10-K 1 a20131231-10xk.htm 10-K 2013.12.31 - 10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
____________________________________
 
FORM 10-K
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
 
OR
 
o
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: 000-26658
 
Pharmacyclics, Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
94-3148201
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
995 E. Arques Avenue, Sunnyvale, CA
94085-4521
(Address of principal executive offices)
(Zip code)
 
Registrant’s telephone number, including area code:  (408) 774-0330
____________________________________
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Name of Each Exchange On Which Registered
Common Stock, $.0001 Par Value
 
Nasdaq Capital Market
 
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
____________________________________
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý
No o
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
 
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 ý No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter)




during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes ý No o
 
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 amendments to this Form 10-K. o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  Check one:
 
Large accelerated filer ý Accelerated filer o Non-accelerated filer o Smaller reporting company o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
 
As of June 30, 2013, the aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant was $3,319,747,833 based on the closing sale price of the Registrant's common stock on The NASDAQ Stock Market LLC on that date. Shares of the Registrant's common stock beneficially owned by each executive officer and director of the Registrant and by each person known by the Registrant to beneficially own 10% or more of its outstanding common stock have been excluded, in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant’s common stock as of February 18, 2014 was 74,788,370.
____________________________________
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the following document are incorporated by reference into Part III of this Form 10-K:  the Definitive Proxy Statement for the Registrant’s 2014 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s fiscal year ended December 31, 2013.




ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2013

TABLE OF CONTENTS

 
 
 
 
 
 
Page
PART I
 
 
 
 
 
 
Item 
 
1
 
Business
 
Item 
 
1A.
 
Risk Factors
 
Item 
 
1B.
 
Unresolved Staff Comments
 
Item 
 
2
 
Properties
 
Item 
 
3
 
Legal Proceedings
 
Item 
 
4
 
Mine Safety Disclosures
 
PART II
 
 
 
 
 
 
Item 
 
5
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Item 
 
6
 
Selected Financial Data
 
Item 
 
7
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 
 
7A.
 
Quantitative and Qualitative Disclosures About Market Risk
 
Item 
 
8
 
Financial Statements and Supplementary Data
 
Item 
 
9
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
Item 
 
9A.
 
Controls and Procedures
 
Item 
 
9B.
 
Other Information
 
PART III
 
 
 
 
 
 
Item 
 
10
 
Directors, Executive Officers and Corporate Governance
 
Item 
 
11
 
Executive Compensation
 
Item 
 
12
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 
 
13
 
Certain Relationships and Related Transactions and Director Independence
 
Item 
 
14
 
Principal Accountant Fees and Services
 
PART IV
 
 
 
 
 
 
Item 
 
15
 
Exhibits and Financial Statement Schedules
 
Signatures
 
 
Exhibits Index
 
 





Part I

Important Factors Regarding Forward-Looking Statements
This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “goal,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “should” or “will” or the negative of such terms or other comparable terminology. In particular, forward-looking statements include:
statements about our future capital requirements and the sufficiency of our cash, cash equivalents, marketable securities and other financing proceeds to meet these requirements;
information concerning possible or assumed future results of operations, trends in financial results and business plans;
statements about our product development schedule;
statements about our expectations for and timing of regulatory approvals for any of our product candidates;
statements about the level of our expected costs and expenses;
statements about the potential results of ongoing or future clinical trials;
other statements about our plans, objectives, expectations and intentions; and
other statements that are not historical fact.
From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Forward-looking statements are only predictions that provide our current expectations or forecasts of future events. Any or all of our forward-looking statements in this report and in any other public statements are subject to unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. You should not place undue reliance on these forward-looking statements.
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Also note that we provide a cautionary discussion of risks, uncertainties, assumptions and other factors relevant to our business under the caption Risk Factors and elsewhere in this report. These are risks that we think could cause our actual results to differ materially from expected or historical results.




Item 1.    Business
Company Overview
We are focused on developing and commercializing innovative small-molecule drugs for the treatment of cancer and immune mediated diseases. Our mission and goal is: To build a viable biopharmaceutical company that designs, develops and commercializes novel therapies intended to improve quality of life, increase duration of life and resolve serious unmet medical healthcare needs. To identify and control promising product candidates based on scientific development and administrational expertise, develop our products in a rapid, cost-efficient manner and to pursue commercialization and/or development partners when and where appropriate. We exist to make a difference for the better and these are important times to do just that.
On November 13, 2013, the U.S. Food and Drug Administration (FDA) approved IMBRUVICATM (ibrutinib, PCI-32765) under accelerated approval as a monotherapy for the treatment of patients with mantle cell lymphoma (MCL) who have received at least one prior therapy. On November 13, 2013, we commercially launched IMBRUVICATM in the United States. IMBRUVICATM is our first product to market and is one of the first treatments to receive FDA approval via the Breakthrough Therapy Designation pathway. On October 30, 2013, our collaboration partner Janssen Biotech, Inc. announced that it submitted a Marketing Authorization Application (MAA) to the European Medicines Agency (EMA) for the use of ibrutinib in the treatment of patients with chronic lymphocytic leukemia (CLL) and MCL. Subsequent to year-end, on February 12, 2014, the FDA approved IMBRUVICATM as a single agent for the treatment of patients with CLL who have received at least one prior therapy. The FDA approval for these indications was based on overall response rate (ORR). Improvements in survival or disease-related symptoms has not been established. IMBRUVICATM is the first once-daily, single-agent, oral kinase inhibitor for patients with MCL and CLL who in each case have received one prior therapy and is being jointly developed and commercialized by Pharmacyclics and Janssen Biotech, Inc. and its affiliates ("Janssen"), one of the Janssen Pharmaceutical companies of Johnson & Johnson.
In addition to IMBRUVICATM (ibrutinib), Pharmacyclics has three other product candidates in clinical development and several preclinical molecules in lead optimization. We are committed to high standards of ethics, scientific rigor, and operational efficiency as we move each of these programs toward potential commercialization.
In December 2011, we entered into a worldwide collaboration and license agreement ("Agreement") with Janssen, for the development and commercialization of ibrutinib, a novel, orally active, first-in-class BTK inhibitor which has been and continues to be developed for the treatment of hematological malignancies, including non-Hodgkin lymphoma (NHL), CLL and multiple myeloma (MM). Under the Agreement, we received our first significant revenue in the form of milestone payments during the year ended June 30, 2012. Together with our partner Janssen, Pharmacyclics is commercializing IMBRUVICATM in the United States.
In 2006, we acquired multiple small molecule drug candidates for the treatment of cancer and other diseases from Celera Genomics, an Applera Corporation business (now Celera Corporation - a subsidiary of Quest Diagnostics Incorporated), including technology and intellectual property relating to drugs that target histone deacetylase ("HDAC") enzymes (specific and multiple isoforms), a Factor VIIa inhibitor targeting a tumor signaling pathway involved in angiogenesis, tumor growth and metastases and B-cell associated tyrosine kinase inhibitors potentially useful for the treatment of lymphomas/leukemias, anti-inflammatory and autoimmune diseases.
We are headquartered in Sunnyvale, California and are listed on NASDAQ under the symbol PCYC. To learn more about how Pharmacyclics advances science to improve human healthcare visit us at http://www.pharmacyclics.com. Information found on our website is not incorporated by reference into this report.
Marketed Product - IMBRUVICATM (ibrutinib)
IMBRUVICATM is approved by the U.S. Food and Drug Administration as a single agent for the treatment of patients with MCL and CLL who in each case have received at least one prior therapy. The FDA approval for these indications was based on ORR. An improvement in survival or disease-related symptoms has not been established. IMBRUVICATM is a new agent that inhibits the function of Bruton's tyrosine kinase (BTK). BTK is a key signaling molecule of the B-cell receptor signaling complex that plays an important role in the survival of malignant B-cells. IMBRUVICATM blocks signals that stimulate malignant B-cells to grow and divide uncontrollably.
The following information can be found on the prescribing information for IMBRUVICATM:
The approval in MCL was based on the results of a multi-center, international, single-arm trial of 111 patients with previously treated mantle cell lymphoma. Tumor response was assessed according to the revised International Working Group (IWG) for NHL criteria.  The efficacy results demonstrated a 65.8% overall response rate (95% Confidence Interval (CI): 56.2,

1



74.5); 17% of patients achieved a complete response and 49% of patients achieved a partial response.  The median duration of response was 17.5 months (95% CI: 15.8, not reached).  The approval in CLL was based on the results of a Phase Ib/II, open-label, multi-center, international, single-arm trial of 48 patients with relapsed or refractory CLL who received 420 mg of IMBRUVICATM daily.  The primary endpoint was safety and a secondary endpoint was ORR, which was assessed by a modified version of the International Working Group on CLL (IWCLL) criteria by an Independent Review Committee. The efficacy results demonstrated a 58.3 percent ORR (95% confidence interval (CI) (%), 43.2, 72.4), all partial responses. The duration of response (DOR) ranged from 5.6 to 24.2+ months. The median DOR was not reached.
Important Safety Information Warnings and Precautions:
Hemorrhage - Five percent of patients with MCL and 6% of patients with CLL had Grade 3 or higher bleeding events (subdural hematoma, ecchymoses, gastrointestinal bleeding, and hematuria). Overall, bleeding events including bruising of any grade occurred in 48% of patients with MCL treated with 560 mg daily and 63% of patients with CLL treated at 420 mg daily.
The mechanism for the bleeding events is not well understood. IMBRUVICA™ may increase the risk of hemorrhage in patients receiving antiplatelet or anticoagulant therapies. Consider the benefit-risk of withholding IMBRUVICA™ for at least 3 to 7 days pre and post-surgery depending upon the type of surgery and the risk of bleeding.
Infections - Fatal and non-fatal infections have occurred with IMBRUVICA™ therapy. At least 25% of patients with MCL and 35% of patients with CLL had infections Grade 3 or greater NCI Common Terminology Criteria for Adverse Events (CTCAE). Monitor patients for fever and infections and evaluate promptly.
Myelosuppression - Treatment-emergent Grade 3 or 4 cytopenias were reported in 41% of patients with MCL and 35% of patients with CLL. These included neutropenia (29%), thrombocytopenia (17%) and anemia (9%) in patients with MCL and neutropenia (27%) and thrombocytopenia (10%) in patients with CLL. Monitor complete blood counts monthly.
Renal Toxicity - Fatal and serious cases of renal failure have occurred with IMBRUVICA™ therapy. Treatment-emergent increases in creatinine levels up to 1.5 times the upper limit of normal occurred in 67% of patients with MCL and 23% of patients with CLL. Increases in creatinine 1.5 to 3 times the upper limit of normal occurred in 9% of patients with MCL and 4% of patients with CLL. Periodically monitor creatinine levels. Maintain hydration.
Second Primary Malignancies - Other malignancies have occurred in 5% of patients with MCL and 10% of patients with CLL who have been treated with IMBRUVICA™.  Four percent of patients with MCL, had skin cancers, and 1% had other carcinomas. Eight percent of patients with CLL had skin cancers and 2% had other carcinomas.
Embryo-Fetal Toxicity - Based on findings in animals, IMBRUVICA™ can cause fetal harm when administered to a pregnant woman. Advise women to avoid becoming pregnant while taking IMBRUVICA™. If this drug is used during pregnancy or if the patient becomes pregnant while taking this drug, the patient should be apprised of the potential hazard to a fetus.
Adverse reactions:
MCL: The most commonly occurring adverse reactions ( > 20%) in the clinical trial were thrombocytopenia*, diarrhea (51%), neutropenia*, anemia*, fatigue (41%), musculoskeletal pain (37%), peripheral edema (35%), upper respiratory tract infection (34%), nausea (31%), bruising (30%), dyspnea (27%), constipation (25%), rash (25%), abdominal pain (24%), vomiting (23%), and decreased appetite (21%).
*Treatment-emergent decreases (all grades) of platelets (57%), neutrophils (47%) and hemoglobin (41%) were based on laboratory measurements and adverse reactions.
The most common Grade 3 or 4 non-hematological adverse reactions ( > 5%) were pneumonia (7%), abdominal pain (5%), atrial fibrillation (5.4%), diarrhea (5%), fatigue (5%), and skin infections (5%).  Treatment-emergent Grade 3 or 4 cytopenias were reported in 41% of patients. Ten patients (9%) discontinued treatment due to adverse reactions in the trial (N=111).
The most frequent adverse reaction leading to treatment discontinuation was subdural hematoma (1.8%). Adverse reactions leading to dose reduction occurred in 14% of patients.
CLL: The most commonly occurring adverse reactions ( > 20%) in the clinical trial were thrombocytopenia*, diarrhea (63%), bruising (54%), neutropenia*, anemia*, upper respiratory tract infection (48%), fatigue (31%), musculoskeletal pain (27%), rash (27%), pyrexia (25%), constipation (23%), peripheral edema (23%), arthralgia (23%), nausea (21%), stomatitis (21%), sinusitis (21%), and dizziness (21%).

2



*Treatment-emergent decreases (all grades) of platelets (71%), neutrophils (54%) and hemoglobin (44%) were based on laboratory measurements per IWCLL criteria and adverse reactions.
The most common Grade 3 or 4 non-hematological adverse reactions ( > 5%) were pneumonia (8%), hypertension (8%), atrial fibrillation (6.3%), sinusitis (6%), skin infection (6%), dehydration (6.4%), and musculoskeletal pain (6%). Treatment-emergent Grade 3 or 4 cytopenias were reported in 35% of patients.
Five patients (10%) discontinued treatment due to adverse reactions in the trial (N=48). These included 3 patients (6%) with infections and 2 patients (4%) with subdural hematomas. Adverse reactions leading to dose reduction occurred in 13% of patients.
Drug Interactions:
CYP3A Inhibitors - Avoid concomitant administration with strong or moderate inhibitors of CYP3A. If a moderate CYP3A inhibitor must be used, reduce the IMBRUVICA™ dose.
CYP3A Inducers - Avoid co-administration with strong CYP3A inducers.
Special Populations - Hepatic Impairment - Avoid use in patients with baseline hepatic impairment.
The FDA granted IMBRUVICATM Breakthrough Therapy Designation due to the ORR and DOR seen in the Phase II study, PCYC-1104, and the serious and life-threatening nature of MCL. Pharmacyclics completed its New Drug Application submission to the FDA in late June 2013.
Commercialization of IMBRUVICATM 
IMBRUVICATM became commercially available in the United States in November 2013. IMBRUVICATM is being marketed principally through a commercial team with relevant expertise in the promotion, distribution and reimbursement of oncology/hematology drugs. In 2013, we established our commercial organization to support the commercialization of IMBRUVICATM in the U.S. We believe that the size of our U.S. sales force is appropriate to effectively reach our target audience. Our collaboration partner Janssen already has an Oncology Sales Organization in place. The U.S. territories and sales efforts have been aligned between the two companies with both participating approximately equally in the sales activities. Pharmacyclics leads the U.S. commercial activities.
Over the past year we have also worked steadily to build up our marketing team, attracting top talent from established hematology/oncology companies. The Pharmacyclics marketing team has expanded to cover all necessary functions, including: strategy, promotional and educational activities, and the respective creative campaigns for each indication. The team is supported by a Business Analytics and Information Unit that provides market research, forecasting and sales force alignment services.
A Market Access Department has been established as well covering Medicare, Medicaid, Commercial Health Plans, Federal Markets, Trade, Advocacy, Pricing, Policy, Contracting and Patient Access Services. The Market Access team created several access and affordability programs which are dedicated to helping patients receive access to IMBRUVICATM.
Sales of pharmaceutical products depend in significant part on the coverage and reimbursement policies of government programs, including Medicare and Medicaid in the United States, and other third party payers. All third party payers are sensitive to the cost of drugs and have taken efforts to control those costs and will continue to do so in the future. Private health insurance plans may restrict coverage of some products by using payer formularies under which only selected drugs are covered, variable co-payments that make drugs that are not preferred by the payer more expensive for patients, and by using utilization management controls, such as requirements for prior authorization or prior failure on another type of treatment. Payers may especially impose these obstacles to coverage for higher priced drugs, and consequently IMBRUVICATM may be subject to payer-driven restrictions.
A Medical Affairs Group was also established in 2013. Within this group we have professionally staffed individual teams for Medical Science, Medical Communications and Medical Information. The team of Medical Science Liaisons Professionals have been deployed with the launch of IMBRUVICATM.
MCL and CLL are considered orphan diseases. Today in the U.S. it is estimated by IMS Health that there are approximately 11,000 MCL patients and 115,000 CLL patients living with these diseases (Note: this information is an estimate derived from the use of information under license from the following IMS Health Incorporated information service: IMS Oncology Tracking Reports for the period January 2012-June 2013. IMS expressly reserves all rights, including rights of copying, distribution and republication). Many of these patients cycle through multiple lines of treatments often requiring

3



combination therapy with extensive supportive care. For patients with MCL who have received one prior therapy, the approved dose is four 140 mg pills of IMBRUVICATM once daily for an initial cost of approximately $10,933 for a 30 day supply. For patients with CLL who have received one prior therapy, the approved dose is three 140 mg pills of IMBRUVICATM once daily for an initial cost of approximately $8,200 for a 30 day supply.
Market Access to IMBRUVICATM 
Patients who are prescribed IMBRUVICATM can receive access support through several distinct programs:
The YOU&i Start™ program enables eligible patients who have been prescribed IMBRUVICATM for the FDA-approved indications and are experiencing insurance coverage delays greater than five business days, to access free product for a limited period of time. In addition, our YOU&i Access service center is set up to help patients with reimbursement and market access related questions.

The YOU&i Access™ Instant Savings Program helps commercially insured patients who have difficulties with out of pocket expenses for IMBRUVICATM. Eligible patients may receive support to reduce their monthly out-of-pocket costs.

Patients who are deemed uninsured and eligible, and who qualify based on financial need, can access IMBRUVICATM through the Johnson & Johnson Patient Assistance Foundation (JJPAF), an independent non-profit organization.
Pharmacyclics is supporting third party foundations, organizations and other efforts to help patients in need get access to appropriate care.
Our Pipeline
Our clinical development and product candidates are small-molecule enzyme inhibitors designed to target key biochemical pathways involved in human diseases with critical unmet needs. IMBRUVICATM, our first product to market, has been developed and commercialized for MCL and CLL patients, who in each case have received at least one prior therapy. IMBRUVICATM is currently being studied in multiple Phase I, II and III studies and continues to be developed for the treatment of other B-cell malignancies. In addition to IMBRUVICATM, we currently have three other product candidates in clinical development and several preclinical molecules in lead optimization; including a BTK inhibitor targeting anti-inflammatory and autoimmune indications entering the clinic with a Phase I study, an inhibitor of Factor VIIa (PCI-27483) and a HDAC inhibitor, abexinostat (formerly known as PCI-24781), currently in Phase I and II clinical trials in solid tumors and hematological malignancies.
Status of Products Currently in Pre-Clinical and Clinical Development
The table below summarizes our pre-clinical programs and clinical product candidates and their stage of development:

4



Product Candidates
 
Disease Indication
 
Development Status(1)
IMBRUVICA BTK Inhibitor
 
B-cell lymphomas:
 
Multiple trials (Phase I, II, III)
 
 
• Treatment naive and relapsed/refractory chronic lymphocytic leukemia
 
 
 
 
• Relapsed/refractory mantle cell lymphoma
 
 
 
 
• Treatment naive and relapsed/refractory diffuse large B-cell lymphoma
 
 
 
 
• Relapsed/refractory follicular lymphoma
 
 
 
 
• Relapsed/refractory multiple myeloma
 
 
 
 
• Waldenstrom's macroglobulinemia
 
 
 
 
• Treatment naive follicular lymphoma
 
 
 
 
• Relapsed/refractory marginal zone lymphoma
 
 
BTK Inhibitor
 
Autoimmune and anti-inflammatory disease
 
Preclinical testing, Phase I initiation
Abexinostat HDAC Inhibitor (PCI-24781)
 
Relapsed/refractory lymphomas and solid tumors
 
Multiple trials (Phase I, II)
Factor VIIa Inhibitor (PCI-27483)
 
Cancer
 
Multiple trials (Phase I, II)
(1) "Phase I" means initial human clinical trials designed to establish the safety, dose tolerance, pharmacokinetics (i.e., absorption, metabolism, excretion) and pharmacodynamics (i.e. biological markers for activity) of a compound. "Phase II" means human clinical trials designed to establish safety, optimal dosage and preliminary activity of a compound in a patient population. "Phase III" means human clinical trials designed to establish the safety and efficacy of a compound. These are the most important trials required by the Food and Drug Administration ("FDA") and are done to rigorously establish the clinical benefit and safety profile of a drug in a particular patient population. "Preclinical" means the stage of drug development prior to human clinical trials in which a molecule is optimized for "drug like" properties and evaluated for efficacy, pharmacokinetics, pharmacodynamics and safety.
BTK Inhibitor Program
We are pioneering the development of orally bioavailable inhibitors of BTK, a signaling protein that is critically important for the activity of B-cells (immune cells that can develop into antibody producing cells). B-cell lymphomas and leukemias, which are common blood cancers, result from mutations acquired during B-cell development that lead to uncontrolled B-cell proliferation. Also, when B-cells are overactive, the immune system can produce antibodies that begin to attack the body's own tissue, leading to autoimmune diseases. Both autoimmune diseases and B-cell malignancies are thought to be driven by overactive signaling and activation of the B-cell antigen receptor ("BCR"), a process that is dependent on BTK.
We have developed IMBRUVICATM, which has been commercialized for MCL and CLL patients, who in each case have received at least one prior therapy, and has demonstrated clinical activity and tolerability in Phase I, II and III clinical trials in a variety of B-cell malignancies. Our development plan includes a variety of B-cell malignancies including: chronic lymphocytic leukemia (CLL) and small lymphocytic lymphoma (SLL), and a number of non-Hodgkin's lymphoma (NHL) subtypes. CLL/SLL, mantle cell lymphoma (MCL), follicular lymphoma (FL), diffuse large B-cell lymphoma (DLBCL), multiple myeloma (MM), Waldenstrom's macroglobulinemia (WM) and marginal zone lymphoma (MZL). We are currently using a multi-tier preclinical testing strategy to develop novel inhibitors of BTK for anti-inflammatory and autoimmune diseases.
IMBRUVICATM (ibrutinib) - Mechanism of Action
Ibrutinib is a potent and selective small molecule inhibitor of BTK, a signaling kinase expressed in B-cells. BTK is an enzyme that functions downstream of the BCR, the latter which is present on the surface of B-cells. When engaged, the BCR signaling pathway causes the B-cell to grow and develop. In a study funded entirely by Pharmacyclics, we found that selective inhibition of BTK with ibrutinib blocks BCR signaling and prevents B-cell activation (Honigberg et al., Proc Natl Acad Sci USA, 2010; 107: 13075-80). Ibrutinib binds covalently to the active site (cysteine-481) of BTK, thereby inhibiting the activity of BTK (IC50 of 0.5 nM). Ibrutinib is a selective inhibitor and does not appear to bind to other cellular proteins, with few exceptions, as strongly and as rapidly as it does to BTK in vivo. Importantly, new evidence has demonstrated ibrutinib inhibits B-cell lymphoma adhesion in vitro (Chang et al, Blood 2013; de Rooij et al; Blood, 2012) which may be related to its rapid

5



lymphocytosis that is observed in humans (Advani et al., JCO; 2012). In humans, the levels of ibrutinib in the blood are reduced by half within 2 to 4 hours of peak exposure. With the combination of irreversible “on-target” kinase inhibition and rapid elimination from the blood, we achieve 24-hour BTK inhibition with once daily dosing while reducing the duration of reversible inhibition of many “off-target” kinases. This has clinical relevance, as off-target kinase interactions can have an adverse effect on drug-safety profiles.

In CLL, multiple studies have documented evidence of enhanced BCR signaling, especially in patients with immunoglobulin variable heavy chain (IgVH) unmutated disease or those with increased ZAP-70 expression, which are predictors of poor prognosis to cytotoxic chemotherapy. It has been published that IMBRUVICATM promotes apoptosis, inhibits proliferation and also prevents CLL cells from responding to survival stimuli provided by the microenvironment (Herman et al, Blood, 2011; 117:6287-6296). In this study, treatment of activated CLL cells with IMBRUVICATM inhibited the phosphorylation activity of BTK and effectively abrogated BTK-dependent downstream survival pathways including those involving ERK1/2, PI3K and NF-κB. Additionally, IMBRUVICATM inhibited activation-induced proliferation of CLL cells in vitro, effectively blocking survival signals provided externally to CLL cells by components of the microenvironment including soluble factors (CD40L, BAFF, IL-6, IL-4 and TNF-α), fibronectin engagement and stromal cell contact.
Several lines of evidence suggest that signaling through the BCR pathway is necessary to sustain the viability of B-cell lymphomas, and BTK was identified in a conventionally-designed small interfering RNA compounds (siRNA) screen as an essential kinase for survival in a subset of diffuse large cell lymphomas driven by activated BCR. In these cells, chronic active BCR signaling drives constitutive NF-κB signaling blocking apoptosis; blocking BTK with IMBRUVICATM was shown to promote apoptosis in these cells (Davis et al., Nature, 2010; 463: 88-94).
IMBRUVICATM (ibrutinib) - Recent Clinical Development Updates
During the calendar year ended December 31, 2013, we provided updates on several of our clinical programs in various press releases and filings with the SEC. The company furnished a press release on December 10, 2013 of the most recent clinical updates from the 55th American Society of Hematology (ASH) Annual Meeting in New Orleans from December 7-10, 2013. The press release from December 10, 2013 contained the following data updates:
Poster Presentation - Abstract #4163:
The Bruton's Tyrosine Kinase (BTK) Inhibitor IMBRUVICATM (PCI-32765) Monotherapy Demonstrates Long-term Safety and Durability of Response in Chronic Lymphocytic Leukemia(CLL)/Small Lymphocytic Leukemia (SLL) Patients in an Open-Label Extension Study (Susan O'Brien, M.D., Department of Leukemia, University of Texas MD Anderson Cancer Center, Houston, TX)
A long-term analysis of Phase 1/2 studies of single agent IMBRUVICATM in 148 patients with CLL/SLL aimed to evaluate safety based on time on therapy, summarize safety findings in both the treatment-naive and relapsed/refractory (R/R) populations and assess overall response rate (ORR) and duration of response (DOR). The results showed that the percentage of patients who experienced a grade 3 or higher serious adverse event (SAE) declined over time from 43% within the first year of study treatment to 32% after the first year of treatment. Grade 3 or higher adverse events (AEs) and SAEs considered to be related directly to IMBRUVICATM also declined notably compared to the first year of treatment: 24% and 8%, respectively, to

6



7% and 0%. The most frequent grade 3 or higher adverse events regardless of relationship to study drug were pneumonia (16.9%), hypertension (13.5%), neutropenia (11.5%), thrombocytopenia (7.4%) and diarrhea (5.4%).
Based on these patients the ORR was determined at 80.6% for treatment-naive patients, and 83.8% for R/R patients. The ORR plus partial response with lymphocytosis was 87.1% in the treatment-naive population and 88.9% in the R/R population. Median DOR was not reached in either population. At 30 months, 95.8% of treatment-naive and 69.7% of R/R responders were alive without disease progression.
Poster Presentation - CLL Abstract #2872:
Changing the Treatment Paradigm for Previously Treated Chronic Lymphocytic Leukemia Patients with Del(17p) Karyotype (Deborah M. Stephens, D.O., Division of Hematology, Department of Internal Medicine, The Ohio State University, Columbus, OH)
This retrospective analysis aimed to describe the success of treatment of del 17p patients on clinical trials at The Ohio State University (OSU). The study reviewed records of 174 CLL patients with del 17p who had received prior therapy.
At patients' first treatment at OSU (OSU Tx1), 16% (n=27), 33% (n=58), and 51% (n=89) of pts received an IMBRUVICATM-based therapy, cyclin-dependent kinase inhibitor-based therapy (CDKi), or other therapies (O), respectively.
The ORR was significantly different among groups at 56%, 45%, and 24% in the IMBRUVICATM, CDKi, and O groups, respectively. 12-month progression free survival (PFS) estimates were 77%, 38%, and 17% in the IMBRUVICATM, CDKi, and O groups, respectively. 12-month overall survival (OS) estimates were 81%, 78%, and 58%. Notably, age did not correlate with response, PFS, or OS.
Oral Presentation - CLL Abstract #673:
Single Agent IMBRUVICATM Achieves Equal Responses in CLL Patients With and Without Deletion 17p (Mohammed Farooqui, DO, National Institutes of Health, National Heart, Lung and Blood Institute, Bethesda, MD)
This phase 2, single center, study of IMBRUVICATM as a single-agent aimed to address the role of IMBRUVICATM in the treatment of CLL patients with del 17p, regardless of their prior treatment history. The study enrolled 29 patients with del 17p, and 24 elderly patients without del 17p (NL 17p). Fifteen of the del 17p patients and eight of the NL 17p patients were treatment naive. The primary endpoint of the study was response after 6 months, assessed by computed tomography (CT) scans, bone marrow biopsies, and routine clinical and laboratory studies.
At six months, 47 patients were evaluable. Of the patients with del 17p, 53% achieved a PR and 43% achieved a PRL, compared to 82% PR and 9% PRL among the NL 17p patients. The apparent difference in response rates is due to slower clearance of the treatment-induced lymphocytosis in the del 17p patients; however, the clinical benefit and disease control in all tissue sites was equal for both cohorts of patients. Twenty-month PFS was 100% in the NL 17p cohort, and 85% in the del 17p cohort.
The most common AEs, predominantly grade 1, were diarrhea (41%); arthralgia (30%); rash (27%); fatigue and bruising (20% each); and cramps (18%). The most common grade 3 or higher AEs were lung infection (5%) and rash (2%).
Oral Presentation - CLL Abstract #525:
IMBRUVICATM in Combination With Bendamustine and Rituximab Is Active and Tolerable in Patients With Relapsed/Refractory CLL/SLL: Final Results Of a Phase 1b Study (Jennifer R. Brown, M.D., Ph.D., Dana-Farber Cancer Institute, Boston, MA)
The primary objective of this study of 30 patients was to evaluate the safety of IMBRUVICATM in combination with bendamustine and rituximab in patients with R/R CLL, and the secondary objectives were to evaluate the ORR and PFS. The observed safety profile for this novel combination was generally consistent with the safety profile of bendamustine and rituximab. The most frequently reported treatment-emergent AEs, regardless of attribution were predominantly grade 1 or 2, including diarrhea (70%), nausea (67%), fatigue (47%), neutropenia (40%) and upper respiratory tract infection (37%). The most frequently reported grade 3 or higher AEs were neutropenia (40%), rash and fatigue (10%each), thrombocytopenia and cellulitis (7% each), and febrile neutropenia (6%). Transient treatment-related lymphocytosis occurred less frequently in this combination than with IMBRUVICATM monotherapy (Byrd et al, NEJM 2013).
With a median duration of treatment of 16 months, the ORR was 93.4% (28 out of 30 patients, including 5 CRs and 3nPRs), and one additional patient achieved a partial response with lymphocytosis. The median PFS has not been reached, and responses appeared to be independent of high-risk features. This combination is currently under investigation in a global Phase 3 trial.

7



Waldenstrom's Macroglobulinemia - Best of ASH Oral Presentation - Abstract #251:
A Prospective Multicenter Study Of The Bruton's Tyrosine Kinase Inhibitor IMBRUVICATM In Patients With Relapsed Or Refractory Waldenstrom's Macroglobulinemia (Steven Peter Treon, M.D., M.A., Ph.D., Bing Center for Waldenstrom's Macroglobulinemia, Dana Farber Cancer Institute, Boston, MA)
This study evaluated the efficacy and tolerability of IMBRUVICATM in 63 patients with relapsed or refractory WM, and examined the impact of MYD88 L265P and WHIM-like CXCR4 mutations on IMBRUVICATM response. With a median follow-up at 9 cycles (9 months), the best ORR (minor response or better, using consensus criteria adapted from the 3rd International Workshop on WM) was 83%. Six patients had a very good partial response, 34 achieved a PR, and 12 achieved a minor response (MR), with a major response rate (PR or better) of 64%. Ten patients showed stable disease. In patients who underwent tumor sequencing, attainment of major responses was impacted by mutations in CXCR4, but not MYD88 L265P.
The most common Grade 2 or higher treatment related AEs were neutropenia (n=12); thrombocytopenia (n=10); bleeding (n=5); and pneumonic infection, anemia and tachyarrhythmia (n=3 each). The most common grade 3 or higher treatment-related AEs were neutropenia (n=9) and thrombocytopenia (n=7). After a median follow up of 9 cycles, fifty-five patients (87.3%) continue on treatment.
Non-Hodgkin's Lymphoma - Oral Presentation - Abstract #852:
Combining IMBRUVICATM With Rituximab, Cyclophosphamide, Doxorubicin, Vincristine, and Prednisone (R-CHOP): Updated Results From a Phase 1b Study in Treatment-Naive Patients With CD20-Positive B-Cell Non-Hodgkin's Lymphoma (NHL) (Anas Younes, M.D., Memorial Sloan-Kettering Cancer Center, New York, NY)
R-CHOP is a standard of care in a number of the most common B-cell malignancies, including several NHL subtypes, such as diffuse large B-cell lymphoma (DLBCL), mantle cell lymphoma (MCL) and follicular lymphoma (FL). This study was an open-label, nonrandomized, multicenter study consisting of 2 parts: dose escalation in patients with DLBCL, MCL and FL (Part 1) and dose expansion only in DLBCL patients (Part 2). The primary objective of this phase 1B study in 33 patients was to determine the recommended phase 2 dose and dose-limiting toxicities of IMBRUVICATM in combination with R-CHOP. Secondary objectives were to evaluate safety, ORR and pharmacokinetics. The results below focus on the 24 DLBCL patients across Parts 1 and 2 of the study.
Across Parts 1 and 2 (n=24), the most common all-grade treatment-emergent AEs ( > 25%) were neutropenia (70.8%), nausea (66.7%), vomiting (66.7%), thrombocytopenia (58.3%), fatigue (50%), constipation (41.7%), anemia (41.7%), and diarrhea (33.3%). The most common Grade 3 or higher treatment-emergent AEs were neutropenia (66.7%), thrombocytopenia (16.7%), febrile neutropenia (16.7%), anemia (12.5%) and hypotension (8.3%).
The ORR for all evaluable patients across Parts 1 and 2 was 91.7%, with 83.3% of patients achieving a CR, and 8.3% achieving a PR.
IMBRUVICATM (ibrutinib) - Active Phase III Clinical Trials
Chronic Lymphocytic Leukemia/ Small Lymphocytic Lymphoma (CLL/SLL)
RESONATE™ (PCYC-1112) Phase III study of IMBRUVICATM versus ofatumumab in patients with relapsed/refractory (R/R) CLL/SLL was initiated in the second quarter of 2012. This is a randomized, multi-center, open-label Phase III trial of IMBRUVICATM as a monotherapy. The enrollment of 391 patients was completed more than two quarters ahead of schedule in April 2013. The primary endpoint of this study is to demonstrate a statistically significant improvement in progression-free survival (PFS) when compared to ofatumumab. The study met its primary end point of PFS as well as a key secondary endpoint of overall survival at the interim analysis in January 2014. We anticipate to file the study data with the FDA within the first half of 2014 and expect a review by the agency to be completed within the first half of 2015.
RESONATE™-2 (PCYC-1115): Phase III study of IMBRUVICATM versus chlorambucil in newly diagnosed elderly CLL/SLL patients was initiated in the first quarter of 2013. This is a randomized, multicenter, open-label trial of IMBRUVICATM as a monotherapy versus chlorambucil in patients 65 years or older with treatment naïve CLL/SLL. The study design was agreed upon with the FDA under a Special Protocol Assessment (SPA). The primary objective of the study is to demonstrate a clinically significant improvement in PFS when compared to chlorambucil. Pharmacyclics has just completed enrollment of 273 patients worldwide, approximately 9 months ahead of the original schedule. A data read out is anticipated in the second half of 2015.

8



HELIOS (CLL3001): Phase III study of IMBRUVICATM in combination with bendamustine and rituximab in patients with R/R CLL/SLL was initiated in the third quarter of 2012. This is a randomized, multi-center, double-blinded, placebo-controlled trial of IMBRUVICATM in combination with bendamustine and rituximab versus placebo in combination with bendamustine and rituximab in R/R CLL/SLL patients who have received at least one line of prior therapy. The primary objective of the study is to demonstrate a clinically significant improvement in PFS when compared to bendamustine and rituximab. This study completed enrollment of 578 patients worldwide during the first quarter of 2014.
CLL3002: Phase III study of IMBRUVICATM versus rituximab in patients with R/R CLL/SLL was initiated in the fourth quarter of 2013. This is a randomized, open-label, multi-center study to evaluate the efficacy and safety of IMBRUVICATM versus rituximab in adult Chinese patients with R/R CLL or SLL with active disease requiring treatment, who have failed at least 1 prior line of therapy and are not considered appropriate candidates for treatment or retreatment with purine analog-based therapy or combination chemo-immunotherapy. The primary objective of the study is to demonstrate a clinically significant improvement in PFS. The enrollment target of this study is 150 patients.
Third party sponsored Phase III study of IMBRUVICATM versus IMBRUVICATM + rituximab versus bendamustine + rituximab in frontline newly diagnosed elderly (≥ 65 Years of Age) CLL/SLL patients (Alliance A041202) was initiated by the National Cancer Institute in the fourth quarter of 2013. This is a randomized, multi-center study designed to evaluate the improvement in PFS of IMBRUVICATM with or without rituximab vs bendamustine and rituximab. Secondary outcome measures include overall survival and duration of response. The enrollment target of this multi-center study is 523 patients.
Third party sponsored Phase III study in treatment naive, young fit patients with CLL, comparing the combination of IMBRUVICATM and Rituxan to chemo immunotherapy of FCR (fludarabine, cyclophosphamide, and rituximab), (ECOG1912), was initiated by the Eastern Cooperative Oncology Group in the first quarter of 2014. This is a randomized study designed to evaluate the improvement in PFS of IMBRUVICATM with rituximab vs FCR. Secondary outcome measures include overall survival and adverse events. The enrollment target of this multi-center study is 519 patients.
Mantle Cell Lymphoma (MCL)
RAY (MCL3001): Phase III study of IMBRUVICATM versus temsirolimus in R/R MCL patients was initiated in the fourth quarter of 2012. This is a randomized, multi-center, open-label trial of IMBRUVICATM as a monotherapy versus temsirolimus in R/R MCL patients who received at least one prior rituximab-containing chemotherapy regimen. The primary endpoint of the study is PFS. The enrollment target of this global study was 280 patients. This trial completed enrollment in the fourth quarter of 2013.
SHINE (MCL3002): Phase III study of IMBRUVICATM in combination with bendamustine and rituximab in elderly patients with newly diagnosed MCL was initiated in the second quarter of 2013. This is a randomized, multi-center, double-blinded, placebo-controlled trial of IMBRUVICATM plus bendamustine and rituximab versus placebo plus bendamustine and rituximab in patients 65 years or older with newly diagnosed MCL. The primary endpoint of the study is PFS. The enrollment target of this global study is 520 patients.
Diffuse Large B-cell Lymphoma (DLBCL)
PHOENIX (DBL3001): Phase III study of IMBRUVICATM in combination with R-CHOP (rituximab, cyclophosphamide, doxorubicin, vincristine, and prednisone) in patients with newly diagnosed the non-GCB subtype of DLBCL was initiated in the third quarter of 2013. This is a randomized, multi-center, double-blinded, controlled trial of IMBRUVICATM plus rituximab, cyclophosphamide, doxorubicin, vincristine, and prednisone (R-CHOP) versus R-CHOP in patients with newly diagnosed non-GCB subtype DLBCL. The primary endpoint of the study is to demonstrate a clinically significant improvement in event-free survival when compared to R-CHOP. The enrollment target of this global study is 800 patients.
Follicular Lymphoma (FL)
SELENE (FLR3001): Phase III study of IMBRUVICATM in patients with R/R indolent Non-Hodgkin’s Lymphoma (iNHL) was initiated in the first quarter of 2014. This is a randomized, multi-center, placebo-controlled Phase III trial of IMBRUVICATM in combination with either bendamustine and rituximab or R-CHOP in patients with previously treated indolent Non-Hodgkin Lymphoma (NHL). The primary endpoint of this study is progression free survival. The enrollment target of this global study is 400 patients.

9



IMBRUVICATM (ibrutinib) - Regulatory Update
On August 29, 2013, we announced that the U.S. Food and Drug Administration (FDA) had accepted for filing our New Drug Application (NDA) for the investigational oral Bruton's tyrosine kinase (BTK) inhibitor ibrutinib, for two B-cell malignancy indications: previously treated mantle cell lymphoma (MCL) and previously treated chronic lymphocytic leukemia (CLL)/small lymphocytic lymphoma (SLL). The FDA also communicated that our application was granted priority review.
On October 30, 2013, Janssen-Cilag International NV (Janssen) announced it has submitted a Marketing Authorization Application (MAA) to the European Medicines Agency (EMA) for ibrutinib for the treatment of adult patients with relapsed or refractory chronic lymphocytic leukemia (CLL)/small lymphocytic leukemia (SLL) or relapsed or refractory mantle cell lymphoma (MCL).
On November 13, 2013, the Food and Drug Administration (FDA) approved IMBRUVICATM (ibrutinib, PCI-32765) monotherapy for the treatment of patients with mantle cell lymphoma (MCL) who have received at least one prior therapy. This indication is based on overall response rate (ORR). An improvement in survival or disease-related symptoms has not been established.
On February 12, 2014 the FDA approved IMBRUVICATM as a single agent for the treatment of patients with chronic lymphocytic leukemia (CLL) who have received at least one prior therapy. This indication is based on overall response rate (ORR). An improvement in survival or disease-related symptoms has not been established.
IMBRUVICATM (ibrutinib) Resistance
Clinically effective cancer therapies are typically associated with escape mechanisms and resistance. Pharmacyclics is committed to understanding the underlying reason for patients who initially respond to IMBRUVICATM, but subsequently progress. Toward this goal, we have studied (1) tumor cell lines that have been selected to become resistant to IMBRUVICATM and (2) blood samples from the few CLL patients who have acquired resistance to IMBRUVICATM over time.
As reported at the international workshop on CLL meeting in September 2013, with a median follow up of 22.1 months, the estimated median progression-free survival rates in our study PCYC-1102-CA were: 96% for treatment-naive CLL patients (n=31), 92% for relapsed/refractory CLL patients excluding high risk patients with del 17p and del 11q (n=29), and 74% for relapsed/refractory patients including high risk patients (n=85) at 26 months. In patients with CLL, the development of therapeutic resistance has so far been uncommon. Nevertheless, early research has revealed the acquisition of specific point mutations in B-cell receptor pathway genes, including BTK, in several patients with IMBRUVICATM resistance. These mutations may help to explain the therapeutic resistance.
As reported at the European Hematology Association meeting in June 2013 in our study PCYC-1104-CA, mantle cell patients (n=111) had an estimated median progression-free survival of 13.9 months. In addition, as reported in an abstract at the ASH annual meeting in December PCYC-1106, DLBCL patients (n=70) had an estimated median progression-free survival of 1.6 months. The rate of acquired resistance is higher in mantle cell and DLBCL patients compared to CLL patients. Research using mantle cell lines has revealed several potential mechanisms of resistance that may help explain the resistance, including the activation of alternate B-cell signaling pathways inside the cell.
We do not yet understand the full scope of these mechanisms in cancer patients who relapse, nor do we understand the full breadth of mutations that may underlie acquired resistance to IMBRUVICATM in the different B-cell malignancies; we are and intend to continue actively studying this in 2014 and beyond. At the 2013 ASCO annual meeting, we presented data regarding resistance mechanisms with IMBRUVICATM ("Tumor Genomic Profiling Reveals Mechanisms of Resistance to BTK Inhibitor IMBRUVICATM in Chronic Lymphocytic Leukemia").
IMBRUVICATM (ibrutinib) - Breakthrough, Fast Track and Orphan Drug Designations
In the U.S., the FDA granted orphan drug designation to IMBRUVICATM for the following orphan diseases, CLL on April 6, 2012, MCL on December 3, 2012, MM on May 16, 2013, SLL on May 30, 2013, WM on October 15, 2013 and DLBCL on October 23, 2013. A U.S. orphan drug designation provides the drug developer with several benefits and incentives related to the orphan drug, including a 7-year period of U.S. marketing exclusivity if the drug is the first of its type approved for the specified indication.
The FDA also granted Pharmacyclics with a Fast Track designation for IMBRUVICATM for the treatment of CLL/SLL on October 29, 2012 and for the treatment of MCL on December 18, 2012. Fast Track is a process designed to facilitate the development, and expedite the review of drugs to treat serious and life-threatening conditions and address unmet medical needs for the condition.

10



The European Commission ("EU") adopted the decision that IMBRUVICATM is designated as an orphan medicinal product for the following diseases, CLL on April 26, 2012, MCL on March 12, 2013, and DLBCL on November 13, 2013. An EU orphan drug designation provides the drug developer with several benefits and incentives related to the orphan drug, including market exclusivity for 10 years after approval if the drug is the first of its type approved for the specified indication.
On February 8, 2013, the U.S. Food and Drug Administration (FDA) granted Breakthrough Therapy Designation to the investigational oral agent IMBRUVICATM monotherapy for the treatment of patients with relapsed or refractory MCL and to IMBRUVICATM monotherapy for the treatment of patients with WM, both of which are B-cell malignancies. On March 18, 2013, Pharmacyclics announced that the FDA granted an additional Breakthrough Therapy Designation for the investigational oral agent IMBRUVICATM as monotherapy for the treatment of CLL/SLL patients with deletion of the short arm of chromosome 17 (deletion 17p). Patients harboring a deletion within chromosome 17 are poor responders to chemoimmunotherapy and have limited treatment options. The presence of deletion 17p is one of the worst prognostic factors in patients with CLL.
The Breakthrough Therapy Designation is intended to expedite the development and review of a potential new drug for serious or life-threatening diseases where “preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.” The designation of a drug as a Breakthrough Therapy was enacted as part of the 2012 Food and Drug Administration Safety and Innovation Act.
IMBRUVICATM (ibrutinib) - Patents
Pharmacyclics owns granted patents in the U.S., Europe, Japan, China, Mexico, South Korea, Singapore, Hong Kong, South Africa, Russia, and Australia that claim the IMBRUVICATM compound and related BTK inhibitor compounds as compositions of matter. Pharmacyclics also owns pending patent applications covering the IMBRUVICATM compound and related BTK inhibitor compounds, as compositions of matter, in the U.S., Europe, Canada, India, Israel, New Zealand, and Brazil. As of December 31, 2013, the duration of the granted patents covering the IMBRUVICATM compound and related BTK inhibitor compounds as compositions of matter in the U.S., Europe, Japan, China, Mexico, South Korea, Singapore, Hong Kong, South Africa, Russia, and Australia is through December 2026, subject to any patent term extensions that may be obtained in certain territories. The projected duration of any patent that may grant on any of the pending patent applications covering the IMBRUVICATM compound and related BTK inhibitor compounds as compositions of matter in the U.S., Europe, Canada, India, Israel, New Zealand, and Brazil is through December 2026, subject to any patent term extensions that may be obtained in certain territories. Pharmacyclics also owns pending patent applications in the U.S. and internationally covering specifically crystalline and polymorph forms of IMBRUVICATM. The projected duration of any patent that may grant on any of these pending patent applications covering these the forms of IMBRUVICATM is through June 2033, subject to any patent term extensions that may be obtained in certain territories. Pharmacyclics also owns pending patent applications in the U.S. and internationally covering the use of IMBRUVICATM for the treatment of various types of cancer. It is expected that the duration of any patent that may grant on the use of IMBRUVICATM for the treatment of various types of cancer is through June 2031, subject to any patent term extensions that may be obtained in certain territories.
BTK Inhibitor Market Opportunity
There are significant and distinct areas of unmet medical need across the B-cell malignancies. Within the indolent lymphomas, we believe a need exists for active therapies that avoid the toxicities typically seen with conventional chemotherapies. Such active therapies are needed as part of effective combinations early in the course of treatment, and also as effective single-agent treatments later in the course of disease progression. In particular, drugs which are well tolerated and which do not limit subsequent treatment options because of bone marrow or other organ toxicity are needed. In the aggressive lymphomas, it is our belief that the need exists for agents that can combine with standard therapies to improve cure rate, and for agents that are effective in patients that fail potentially curative therapy.
BTK Inhibitor for Autoimmune Diseases
In animal models of rheumatoid arthritis, we have observed that once daily oral administration of our proprietary BTK inhibitors leads to regression of established disease. Based on data from a study funded entirely by Pharmacyclics, we reported that our BTK inhibitors reduce cytokine releases from human monocytes in cell culture and reduced inflammatory synovitis, pannus formation, synovial fluid cytokines, cartilage damage and bone erosion in mice with collagen-induced arthritis (Chang et al., ACR Annual Meeting Abstracts, 2010). During 2013, we continued working on a series of BTK inhibitors which were optimized preclinically for eventual treatment of patients with anti-inflammatory and autoimmune diseases, including rheumatoid arthritis. In January 2014, we filed an investigational new drug application (IND) for our lead molecule for anti-inflammatory and autoimmune diseases. This IND was deemed safe to proceed by the FDA in mid-February 2014.

11



FACTOR VIIa INHIBITOR PROGRAM
Tissue Factor (TF) up-regulation is associated with increased tumor invasiveness and progression, worsened prognosis and increased thromboembolism (VTE). Factor VII is an enzyme that becomes activated ("FVIIa") by binding to the cell surface protein tissue factor ("TF"), a protein found in the body that helps to trigger the process of blood clotting in response to injury. TF is over expressed in many cancers including gastric, breast, colon, lung, prostate, ovarian and pancreatic cancers. Activation of protease activated receptors by TF:FVIIa complex leads to increases in IL-8, VEGF and other invasiveness promoting factors. Our Factor VIIa inhibitor PCI-27483 is a novel first-in-human small molecule inhibitor that selectively targets FVIIa. As an inhibitor of FVIIa, PCI-27483 has two potential mechanisms of action: 1) inhibition of intracellular signaling involved in tumor growth and metastases and 2) inhibition of early coagulation processes associated with thromboembolism. Pharmacyclics is currently defining the next steps for the development of this agent.
PCI-27483, claimed as a composition of matter, is covered by granted patents in the U.S., Canada, Japan, China and India. We have pending patent applications covering PCI-24783, as compositions of matter, in the U.S., and Europe. As of December 31, 2013, the duration of the granted patents in the U.S., Canada, Japan, China and India that claim PCI-27483 as compositions of matter is through December 2023, subject to any patent term extensions that may be obtained in certain territories. The projected duration of any patent that may grant on any of the pending patent applications covering PCI-24783 as compositions of matter in Europe is through December 2023 and in the US is through June 2025, subject to any patent term extensions that may be obtained in those territories.
ABEXINOSTAT (PCI-24781) PAN-HDAC INHIBITOR
Histone deacetylases ("HDACs") are well-validated drug targets in a number of disease areas including cancer. These enzymes control several vital cellular processes, such as transcription, cell cycle progression, protein transport and degradation etc, and their activity is often dysregulated in cancer. Classically, the major function of these enzymes is controlling the expression of genes, i.e. whether genes are turned "on" or "off" via epigenetic mechanisms. In cancer, HDACs are often differentially expressed from normal cells, resulting in gene expression changes that favor a tumor's ability to multiply, to avoid apoptosis (i.e. programmed cell death) or to become resistant to chemotherapy. Treatment with HDAC inhibitors reverses these changes, resulting in cancer cell death in vitro (i.e. in cultured cells) and tumor growth inhibition in vivo (i.e. in animals) at non-toxic concentrations.
Abexinostat is an orally dosed, broad spectrum, hydroxamic acid-based small molecule HDAC inhibitor that has been evaluated in Phase I and II clinical trials for refractory solid tumors and lymphoma by Pharmacyclics and its ex-U.S. partner, Les Laboratoires Servier of Paris, France ("Servier"). Abexinostat has shown promising anti-tumor activity in vitro and in vivo (Buggy et al, Mol Cancer Ther 2006; 5: 1309-17).
Abexinostat treatment leads to synergistic efficacy in tumor cells in combination with many cancer therapeutics, such as bortezomib, as well as DNA-damaging agents such as radiation (Banuelos et al Clin Cancer  Res 2007 13:6816-26) and chemotherapy agents such as doxorubicin (Lopez et al, Clin Cancer Res 2009 15:3472-83, Yang et al, Anticancer Res. 2011 31:1115-23).  In lymphoma cells, abexinostat together with bortezomib greatly enhances proteasome and NF-êB inhibition, increases oxidative stress, causes cell cycle arrest and results in increased cell death (Bhalla et al Clin Cancer Res 2009 15:3354-65). In solid tumor cells, we have shown that abexinostat inhibits DNA repair following damage by radiation or chemotheraputic agents, thereby enhancing the efficacy of these anti-cancer agents. The mechanism of the synergy may involve inhibition of the homologous recombination pathway, a major double-strand break ("DSB") repair pathway. In a study funded entirely by Pharmacyclics, we showed that abexinostat also effectively synergizes with inhibitors of single-strand break repair such as poly ADP ribose polymerase inhibitors (PARP is a protein important for repairing single-strand breaks in DNA) (Adimoolam et al 2007). Furthermore, abexinostat demonstrated highly synergistic growth inhibition of chemotherapy-resistant tumors in combination with chloroquine (an inhibitor of autophagy, a protective mechanism in cells under stress), particularly in certain subtypes of sarcoma (Lopez et al. Cancer Res 2010 71:185-96). In a model of epigenetic regulation of cancers, abexinostat showed synergistic cell death in glioblastoma cells when combined with a demethylase inhibitor (Singh et al 2011 13:894-903). Other recent preclinical publications have also demonstrated activity of abexinostat in a mouse model of gallbladder carcinoma (Kitamura et al J Hepatology 2012 57:84-91) and in combination with radiation on breast cancer stem cells (Al-Assar et al Cancer Biol & Ther 11: 1028-36, 2011).
Abexinostat has been tested in several clinical trials in the U.S. by Pharmacyclics and globally by our partner Servier. In the U.S., Pharmacyclics has completed two Phase I studies using abexinostat as a single agent in patients with advanced solid tumors, a Phase I/II trial testing abexinostat single agent in patients with relapsed or refractory NHL and a Phase I trial in soft-tissue sarcoma patients (in combination with doxorubicin, an anti-tumor agent) co-sponsored by the Massachusetts General Hospital and Dana-Farber Cancer Institute. Results from this trial were presented at the annual meeting of the Connective Tissue Oncology Society in November 2012 in Prague, Czech Republic and updated at the AACR Annual Meeting in April

12



2013. A Phase II study was undertaken in relapsed/refractory FL and mantle-cell lymphoma (MCL). The results from this study were presented in poster at the 12th International Conference on Malignant Lymphoma ("IMCL") in Lugano, Switzerland (June 19-22, 2013). Pharmacyclics is currently defining the next steps for the development of this agent.
Our collaboration partner for ex-U.S. markets, Servier, has initiated a multitude of Phase I/II trials in Europe and Asia in lymphomas and solid tumors with abexinostat as single agent and in combination with other chemotherapeutic agents including cisplatin, liposomal doxorubicin and FOLFOX. Further analysis of these trials and any updates may be released by Servier.
In April 2009, we entered into a collaboration agreement with Servier, pursuant to which we granted Servier an exclusive license for our pan-HDAC inhibitors, including abexinostat, for territories throughout the world excluding the United States and its possessions. Under the terms of the agreement, Servier will pay us for reaching various development and regulatory milestones and a royalty on sales outside of the United States. We will continue to own all rights within the United States.
Abexinostat and pan-HDAC inhibitors, claimed as compositions of matter, are covered by granted patents in the U.S., Europe, Canada, Mexico, Japan and India. We have pending applications covering abexinostat and pan-HDAC inhibitors, as compositions of matter, in China, Israel, Brazil, and Norway. As of December 31, 2013, the duration of the granted patents in Europe, Canada, Mexico, Japan and India is through 2024, and in the U.S. through 2025 due to a Patent Term Adjustment. The projected duration of any patent that may grant on any of the pending patent applications in China, Israel, Brazil and Norway is through 2024. The durations of the granted patents and the projected duration of any patent that may be granted on any of the pending patent applications are subject to any patent term extensions that may be obtained in certain territories.
Our Business Strategy
Our mission is to build a viable biopharmaceutical company that designs, develops and commercializes novel therapies intended to improve quality of life, increase duration of life and resolve serious medical healthcare needs. The key elements of our business strategy include:
Focusing on creating novel, patentable, differentiated biopharmaceutical products. We are leveraging our expertise in chemistry, biology and clinical development to create multiple novel drug candidates.

Focusing on proprietary drugs that address large markets of unmet medical need for the treatment of oncology and immune mediated diseases. We have focused most of our initial efforts in oncology and immune mediated diseases where we have established strength in preclinical and clinical development.

Utilize biomarkers and predictive pharmacodynamic assays wherever possible. Targeting the right drug to the right patient at the right time with the right dose has the potential to greatly expedite intelligent clinical development and reduce the time, cost and risk of clinical programs.

Leverage development with outsourcing. We utilize outside vendors with expertise and capability in manufacturing and clinical development to more efficiently develop our multiple product candidates.

Create a large clinical pipeline. This allows us to explore the full potential of our existing molecules.
We are subject to risks common to pharmaceutical companies developing products, including risks inherent in our research, development and commercialization efforts, preclinical testing, clinical trials, uncertainty of regulatory and marketing approvals, uncertainty of market acceptance of our products, history of and expectation of future operating losses, reliance on collaborative partners, enforcement of patent and proprietary rights and the need for future capital. In order for a product to be commercialized, we must conduct preclinical tests and clinical trials, demonstrate efficacy and safety of our product candidates to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and marketing arrangements, build U.S. commercial capability, obtain market acceptance and, in many cases, obtain adequate coverage of and reimbursement for our products from government and private insurers. We have incurred significant operating losses since our inception in 1991 and we expect to continue to incur substantial additional operating losses until such time, if ever, as the commercialization of IMBRUVICATM or our other product candidates generates sufficient revenue to cover our expenses. We commercially launched IMBRUVICATM on November 13, 2013.
Collaborations and Other Agreements
Collaboration and License Agreement with Janssen Biotech, Inc.

13



In December 2011, we entered into the Agreement with Janssen for the development and commercialization of IMBRUVICATM, and certain compounds structurally related to IMBRUVICATM, for oncology and other indications, excluding all immune mediated diseases and inflammatory or conditions and all psychiatric or psychological diseases or conditions, in the U.S. and outside the U.S. Each company is leading development for specific indications as stipulated in a global development plan.
The collaboration provides Janssen with an exclusive license to exploit the underlying technology outside of the U.S. (the “License Territory”) and co-exclusively with Pharmacyclics in the U.S.
The collaboration has no fixed duration or expiration date and provided for payments by Janssen to us of a $150,000,000 non-refundable upfront payment upon execution, as well as potential future milestone payments of up to $825,000,000 based upon continued development progress ($250,000,000), regulatory progress ($225,000,000) and approval of the product in both the U.S. and the License Territory ($350,000,000). As of December 31, 2013, $385,000,000 in milestone payments had been earned by the Company under the Agreement and the Company may receive up to an additional $440,000,000 in development, regulatory and approval milestone payments.
Subsequent to December 31, 2013, we announced that the FDA approved IMBRUVICATM as a single agent for the treatment of patients with CLL who have received at least one prior therapy. This approval of IMBRUVICATM in CLL triggered a $60,000,000 milestone payment to us under the Agreement (see Note 15 to the consolidated financial statements).
The Agreement includes a cost sharing arrangement for associated collaboration activities. Except in certain cases, in general Janssen is responsible for approximately 60% of collaboration development costs and we are responsible for the remaining 40% of collaboration development costs. In general, costs associated with commercialization will be included in determining pre-tax profit or pre-tax loss, which are to be shared 50% by us and 50% by Janssen.
The collaboration with Janssen provides us with an annual cap of our share of collaboration costs and pre-tax commercialization losses for each calendar year until the third profitable calendar quarter for the product, as determined in the Agreement. In the event that our share of aggregate development costs in any given calendar year, together with any other amounts that become due from us, plus our share of pre-tax loss (if any) for any calendar quarter in such calendar year, less our share of pre-tax profit (if any) for any calendar quarter in such calendar year, exceeds $50,000,000, then amounts that are in excess of $50,000,000 (the "Excess Amounts") are funded by Janssen. The total Excess Amounts plus interest may not exceed $225,000,000.  Interest shall be accrued on the outstanding balance with interest calculated at the average annual European Interbank Offered Rate ("EURIBOR") for the EURO or average annual London Interbank Offered Rate ("LIBOR") for U.S. Dollars as reported in the Wall Street Journal, plus 2%, calculated on the number of days from the date on which our payment would be due to Janssen. The interest rate on outstanding Excess Amounts shall not exceed 5% per annum, and shall not in the aggregate exceed an outstanding balance of $25,000,000.
In the event the Excess Amounts reach a maximum of $225,000,000, we shall be responsible for our share of development costs, together with any other amounts that become due from us, plus our share of any pre-tax loss beyond such maximum.
For all calendar quarters following the third profitable calendar quarter for the product, as determined in the Agreement, we can no longer add to Excess Amounts and shall be responsible for our own share of development costs along with our share of pre-tax losses incurred in such quarters. Janssen may recoup the Excess Amounts, together with interest from our share of pre-tax profits (if any) in subsequent calendar quarters until the Excess Amounts and applicable interest has been fully repaid.
The Company recognizes Excess Amounts as a reduction to costs and expenses as the Company's repayment of Excess Amounts to Janssen is contingent and would become payable only after the third profitable calendar quarter for the product. Further, Excess Amounts shall be reimbursable only from the Company's share of pre-tax profits (if any) after the third profitable calendar quarter for the product.
Following any regulatory approval in the U.S., Pharmacyclics recognizes product revenue and takes a lead role in U.S. commercial strategy development and both Pharmacyclics and Janssen share in commercialization activities. Under the Agreement, following any regulatory approval outside the United States, Janssen will recognize product revenue and lead and perform commercialization activities. The Agreement also provides that pre-tax profits or pre-tax losses from the commercialization of any products resulting from the collaboration are shared 50% by us and 50% by Janssen.
Both parties have responsibilities for the development, manufacturing and marketing of products resulting from the Agreement. Janssen has the sole responsibility and exclusive rights to commercialize the products in the License Territory. The parties hold joint responsibility and co-exclusive rights to commercialize the products in the U.S., and Pharmacyclics will serve as the lead party in such effort. We continue to work with Janssen on protocols and the design, schedules and timing of trials. Development and commercialization activities under the collaboration are managed through a shared governance structure.

14



Collaboration and License Agreement with Servier
In April 2009, we entered into a collaboration and license agreement with Servier to research, develop and commercialize abexinostat, an orally active, novel, small molecule inhibitor of pan-HDAC enzymes.  Servier is one of the leading independent pharmaceutical companies in France. Under the terms of the agreement, Servier acquired the exclusive right to develop and commercialize the pan-HDAC inhibitor product worldwide except for the United States and its possessions. Pharmacyclics will continue to own all rights within the United States.
In May 2009, we received an upfront payment of $11,000,000 ($10,450,000 net of withholding taxes) from Servier and received an additional $4,000,000 for research collaboration which was paid over a twenty-four month period through April 2011. In April 2011, we also received a $7,000,000 advance development milestone payment from Servier. Under the agreement, we could receive an additional amount of approximately $17,500,000 upon the achievement of certain future development and regulatory milestones, as well as royalty payments. Servier is solely responsible for conducting and paying for all development activities outside the United States.
The collaboration and license agreement continues until the later of the expiration of any patent rights licensed under the license agreement and the expiration of all periods of market exclusivity with respect to licensed compounds. Either Servier or we can terminate the agreement under certain circumstances, including material breach and insolvency.
License agreement with Novo Nordisk A/S
In October 2012, we entered into a license agreement with Novo Nordisk A/S ("Novo Nordisk"). Under the terms of the agreement, Novo Nordisk acquired the exclusive worldwide rights for the Company's small molecule Factor VIIa inhibitor, PCI-27483, in a restricted disease indication outside of oncology. Novo Nordisk will utilize PCI-27483 as an excipient in a product within Novo Nordisk's biopharmaceutical unit. Novo Nordisk is solely responsible for all further research and development activities within the restricted disease indication outside of oncology.
In connection with entering into the license agreement with Novo Nordisk, we received an upfront payment of $5,000,000 in October 2012. The $5,000,000 upfront payment was for the license delivered by us to Novo Nordisk and we have no additional obligation related to the delivery of the license. In addition to the upfront payment, we may receive up to $55,000,000 based on the achievement of certain development, regulatory and sales milestones. Upon commercialization, we will also receive low single digit tiered royalties on Novo Nordisk's net sales of biopharmaceutical formulations utilizing the addition of PCI-27483.
On June 28, 2013, the Company entered into an amended and restated license agreement with Novo Nordisk to expand the scope of the license granted by the Company to Novo Nordisk in October 2012. Under the amended and restated license agreement with Novo Nordisk, the Company has no additional obligations related to the delivery of the license.
Cooperative Research and Development Agreement (CRADA) with the National Cancer Institute (NCI)
In August 2011, we entered into a five-year CRADA with the NCI to collaborate on the development of IMBRUVICATM. Under the Agreement, the NCI's Division of Cancer Treatment and Diagnosis is sponsoring multiple trials of IMBRUVICATM in various hematologic malignancies. In addition, we are participating in several other investigator sponsored trials.
Acquired Products
Celera Corporation
In April 2006, we acquired multiple small molecule drug candidates for the treatment of cancer and other diseases from Celera Genomics, an Applera Corporation business (now Celera Corporation - a subsidiary of Quest Diagnostics Incorporated). Future milestone payments under the agreement, as amended, could total as much as approximately $97,000,000, although we currently cannot predict if or when any of the milestones will be achieved. Approximately two-thirds of the milestone payments relate to our HDAC inhibitor program and approximately one-third relates to our Factor VIIa inhibitor program. Approximately 90% of the potential future milestone payments would be paid to Celera after obtaining regulatory approval in various countries. There were no milestone payments triggered related to our HDAC inhibitor or Factor VIIa programs during the year ended December 31, 2013, the six months ended December 31, 2012, or for the years ended June 30, 2012 and 2011.
In addition to the milestone payments, we are required to make single-digit royalty payments based on annual sales of IMBRUVICATM and would be required to make single-digit royalty payments based on annual sales of drugs commercialized from the Company's HDAC inhibitor, Factor VIIa inhibitor and certain other BTK inhibitor programs. We commercially launched IMBRUVICATM for MCL on November 13, 2013. For the year ended December 31, 2013, we recognized royalty

15



expense under the Celera agreement of approximately $1,000,000 on net product sales of IMBRUVICATM. Royalty expense related to net product sales of IMBRUVICATM is included within cost of goods sold in the consolidated statement of operations. No royalty expense was incurred under the Celera agreement in periods prior to the three months ended December 31, 2013 as there were no product sales.
For any BTK inhibitor product or Factor VIIa inhibitor product obtained from Celera, the agreement with Celera expires on a product-by-product and country-by-country basis. The term of the agreement for a given BTK inhibitor product shall expire in a given country upon the expiration of the last-to-expire Celera patent assigned to us that covers the manufacture, use, sale, offer for sale, or importation of such product in such country. For any HDAC inhibitor product obtained from Celera, the agreement with Celera expires on a product-by-product and country-by-country basis. The term of the agreement for a given HDAC inhibitor product shall expire in a given country upon the expiration of the last-to-expire Celera patent assigned to us that covers the sale of such product in such country.
We may terminate the agreement with Celera in its entirety, or with respect to one or more of the three classes of products (BTK inhibitor products, HDAC inhibitor products and Factor VIIa inhibitor products) obtained from Celera, at any time by giving Celera at least 60 days' prior written notice. If we terminate the agreement with respect to a particular class of products, ownership of the Celera intellectual property assigned to us relating to the products in the terminated product class will revert to Celera. If we terminate the agreement in its entirety, ownership of all of the Celera intellectual property assigned to us will revert to Celera.
The agreement with Celera may be terminated effective immediately upon a party's written notice to the other party for a breach by the other party that remains uncured for 90 days after notice of the breach is given to the breaching party. If we breach the agreement only with respect to one or two of the three classes of products obtained from Celera, but not with respect to all three classes of products, and if our breach remains uncured for 90 days after we have received notice of breach from Celera, Celera may terminate the agreement solely with respect to the class or classes of products affected by our breach, but may not terminate the agreement with respect to the class or classes of products unaffected by our breach.
Patents and Proprietary Technology
We believe our success depends in part on our ability to protect and defend our proprietary technology and product candidates through patents and trade secret protection.  We, therefore, aggressively pursue and prosecute, patent applications and protect our trade secrets. While we intend to defend against threats to our intellectual property, these patents and trade secrets may not adequately protect our intellectual property.
We have a number of patents and patent applications related to our compounds, but we cannot be certain that issued patents will be enforceable or provide adequate protection or that pending patent applications will issue as patents. The evaluation of the patentability of United States and foreign patent applications can take years to complete and can involve considerable expense.  Even if patents are issued and maintained, these patents may not be of adequate scope to benefit us, or may be held invalid and unenforceable against third parties. Third parties could obtain patents that may require us to negotiate licenses to conduct our business, and the required licenses may not be available on reasonable terms or at all.
Our patents, patent applications, and licensed patent rights cover various compounds, pharmaceutical formulations and methods of use. As of December 31, 2013, Pharmacyclics owns or holds licenses to:
60 issued U.S. patents; and
96 other pending U.S. patent applications, including 9 allowed U.S. patent applications.
These issued U.S. patents expire at various times depending on product programs (see above program sections for certain specific compounds). In addition, Pharmacyclics owns or holds licenses to approximately 169 issued foreign patents, 16 Patent Cooperation Treaty ("PCT") patent applications, and more than 200 pending non-U.S. patent applications filed with the European Patent Office, and nationally in Canada, Japan, China, India, Australia and other international territories.
Some of these issued patents would be subject to potential patent term extensions in the U.S. and certain non-U.S. territories.
We also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. We depend on confidentiality and assignment-of-invention agreements with certain of our employees, consultants and other parties, to protect in part trade secrets and other proprietary rights. We cannot be certain that this agreements will not be breached, that we will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information, or that third parties will not otherwise gain access to our trade secrets or proprietary information.

16



Research and Development
The majority of our costs and expenses to date have been related to research and development, or R&D. R&D expenses consist of independent R&D costs and costs associated with collaborative R&D. R&D expenses were $85,133,000 for the year ended December 31, 2013 (net of Janssen's share of costs under the cost sharing arrangement of $48,223,000 and Excess Amounts of $85,732,000 which were recorded as reductions to R&D expense). R&D expenses were $29,333,000 for the six months ended December 31, 2012 (net of Janssen's share of costs under the cost sharing arrangement of $17,339,000 and Excess Amounts of $17,306,000 which were recorded as reductions to R&D expense). R&D expenses were $54,537,000 for the year ended June 30, 2012 (net of Janssen's share of costs under the cost sharing arrangement of $18,381,000) and $34,482,000 for the year ended June 30, 2011. For further information regarding the terms and conditions underlying our cost sharing arrangement with Janssen, see "Collaboration and License Agreement with Janssen Biotech, Inc." above.
Manufacturing
Overview
Generally the raw materials required for the production of our product are available from several suppliers, yet in some cases the raw materials are only available through one supplier. We have adopted policies to attempt, to the extent feasible, to minimize our raw material supply risks, including maintenance of greater levels of raw materials inventory and implementation of multiple raw materials sourcing strategies, especially for critical raw materials. Although to date we have not experienced any significant delays in obtaining any raw materials from our suppliers, we cannot provide assurance that we will not face shortages from one or more of them in the future.
We contract with third parties to manufacture the raw materials and the active pharmaceutical ingredient ("API") of IMBRUVICATM for clinical and commercial uses. We currently do not have internal manufacturing facilities for clinical or commercial production of IMBRUVICATM. In addition, we expect in the foreseeable future to continue to rely on third parties for the manufacture of the raw materials, API for IMBRUVICATM.
Raw materials required for the production of the API are generally sourced from several third-party suppliers. Contract manufacturers in Asia convert these raw materials into API for clinical and commercial purposes. We use a third party facility in North America to manufacture drug product. A dedicated facility is in construction at this site to eventually provide drug product manufacturing. Another third party is used to package and label the finished product for commercial purposes. We use a third party logistics provider to handle shipping and warehousing of our commercial supply of IMBRUVICATM and a range of specialty pharmacies and distributors to dispense IMBRUVICATM to patients in fulfillment of prescriptions.
Our third-party manufacturers are independent entities, under contract with us, who are subject to their own unique operational and financial risks which are out of our control. If we or any of our third-party manufacturers fail to perform as required, this could impair our ability to deliver IMBRUVICATM on a timely basis or cause delays in supplies for our clinical trials and commercial activities. To the extent these risks materialize, our financial results may be adversely affected.
The processes used to manufacture our products are proprietary. For products manufactured by our third-party contract manufacturers, we have licensed the necessary knowhow of these processes which are proprietary to us to enable them to manufacture the products for us. We have agreements with these third-party manufacturers to restrict these manufacturers from using or revealing our processes, but we cannot be certain that these third-party manufacturers will comply with these restrictions.
To establish a new third party manufacturer to produce our products may take several years. While there are third parties potentially capable of providing most of the materials and services we need to manufacture and distribute IMBRUVICATM, it is very expensive, time consuming, and we may be subject to other implementation execution risks should we be required to replace any member of our existing supply chain. We are dependent on the performance of our supply chain. Should any third party manufacturer in our supply chain fail to perform for any reason it may have significant consequences on our ability to deliver the commercial and clinical supplies of IMBRUVICATM.
We believe that our current arrangement for the supply of starting materials, intermediates and active ingredients, will be adequate to satisfy our currently forecasted commercial requirements of IMBRUVICATM and any currently planned future clinical studies. Due to the significant lead times involved in our supply chain for IMBRUVICATM, we have less flexibility to adjust our supply in response to changes in demand than if we had shorter lead times.
Manufacturing Agreements
Agreement with Lonza Sales Ltd. ("Lonza")

17



On February 5, 2013, we entered into a Commercial Manufacturing Agreement (the "Lonza Agreement") with Lonza dated as of February 5, 2013 (the "Lonza Effective Date"), pursuant to which Lonza will manufacture for Pharmacyclics a human pharmaceutical oncology agent (the "Lonza Product"), as identified in the Lonza Agreement, for the sale and distribution by Pharmacyclics. On October 2, 2013, Pharmacyclics and Lonza entered into an amendment to the Lonza Agreement (the “Amendment”), which amends certain pricing and delivery terms originally included in the Lonza Agreement.
Under the Lonza Agreement, Lonza has agreed to supply the Lonza Product and we have agreed to purchase Lonza Product, subject to Lonza’s continued material compliance with the terms of the Lonza Agreement. Pharmacyclics is obligated to purchase a minimum amount of Lonza Product, to be calculated based on a percentage of Pharmacyclics' global requirements of Lonza Product in each calendar year. In the event that the minimum amount of the Lonza Product is not purchased by Pharmacyclics, Lonza may invoice Pharmacyclics for the amount equal to the shortfall between the minimum purchase requirement and the number of units of Lonza Product actually ordered during such year. The Lonza Agreement commenced on the Lonza Effective Date and will continue for a certain specified number of years (the "Lonza Agreement Term"), unless terminated earlier as provided in the Lonza Agreement. Upon expiration of the Lonza Agreement Term or any extension thereof, the Lonza Agreement will automatically extend for an additional set period, as set forth in the Lonza Agreement.
Agreement with Catalent CTS, LLC ("Catalent")
On May 1, 2013, we entered into a Build-Out and Commercial Supply Agreement (the "Catalent Agreement") with Catalent dated as of May 1, 2013 (the "Catalent Effective Date"), pursuant to which Catalent will manufacture and supply Pharmacyclics’ fully formulated bulk pharmaceutical product (the "Catalent Product").
Under the Catalent Agreement, we will purchase from Catalent the Catalent Product during the term of the Catalent Agreement for commercial use in certain specified territories that we and Catalent mutually agree to in writing (the "Territory"). The Catalent Agreement commenced on the Catalent Effective Date and will continue until the earlier of the end of a specified anniversary of the completion of the building improvements in accordance with the terms of the Catalent Agreement (the "Completion Date") or July 1, 2014, unless earlier terminated in accordance with the Catalent Agreement. A contract year means each consecutive 12 month period beginning on the earlier of the Completion Date or July 1, 2014, and each anniversary thereof, as applicable. The term of the Catalent Agreement will be automatically extended for successive five year periods, with a total maximum extension of a specified number of years, as indicated in the Catalent Agreement.
We will be obligated to purchase from Catalent a certain minimum amount with respect to the Catalent Product. This amount will be determined in accordance with the requirements of Catalent Product for countries in the Territory in which Pharmacyclics has the right to sell, have sold, or grant a license to sell the Catalent Product. Pharmacyclics will pay Catalent a non-refundable annual facility fee, which includes the cost of a designated number of batches of Catalent Product to be produced. Any additional batches of Catalent Product ordered in a contract year will be paid to Catalent in accordance with the terms of the Catalent Agreement.
Customers
We sell IMBRUVICATM to specialty pharmacies ("SP") that sell to individual patients and specialty distributors ("SD") that sell to hospital pharmacies. For details on our customers, refer to Notes 2 and 3 to the consolidated financial statements.
Competition
There are many companies focused on the development of small molecules and antibodies for treating B-cell malignancies. Our potential competitors include major pharmaceutical and biotechnology companies, clinical reference laboratories and government agencies, as well as academic research institutions that are pursuing research activities similar to ours. Many of our potential competitors have significantly more financial and other resources, larger research and development staffs, lower labor costs, more extensive marketing and manufacturing organizations, and other resources than we do, which may allow them to have a competitive advantage.
Many of these companies and organizations have significant experience in preclinical testing, human clinical trials, product manufacturing, marketing, sales and distribution and other regulatory approval and commercial procedures. They may also have a greater number of significant patents and greater legal resources to seek remedies for cases of alleged infringement of their patents by us to block, delay or compromise our own drug development process.
The markets for which we have and intend to pursue regulatory approval of IMBRUVICATM are highly competitive. We are aware of products in research or development by our competitors that are intended to treat the B-cell malignancies we are targeting, and any of these products may compete with IMBRUVICATM. Our competitors may succeed in developing their products before we do, obtaining approvals from the FDA, or regulatory agencies in other regions of the world, for their

18



products more rapidly than we do, or developing products that are more effective than IMBRUVICATM. These products or technologies might render our technology obsolete or noncompetitive. There may also be drug candidates of which we are not aware at an earlier stage of development that may compete with IMBRUVICATM. In addition, IMBRUVICATM competes with existing therapies that have long histories of use, such as chemotherapy used in cancer indications.
See "Risk Factors — Risks Related to Our Industry – We face rapid technological change and intense competition."
Government Regulation and Product Approval
The FDA and applicable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our product candidates. Failure to comply with FDA requirements, both before and after product approval, may subject us to administrative or judicial sanctions, including but not limited to, FDA refusal to approve pending applications, warning letters, product recalls, product seizures, or total or partial suspension of production or distribution, fines, injunctions, or civil or criminal penalties.
The process required by the FDA before our products may be marketed or receive a label extension in the U.S. generally involves the following:
completion of preclinical laboratory and animal tests;
submission of an Investigational New Drug ("IND") application, which must become effective before clinical trials may begin;
performance of adequate and well-controlled human clinical trials to establish the safety and efficacy for each intended use;
submission to the FDA of a (supplemental) New Drug Application ("NDA"); and
satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the product candidate is made to assess compliance with the FDA’s current good manufacturing practice ("cGMP") regulations.
The testing and approval process requires substantial time, effort, and financial resources; and we cannot be certain that any approval will be granted on a timely basis, if at all.
Preclinical tests include laboratory evaluation of the product, its chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of the product. We then submit the results of the preclinical tests, together with manufacturing information and analytical data, to the FDA as part of an IND, which must become effective before we may begin human clinical trials. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the trials as outlined in the IND, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. Our submission of an IND may not result in FDA authorization to commence clinical trials. Further, an independent Institutional Review Board/Ethics Committee responsible for the medical center proposing to conduct the clinical trials must review and approve any clinical study.
Human clinical trials are typically conducted in three sequential phases which may overlap:
Phase I: The drug is initially introduced into healthy human subjects or patients and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion.
Phase II: Involves studies in a limited patient population to identify possible adverse effects and safety risks, to evaluate preliminarily the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage/schedule.
Phase III: When Phase II evaluations demonstrate that a dosage range of the product may be effective and has an acceptable safety profile, Phase lll trials are undertaken to evaluate clinical efficacy and safety in the patient population intended for registration at geographically dispersed clinical study sites.
In the case of products for severe or life-threatening diseases such as cancer, the initial human testing is often conducted in patients rather than in healthy volunteers. Since these patients already have the target disease, these studies may provide initial

19



evidence of efficacy traditionally obtained in Phase II trials and thus these trials are frequently referred to as Phase I/II trials. We cannot be certain that we will successfully complete Phase I, Phase II or Phase III testing of our product candidates within any specific time period, if at all. Furthermore, the FDA/applicable agencies, the relevant Institutional Review Board/Ethics Committee or the sponsor may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.
The results of product development, preclinical studies and clinical studies are submitted to the FDA as part of a New Drug Application, or NDA, for approval of the product allowing commercial shipment and marketing of the product. The FDA may not accept the NDA for review if the applicable regulatory criteria are not satisfied or may require additional data. Even if such data are accepted for filing, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. In addition, before approving an NDA, the FDA will inspect the facilities at which the product is manufactured to ensure compliance with all cGMP regulations. Once issued, the FDA/applicable regulatory agencies may withdraw product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. In addition, the FDA/applicable regulatory agency may require testing and surveillance programs to monitor the effect of approved products which have been commercialized, and the agency has the authority to prevent or limit further marketing of a product based on the results of these post-marketing studies or evaluations.
Satisfaction of the above FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially, based upon the type, complexity and novelty of the pharmaceutical product. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon our activities. We cannot be certain that the FDA or any other regulatory agency will grant approval for any of our products under development on a timely basis, if at all. Success in preclinical or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities is not always conclusive and may be susceptible to varying interpretations which could delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, the approval may be significantly limited to specific indications. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Delays in obtaining, or failures to obtain regulatory approvals would have a material adverse effect on our business. Marketing our products abroad will require similar regulatory approvals and is subject to similar risks. In addition, we cannot predict what adverse governmental regulations may arise from future U.S. or foreign governmental action.
Any products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA (announced or unannounced) and certain state agencies, and are subject to periodic inspections by the FDA and certain state agencies for compliance with Good Manufacturing Practice regulations, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. We cannot be certain that we or our present or future suppliers will be able to comply with the current Good Manufacturing Practice, or cGMP, regulations and other FDA regulatory requirements.
The FDA regulates drug labeling and promotion activities. The FDA has actively enforced regulations prohibiting the marketing of products for unapproved uses. The Company, our partners, and our products are also subject to a variety of federal, state and foreign laws and regulations in those states or localities where our products are or will be marketed. Any applicable state or local regulations may hinder our ability to market our products in those states or localities. We are also subject to numerous federal, state, local and foreign laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with such laws and regulations now or in the future.
The FDA's policies may change and additional government regulations may be enacted which could prevent or delay regulatory approval of our potential products. Moreover, increased attention to the containment of health care costs in the U.S. and in foreign markets could result in new government regulations that could have a material adverse effect on our business. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the U.S. or abroad.
Employees
As of December 31, 2013, we had 484 employees, all of whom were full-time employees. 269 of our employees are engaged in research, development, preclinical and clinical testing, manufacturing, quality assurance and quality control and regulatory affairs and 215 are in sales and marketing, medical affairs, legal and compliance, human resources, procurement, finance and administration.  Forty-one of our employees have an M.D. or Ph.D. degree. Our future performance depends in significant part upon the continued service of our key scientific, technical and senior management personnel, none of whom is

20



bound by an employment agreement requiring service for any defined period of time. The loss of the services of one or more of our key employees could harm our business. None of our employees are represented by a labor union. We consider our relations with our employees to be good.
Change in Fiscal Year End
On November 14, 2012, the Board of Directors approved a change in the fiscal year end from June 30 to December 31, effective December 31, 2012. All references to "fiscal years", unless otherwise noted, refer to the twelve-month fiscal year, which prior to July 1, 2012, ended on June 30, and beginning on January 1, 2013, ends on December 31, of each year.
Available Information
We were incorporated in Delaware in 1991 and commenced operations in 1992.
We file electronically with the Securities and Exchange Commission, or SEC, our annual reports on Form 10-K, quarterly interim reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We maintain a site on the worldwide web at www.pharmacyclics.com; however, information found on our website is not incorporated by reference into this report. We make our SEC filings available free of charge on or through our website, including our annual report on Form 10-K, quarterly interim reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Further, a copy of this annual report on Form 10-K is located at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.
In 2004, we adopted a code of ethics that applies to our officers, directors and employees, including our principal executive officer, principal financial officer and principal accounting officer. We have posted the text of our code of ethics on our website at www.pcyc.com in connection with “Investor” materials. In addition, we intend to promptly disclose (1) the nature of any amendment to our code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of our code of ethics that is granted to one of these specified officers, the name of such person who is granted the waiver and the date of the waiver on our website in the future.

Item  1A.                      Risk Factors
An investment in our securities involves a high degree of risk. Anyone who is making an investment decision regarding our securities should carefully consider the following risk factors, as well as the other information contained or incorporated by reference in this report. The risks and uncertainties described below are those that we currently believe may materially affect our company or your investment. Other risks and uncertainties that we do not presently consider to be material, or of which we are not presently aware, may become important factors that adversely affect our security holders or us in the future. If any of the risks discussed below actually materialize, then our business, financial condition, operating results, cash flows and future prospects, or your investment in our securities, could be materially and adversely affected, resulting in a loss of all or part of your investment.
Risks Relating to Pharmacyclics
IMBRUVICATM (ibrutinib) is our only approved product.
On November 13, 2013, we obtained approval from the United States Food and Drug Administration, or FDA, to market IMBRUVICATM to treat patients with Mantle Cell Lymphoma (MCL) and on February 12, 2014 to treat patients with CLL, who in each case have received at least one prior therapy. This is the only marketing approval for IMBRUVICATM we have received anywhere in the world. Unless we and our collaboration partner, Janssen, can obtain regulatory approval of, and successfully commercialize, IMBRUVICATM to treat other patient populations within the U.S., or any patient populations outside the U.S., we will be solely dependent on U.S. sales of IMBRUVICATM to treat patients with MCL and CLL who in each case have received at least one prior therapy to generate revenue and fund our operations.
Our prospects are largely dependent on (a) successful commercialization of IMBRUVICATM in the U.S. to treat patients with MCL and CLL who in each case have received at least one prior therapy, (b) obtaining regulatory approval of, and

21



successfully commercializing, IMBRUVICATM outside the U.S. to treat patients with MCL and CLL who in each case have received at least one prior therapy, and (c) obtaining regulatory approval of, and successfully commercializing, IMBRUVICATM both in and outside the U.S. to treat other indications. If we are unsuccessful in achieving any one or more of these critical business objectives, our ability to generate significant revenue or achieve profitability will be adversely affected and our business may fail.
The commercialization of IMBRUVICATM for the treatment of patients with MCL and CLL who in each case have received at least one prior therapy, or any other patient populations for which IMBRUVICATM may subsequently be approved may not be successful for a number of reasons, including:
we and our collaborative partner, Janssen, may not be able to establish or demonstrate in the medical community the safety and efficacy of IMBRUVICATM and its potential advantages over and side effects compared to competing therapeutics and products currently in clinical development for each applicable patient population;
our limited experience in marketing IMBRUVICATM for any patient population;
reimbursement and coverage policies of government and private payors such as Medicare, Medicaid, insurance companies, health maintenance organizations and other plan administrators;
the relative price of IMBRUVICATM as compared to alternative treatment options;
changed or increased regulatory restrictions;
changes to the label for IMBRUVICATM that further restrict how we and Janssen market IMBRUVICATM, including as a result of data collected from the safety study of platelets in patients that the FDA required us to undertake as a post-marketing requirement or from any other ongoing or future studies;
we may not have adequate financial or other resources to successfully commercialize IMBRUVICATM; and
we and Janssen may not be able to obtain adequate commercial supplies of IMBRUVICATM to meet demand or at an acceptable cost.
If the commercialization of IMBRUVICATM is unsuccessful, our ability to generate revenue from product sales and achieve profitability will be adversely affected and our business could fail.
Our success will depend on our ability to effectively and profitably commercialize IMBRUVICATM.
Our success will depend on our ability to effectively and profitably commercialize IMBRUVICATM, which will include our ability to:
create market demand for IMBRUVICATM through education, marketing and sales activities;
achieve market acceptance and generate product sales;
receive adequate levels of reimbursement from third-party payers, such as private insurance programs;
comply with post-marketing requirements established by the U.S. Food and Drug Administration, or FDA, for IMBRUVICATM, and any other requirements established by the FDA in the future;
conduct the post-marketing studies required by the FDA;
comply with other healthcare regulatory requirements;
ensure that the active pharmaceutical ingredient, or API, for IMBRUVICATM and the finished product are manufactured in sufficient quantities and in compliance with requirements of the FDA and similar foreign regulatory agencies and with an acceptable quality and pricing level in order to meet commercial demand; and
ensure that the entire supply chain for IMBRUVICATM - from API to finished product - efficiently and consistently delivers IMBRUVICATM to our customers.
Prior to commercialization of IMBRUVICATM, we have not had any commercial products. While many members of our management and key personnel have significant experience launching and commercializing drugs at other companies, we have not worked together to commercialize any drug in the past and we cannot be certain that we will be successful. If we are unable to successfully commercialize IMBRUVICATM, our ability to generate product sales will be severely limited, which will have a material adverse impact on our business, financial condition, and results of operations.

22



Acceptance of our products in the marketplace is uncertain, and failure to achieve market acceptance may harm our business.
Although approved for marketing for the treatment of patients with MCL and CLL, who in each case have received at least one prior therapy, IMBRUVICATM may not achieve market acceptance. The degree of market acceptance for IMBRUVICATM and our other product candidates will depend upon a number of factors, including:
the receipt of regulatory approvals for the additional indications of IMBRUVICATM and the desired indications for our other product candidates, and the acceptance by physicians and patients of the clinical benefits that IMBRUVICATM and our other product candidates may offer;
the establishment and demonstration in the medical community of the safety, clinical efficacy and cost-effectiveness of IMBRUVICATM our other product candidates and their potential advantages over existing therapeutic products;
marketing and distribution support;
the introduction, market penetration and pricing strategies of competing and future products;
coverage and reimbursement policies of governmental and other third- party payers such as insurance companies, health maintenance organizations and other plan administrators; and
physicians, patients, payers or the medical community in general may be unwilling to accept, purchase, utilize or recommend IMBRUVICATM or any of our other product candidates.
If growth in sales of our product is slow or perceived to be slow in the first few months after product launch, future sales of the product may be reduced.
We have commercially launched IMBRUVICATM for the treatment of patients with MCL and CLL, who in each case have received at least one prior therapy. The growth in sales of IMBRUVICATM during the months immediately following the product’s commercial launch, as reported by us and/or market analysts, may be or may be perceived to be slow, flat or negative. Historically, the speed and size of the growth in sales of a new pharmaceutical product during the first few months of sales will define or have a lasting impact on the future sales performance of the product. We cannot guarantee that the growth in sales of IMBRUVICATM will be reported or perceived to be strong during the months immediately following the product’s commercial launch. If during the months immediately following the product’s commercial launch the growth in sales of IMBRUVICATM is reported and/or perceived to be slow, flat or negative, IMBRUVICATM likely would not generate the interest or momentum necessary for the product to reach its full potential over time, causing a lasting reduction in the sales performance of IMBRUVICATM and a commensurate diminution of the value of our business.
If we are unable to obtain marketing approvals for IMBRUVICATM outside the United States, or if we are significantly delayed or limited in doing so, our results of operations and business will be materially and adversely affected and our stock price would likely decline.
In October 2013, our partner Janssen filed a Marketing Authorization Application, or MAA, for IMBRUVICATM in the European Union, and the European Medicines Agency, or EMA, accepted the filing for review. By and also through our partner Janssen, we also plan to seek regulatory approval of IMBRUVICATM in approximately 50 additional territories.
Despite the FDA’s approval of IMBRUVICATM, we cannot assure you or predict with any certainty that any other foreign regulatory authority will grant marketing approval for IMBRUVICATM, or the expected timeframe of any such approval. The review and potential approval of IMBRUVICATM carries many risks and uncertainties, and our regulatory submissions outside of the United States may not be satisfactory to the applicable regulatory authorities, including with regard to demonstrating adequate safety and efficacy for regulatory approval. We have made, and expect to make in the future, assumptions, estimations, calculations and decisions as part of our analyses of data and regulatory submissions, and the applicable regulatory authorities may not accept or agree with our assumptions, estimations, calculations, decisions or analyses or may interpret or weigh the importance of data differently.
Furthermore, as was the case with FDA approval, other regulatory approvals, even if obtained, may be limited to specific indications, limit the type of patients in which the drug may be used, or otherwise require specific warning or labeling language, any of which might reduce the commercial potential of IMBRUVICATM. As with the FDA’s approval of IMBRUVICATM, regulatory authorities in other territories may condition IMBRUVICATM marketing approval on the conduct of specific post-marketing studies to further evaluate safety and efficacy, in either particular or general patient populations or both. The results of these studies, discovery of previously unknown issues involving safety or efficacy or failure to comply with post-approval regulatory requirements, including requirements with respect to manufacturing practices, reporting of adverse

23



effects, advertising, promotion and marketing, may result in restrictions on the marketing of IMBRUVICATM or the withdrawal of IMBRUVICATM from the market.
We are subject to certain healthcare laws, regulation and enforcement that may impact the commercialization of IMBRUVICATM and our product candidates. Failure to comply with such laws, regulations and enforcement could subject us to significant fines and penalties and result in a material adverse effect on our results of operations and financial condition.
We are subject to several healthcare regulations and enforcement by the federal government and the states in which we conduct our business. These laws may impact, among other things, the viability of the corporation as a whole, and more specifically, the sales, marketing and education programs for IMBRUVICATM or any of our potential future product candidates that may be approved for commercial sale. The most significant healthcare laws, regulations and enforcement areas are as follows:
the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act (collectively, "HIPAA"), as amended by the Health Information for Economic and Clinical Health Act of 2009 ("HITECH") which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information;
the federal healthcare programs’ Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;
federal False Claims Act which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;
the Federal Food, Drug, and Cosmetic Act, which, among other things, strictly regulates drug product marketing, prohibits manufacturers from marketing drug products for off-label use, and regulates the distribution of drug samples;
the Foreign Corrupt Practices Act, which among other things, prohibits bribery of non-US government (i.e., foreign) officials;
the PhRMA Code on Interactions with Healthcare Professionals (codified into law in the California), which among other things, governs appropriate interactions between pharmaceutical manufacturers and healthcare professionals;
federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; and
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.
Additionally, the compliance environment is changing, with more states, such as California and Massachusetts, mandating implementation of compliance programs, compliance with industry ethics codes, and spending limits, and other states, such as Vermont, District of Columbia, and Minnesota limiting the provision of and/or requiring reporting to state governments of gifts, compensation, and other remuneration to healthcare professionals. Moreover, Section 6002 of the Patient Protection and Affordable Care Act, or PPACA, includes new requirements for pharmaceuticals manufacturers, among others, to report certain financial arrangements with physicians and teaching hospitals, as defined in PPACA, including reporting any payment or “transfer of value” made or distributed to teaching hospitals, prescribers, and other healthcare providers and reporting any ownership and investment interests held by physicians and their immediate family members and applicable group purchasing organizations during the preceding calendar year. Section 6002 of PPACA includes in its reporting requirements a broad range of transfers of value (such as, for example, consulting fees, charitable contributions, payments for research, and grants) and excludes a transfer of anything the value of which is less than $10, unless the aggregate amount of such transfers of value to a recipient exceeds $100 annually. On February 8, 2013, the Centers for Medicare and Medicaid Services, or CMS, released the final rule implementing Section 6002 of PPACA. Under the rule, drug manufacturers are required to track payments or transfers of value to recipients beginning on August 1, 2013, and annually report payments, transfers for value, and investments interests beginning on March 31, 2014. Under the rule, with our product approval on November 13, 2013 for MCL, we will commence data capture from May 12, 2014, 6 months from product registration, for reporting by March 31, 2015. Several states currently have similar laws and more states may enact similar legislation. Reporting and potential public disclosure of these expenses may make it more difficult to recruit physicians for assistance with activities that would be helpful to our business. Tracking and reporting the required expenses may result in considerable expense and additional resources.

24



If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results.
Current health care laws and regulations, including the recently enacted health care reform, as well as future legislative or regulatory changes to the healthcare system, may affect our ability to sell our products profitably.
In the United States, there has been recent legislation, as well as legislative and regulatory proposals, changing the healthcare system in ways that may affect our future revenue and profitability, and the future revenue and profitability of our potential customers, suppliers and collaborative partners, and the availability of capital. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system and, in particular, that are intended to contain or reduce the costs of medical products and services.
The most significant recent health care legislation is the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the “Healthcare Reform Act”, which President Obama signed into law in March 2010. This law substantially changes how health care is funded by the state and federal government as well as private insurers, and significantly impacts the pharmaceutical industry. Though the full effect of the Healthcare Reform Act on pharmaceutical companies has yet to be seen, the changes that may affect our business include those governing enrollment in federal healthcare programs, reimbursement changes, new governmental programs, and fraud and abuse enforcements. The Healthcare Reform Act takes effect in stages through 2018.
Certain aspects of the Health Care Reform Act are likely to adversely affect pharmaceutical manufacturers in particular. For example, in 2011, the Healthcare Reform Act imposed non-deductible annual flat fees on pharmaceutical manufacturers and importers based upon relative market share. Furthermore, as part of the Healthcare Reform Act closing a funding gap in the Medicare Part D prescription drug program, certain pharmaceutical manufacturers will be required to provide a 50% discount on drugs dispensed to beneficiaries within this funding gap.
There also have been and likely will continue to be legislative and regulatory proposals at the state and federal levels that could bring about significant changes to the Medicaid drug rebate program and other federal pharmaceutical pricing and rebate programs. Given these and other recent federal and state government initiatives directed at lowering the total cost of health care, federal and state lawmakers will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid programs. These efforts could adversely affect our business by, among other possibilities, limiting the prices that can be charged for drugs we develop or the amount of reimbursement available for these products from governmental agencies or third-party payers, limiting the profits that pharmaceutical companies may earn on certain sales, increasing the tax obligations on pharmaceutical companies, increasing our rebate liability, or limiting our commercial opportunity. We cannot predict the impact on our business of any legislation or regulations that may be adopted in the future. Any cost containment measures and other healthcare system reforms that are adopted could have a material adverse effect on our ability to operate profitably.
We may need to adjust our business practices to comply with evolving health care fraud and abuse regulations, and our failure to comply with such laws could adversely affect our business, financial condition and results of operations.
Our operations will be directly, or indirectly through our customers, subject to various state and federal fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and False Claims Act. These laws may impact, among other things, our proposed sales, marketing and education programs.
The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statute's intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements, Congress authorized the Department of Health and Human Services, Office of Inspector General ("OIG") to issue a series of regulations, known as the "safe harbors." These safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities such as the

25



OIG. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.
The federal False Claims Act prohibits persons from knowingly filing or causing to be filed a false claim to, or the knowing use of false statements to obtain payment from, the federal government. Suits filed under the False Claims Act, known as "qui tam" actions, can be brought by any individual on behalf of the government and such individuals, sometimes known as "relators" or, more commonly, as "whistleblowers," may share in any amounts paid by the entity to the government in fines or settlement. The frequency of filing of qui tam actions has increased significantly in recent years, causing greater numbers of healthcare companies to have to defend a False Claim action. In addition, under current case law of the federal courts, the False Claims Act prohibits as a false claim any claim for payment submitted to or paid by the federal government for utilization of a prescription drug consequent to off-label promotion of the drug in violation of the Food, Drug and Cosmetics Act (FDCA). When an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of between $5,500 to $11,000 for each separate false claim, and face exclusion from Medicare, Medicaid, and other federal health programs. Various states have also enacted laws modeled after the federal False Claims Act.
In addition to the laws described above, the Health Insurance Portability and Accountability Act of 1996 created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payers. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment.
If our operations are found to be in violation of any of the laws described above and other applicable state and federal fraud and abuse laws, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from government healthcare programs, and the curtailment or restructuring of our operations.
Even though we have obtained approval to market IMBRUVICATM in the United States, we are subject to ongoing regulatory obligations and review, including post-approval requirements that could result in the withdrawal of IMBRUVICATM from the market.
IMBRUVICATM was approved for treating patients with MCL and for patients with CLL, who in each case have received at least one prior therapy under the FDA’s priority review program, which provides for an expedited review for drugs that may offer significant improvement in treatment or provide treatment where no satisfactory alternative therapy exists. Even though we have obtained approval to market IMBRUVICATM in the United States, we are subject to extensive ongoing obligations and continued regulatory review from the FDA and other applicable regulatory agencies, such as continued adverse event reporting requirements and the requirement to have our promotional materials pre-cleared by the FDA. There may also be additional FDA post-marketing obligations, all of which may result in significant expense and limit our ability to commercialize IMBRUVICATM in the United States or potentially other jurisdictions.
We and the manufacturers of IMBRUVICATM are also required to comply with cGMP regulations which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Further, regulatory agencies must approve these manufacturing facilities before they can be used to manufacture IMBRUVICATM. In addition, regulatory agencies subject an approved product, its manufacturer and the manufacturer’s facilities to continual review and inspections. The subsequent discovery of previously unknown problems with IMBRUVICATM, including adverse events of unanticipated severity or frequency, or problems with the facilities where IMBRUVICATM is manufactured, may result in restrictions on the marketing of IMBRUVICATM, up to and including withdrawal of IMBRUVICATM from the market. If our manufacturing facilities or those of our suppliers fail to comply with applicable regulatory requirements, such noncompliance could result in regulatory action and additional costs to us. Failure to comply with applicable FDA and other regulatory requirements may subject us to administrative or judicially imposed sanctions, including:
issuance of Form 483 notices or Warning Letters by the FDA or other regulatory agencies;
imposition of fines and other civil penalties;
criminal prosecutions;

26



injunctions, suspensions or revocations of regulatory approvals;
suspension of any ongoing clinical trials;
total or partial suspension of manufacturing;
delays in commercialization;
refusal by the FDA to approve pending applications or supplements to approved applications filed by us;
refusals to permit drugs to be imported into or exported from the United States;
restrictions on operations, including costly new manufacturing requirements; and
product recalls or seizures.
The policies of the FDA and other regulatory agencies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of IMBRUVICATM in other indications or further restrict or regulate post-approval activities. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, we or Janssen might not be permitted to market IMBRUVICATM and our business would suffer.
If any promotional activities that we undertake fail to comply with the regulations and guidelines of the FDA and applicable foreign regulatory agencies, we may be subject to warnings or enforcement actions that could harm our business.
Physicians may prescribe drugs for uses that are not described in the drug’s labeling or for uses that differ from those tested in clinical studies and approved by the FDA or foreign regulatory authorities. Regulatory authorities generally do not regulate the behavior of physicians in their choice of treatments. Regulatory authorities do, however, restrict communications on the subject of off-label use. Companies cannot actively promote approved drugs for off-label uses but may in some jurisdictions and under specified conditions disseminate articles published in peer-reviewed journals that discuss off-label uses of approved products to physicians. To the extent allowed, we may in the future disseminate peer-reviewed articles on our products to physicians. If our promotional activities for IMBRUVICATM and any other potential future product candidate for which we may receive regulatory approval fail to comply with these regulations or guidelines, we may be subject to warnings from, or enforcement by, these authorities.
Our failure to establish, manage and maintain a distribution network could delay or compromise the commercialization of IMBRUVICATM.
We do not have the infrastructure necessary for distributing IMBRUVICATM to patients. We have contracted with a third-party logistics company to warehouse IMBRUVICATM and distribute it to wholesalers, distributors, pharmacies, hospitals, and other drug suppliers that ultimately distribute IMBRUVICATM directly to patients. Our third-party logistics company will also provide billing, collection and returns services. This distribution network requires significant coordination with our sales and marketing, finance, regulatory and medical affairs teams.
Failure to maintain our contracts with our third-party logistics company, wholesalers, distributors, pharmacies, hospitals or other drug suppliers, or the inability or failure of any of them to adequately perform under the contracts, could negatively impact the distribution of IMBRUVICATM. Failure to coordinate financial systems could also negatively impact our ability to accurately report and forecast product revenue. If we are unable to effectively establish and manage the distribution process, sales of IMBRUVICATM could be severely compromised and our business, financial condition and results of operations would be harmed.
We may need substantial additional financing and we may have difficulty raising needed capital in the future.
We have expended and will continue to expend substantial funds for the commercialization, manufacturing, marketing and sales of IMBRUVICATM and to complete the research, development and clinical testing of investigational uses of IMBRUVICATM and additional products. We may be unable to entirely fund these efforts with our current financial resources. We may also raise from time to time additional funds through the public or private sale of securities, bank debt, collaborations or otherwise. If we are unable to secure additional funds, whether through additional partnership collaborations, bank debt financings, or sale of our securities, we may have to delay, reduce the scope of or discontinue one or more of our product development programs. Based upon the current status of our product development plans, we believe that our cash, cash

27



equivalents and marketable securities will be adequate to satisfy our capital needs for at least the next twelve months. We may, however, choose to raise additional funds before then. Our actual capital requirements will depend on many factors, including:
the level of sales of IMBRUVICATM;
the timing of marketing authorization of any of our additional products granted by the FDA or other regulatory authority;
the timing of market launch of any of our additional products after grant of marketing authorization by the FDA or other regulatory agency;
the speed of market uptake and the timing and extent of demand for any of our additional products after grant of marketing authorization by the FDA or other regulatory agency;
continued progress of our research and development programs;
progress with preclinical studies and clinical trials;
the time and costs involved in obtaining regulatory approval;
our ability to establish and maintain collaborative arrangements with third parties;
the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
the amount and timing of capital equipment purchases; and
competing technological and market developments.
We also expect to raise any necessary additional funds through the public or private sale of securities, bank debt financings, collaborative arrangements with corporate partners or other sources that may be highly dilutive, or otherwise disadvantageous, to existing stockholders or subject us to restrictive covenants. In addition, in the event that additional funds are obtained through arrangements with collaborative partners or other sources, such arrangements may require us to relinquish rights to some of our technologies, product candidates or products under development that we would otherwise seek to develop or commercialize ourselves. Additional funds may not be available on acceptable terms, if at all. Our failure to raise capital when needed and on acceptable terms may require us to reduce our costs and expenses, delay or reduce the scope of or eliminate one or more of our research or development programs and would limit our ability to respond to competitive pressures or unanticipated requirements and to continue operations. Any one of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
Failure to obtain product approvals or comply with ongoing governmental regulations could adversely affect our business.
The manufacture and marketing of our products and our research and development activities are subject to extensive regulation for safety, efficacy and quality by numerous government authorities in the United States and abroad. Before receiving FDA approval to market a product, we are required to demonstrate to the satisfaction of the FDA that the product is safe and effective for the patient population and for the diseases that will be treated. Clinical trials, and the manufacturing and marketing of products, are subject to the rigorous testing and approval process of the FDA and equivalent foreign regulatory authorities. The Federal Food, Drug and Cosmetic Act and other federal, state and foreign statutes and regulations govern and influence the testing, manufacture, labeling, advertising, distribution and promotion of drugs and medical devices. As a result, clinical trials and regulatory approval can take a number of years to accomplish and require the expenditure of substantial resources. Data obtained from clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approvals.
In addition, we may encounter delays or rejections based upon additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. We may encounter similar delays in foreign countries. Our trials may be placed on clinical hold or otherwise suspended and we may be unable to complete such trials. Additionally, we may be unable to obtain requisite approvals from the FDA and foreign regulatory authorities and even if obtained, such approvals may not be received on a timely basis, or they may not cover the clinical uses that we specify.
Furthermore, regulatory approval may entail ongoing requirements for post-marketing studies. The manufacture and marketing of drugs are subject to continuing FDA and foreign regulatory review and later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions, including withdrawal of the product from the market. Any of the following events, if they were to occur, could delay or preclude us from further developing, marketing or realizing full commercial use of our products, which in turn could have a material adverse effect on our business, financial condition and results of operations:

28



failure to obtain and thereafter maintain requisite governmental approvals;
failure to obtain approvals for specific indications of our products under development;
an occurrence of serious and unanticipated adverse side effects;
identification of serious and unanticipated long-term adverse side effects in our products under development, that may not have been identified prior to approval; or
identification of previously unknown problems with the manufacturing or manufacturing processes for our products.
The FDA granted approval for IMBRUVICATM for the treatment of patients with MCL and for the treatment of patients with CLL, who in each case have received at least one prior therapy. The regulatory approval is limited in that patients with MCL/CLL who in each case have not received any prior therapy, or treatment-naïve patients, are not included in the approved indication for IMBRUVICATM. This limitation prevents us and Janssen from marketing IMBRUVICATM for the treatment of any such treatment-naïve patients. Any future regulatory approval that we receive for a product candidate may also be subject to limitations on the indicated uses for which the product may be marketed. In addition, extensive requirements apply to the labeling, packaging, adverse event reporting, storage, advertising and promotion of IMBRUVICATM and any future product candidates that may receive approval from the FDA and/or foreign regulatory agencies. We and the manufacturers of our product candidates must also comply with the applicable FDA Good Manufacturing Practice ("GMP") regulations, which include quality control and quality assurance requirements as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to ongoing periodic inspection by the FDA and corresponding state agencies, including unannounced inspections, and must achieve an acceptable inspection outcome before they can be used in commercial manufacturing of our products. We or our present or future suppliers may be unable to comply with the applicable GMP regulations and other FDA regulatory requirements. Failure of our suppliers to follow current GMP practice or other regulatory requirements may lead to significant delays in the availability of products for commercial or clinical use and could subject us to fines, injunctions and civil penalties.
Although Breakthrough Therapy Designations for IMBRUVICATM monotherapy for the treatment of patients with relapsed or refractory MCL, IMBRUVICATM monotherapy for the treatment of patients with Waldenström's macroglobulinemia (WM), and IMBRUVICATM monotherapy for the treatment of patients with CLL/SLL characterized by deletion of the short arm of chromosome 17 (deletion 17p) were previously granted, and although FDA subsequently granted a marketing approval for IMBRUVICATM in the treatment of MCL and in the treatment of CLL, there is no guarantee that the Breakthrough Therapy Designation for the WM indication or the CLL/SLL with deletion 17P indication or any other potential indications for IMBRUVICATM will lead to a faster development or regulatory review or approval process or increase the likelihood that IMBRUVICATM will receive marketing approval for the WM indication, the CLL/SLL with deletion 17P indication or any other potential indications.
If a drug is intended for the treatment of a serious or life-threatening condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development, the FDA may grant a Breakthrough Therapy Designation.  Marketing applications filed with the FDA by sponsors of products with a Breakthrough Therapy Designation are intended to facilitate the development, and expedite the review of such drugs, but the Breakthrough Therapy Designation does not assure any such qualification or ultimate marketing approval by the FDA. The previous receipt of a Breakthrough Therapy Designation for the development of IMBRUVICATM monotherapy for the treatment of patients with MCL, IMBRUVICATM monotherapy for the treatment of patients with WM, and IMBRUVICATM monotherapy for the treatment of patients with CLL/SLL characterized by deletion of the short arm of chromosome 17 (deletion 17p) and the FDA’s subsequent grant of marketing approval of IMBRUVICATM for the treatment of patients with MCL or for the treatment of patients with CLL, who in each case have received at least one prior therapy, neither guarantees that the Breakthrough Therapy Designation for the WM indication or the CLL/SLL with deletion 17P indication will result in a faster development process, review or approval for such indications nor increases the likelihood that IMBRUVICATM will be granted marketing approval for the WM indication or the CLL/SLL with deletion 17P indication. Likewise, any future Breakthrough Therapy Designation for any other potential indication of IMBRUVICATM neither guarantees a faster development process, review or approval nor improves the likelihood of the grant of marketing approval by FDA for any such potential indication of IMBRUVICATM compared to drugs considered for approval under conventional FDA procedures. In addition, the FDA may withdraw any Breakthrough Therapy Designation at any time. We may seek a Breakthrough Therapy Designation for other of our product candidates, but the FDA may not grant this status to any of our proposed product candidates.
If we are unable to successfully develop and test our drug candidates, we may not be successful.
The success of our business depends primarily upon our ability, and the ability of our collaborators, if any, to develop and

29



commercialize our drug candidates, including IMBRUVICATM for indications other than those approved by the FDA, successfully. Our drug candidates are in various stages of development and must satisfy rigorous standards of safety and efficacy before they can be approved by the FDA or comparable foreign regulatory authorities for sale. To satisfy these standards, we and/or our collaborators must allocate resources among our various development programs and must engage in expensive and lengthy testing of our drug candidates. Despite our efforts, our drug candidates may:
cause, or may appear to have caused, serious adverse side effects (including death) or potentially dangerous drug interactions;
have dose limiting toxicities;
not show signs of efficacy in any disease as a single agent or in combination, or may only work in combination with other drugs;
cause resistance in patients that may diminish the clinical benefit;
not offer therapeutic or other improvement over existing competitive drugs; or
not be proven safe and effective in clinical trials.
The strength of our pipeline of drug candidates and potential drug candidates will depend in large part upon the outcomes of our ongoing and planned Phase II and Phase III clinical trials. Findings, including toxicology findings, in nonclinical studies conducted concurrently with clinical trials as well as results of our clinical trials could lead to abrupt changes in our development activities, including the possible cessation of development activities associated with a particular drug candidate or program, including development of IMBRUVICATM for indications other than those approved by the FDA. Furthermore, results from our clinical trials may not meet the level of statistical significance required by the FDA or other regulatory authorities for approval of a drug candidate.
We and many other companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in earlier-stage clinical trials. Accordingly, the results from the completed preclinical studies and clinical trials, positive results in preclinical studies and early clinical trials may not be replicated in later clinical trials, and ongoing clinical trials for our drug candidates may not be predictive of the results we may obtain in later−stage trials or of the likelihood of approval of a drug candidate for commercial sale. In addition, from time to time we report interim data from our clinical trials, including our BTK program and its effects on various types of cancers. Interim data are subject to change, and there can be no assurances that interim data will be confirmed upon the analysis of final data.
Serious adverse events may force us to limit or discontinue any of our drug development and commercialization programs. 
Our ability to develop and commercialize any of our drug candidates or products may be adversely impacted by any serious adverse events that patients may experience when treated with our drug candidate or product. The initial safety profile of IMBRUVICATM is established with very limited patient safety data with the US approval. No contraindication has been identified to date. Adverse events included hemorrhage, infection, myelosuppression (blood cells decreases), renal failure, second primary malignancies and atrial fibrillation were reported. Severe bleeding events, including such events affecting the gastrointestinal tract or the central nervous system, have been reported in patients exposed to IMBRUVICATM. Common infection includes upper respiratory infection and pneumonia. For myelosuppression, low white counts, low red cell counts and low platelet counts have been reported. Other primary malignancies, including skin cancers and other cancers have also been reported in patients exposed to IMBRUVICATM. Renal failure has also been reported with patients in MCL. Cardiac arrhythmia such as atrial fibrillation has been reported. Limited safety data is available with these initial open label clinical trials and all of the AE are included regardless if they are related to the drug or not. Although we have a monitoring plan in place should these events occur and although they are generally managed by withdrawal of IMBRUVICATM therapy, we cannot guarantee that events or the occurrence of new unexpected serious safety signal will not cause us to cease development of IMBRUVICATM or withdraw the product from the market following any grant of marketing authorization by the FDA or other regulatory authority.
We may not be successful in developing and obtaining regulatory approval for IMBRUVICATM in other indications and we cannot be certain that any of our products under development will be commercialized.
In addition to successfully launching IMBRUVICATM for patients with MCL and CLL, who in each case have received at least one prior therapy, to achieve sustained profitability, we must successfully develop and obtain regulatory approval of IMBRUVICATM in other indications. Likewise, we must successfully research, develop, obtain regulatory approval for, manufacture, introduce, market and distribute the other products we have under development. The time frame necessary to achieve these goals for any individual product is long and uncertain. Before we can sell any of our products under development, we must demonstrate to the satisfaction of the FDA and regulatory authorities in foreign markets through the

30



submission of nonclinical (animal) studies and clinical (human) trials that each product is safe and effective for human use for each targeted disease. We have conducted and plan to continue to conduct extensive and costly clinical trials to assess the safety and effectiveness of our potential products. We cannot be certain that we will be permitted to begin or continue our planned clinical trials for our potential products, or if permitted, that our potential products will prove to be safe and produce their intended effects.
The completion rate of our clinical trials depends upon, among other factors, the rate of patient enrollment, the adequacy of patient follow-up and the completion of required clinical evaluations. Many factors affect patient enrollment, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, competing clinical trials and new drugs or procedures used for the conditions we are investigating. Other companies are conducting clinical trials and have announced plans for future trials that are seeking or are likely to seek patients with the same diseases that we are studying. We may experience delays in reaching planned level of patient enrollment in our clinical trials. Delays in planned patient enrollment may result in increased costs, and delays or termination of clinical trials, which could have a material adverse effect on us. Many factors can affect the adequacy of patient follow-up and completion of required clinical evaluations, including failure of patients to return for scheduled visits or failure of clinical sites to complete necessary documentation. Delays in or failure to obtain required clinical follow-up and completion of clinical evaluations could also have a material adverse effect on the timing and outcome of our clinical trials and product approvals.
Additionally, clinical trials require substantial administration and monitoring. We may fail to effectively oversee and monitor the various trials we have underway at any particular time, which would result in increased costs or delays of our clinical trials or compromise our ability to obtain product approvals.
Data already obtained from preclinical studies and clinical trials of our products under development do not necessarily predict the results that will be obtained from later preclinical studies and clinical trials. Moreover, data from clinical trials we are conducting are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the safety and effectiveness of a product under development could limit or prevent regulatory approval of the potential product and would materially harm our business. Our clinical trials may not demonstrate the sufficient levels of safety and efficacy necessary to obtain the requisite regulatory approval or may not result in marketable products.
We have a history of operating losses and we expect to continue to have losses in the future, until such time, if ever, as the commercialization of our products generate sufficient revenue to cover our expenses.
We have incurred significant operating losses since our inception in 1991 and we expect to continue to incur substantial additional operating losses until such time, if ever, as the sale of IMBRUVICATM or the commercialization of our products generates sufficient revenue to cover our expenses. The FDA approved IMBRUVICATM for the treatment of patients with MCL and for the treatment of patients with CLL, who in each case have received at least one prior therapy, in the United States. We commercially launched IMBRUVICATM on November 13, 2013 for MCL and on February 12, 2014 for CLL. In connection with the commercial launch of IMBRUVICATM and the NDA filing, we incurred substantial expenses.
We began generating commercial product revenue during the year ended December 31, 2013, however the commercial product revenue generated to date is not sufficient to cover our expenses. Our sustaining profitability depends upon our ability, alone or with others, to successfully commercialize IMBRUVICATM for the treatment of patients with MCL and CLL, who in each case have received at least one prior therapy, to successfully complete the development of our product candidates including IMBRUVICATM for other indications, and to obtain required regulatory approvals and to successfully manufacture and market our proposed products.
We may fail to adequately protect or enforce our intellectual property rights or secure rights to third-party patents.
Our success depends in part upon our ability to protect and defend our proprietary technology and product candidates through patents and trade secret protection. We, therefore, aggressively pursue, prosecute, protect and defend patent applications, issued patents, trade secrets, and licensed patent and trade secret rights covering certain aspects of our technology. The evaluation of the patentability of United States and foreign patent applications can take years to complete and can involve considerable expense and uncertainty.
We have a number of patents and patent applications related to our compounds but we cannot be certain that issued patents will be enforceable or provide adequate protection or that pending patent applications will issue as patents. Even if patents are issued and maintained, these patents may not be of adequate scope to benefit us, or may be held invalid and unenforceable against third parties. In addition, if we breach our agreements with our licensors and do not cure such breaches, we may lose rights under patents and other intellectual property licensed to us. Moreover, if our agreement with Celera is terminated by

31



Celera under certain circumstances, our rights in our intellectual property acquired from Celera, including that related to IMBRUVICATM, would revert to Celera and we would lose our right to commercialize such intellectual property.
We face risks and uncertainties related to our intellectual property rights. For example:
we may be unable to obtain or maintain patent or other intellectual property protection for any products or processes that we may develop;
third parties may obtain patents covering the manufacture, use or sale of these products, which may prevent us from commercializing IMBRUVICATM or any of our products under development globally or in certain regions; and
any future patents that we may obtain may not prevent other companies from competing with us by designing their products or conducting their activities so as to avoid the coverage of our patents.
The actual protection afforded by a patent varies depending on the product candidate and country and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patents under existing and future laws. Our ability to maintain or enhance our proprietary position for our product candidates will depend on our success in obtaining effective claims and enforcing those claims once granted. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar products. Due to the extensive amount of time required for the development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.
We also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. Although we take steps to protect our proprietary rights and information, including the use of confidentiality and other agreements with our employees and consultants, and in our academic and commercial relationships, these steps may be inadequate, these agreements may be violated, or there may be no adequate remedy available for a violation. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Furthermore, our trade secrets may become known to our competitors even in the absence of any violation of our rights. Our competitors may independently develop substantially equivalent proprietary information and techniques, reverse engineer our information and techniques, or otherwise gain access to our proprietary technology. We may be unable to meaningfully protect our rights in unpatented proprietary technology.
Our success depends in large part on our ability to operate without infringing upon the patents or other proprietary rights of third parties.
If we infringe the patents of others, we may be prevented from commercializing future products or may be required to obtain licenses from these third parties. We may not be able to obtain alternative technologies or any required license on reasonable terms or at all. If we fail to obtain these licenses or alternative technologies, we may be unable to develop or commercialize some or all of our products. We own patents that claim the active pharmaceutical ingredient of IMBRUVICATM as a chemical entity. However, the existence of issued patents does not guarantee our right to practice the patented technology or commercialize the patented product. Third parties may have or obtain rights to patents which they may use to prevent or attempt to prevent us from commercializing IMBRUVICATM or any of our patented product candidates. If these other parties are successful in obtaining valid and enforceable patents, and establishing our infringement of those patents, we could be prevented from selling IMBRUVICATM or any of our other products unless we were able to obtain a license under such patents. If any license is needed it may not be available on commercially reasonable terms or at all. For example, we are aware of a third party patent application that contains claims covering a method of treating malignancies using a certain class of compounds that may encompass certain of our products, including IMBRUVICATM. In the event that such claims are included in a patent granted on such patent application, we could be prevented from commercializing any such products for the treatment of malignancies unless we obtain sufficient rights under such patent from the patent owner or successfully challenge the validity and/or enforceability of such patent. Patents in the United States issue with a presumption of validity and enforceability and, therefore, there can be no assurance that any such challenge would be successful.
Furthermore, we use significant proprietary technology and rely on unpatented trade secrets and proprietary know-how to protect certain aspects of our production and other technologies. Our trade secrets may become known or independently discovered by our competitors.
We are dependent on our collaboration agreement with Janssen to further develop and commercialize IMBRUVICATM globally. The failure to maintain this agreement or the failure of Janssen to perform its obligations under this agreement, could negatively impact our business.

32



Pursuant to the terms of our collaboration and licensing agreement with Janssen, we granted Janssen a license to co-develop (with us) IMBRUVICATM, our BTK Inhibitor, globally, to co-commercialize it (with us) in the United States, and to exclusively commercialize it outside of the United States, in each case for all non-immunology related indications. Under a global development plan, each party will be responsible for conducting certain clinical trials. The collaboration and license agreement includes a cost sharing arrangement for associated development activities. Except in certain cases, in general Janssen is responsible for approximately 60% of development costs and we are responsible for the remaining 40% of development costs. The agreement also provides that pre-tax profits or pre-tax losses from the commercialization of any products resulting from the collaboration are shared 50% by us and 50% by Janssen.
The collaboration with Janssen provides us with an annual cap of our share of collaboration costs and pre-tax commercialization losses for each calendar year until the third profitable calendar quarter for the product, as determined in the agreement. In the event that our share of aggregate development costs in any given calendar year, together with any other amounts that become due from us, plus our share of pre-tax loss (if any) for any calendar quarter in such calendar year, less our share of pre-tax profit (if any) for any calendar quarter in such calendar year, exceeds $50,000,000, then amounts that are in excess of $50,000,000 (the "Excess Amounts") are funded by Janssen. Under the Agreement, total Excess Amounts plus interest may not exceed $225,000,000. As of December 31, 2013, total Excess Amounts of $134,968,000 (which comprises the cumulative amount funded by Janssen to-date of $134,261,000 and interest of $707,000) would become payable once we reach a third profitable calendar quarter for the product. Further, Excess Amounts shall be reimbursable only from our share of pre-tax profits (if any) after the third profitable calendar quarter for the product. We cannot reasonably predict the amount and timing of potential future commitments under the Janssen collaboration and license agreement, including Excess Amounts, as the payments are contingent upon future events. See Note 5 to the consolidated financial statements for more information about our collaboration and licensing agreement with Janssen.
We have limited control over the development or commercialization costs incurred by Janssen, and limited control over the implementation of development and commercial activities performed by them. Our costs and revenue are therefore tied to efforts made by ourselves and Janssen in developing and marketing our product. We have limited control over the amount of time and effort Janssen will devote to the development, manufacturing and commercialization of IMBRUVICATM, and very limited control over the manner in which Janssen conducts its business with regard to obtaining regulatory and other approvals and commercializing the product, especially outside the United States. Accordingly, our revenue and financial position may be adversely affected if Janssen does not dedicate sufficient time to the development and commercialization of IMBRUVICATM, fails to obtain regulatory approvals, or otherwise fails to comply with its obligations under the agreement.
We are subject to a number of other risks associated with our dependence on our collaboration and license agreement with Janssen, including:
We and Janssen could disagree as to future development plans and Janssen may delay future clinical trials or stop a future clinical trial;
There may be disputes between us and Janssen, including disagreements regarding the collaboration and license agreement, that may result in (1) the delay of or failure to achieve regulatory and commercial objectives that would result in additional milestone or profit share payments, (2) the delay or termination of any future development or commercialization of IMBRUVICATM, and/or (3) costly litigation or arbitration that diverts our management's attention and resources;
Janssen may not provide us with timely and accurate information regarding supply forecasts, which could adversely impact our ability to comply with our supply obligations to Janssen and manage our own inventory of IMBRUVICATM, as well as our ability to generate accurate financial forecasts;
Business combinations or significant changes in Janssen's business strategy may adversely affect Janssen's ability or willingness to perform its obligations under our collaboration agreement;
If Janssen is unsuccessful in performing clinical trials, or in obtaining regulatory approvals for or commercializing IMBRUVICATM outside the U.S., we may not receive certain additional milestone payments or any profit payments under the collaboration and license agreement and our business prospects and financial results may be materially harmed;
Janssen may not comply with applicable regulatory requirements or guidelines with respect to developing or commercializing IMBRUVICATM, which could adversely impact future development or sales of IMBRUVICATM globally.
The collaboration and license agreement is subject to early termination, including through Janssen's right to terminate without cause upon advance notice to us. If the agreement is terminated early, we may not be able to find another collaborator for the further development and commercialization of IMBRUVICATM on acceptable terms, or at all, and we may be unable to pursue continued development and commercialization of IMBRUVICATM on our own.

33



If our collaboration is unsuccessful or is terminated by Janssen, we might not effectively develop and market IMBRUVICATM.
Integral to the success of our collaboration with Janssen is our ability to timely achieve certain milestones and obtain regulatory approvals. Our collaboration with Janssen may be unsuccessful. Under the terms of our agreement, Janssen may terminate its agreement with us without cause and upon short notice. Termination of our agreement would hinder our efforts to effectively develop and commercialize IMBRUVICATM. There could be a delay in getting our product to market. Such delay could likely result in higher costs for us and could adversely affect any progress we have made in clinical trials.
We may have difficulty finding another collaboration partner on favorable terms if Janssen terminates our agreement. We might not be able to raise capital on our own.
We rely heavily on third parties for research, pre-clinical development and clinical development of our products.
We currently depend heavily and will continue to depend heavily in the future on third parties for support in research, pre-clinical development and clinical development of our products. The termination of a significant number of our existing collaborative arrangements, or our inability to establish and maintain collaborative arrangements could have a material adverse effect on our ability to complete clinical development of our products. Given our limited resources, it may be necessary to establish partnerships with other pharmaceutical companies that have greater financial and technical resources in order to successfully develop and commercialize our products. Although we have entered into a global strategic alliance with Servier related to the research, development, and commercialization of abexinostat (formerly known as PCI-24781), there is no assurance that any additional collaborations can be entered into, and if entered into, such collaborations may require us to relinquish product rights that could affect the financial success of these products.
We engage clinical investigators and medical institutions to enroll subjects in our clinical trials and contract clinical research organizations, or CROs, for various aspects of our clinical development activities including clinical trial monitoring, data collection, safety monitoring and data management. As a result, we have had and continue to have less control over the conduct of clinical trials, the timing and completion of the trials, the required reporting of adverse events and the management of data developed through the trial than would be the case if we were relying entirely upon our own staff. Although we rely on CROs to conduct some of our clinical trials, we are responsible for confirming that each of our clinical trials is conducted in accordance with the investigational plan and protocol. Moreover, the FDA and foreign regulatory agencies require us to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that the data and results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities and requirements.
Outside parties may have staffing difficulties, may undergo changes in priorities or may become financially distressed, adversely affecting their willingness or ability to conduct our trials. We may experience unexpected cost increases that are beyond our control. Any failure of such CROs to successfully accomplish clinical trial monitoring, data collection, safety monitoring and data management and the other services they provide for us in a timely manner and in compliance with regulatory requirements could have a material adverse effect on our ability to complete clinical development of our products and obtain regulatory approval. Problems with the timeliness or quality of the work of a CRO may lead us to seek to terminate the relationship and use an alternate service provider. However, making such changes may be costly and may delay our trials, and contractual restrictions may make such a change difficult or impossible. Additionally, it may be difficult to find a replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.
We lack the resources, capability and experience necessary to manufacture pharmaceuticals for clinical development or for commercial sale and thus rely heavily upon contract manufacturers.
We have no manufacturing facilities and we currently rely on third parties for manufacturing and storage activities related to the manufacture of pharmaceuticals for our clinical trials or for commercial sale of IMBRUVICATM. Our manufacturing strategy presents the following risks:
delays in scale-up to quantities needed for multiple clinical trials, or failure to manufacture such quantities to our specifications, or deliver such quantities on the dates we require, could cause delay or suspension of clinical trials, regulatory submissions and commercialization of our products;
there is no guarantee that the supply of clinical materials can be maintained during the clinical development of our product candidates;
our current and future manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding regulatory agencies for compliance with strictly enforced GMP and similar standards in other countries.

34



Failure to achieve an acceptable inspection outcome could have a material adverse effect on our ability to produce our products to support our operations;
if we need to change to other commercial manufacturing contractors, there is no guarantee that we will be able to locate a suitable replacement contractor. These contractors must achieve an acceptable inspection outcome by the FDA and comparable foreign regulators prior to our use. The new manufacturers would have to demonstrate substantially equivalent processes for the production of our products;
our current manufacturers might not be able to fulfill our commercial needs, which would require us to seek new manufacturing arrangements and may result in substantial delays in meeting market demand;
any disruption of the ability of our manufacturing contractors to supply necessary quantities of our products could have a material adverse effect on our ability to support our operations; and
our current manufacturers may have insufficient capacity to support our requirements in the event of an increase in market demand.
Any of these factors could delay clinical trials or commercialization of our products under development and entail higher costs.
If we are unable to maintain or enter into agreements with suppliers or our suppliers fail to supply us with the active pharmaceutical ingredients, or APIs, for our drugs, we may experience delays in commercializing our drugs.
We currently have supply agreements for PCI-32765, the API used in IMBRUVICATM. We cannot guarantee that we will be successful in maintaining these supply agreements or obtaining new supply agreements on reasonable terms or at all or that we will be able to obtain or maintain the necessary regulatory approvals for these suppliers in a timely manner or at all.
We anticipate that we will rely on a single manufacturing and supply chain for IMBRUVICATM for the foreseeable future. Any production shortfall on the part of our suppliers that impairs the supply of IMBRUVICATM could have a material adverse effect on our business, financial condition and results of operations. If we are unable to obtain a sufficient quantity of this compound, there could be a substantial delay in successfully developing a second source of supply. An inability to continue to source product from our only manufacturing and supply chain, which could be due to regulatory actions or requirements affecting the supplier, adverse financial or other strategic developments experienced by a supplier, labor disputes or shortages, unexpected demands or quality issues, could adversely affect our ability to satisfy demand for IMBRUVICATM, which could adversely affect our product sales and operating results materially, which could significantly harm our business.
We rely on sole source suppliers and face risk of harm caused by hazardous materials used in the manufacturing of our products.
The manufacturing processes for our products involve the use of hazardous, volatile and flammable materials capable of igniting and/or exploding if not handled properly.  Although our manufacturing processes incorporate safety procedures designed to prevent or avoid the creation of conditions under which the materials could ignite and/or explode, we cannot be certain that such safety procedures will be followed or if followed will be adequate to mitigate or eliminate the risk of harm caused by fire and/or explosion during the manufacturing of any of our products.  Any such event may incapacitate the manufacturing capability of any of our contract manufacturing organizations (CMOs).  We have no assurance that we will avoid liability for harm caused by any such event.  If we are found liable for damages or agree to pay damages in settlement of a claim against us for any harm caused by any such event, our insurance coverage may be inadequate or may not cover part or all of such damages.  In addition, we do not have an alternate or back-up supply chain for the manufacturing and supply of any of our products.  If such an event causes us to lose the operational capacity of any manufacturing element in the supply chain for any of our products, our ability to manufacture and supply the product will be substantially impaired or prevented, and we may be unable to supply enough product to support our development and/or commercialization programs, which may force us to curtail or discontinue our business operations.
We may be unsuccessful in developing, training and managing our Sales and Marketing organizations.
The FDA approved IMBRUVICATM for the treatment of patients with MCL on November 13, 2013 and for the treatment of patients with CLL on February 12, 2014, who in each case have received at least one prior therapy. Prior to the approval, we hired and trained sales representatives for our U.S. territories. While we believe our Sales and Marketing organizations have the technical expertise and experience that will be required for the marketing of IMBRUVICATM in the U.S., we have not previously operated a sales and marketing organization. We have and will incur substantial additional expenses in developing, training and managing such an organization. The cost of developing, training and managing our sales force may exceed any product revenue. In addition, our own marketing and sales efforts may be unsuccessful. We compete with many other

35



companies that currently have extensive and well-funded marketing and sales operations. Our marketing and sales efforts may be unable to compete successfully against those of such other companies. Although we have a co-promotion and licensing arrangement with our partner Janssen for the marketing of IMBRUVICATM in the U.S., this relationship may fail to increase the commercial success of IMBRUVICATM. If Janssen terminates its relationship with us, we may decide to enter into a co-promotion or other licensing arrangement with another large pharmaceutical or biotechnology firm in order to commercialize IMBRUVICATM. To the extent we rely on our existing co-promotion and licensing arrangement with our partner Janssen or enter into a co-promotion or other licensing agreement with another large pharmaceutical or biotechnology firm, some or all of the revenues we receive will depend upon the efforts of third parties, which may not be successful and may not be within our control. If we are unable to retain our existing co-promotion and licensing arrangement with our partner Janssen or we are unable to enter into a co-promotion or other licensing agreement with another large pharmaceutical or biotechnology firm on acceptable terms or at all, we may not be able to successfully commercialize IMBRUVICATM or our future product candidates. If we are not successful in commercializing IMBRUVICATM or our future product candidates, either on our own or through collaborations with one or more third parties, our future product revenue will suffer and we may incur significant losses or become unable to continue the operation of our business.
If we lose or are unable to hire and retain qualified personnel, then we may not be able to develop our products or processes and obtain the required regulatory approvals.
We are highly dependent on qualified scientific and management personnel. We will need to expand and effectively manage our managerial, operational, financial, development and other resources in order to successfully pursue our research, development and commercialization efforts for our existing product and for existing and future product candidates. Our success depends on our continued ability to attract, retain and motivate highly qualified management and personnel with sales, marketing, medical affairs, regulatory, manufacturing, pre-clinical and clinical experience. We will need to hire additional personnel as we continue to expand our research and development, partnering activities and commercialization efforts.
We face intense competition from other companies and research and academic institutions for qualified personnel. We may not be able to attract or retain qualified management and scientific personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Francisco, California area. We are highly dependent on our senior executives. If any of our senior executives were to terminate his or her position with us, or we were to lose an additional senior executive officer, any of our senior scientists, a manager of one of our programs, or a significant number of any of our staff or we are unable to hire and retain qualified personnel, then our ability to develop and commercialize our products and processes, raise additional capital or implement our business strategy may be adversely affected or rendered impractical and our business may be harmed as a result.
Our business is subject to risks associated with international operations and collaborations.
The laws of foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. In countries where we do not have and/or have not applied for patents on our products, we will be unable to prevent others from developing or selling similar products. In addition, in jurisdictions outside the United States where we acquire patent rights, we may be unable to prevent unlicensed parties from selling or importing products or technologies derived elsewhere using our patented technology.
Until we or our licensees obtain the required regulatory approvals for pharmaceuticals in any specific foreign country, we or our licensees will be unable to sell these products in that country. International regulatory authorities have imposed numerous and varying regulatory requirements and the approval procedures can involve additional testing. Approval by one regulatory authority does not ensure approval by any other regulatory authority.
Forecasting sales of IMBRUVICATM may be difficult and revenue recognition may be deferred. If our revenue projections are inaccurate or revenue is deferred and our business forecasting and planning decisions are not reflected in our actual results, our business may be harmed and our future prospects may be adversely affected.
Our management must make forecasting decisions regarding future revenue in the course of business planning despite the uncertainty of revenue projection. Our actual results of operations may deviate materially from projected results. This may lead to inefficiencies and increased difficulties in operational planning. If our revenues from IMBRUVICATM sales are lower than we anticipate or revenue is deferred, we will incur costs in the short term that will result in losses that are unavoidable. A shortfall in our revenue would have a direct impact on our cash flow and on our business generally. In addition, fluctuations in our quarterly results can adversely and significantly affect the market price of our common stock.
We may have exposure to greater than anticipated tax liabilities.

36



Our income tax obligations are based on our corporate operating structure, including the manner in which we develop, value, and use our intellectual property and the scope of our international operations. The tax laws applicable to our international business activities, including the laws of the United States and other jurisdictions, are subject to interpretation. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements and our positions that defer or avoid the recognition of revenue from and taxation of intercompany technology transfer transactions, which could increase our worldwide effective tax rate and harm our financial position and results of operations. In addition, our future income taxes could be adversely affected by earnings being lower than anticipated in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, or accounting principles. We are subject to regular review and audit by both U.S. federal and state and foreign tax authorities. Any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform policies could materially affect our financial position, cash flows and results of operations.
The current administration has made public statements indicating that it has made international tax reform a priority, and key members of the U.S. Congress have conducted hearings and proposed a wide variety of potential changes. Certain changes to U.S. tax laws, including limitations on the ability to defer U.S. taxation on earnings outside of the United States until those earnings are repatriated to the United States, could affect the tax treatment of our foreign earnings, as well as cash and cash equivalent balances we currently maintain outside of the United States. Due to the expanding scale of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and harm our financial position and results of operations.
We are exposed to fluctuations in foreign currency exchange rates, and an adverse change in foreign currency exchange rates could have a material adverse impact on our business, financial condition, cash flows and results of operations.
All of our revenues and the majority of our expenses are denominated in U.S. dollars and as a result, we have not experienced significant foreign currency transaction gains and losses to date. We conduct some transactions in foreign currencies, primarily related to ex-U.S. clinical trial and manufacturing activities, and we expect to continue to do so. We have not entered into any agreements or transactions for currency exchange to hedge the risk associated with potential fluctuations in currencies; accordingly, we are subject to foreign currency exchange risk related to these ex-U.S. clinical trial and manufacturing activities. While we may enter into hedge or other agreements in the future to actively manage this risk, we do not believe this risk is material to our financial statements.
We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their former employers.
Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these or other claims. If we fail in defending such claims, in addition to paying monetary damages, we may face injunctions that restrict or preclude our access to important markets, intellectual property, or personnel. Any restriction or loss of access to markets, intellectual property, research personnel or work product that are key to our operations could hamper or negate our ability to commercialize our existing product or certain potential drugs, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
We may be subject to damages or injunctions resulting from employment discrimination or harassment claims that our employees or former employees bring against us.
Although we have developed and implemented a program for compliance with federal and state civil rights laws and employment laws, including laws prohibiting any harassment or discrimination in the hiring, promotion, firing, or treatment of employees on the basis of age, race, color, ancestry, national origin, disability, medical condition, marital status, sexual orientation, gender, gender identity, religious denomination, pregnancy status, other classification, or any retaliation against employees for engaging in protected activity, we cannot guarantee that our compliance program will be sufficient or effective, that our employees will comply with our policies, that our employees will notify us of any violation of our policies, that we will

37



have the ability to take appropriate and timely corrective action in response to any such violation, or that we will make decisions and take actions that will necessarily limit or avoid liability with respect to any employment discrimination, harassment or retaliation claim our employees may bring against us, including any claim under the federal Civil Rights Act of 1964 and 1991 (as amended), the California Fair Employment and Housing Act ("FEHA"), as amended, Section 1981 of the Civil Rights Acts of 1866, the federal Age Discrimination in Employment Act of 1967 (as amended) ("ADEA"), the Older Workers Benefits Protection Act, the Employee Retirement Income and Securities Act ("ERISA", the Family and Medical Leave Act ("FMLA"), the California Family Rights Act ("CFRA"), the federal Americans with Disabilities Act of 1990 ("ADA"), the Lilly Ledbetter Fair Pay Act, the Immigration Reform and Control Act of 1986, the Equal Pay Act of 1963, as amended, California Business and Professions Code 17200, any and all protections pursuant to California's Labor Code or the Fair Labor Standards Act (“FLSA”), Section 806 of the Sarbanes Oxley Act of 2002, and any federal or state constitutional rights and protections. Discrimination, harassment or retaliation claims brought by employees or former employees against their employers or former employers have increased substantially in recent years. In addition, the enactment of new federal and state laws, the amendment of existing federal and state laws, and the interpretation of existing or future laws by court decision could further expand the grounds on which employees and former employees may pursue claims of employment discrimination, harassment or retaliation. We cannot adequately predict whether our compliance program will effectively protect us from liability under present or future federal or state laws against employment discrimination, harassment or retaliation. If one or more of our employees brings a claim of employment discrimination, harassment or retaliation against us and if we are found liable for damages and/or an injunction is imposed on us or we agree to pay damages and/or accept an injunction in settlement of the claim, the payment of the damages amount or the curtailment of our activities consequent to the injunction could have a material adverse effect on our financial condition and impair or prevent us from continuing our business.
We may be subject to damages or injunctions resulting from qui tam or “whistleblower” actions that our employees or former employees bring against us.
Although we have developed and implemented a program for compliance with all federal and state laws and regulations, we cannot guarantee that our compliance program will be sufficient or effective, that our employees will comply with our policies, that our employees will notify us of any violation of our policies, that we will have the ability to take appropriate and timely corrective action in response to any such violation, or that we will make decisions and take actions that will necessarily limit or avoid liability for qui tam or federal “whistleblower” claims that our employees or former employees may bring against us or that governmental authorities may prosecute against us based on information provided by our employees or former employees. Qui tam or “whistleblower” claims against employers brought by employees or former employees or governmental authorities based on information from employees or former employees have increased substantially in recent years. In any qui tam or “whistleblower” action that results in the payment of a fine imposed by a court or a settlement, the employee or former employee who brought the claim or furnished information allowing the governmental authority to prosecute the claim is rewarded with a percentage of the fine or settlement amount collected from the employer. The prospect of sharing in the proceeds of any fine collected from the employer motivates employees and former employees to bring qui tam or “whistleblower” claims or to furnish information to a governmental authority for the prosecution of such claims. In addition, the enactment of new federal and state laws, the amendment of existing federal and state laws, and the interpretation of existing or future laws by court decision could further expand the grounds on which employees and former employees may pursue qui tam or “whistleblower” claims. We cannot adequately predict whether our compliance program will effectively protect us from liability under present or future federal or state laws relating to qui tam or “whistleblower” claims that our employees or former employees may bring against us or that governmental authorities may prosecute against us on the basis of information provided by our employees or former employees. If one or more of our employees brings a qui tam or “whistleblower” claim against us or if a governmental authority prosecutes a claim against us on the basis of information provided by one or more of our employees or former employees, and if we are found liable and a fine and/or an injunction is imposed on us or we agree to pay a fine and/or accept an injunction in settlement of the claim, the payment of the fine and/or the curtailment of our activities consequent to the injunction could have a material adverse effect on our financial condition and impair or prevent us from continuing our business.
Our investments in marketable securities are subject to risks which may cause losses and affect the liquidity of these investments.
We invest funds in excess of those needed for working capital and costs and expenses in marketable securities which may include corporate notes, certificates of deposit, government securities and other financial instruments. Significant declines in the value of these investments due to the operating performance of the companies we invest in or general economic or market conditions may result in the recognition of realized or impairment losses which could be material.

38



We may need to implement additional finance and accounting systems, procedures and controls to satisfy reporting requirements.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002, including Section 404, and the related rules and regulations of the Securities and Exchange Commission, including expanded disclosures and accelerated reporting requirements and more complex accounting rules. Compliance with Section 404 and other requirements will increase our costs and require additional management resources. We may need to continue to implement additional finance and accounting systems, procedures and controls to satisfy reporting requirements. While we were able to complete an unqualified assessment as to the adequacy of our internal control over financial reporting as of December 31, 2013, there is no assurance that future assessments of the adequacy of our internal control over financial reporting will be unqualified. If we are unable to obtain future unqualified reports as to the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our internal control over financial reporting, which could adversely affect our stock price.
Our corporate compliance program cannot guarantee that we are in compliance with all potentially applicable regulations.
The development, manufacturing, pricing, sales, coverage and reimbursement of our products, together with our general operations, are subject to extensive regulation by federal, state and other authorities within the United States and numerous entities outside of the United States. While we have developed and implemented a corporate compliance program, which adheres to: (1) the requirements set forth by the OIG in OIG’s Compliance Program Guidance for Pharmaceutical Manufacturers, as codified into law in California, (2) the PhRMA Code on Interactions with Healthcare Professionals as codified into law in California, and (3) other applicable healthcare compliance laws and regulations, and is largely based on what we believe are the current pharmaceutical industry best practices, we cannot provide any assurance that governmental authorities will find that our business practices comply with current or future administrative or judicial interpretations of potentially applicable laws and regulations. If we fail to comply with any of these laws and regulations, we could be subject to a range of regulatory actions, including suspension or termination of clinical trials, the failure to approve a product candidate, restrictions on our products or manufacturing processes, withdrawal of products from the market, significant fines, disqualification or debarment from participation in federally-funded health care programs or other sanctions or litigation, any of which events may have a significant adverse impact on our business.
Our facility in California is located near an earthquake fault, and an earthquake or other types of natural disasters or resource shortages could disrupt our operations and adversely affect results.
Important documents and records, such as hard copies of our laboratory books and records for our drug candidates and compounds, are located in our corporate headquarters at a single location in Sunnyvale, California, which is near active earthquake zones. We do not have a formal business continuity or disaster recovery plan, and could therefore experience a significant business interruption in the event of a natural disaster, such as an earthquake, drought or flood, or localized extended outages of critical utilities or transportation systems. In addition, California from time to time has experienced shortages of water, electric power and natural gas. Future shortages and conservation measures could disrupt our operations and cause expense, thus adversely affecting our business and financial results.
Risks Related to Our Common Stock
If our results do not meet our and analysts' forecasts and expectations, our stock price could decline.
Analysts who cover our business and operations provide valuations regarding our stock price and make recommendations whether to buy, hold or sell our stock. Our stock price may be dependent upon such valuations and recommendations. Analysts' valuations and recommendations are based primarily on our reported results and our and their forecasts and expectations concerning our future results regarding, for example, expenses, revenues, clinical trials, regulatory marketing approvals and competition. Our future results are subject to substantial uncertainty, and we may fail to meet or exceed our and analysts' forecasts and expectations as a result of a number of factors, including those discussed under the section entitled “Risks Related to Pharmacyclics” above. If our results do not meet our and analysts' forecasts and expectations, our stock price could decline as a result of analysts lowering their valuations and recommendations or otherwise.
Future equity issuances or a sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
Because we may need to raise additional capital in the future to continue to expand our business and our research and development activities, among other things, we may conduct additional equity offerings. If we or our stockholders sell substantial amounts of our common stock (including shares issued upon the exercise of options and warrants) in the public

39



market, the market price of our common stock could fall. A decline in the market price of our common stock could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
If our officers, directors and largest stockholders choose to act together, they are able to control our management and operations, acting in their best interests and not necessarily those of other stockholders.
Our directors, executive officers and principal stockholders and their affiliates collectively have the ability to determine the election of all of our directors and to determine the outcome of most corporate actions requiring stockholder approval. They may exercise this ability in a manner that advances their best interests and not necessarily those of other stockholders.
Anti-takeover provisions in our charter documents and Delaware law could prevent or delay a change in control.
Our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. In addition, provisions of the Delaware General Corporation Law also restrict certain business combinations with interested stockholders. These provisions are intended to encourage potential acquirers to negotiate with us and allow our board of directors the opportunity to consider alternative proposals in the interest of maximizing stockholder value. However, these prohibitions may also discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price.
The price of our common stock is volatile.
The market prices for securities of biotechnology companies, including ours, have historically been highly volatile. Our stock, like that of many other companies, has from time to time experienced significant price and volume fluctuations sometimes unrelated to operating performance. For example, during the period beginning January 1, 2011 and ending December 31, 2013, the sales price for one share of our common stock reached a high closing price of $139.89 per share and a low closing price of $4.88 per share. The market price of our common stock may fluctuate significantly due to a variety of factors, including:
the commercial success of IMBRUVICATM and the revenues we generate;
the progress and results of our preclinical testing, clinical trials, product development and partnering activities;
quarterly fluctuations in our financial results;
the development of technological innovations or new therapeutic products by us, our competitors or others;
changes in governmental regulation;
the success or failure of our efforts to obtain marketing authorization for any of our products from the FDA or other regulatory authority;
our ability to satisfy regulatory requirements for the maintenance of any marketing authorization granted by FDA or other regulatory authority for any of our products;
the emergence of drug safety issues that require us to add restrictions or warnings to the label or withdraw from the market any of our products after approval by the FDA or other regulatory authority;
developments in patent or other proprietary rights by us, our competitors or others;
developments and/or announcements by us, our competitors or others;
litigation;
public concern as to the safety of products developed by us, our competitors or others;
departure of key personnel;
ability to manufacture our products to commercial standards;
changes in the structure of healthcare payment systems and the coverage and reimbursement policies of governmental and other third-party payers;
our ability to successfully commercialize our products if they are approved;
comments by securities analysts; and
general market conditions in our industry.

40



In addition, if any of the risks described in this section entitled “Risk Factors” actually occur, there could be a dramatic and material adverse impact on the market price of our common stock.
Risks Related to Our Industry
We face rapid technological change and intense competition.
The pharmaceutical industry is subject to rapid and substantial technological change. Therapies designed by other companies to treat the conditions that are the focus of our products are currently in clinical trials. Developments by others may render our products under development or technologies noncompetitive or obsolete, or we may be unable to keep pace with technological developments or other market factors. Technological competition in the industry from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase. Many of these entities have significantly greater research and development capabilities than we do, as well as substantially more marketing, sales, manufacturing, financial and managerial resources. These entities represent significant competition for us. Acquisitions of, or investments in, competing pharmaceutical or biotechnology companies by large corporations could increase such competitors' financial, marketing, manufacturing and other resources. In addition, we may experience competition from companies that have acquired or may acquire technology from universities and other research institutions. As these companies develop their technologies, they may develop proprietary positions that compete with our products. We are engaged in the development of novel therapeutic technologies. Our resources are limited and we may experience technical challenges inherent in such novel technologies.
Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products. Some of these products may have an entirely different approach or means of accomplishing similar therapeutic effects than our products. Our competitors may develop products that are safer, more effective or less costly than our products and, therefore, present a serious competitive threat to our product offerings. Our competitors may price their products below ours, may receive better coverage and/or reimbursement or may have products that are more cost effective than ours.
The widespread acceptance of therapies that are alternatives to ours may limit market acceptance of IMBRUVICATM and any of our additional products even if commercialized. The diseases for which we are developing our therapeutic products can also be treated, in the case of cancer, by surgery, radiation, biologics and chemotherapy. These treatments are widely accepted in the medical community and have a long history of use. The established use of these competitive products may limit the potential for widespread acceptance of IMBRUVICATM and any of our additional products even if commercialized. We may be unable to demonstrate any pharmacoeconomic advantage for our products compared to established or standard-of-care therapies for our target patient populations. In addition, many of our target patient populations can present with indolent, or slowly progressing, disease. It may be difficult for us to show that treatment with our products provides a significant improvement in clinical outcome compared to the avoidance of treatment, or watching for the progression of disease, in such patients. Payers may decide that the potential improvement our products provide to clinical outcomes in our target patient populations is not adequate to justify the costs of treatment with our products. If payers do not view our products as offering a better balance between clinical benefit and treatment cost compared to standard-of-care therapies, the profitability of our products may be severely reduced.
If our products are not accepted by the market or if users of our products are unable to obtain adequate coverage of and reimbursement for our products from government and other third-party payers, our revenue and profitability may suffer.
Our ability to commercialize our products successfully will depend in significant part on the extent to which appropriate coverage of and reimbursement for our products and related treatments are obtained from governmental authorities, private health insurers and other organizations, such as HMOs. Third-party payers are increasingly challenging the prices charged for medical products and services. We cannot provide any assurances that third- party payers will consider our products cost-effective or provide coverage of and reimbursement for our products, in whole or in part.
Uncertainty exists as to the coverage and reimbursement status of newly approved medical products and services and newly approved indications for existing products. Third-party payers may conclude that our products are less safe, less clinically effective, or less cost-effective than existing products, and third-party payers may not approve our products for coverage and reimbursement. If we are unable to obtain adequate coverage of and reimbursement for our products from third-party payers, physicians may limit how much or under what circumstances they will prescribe or administer them. Such reduction or limitation in use of our products could cause our sales to suffer. Even if third-party payers make reimbursement available, payment levels may not be sufficient to make the sale of our products profitable.
Also, the trend towards managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of medical services and products, may result in inadequate

41



coverage of and reimbursement for our products. Many third-party payers, including in particular HMOs, are pursuing various ways to reduce pharmaceutical costs, including, for instance, the use of formularies. The market for our products depends on access to such formularies, which are lists of medications for which third-party payers provide reimbursement. These formularies are increasingly restricted, and pharmaceutical companies face significant competition in their efforts to place and obtained preferred positioning for their products on formularies of HMOs and other third-party payers. This increased competition has led to a downward pricing pressure in the industry. The cost containment measures that third-party payers are instituting could have a material adverse effect on our ability to operate profitably.
Our business exposes us to product liability claims.
The testing, manufacture, marketing and sale of our products involve an inherent risk that product liability claims will be asserted against us. We face the risk that the use of our products when sold to patients and when used in human clinical trials will result in adverse effects. IMBRUVICATM is currently marked, and if we complete clinical testing for our additional products and receive regulatory approval to market such additional products, we will mark our additional products, with warnings that identify the known potential adverse effects and the patients who should not receive our product. We cannot ensure that physicians and patients will comply with these warnings. In addition, unexpected adverse effects may occur even with use of our products that have received approval for commercial sale. Although we are insured against such risks in connection with clinical trials and commercial activities, our present product liability insurance may be inadequate. A successful product liability claim in excess of our insurance coverage could have a material adverse effect on our business, financial condition and results of operations. Any successful product liability claim may prevent us from obtaining adequate product liability insurance in the future on commercially desirable or reasonable terms. In addition, product liability coverage may cease to be available in sufficient amounts or at an acceptable cost. An inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our pharmaceutical products. A product liability claim or recall would have a material adverse effect on our reputation, business, financial condition and results of operations.
Our business involves environmental risks.
In connection with our research and development activities and our manufacture of materials and products, we are subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens and wastes. Although we believe that we have complied with the applicable laws, regulations and policies in all material respects and have not been required to correct any material noncompliance, we may be required to incur significant costs to comply with environmental and health and safety regulations in the future. Our research and development involves the controlled use of hazardous materials, including but not limited to certain hazardous chemicals and radioactive materials. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, we cannot completely eliminate the risk of contamination or injury from these materials. In the event of such an occurrence, we could be held liable for any damages that result and any such liability could exceed our resources.
Item 1B. Unresolved Staff Comments
None.
Item 2.    Properties
As of December 31, 2013, the Company leases a total of 132,176 square feet for its corporate headquarters in Sunnyvale, California. Of this total space, 79,776 square feet are leased under an operating lease that expires in November 2017, with an option to extend the lease term for an additional five years. The remaining 52,400 square feet, of which 32,000 square feet represents additional space that the Company exercised an option to lease during the year ended December 31, 2013, is leased under an operating lease which expires in February 2023 and has an option to extend the lease term for an additional five years. In addition, during the year ended December 31, 2013, the Company entered into an agreement to lease approximately 7,500 square feet for its Pharmacyclics Switzerland GmbH office under an agreement that expires in May 2015. During the year ended December 31, 2013, the Company entered into an agreement to lease 7,000 square feet of office space in South San Francisco, California under an operating lease which expires in September 2014.
We believe our existing facilities are adequate to meet our current needs and that suitable additional space will be available as needed.
Item 3.    Legal Proceedings

42



We may be involved, from time to time, in legal proceedings and claims arising in the ordinary course of our business. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. We accrue amounts, to the extent they can be reasonably estimated, that we believe are adequate to address any liabilities related to legal proceedings and other loss contingencies that we believe will result in a probable loss. While there can be no assurances as to the ultimate outcome of any legal proceeding or other loss contingency involving us, management does not believe any pending matter will be resolved in a manner that would have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Item 4.    Mine Safety Disclosures
None.
PART II
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the NASDAQ Stock Market under the symbol "PCYC." The following table sets forth the range of high and low closing prices for our common stock for the periods indicated.
 
 
HIGH
 
LOW
FISCAL YEAR ENDED December 31, 2013
 
 
 
 
First Quarter
 
$
94.20

 
$
61.43

Second Quarter
 
91.64

 
72.51

Third Quarter
 
138.26

 
84.50

Fourth Quarter
 
139.89

 
99.28

 
 
 
 
 
Six Months Ended December 31, 2012
 
$
69.80

 
$
47.87

Three Months Ended September 30, 2012
 
69.80

 
49.35

Three Months Ended December 31, 2012
 
69.78

 
47.87

 
 
 
 
 
FISCAL YEAR ENDED June 30, 2012
 
 
 
 
First Quarter
 
$
12.81

 
$
9.04

Second Quarter
 
15.63

 
11.10

Third Quarter
 
28.68

 
14.99

Fourth Quarter
 
54.61

 
25.33

FISCAL YEAR ENDED June 30, 2011
 
 

 
 

First Quarter
 
$
8.42

 
$
6.36

Second Quarter
 
8.22

 
5.29

Third Quarter
 
6.52

 
4.88

Fourth Quarter
 
10.63

 
5.66

 As of February 18, 2014, there were 82 holders of record of our common stock. We have not paid cash dividends on our common stock since our inception and we do not anticipate paying any in the foreseeable future.
Performance Graph (1) 
The following graph compares our total stockholder returns for the past 5 years to two indices: the Nasdaq Composite Index and the Nasdaq Biotechnology Index.  The total return for each index assumes the reinvestment of all dividends, if any, paid by companies included in these indices.
The stockholder return shown on the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.

43



(1) 
This section is not "soliciting material," is not deemed "filed" with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act whether made before or after the date hereof and  irrespective of any general incorporation language in any such filing. 
(2) 
Shows the cumulative return on investment assuming an investment of $100 in our common stock, the Nasdaq Composite Index and the Nasdaq Biotechnology Index at December 31, 2008. 
Sales of Unregistered Securities
Not Applicable.
Stock Repurchases during the three months ended December 31, 2013
Not Applicable.
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" for information with respect to our compensation plans under which equity securities are authorized for issuance.
Item 6.    Selected Financial Data
On November 14, 2012, the Board of Directors approved a change in the fiscal year end from June 30 to December 31, effective December 31, 2012. All references to "fiscal years", unless otherwise noted, refer to the twelve-month fiscal year, which prior to July 1, 2012, ended on June 30, and beginning on January 1, 2013, ends on December 31, of each year.
The following table sets forth selected historical financial data for the year ended December 31, 2013, six-month transition period ended December 31, 2012 and the previous four fiscal years. The financial data presented below is derived from our audited consolidated financial statements and should be read in conjunction with Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere herein.

44



Selected Consolidated Financial Data
(in thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
Six Months Ended
 
Years Ended June 30,
 
 
December 31, 2013
 
December 31, 2012
 
2012
 
2011
 
2010
 
2009
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
License and milestone revenue  (1)
 
$
235,000

 
$
155,000

 
$
77,605

 
$
4,355

 
$
6,645

 
$

Product revenue, net
 
13,573

 

 

 

 

 

Collaboration services revenue (1)
 
11,596

 
5,658

 
4,385

 
3,878

 
2,662

 

Total revenue
 
260,169

 
160,658

 
81,990

 
8,233

 
9,307

 

Costs and expenses (2):
 
 
 
 

 
 

 
 

 
 

 
 
Cost of goods sold
 
3,501

 

 

 

 

 

Research and development
 
170,865

 
46,639

 
54,537

 
34,482

 
17,358

 
13,954

Less: Excess Amounts related to Research and development (3)
 
(85,732
)
 
(17,306
)
 

 

 

 

Research and development, net
 
85,133

 
29,333

 
54,537

 
34,482

 
17,358

 
13,954

Selling, general and administrative
 
104,016

 
12,093

 
15,575

 
9,125

 
7,561

 
8,474

Less: Excess Amounts related to Selling, general and administrative (3)
 
(30,405
)
 
(819
)
 

 

 

 

Selling, general and administrative, net
 
73,611

 
11,274

 
15,575

 
9,125

 
7,561

 
8,474

Total costs and expenses
 
162,245

 
40,607

 
70,112

 
43,607

 
24,919

 
22,428

Income (loss) from operations
 
97,924

 
120,051

 
11,878

 
(35,374
)
 
(15,612
)
 
(22,428
)
Interest income
 
341

 
137

 
178

 
169

 
81

 
137

Other income (expense), net
 
(129
)
 
(8
)
 
(31
)
 
2

 
(43
)
 
(606
)
Income (loss) before income taxes
 
98,136

 
120,180

 
12,025

 
(35,203
)
 
(15,574
)
 
(22,897
)
Income tax provision (benefit)
 
31,126

 
2,647

 
39

 

 
(550
)
 
550

Net income (loss)
 
$
67,010

 
$
117,533

 
$
11,986

 
$
(35,203
)
 
$
(15,024
)
 
$
(23,447
)
Net income (loss) per share (4):
 
 
 
 

 
 

 
 

 
 

 
 
Basic
 
$
0.92

 
$
1.69

 
$
0.17

 
$
(0.59
)
 
$
(0.31
)
 
$
(0.88
)
Diluted
 
$
0.87

 
$
1.58

 
$
0.17

 
$
(0.59
)
 
$
(0.31
)
 
$
(0.88
)
Weighted average shares used to compute net income (loss) per share:
 
 
 
 

 
 

 
 

 
 

 
 
Basic
 
72,777

 
69,676

 
68,728

 
59,973

 
48,344

 
26,570

Diluted
 
77,083

 
74,408

 
72,617

 
59,973

 
48,344

 
26,570





45



Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30,
 
 
December 31, 2013
 
December 31, 2012
 
2012
 
2011
 
2010
 
2009
Cash, cash equivalents and marketable securities (5)
 
$
635,628

 
$
317,114

 
$
203,607

 
$
112,329

 
$
74,149

 
$
16,326

Total assets
 
768,751

 
355,129

 
219,120

 
116,352

 
76,820

 
18,301

Deferred revenue
 
59,606

 
70,701

 
75,378

 
7,000

 
6,099

 
11,628

Total liabilities
 
141,128

 
92,603

 
86,997

 
14,678

 
10,059

 
20,042

Accumulated deficit
 
(216,596
)
 
(283,606
)
 
(401,139
)
 
(413,125
)
 
(377,922
)
 
(362,898
)
Total stockholders' equity (deficit)
 
627,623

 
262,526

 
132,123

 
101,674

 
66,761

 
(1,741
)


(1) See Note 5 to the consolidated financial statements for a discussion of our collaboration and license agreements.
(2) See Note 8 to the consolidated financial statements for a description of share-based compensation included in Costs and expenses for the for the year ended December 31, 2013, the six months ended December 31, 2012 and for the fiscal years ended June 30, 2012 and 2011.
(3) See Note 5 to the consolidated financial statements for a description of Excess Amounts which are included as a reduction to costs and expenses for the year ended December 31, 2013 and the six months ended December 31, 2012.
(4) See Note 12 to the consolidated financial statements for a description of the computation of basic and diluted net income (loss) per share.
(5) See Note 8 to the consolidated financial statements for a description of the public offering completed during the year ended December 31, 2013 and equity financings completed during fiscal years ended June 30, 2011 and 2010.
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
In addition to historical information, this report contains predictions, estimates, assumptions and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from any future performance suggested in this report as a result of the risks, uncertainties and other factors described herein and elsewhere in this report, including those discussed in “Risk Factors.”
Company Overview
We are focused on developing and commercializing innovative small-molecule drugs for the treatment of cancer and immune mediated diseases. Our mission and goal is: To build a viable biopharmaceutical company that designs, develops and commercializes novel therapies intended to improve quality of life, increase duration of life and resolve serious unmet medical healthcare needs. To identify and control promising product candidates based on scientific development and administrational expertise, develop our products in a rapid, cost-efficient manner and to pursue commercialization and/or development partners when and where appropriate. We exist to make a difference for the better and these are important times to do just that.
On November 13, 2013, the U.S. Food and Drug Administration (FDA) approved IMBRUVICATM (ibrutinib, PCI-32765) under accelerated approval as a monotherapy for the treatment of patients with mantle cell lymphoma (MCL) who have received at least one prior therapy. On November 13, 2013, we commercially launched IMBRUVICATM in the United States. IMBRUVICATM is our first product to market and is one of the first treatments to receive FDA approval via the Breakthrough Therapy Designation pathway. On October 30, 2013, our collaboration partner Janssen Biotech, Inc. announced that it submitted a Marketing Authorization Application (MAA) to the European Medicines Agency (EMA) for the use of ibrutinib in the treatment of patients with chronic lymphocytic leukemia (CLL) and MCL. Subsequent to year-end, on February 12, 2014, the FDA approved IMBRUVICATM as a single agent for the treatment of patients with CLL who have received at least one prior therapy. The FDA approval for these indications was based on overall response rate (ORR). Improvements in survival or disease-related symptoms has not been established. IMBRUVICATM is the first once-daily, single-agent, oral kinase inhibitor for patients with MCL and CLL who in each case have received one prior therapy and is being jointly developed and commercialized by Pharmacyclics and Janssen Biotech, Inc. and its affiliates ("Janssen"), one of the Janssen Pharmaceutical companies of Johnson & Johnson.

46



In addition to IMBRUVICATM (ibrutinib), Pharmacyclics has three other product candidates in clinical development and several preclinical molecules in lead optimization. We are committed to high standards of ethics, scientific rigor, and operational efficiency as we move each of these programs toward potential commercialization.
In December 2011, we entered into a worldwide collaboration and license agreement ("Agreement") with Janssen, for the development and commercialization of ibrutinib, a novel, orally active, first-in-class BTK inhibitor which has been and continues to be developed for the treatment of hematological malignancies, including non-Hodgkin lymphoma (NHL), CLL and multiple myeloma (MM). Under the Agreement, we received our first significant revenue in the form of milestone payments during the year ended June 30, 2012. Together with our partner Janssen, Pharmacyclics is commercializing IMBRUVICATM in the United States.
In 2006, we acquired multiple small molecule drug candidates for the treatment of cancer and other diseases from Celera Genomics, an Applera Corporation business (now Celera Corporation - a subsidiary of Quest Diagnostics Incorporated), including technology and intellectual property relating to drugs that target histone deacetylase ("HDAC") enzymes (specific and multiple isoforms), a Factor VIIa inhibitor targeting a tumor signaling pathway involved in angiogenesis, tumor growth and metastases and B-cell associated tyrosine kinase inhibitors potentially useful for the treatment of lymphomas/leukemias, anti-inflammatory and autoimmune diseases.
Marketed Product - IMBRUVICATM (ibrutinib)
IMBRUVICATM is approved by the U.S. Food and Drug Administration as a single agent for the treatment of patients with MCL and CLL who in each case have received at least one prior therapy. The FDA approval for these indications was based on ORR. An improvement in survival or disease-related symptoms has not been established. IMBRUVICATM is a new agent that inhibits the function of Bruton's tyrosine kinase (BTK). BTK is a key signaling molecule of the B-cell receptor signaling complex that plays an important role in the survival of malignant B-cells. IMBRUVICATM blocks signals that stimulate malignant B-cells to grow and divide uncontrollably.
The following information can be found on the prescribing information for IMBRUVICATM:
The approval in MCL was based on the results of a multi-center, international, single-arm trial of 111 patients with previously treated mantle cell lymphoma. Tumor response was assessed according to the revised International Working Group (IWG) for NHL criteria.  The efficacy results demonstrated a 65.8% overall response rate (95% Confidence Interval (CI): 56.2, 74.5); 17% of patients achieved a complete response and 49% of patients achieved a partial response.  The median duration of response was 17.5 months (95% CI: 15.8, not reached).  The approval in CLL was based on the results of a Phase Ib/II, open-label, multi-center, international, single-arm trial of 48 patients with relapsed or refractory CLL who received 420 mg of IMBRUVICATM daily.  The primary endpoint was safety and a secondary endpoint was ORR, which was assessed by a modified version of the International Working Group on CLL (IWCLL) criteria by an Independent Review Committee. The efficacy results demonstrated a 58.3 percent ORR (95% confidence interval (CI) (%), 43.2, 72.4), all partial responses. The duration of response (DOR) ranged from 5.6 to 24.2+ months. The median DOR was not reached.
Our Pipeline
Our clinical development and product candidates are small-molecule enzyme inhibitors designed to target key biochemical pathways involved in human diseases with critical unmet needs. IMBRUVICATM, our first product to market, has been developed and commercialized for MCL and CLL patients, who in each case have received at least one prior therapy. IMBRUVICATM is currently being studied in multiple Phase I, II and III studies and continues to be developed for the treatment of other B-cell malignancies. In addition to IMBRUVICATM, we currently have three other product candidates in clinical development and several preclinical molecules in lead optimization; including a BTK inhibitor targeting anti-inflammatory and autoimmune indications entering the clinic with a Phase I study, an inhibitor of Factor VIIa (PCI-27483) and a HDAC inhibitor, abexinostat (formerly known as PCI-24781), currently in Phase I and II clinical trials in solid tumors and hematological malignancies.
Our Drug Development Programs
BTK INHIBITOR PROGRAM
We are pioneering the development of orally bioavailable inhibitors of BTK, a signaling protein that is critically important for the activity of B-cells (immune cells that can develop into antibody producing cells). B-cell lymphomas and leukemias, which are common blood cancers, result from mutations acquired during B-cell development that lead to uncontrolled B-cell proliferation. Also, when B-cells are overactive, the immune system can produce antibodies that begin to attack the body's own tissue, leading to autoimmune diseases. Both autoimmune diseases and B-cell malignancies are thought to be driven by

47



overactive signaling and activation of the B-cell antigen receptor ("BCR"), a process that is dependent on BTK.
We have developed IMBRUVICATM, which has been commercialized for MCL and CLL patients, who in each case have received at least one prior therapy, and has demonstrated clinical activity and tolerability in Phase I, II and III clinical trials in a variety of B-cell malignancies. Our development plan includes a variety of B-cell malignancies including: chronic lymphocytic leukemia (CLL) and small lymphocytic lymphoma (SLL), and a number of non-Hodgkin's lymphoma (NHL) subtypes. CLL/SLL, mantle cell lymphoma (MCL), follicular lymphoma (FL), diffuse large B-cell lymphoma (DLBCL), multiple myeloma (MM), Waldenstrom's macroglobulinemia (WM) and marginal zone lymphoma (MZL). We are currently using a multi-tier preclinical testing strategy to develop novel inhibitors of BTK for anti-inflammatory and autoimmune diseases.
IMBRUVICATM (ibrutinib) Worldwide Collaboration with Janssen
In December 2011, we entered into the Agreement with Janssen for the development and commercialization of IMBRUVICATM, and certain compounds structurally related to IMBRUVICATM, for oncology and other indications, excluding all immune mediated diseases and inflammatory or conditions and all psychiatric or psychological diseases or conditions, in the U.S. and outside the U.S. Each company is leading development for specific indications as stipulated in a global development plan.
The collaboration provides Janssen with an exclusive license to exploit the underlying technology outside of the U.S. (the “License Territory”) and co-exclusively with Pharmacyclics in the U.S.
The collaboration has no fixed duration or expiration date and provided for payments by Janssen to us of a $150,000,000 non-refundable upfront payment upon execution, as well as potential future milestone payments of up to $825,000,000 based upon continued development progress ($250,000,000), regulatory progress ($225,000,000) and approval of the product in both the U.S. and the License Territory ($350,000,000). As of December 31, 2013, $385,000,000 in milestone payments had been earned by the Company under the Agreement and the Company may receive up to an additional $440,000,000 in development, regulatory and approval milestone payments.
Subsequent to December 31, 2013, we announced that the FDA approved IMBRUVICATM as a single agent for the treatment of patients with CLL who have received at least one prior therapy. This approval of IMBRUVICATM in CLL triggered a $60,000,000 milestone payment to us under the Agreement (see Note 15 to the consolidated financial statements).
The Agreement includes a cost sharing arrangement for associated collaboration activities. Except in certain cases, in general Janssen is responsible for approximately 60% of collaboration development costs and we are responsible for the remaining 40% of collaboration development costs. In general, costs associated with commercialization will be included in determining pre-tax profit or pre-tax loss. The Agreement provides that pre-tax profits or pre-tax losses from the commercialization of any products resulting from the collaboration are shared 50% by us and 50% by Janssen.
The collaboration with Janssen provides us with an annual cap of our share of collaboration costs and pre-tax commercialization losses for each calendar year until the third profitable calendar quarter for the product, as determined in the Agreement. In the event that our share of aggregate development costs in any given calendar year, together with any other amounts that become due from us, plus our share of pre-tax loss (if any) for any calendar quarter in such calendar year, less our share of pre-tax profit (if any) for any calendar quarter in such calendar year, exceeds $50,000,000, then amounts that are in excess of $50,000,000 (the "Excess Amounts") are funded by Janssen. The total Excess Amounts plus interest may not exceed $225,000,000.  Interest shall be accrued on the outstanding balance with interest calculated at the average annual European Interbank Offered Rate ("EURIBOR") for the EURO or average annual London Interbank Offered Rate ("LIBOR") for U.S. Dollars as reported in the Wall Street Journal, plus 2%, calculated on the number of days from the date on which our payment would be due to Janssen. The interest rate on outstanding Excess Amounts shall not exceed 5% per annum, and shall not in the aggregate exceed an outstanding balance of $25,000,000.
In the event the Excess Amounts reach a maximum of $225,000,000, we shall be responsible for our share of development costs, together with any other amounts that become due from us, plus our share of any pre-tax loss beyond such maximum.
For all calendar quarters following the third profitable calendar quarter for the product, as determined in the Agreement, we can no longer add to Excess Amounts and shall be responsible for our own share of development costs along with our share of pre-tax losses incurred in such quarters. Janssen may recoup the Excess Amounts, together with interest from our share of pre-tax profits (if any) in subsequent calendar quarters until the Excess Amounts and applicable interest has been fully repaid.
The Company recognizes Excess Amounts as a reduction to costs and expenses as the Company's repayment of Excess Amounts to Janssen is contingent and would become payable only after the third profitable calendar quarter for the product.

48



Further, Excess Amounts shall be reimbursable only from the Company's share of pre-tax profits (if any) after the third profitable calendar quarter for the product.
Following any regulatory approval in the U.S., Pharmacyclics recognizes product revenue and takes a lead role in U.S. commercial strategy development and both Pharmacyclics and Janssen share in commercialization activities. Under the Agreement, following any regulatory approval outside the United States, Janssen will recognize product revenue and lead and perform commercialization activities. The Agreement provides that pre-tax profits or pre-tax losses from the commercialization of any products resulting from the collaboration are shared 50% by us and 50% by Janssen.
Both parties have responsibilities for the development, manufacturing and marketing of products resulting from the Agreement. Janssen has the sole responsibility and exclusive rights to commercialize the products in the License Territory. The parties hold joint responsibility and co-exclusive rights to commercialize the products in the U.S., and Pharmacyclics will serve as the lead party in such effort. We continue to work with Janssen on protocols and the design, schedules and timing of trials. Development and commercialization activities under the collaboration are managed through a shared governance structure.
FACTOR VIIa INHIBITOR PROGRAM
Tissue Factor (TF) up-regulation is associated with increased tumor invasiveness and progression, worsened prognosis and increased thromboembolism (VTE). Factor VII is an enzyme that becomes activated ("FVIIa") by binding to the cell surface protein tissue factor ("TF"), a protein found in the body that helps to trigger the process of blood clotting in response to injury. TF is over expressed in many cancers including gastric, breast, colon, lung, prostate, ovarian and pancreatic cancers. Activation of protease activated receptors by TF:FVIIa complex leads to increases in IL-8, VEGF and other invasiveness promoting factors. Our Factor VIIa inhibitor PCI-27483 is a novel first-in-human small molecule inhibitor that selectively targets FVIIa. As an inhibitor of FVIIa, PCI-27483 has two potential mechanisms of action: 1) inhibition of intracellular signaling involved in tumor growth and metastases and 2) inhibition of early coagulation processes associated with thromboembolism. Pharmacyclics is currently defining the next steps for the development of this agent.
ABEXINOSTAT (PCI-24781) PAN-HDAC INHIBITOR
Histone deacetylases ("HDACs") are well-validated drug targets in a number of disease areas including cancer. These enzymes control several vital cellular processes, such as transcription, cell cycle progression, protein transport and degradation etc, and their activity is often dysregulated in cancer. Classically, the major function of these enzymes is controlling the expression of genes, i.e. whether genes are turned "on" or "off" via epigenetic mechanisms. In cancer, HDACs are often differentially expressed from normal cells, resulting in gene expression changes that favor a tumor's ability to multiply, to avoid apoptosis (i.e. programmed cell death) or to become resistant to chemotherapy. Treatment with HDAC inhibitors reverses these changes, resulting in cancer cell death in vitro (i.e. in cultured cells) and tumor growth inhibition in vivo (i.e. in animals) at non-toxic concentrations.
Abexinostat is an orally dosed, broad spectrum, hydroxamic acid-based small molecule HDAC inhibitor that has been evaluated in Phase I and II clinical trials for refractory solid tumors and lymphoma by Pharmacyclics and its ex-U.S. partner, Les Laboratoires Servier of Paris, France ("Servier"). Abexinostat has shown promising anti-tumor activity in vitro and in vivo (Buggy et al, Mol Cancer Ther 2006; 5: 1309-17).
Abexinostat treatment leads to synergistic efficacy in tumor cells in combination with many cancer therapeutics, such as bortezomib, as well as DNA-damaging agents such as radiation (Banuelos et al Clin Cancer  Res 2007 13:6816-26) and chemotherapy agents such as doxorubicin (Lopez et al, Clin Cancer Res 2009 15:3472-83, Yang et al, Anticancer Res. 2011 31:1115-23).  In lymphoma cells, abexinostat together with bortezomib greatly enhances proteasome and NF-êB inhibition, increases oxidative stress, causes cell cycle arrest and results in increased cell death (Bhalla et al Clin Cancer Res 2009 15:3354-65). In solid tumor cells, we have shown that abexinostat inhibits DNA repair following damage by radiation or chemotheraputic agents, thereby enhancing the efficacy of these anti-cancer agents. The mechanism of the synergy may involve inhibition of the homologous recombination pathway, a major double-strand break ("DSB") repair pathway. In a study funded entirely by Pharmacyclics, we showed that abexinostat also effectively synergizes with inhibitors of single-strand break repair such as poly ADP ribose polymerase inhibitors (PARP is a protein important for repairing single-strand breaks in DNA) (Adimoolam et al 2007). Furthermore, abexinostat demonstrated highly synergistic growth inhibition of chemotherapy-resistant tumors in combination with chloroquine (an inhibitor of autophagy, a protective mechanism in cells under stress), particularly in certain subtypes of sarcoma (Lopez et al. Cancer Res 2010 71:185-96). In a model of epigenetic regulation of cancers, abexinostat showed synergistic cell death in glioblastoma cells when combined with a demethylase inhibitor (Singh et al 2011 13:894-903). Other recent preclinical publications have also demonstrated activity of abexinostat in a mouse model of gallbladder carcinoma (Kitamura et al J Hepatology 2012 57:84-91) and in combination with radiation on breast cancer stem cells (Al-Assar et al Cancer Biol & Ther 11: 1028-36, 2011).

49



Abexinostat has been tested in several clinical trials in the U.S. by Pharmacyclics and globally by our partner Servier. In the U.S., Pharmacyclics has completed two Phase I studies using abexinostat as a single agent in patients with advanced solid tumors, a Phase I/II trial testing abexinostat single agent in patients with relapsed or refractory NHL and a Phase I trial in soft-tissue sarcoma patients (in combination with doxorubicin, an anti-tumor agent) co-sponsored by the Massachusetts General Hospital and Dana-Farber Cancer Institute. Results from this trial were presented at the annual meeting of the Connective Tissue Oncology Society in November 2012 in Prague, Czech Republic and updated at the AACR Annual Meeting in April 2013. A Phase II study was undertaken in relapsed/refractory FL and mantle-cell lymphoma (MCL). The results from this study were presented in poster at the 12th International Conference on Malignant Lymphoma ("IMCL") in Lugano, Switzerland (June 19-22, 2013). Pharmacyclics is currently defining the next steps for the development of this agent.
Our collaboration partner for ex-U.S. markets, Servier, has initiated a multitude of Phase I/II trials in Europe and Asia in lymphomas and solid tumors with abexinostat as single agent and in combination with other chemotherapeutic agents including cisplatin, liposomal doxorubicin and FOLFOX. Further analysis of these trials and any updates may be released by Servier.
In April 2009, we entered into a collaboration agreement with Servier, pursuant to which we granted Servier an exclusive license for our pan-HDAC inhibitors, including abexinostat, for territories throughout the world excluding the United States and its possessions. Under the terms of the agreement, Servier will pay us for reaching various development and regulatory milestones and a royalty on sales outside of the United States. We will continue to own all rights within the United States.
Change in Fiscal Year End
On November 14, 2012, the Board of Directors approved a change in the fiscal year end from June 30 to December 31, effective December 31, 2012. All references to "fiscal years", unless otherwise noted, refer to the twelve-month fiscal year, which prior to July 1, 2012, ended on June 30, and beginning on January 1, 2013, ends on December 31, of each year.
Critical Accounting Policies, Estimates and Judgments
This discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an on-going basis, we evaluate our estimates, including those related to revenue recognition and clinical trial accruals. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results, however, may differ significantly from these estimates under different assumptions or conditions and may adversely affect the financial statements.
We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our financial statements and accompanying notes.
Revenue Recognition
Product revenue, net is recognized in accordance with the FASB Accounting Standards Codification (ASC) 605, Revenue Recognition, when the following criteria have been met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price is fixed or determinable and (4) collectability is reasonably assured. Revenues are deferred for fees received before earned or until no further obligations exist. We exercise judgment in determining that collectability is reasonably assured or that services have been delivered in accordance with the arrangement. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectability based primarily on the customer's payment history and on the creditworthiness of the customer.
Product Revenue, Net
Product revenue, net consists of U.S. sales of IMBRUVICATM and is recognized once all four revenue recognition criteria described above have been met. We sell IMBRUVICATM to specialty pharmacies ("SP") that sell to individual patients and specialty distributors ("SD") that sell to hospital pharmacies. We recognize revenue from sales of IMBRUVICATM when the product’s title and risk of loss transfers to the customer. We determined that we have the ability to make reasonable estimates of product returns in order to recognize revenue at the time that title and risk of loss transfers to the customer based on the following factors: (1) we believe that we have sufficient insight into the distribution channel at the SP's and SD's in order to ascertain their inventory level and dispense data, (2) due to the price of our product and limited patient population, our SP and SD customers have not built up significant levels of inventory, nor do we expect they will do so for the foreseeable future, (3) inventory on hand at our SP customers was generally less than two weeks as of December 31, 2013, (4) there have been no

50



product returns to-date since our launch of IMBRUVICATM on November 13, 2013 and (5) we believe there is limited risk of return of inventory in the channel due to expiration, based on the shelf life of inventory in the channel.
We recognize product revenue net of adjustments for customer credits, including estimated government rebates and charge-backs, returns, prompt payment discounts, patient assistance programs, and Medicare Part D coverage gap reimbursements. Each of the above adjustments are recorded at the time of revenue recognition, resulting in a reduction in product revenue, net and an increase in accrued expenses or a reduction in accounts receivable, net. The above adjustments require significant estimates, judgment and information obtained from external sources. If our estimates differ from actuals, we will record adjustments that would affect product revenue, net in the period of adjustment.
The following table summarizes the provisions, and credits/payments, for these adjustments (in thousands):
 
Total
Balance as of December 31, 2012
$

Provision related to current period sales
1,395

Credits/payments
(189
)
Balance as of December 31, 2013
$
1,206

Gross-to-net sales adjustments
Rebates
We record an allowance for rebates including mandated discounts under the Medicaid Drug Rebate Program. The allowance for rebates is based upon contractual agreements or legal requirements with public sector benefit providers, including Medicaid. The allowance for rebates represents the estimated amounts owed to such public sector benefit providers, including Medicaid, based on the estimated rebate percentage of forecasted eligible Medicaid sales. The estimated rebate percentage is based on statutory discount rates and expected utilization. The forecasted eligible Medicaid sales represents those sales made by us that will ultimately be consumed by patients covered by Medicaid. To estimate the allowance for rebates, we use estimated patient mix information which is provided by our specialty pharmacy customers, as well as third party sources. Rebates are generally invoiced and paid in arrears. As such, the allowance for rebates consists of an estimate of the amount expected to be incurred for the current quarter's shipments to patients, plus an accrual balance for estimated unpaid rebates from prior periods. The allowance for rebates is recorded within Accrued liabilities in the consolidated balance sheets.
Charge-backs
Charge-backs are discounts that result from the difference between the prices at which we sell IMBRUVICATM to direct customers and the sales price ultimately paid to wholesalers under fixed price contracts by third-party payers, including governmental agencies. These entities purchase products through wholesalers at a lower price pursuant to fixed price contracts and the wholesalers then charge us the difference between their acquisition cost and the lower program price. Charge-backs are recorded as a reduction to Accounts receivable, net in the consolidated balance sheets.
Product Returns
Consistent with industry practice, we generally offer customers a limited right to return. We generally allow for the return of product that is a few months prior to and up to a few months after the product expiration date. Additionally, we consider several other factors in the estimation process including the expiration dates of product shipped, third party data in monitoring channel inventory levels, shelf life of the product, prescription trends and other relevant factors. Provisions for estimated product returns are recorded within Accrued liabilities in the consolidated balance sheets.
Medicare Part D coverage gap
Medicare Part D, also known as the Medicare prescription drug benefit, is a federal program to subsidize the costs of prescription drugs for Medicare beneficiaries in the United States. The Medicare Part D prescription drug benefit mandates that drug manufacturers fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Funding of the Medicare Part D gap is invoiced and paid in arrears. As such, the allowance for Medicare Part D consists of an estimate of the amount expected to be incurred for the current quarter's shipments to patients, plus an accrual balance for estimated shipments remaining in the channel at period end which are estimated to ship to Medicare Part D patients. The allowance for rebates is recorded within Accrued liabilities in the consolidated balance sheets.
Prompt payment discounts

51



We generally offer cash discounts to our customers, generally a 2% discount applied to the invoice amount, as an incentive for prompt payment. We expect that all of our customers to whom we offer cash discounts for prompt payment to take advantage of the full amount of the 2% discount. We record the prompt-payment discount as a reduction to Accounts receivable, net in the consolidated balance sheets.
Co-payment assistance
Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. We accrue for co-payment assistance based on actual program participation and estimates of program redemption using data provided by a third-party administrator.
Collaboration Revenues
Revenue under our license and collaboration arrangements is recognized based on the performance requirements of the contract. Determinations of whether persuasive evidence of an arrangement exists and whether delivery has occurred or services have been rendered are based on management’s judgments regarding the fixed nature of the fees charged for deliverables and the collectability of those fees. Should changes in conditions cause management to determine that these criteria are not met for any new or modified transactions, revenue recognized could be adversely affected.
Our collaborations with multiple elements prior to July 1, 2010 were evaluated and divided into separate units of accounting if certain criteria were met, including whether the delivered element had stand-alone value and whether there was verifiable objective and reliable evidence ("VSOE") of the fair value of the undelivered items. The consideration we received was combined and recognized as a single unit of accounting when criteria for separation were not met. Amounts received under such arrangements consisted of up-front collaboration payments, periodic milestone payments and payments for research activities. Up-front payments under agreements that included future performance requirements were recorded as deferred revenue and were recognized over the performance period. The performance period was estimated at the inception of the arrangement and is reevaluated at each reporting period. The reevaluation of the performance period may shorten or lengthen the period during which the deferred revenue is recognized. Revenues related to substantive, at-risk collaboration milestones are recognized upon achievement of the event specified in the underlying agreement. In determining whether a payment is deemed to be a substantive performance milestone, we take into consideration (i) the enhancement in value to the related development product candidate, (ii) our performance and the relative level of effort required to achieve the milestone, (iii) whether the milestone relates solely to past performance, and (iv) whether the milestone payment is considered reasonable relative to all of the deliverables and payment terms. Revenues for research activities are recognized as the related research efforts are performed.
We recognize revenue related to collaboration and license arrangements in accordance with the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 605-25, “Revenue Recognition – Multiple-Element Arrangements,” or ASC Topic 605-25. Additionally, we adopted, effective July 1, 2010, Accounting Standards Update, or ASU, No. 2009-13, “Multiple Deliverable Revenue Arrangements,” or ASU 2009-13, which amended ASC Topic 605-25 and:
provided guidance on how deliverables in an arrangement should be separated and how the arrangement consideration should be allocated to the separate units of accounting;
required an entity to determine the selling price of a separate deliverable using a hierarchy of (i) vendor-specific objective evidence, or VSOE, (ii) third-party evidence, or TPE, or (iii) best estimate of selling price, or BESP; and
required the allocation of the arrangement consideration, at the inception of the arrangement, to the separate units of accounting based on relative fair value.
We evaluate all deliverables within an arrangement to determine whether or not they provide value on a stand-alone basis. Based on this evaluation, the deliverables are separated into units of accounting. The arrangement consideration that is fixed or determinable at the inception of the arrangement is allocated to the separate units of accounting based on their relative selling prices. We may exercise significant judgment in determining whether a deliverable is a separate unit of accounting, as well as in estimating the selling prices of such unit of accounting.
To determine the selling price of a separate deliverable, we use the hierarchy as prescribed in ASC Topic 605-25 based on VSOE, TPE or BESP. VSOE is based on the price charged when the element is sold separately and is the price actually charged for that deliverable. TPE is determined based on third party evidence for a similar deliverable when sold separately and BESP is the price at which we would transact a sale if the elements of collaboration and license arrangements were sold on a stand-alone basis. We may not be able to establish VSOE or TPE for the deliverables within collaboration and license arrangements, as we do not have a history of entering into such arrangements or selling the individual deliverables within such arrangements separately. In addition, there may be significant differentiation in these arrangements, which indicates that comparable third

52



party pricing may not be available. We may determine that the selling price for the deliverables within collaboration and license arrangements should be determined using BESP. The process for determining BESP involves significant judgment on our part and includes consideration of multiple factors such as estimated direct expenses and other costs, and available data.
For collaborations entered into after July 1, 2010, we have determined BESP for license units of accounting based on market conditions, similar arrangements entered into by third parties and entity-specific factors such as the terms of previous collaborative agreements, our pricing practices and pricing objectives, the likelihood that clinical trials will be successful, the likelihood that regulatory approval will be received and that the products will become commercialized. We have also determined BESP for services-related deliverables based on the nature of the services to be performed and estimates of the associated effort as well as estimated market rates for similar services.
For each unit of accounting identified within an arrangement, we determine the period over which the performance obligation occurs. Revenue is then recognized using either a proportional performance or straight-line method. We recognize revenue using the proportional performance method when the level of effort to complete our performance obligations under an arrangement can be reasonably estimated. Direct labor hours or full time equivalents are typically used as the measurement of performance.
Effective July 1, 2010, we adopted ASU No. 2010-17, “Milestone Method of Revenue Recognition,” or ASU 2010-17, which provides guidance on revenue recognition using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in the period in which the milestone is achieved. The determination that a milestone is substantive is subject to considerable judgment.
Inventory valuation and related reserves
Inventories are stated at the lower of cost or market value with the approximate cost being determined on a first-in, first-out basis. Costs capitalized as inventories include third party manufacturing costs and labor costs for personnel involved in the manufacturing process.
During the quarter ended December 31, 2013, we began capitalizing costs associated with manufacturing inventory as a result of the FDA approval for IMBRUVICATM. Until September 30, 2013, all inventory costs incurred were recorded as research and development expense in the consolidated statements of operations.
Products that have been approved by the FDA or other regulatory agencies, such as IMBRUVICATM, are also used in clinical programs to assess the safety and efficacy of the products for usage in diseases that have not been approved by the FDA or other regulatory authorities. The form of IMBRUVICATM (i.e., raw materials and API) utilized for both commercial and clinical programs is identical and, as a result, the inventory has an "alternative future use" as defined in authoritative guidance. Raw materials and purchased drug product associated with clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and can no longer be used for commercial purposes and, therefore, does not have "alternative future use."
We evaluate inventory levels quarterly to determine if the inventory has a cost basis in excess of its expected net realizable value, inventory has expired, inventory on-hand is in excess of expected sales forecasts, and/or inventory that does not meet its quality specifications. Our raw materials and API has no expiration date and can be revalidated for use after testing. Our finished good inventory currently has an estimated life of 24 months and, based on our sales forecasts, we expect to realize the carrying value of the IMBRUVICATM inventory. If any impairment of inventory is identified, the related inventory is written down with a corresponding charge to cost of goods sold in the consolidated statements of operations in the period that the inventory impairment is first identified.
Research and Development
Research and development expenses include personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs and other consulting services. Research and development costs are expensed as incurred. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and amortized over the period that the goods are delivered or the related services are performed, subject to an assessment of recoverability.
Clinical development costs are a significant component of Research and development expenses. We have a history of contracting with third parties that perform various clinical trial activities on our behalf in the ongoing development of our product candidates. The financial terms of these contracts are subject to negotiations and may vary from contract to contract and may result in uneven payment flow. We accrue and expense costs for clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with contract research organizations and clinical trial sites. We determine our estimates through discussions with

53



internal clinical personnel and outside service providers as to the progress or stage of completion of trials or services and the agreed upon fee to be paid for such services.
Share-Based Compensation
Share-based compensation cost for employee stock options is measured at the grant date based on the fair value of the award.  The accounting grant date for employee stock options with performance obligations is the date on which the performance goals have been defined and a mutual understanding of the terms has been reached.  Generally options with performance obligations vest over a four year period, with the goals set and agreed upon annually. Share-based compensation for non-employee stock options is re-estimated at each period-end through the vesting date.
The fair value of each stock option is estimated using the Black Scholes option-pricing model. Expected volatility is based on historical volatility data of our stock. The expected term of stock options granted represents the period of time that stock options are expected to be outstanding.  We generally do not expect substantially different exercise or post-vesting termination behavior among our employee or non-employee population. As such, for the majority of stock options granted and our Employee Stock Purchase Plan, we generally calculate and apply an overall expected term assumption based on historical data. In certain cases, we use a shorter expected term for performance-based stock options based on a combination of historical data and management's estimates of the period of time that options will be outstanding. The risk-free interest rate is based on a zero-coupon United States Treasury bond whose maturity period equals the expected term of the our options.
Options vest upon the passage of time or a combination of time and the achievement of certain performance obligations. Vesting of performance-based options for executive officers depends on their attainment of key corporate and departmental goals. The Compensation Committee of the Board of Directors will determine if the performance conditions have been met.  Share-based compensation expense for the options with performance obligations is recorded when the company believes that the vesting of these options is probable.
Income Taxes
We are subject to income taxes in both the U.S. and foreign jurisdictions, and we use estimates in determining our provisions for income taxes. We use the liability method of accounting for income taxes, whereby deferred tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income.
Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. We recognize a valuation allowance against our net deferred tax assets if it is more likely than not that some portion of the deferred tax assets will not be fully realizable. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. At December 31, 2013, we had a full valuation allowance against all of our deferred tax assets. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.
We apply the provisions of FASB's guidance on accounting for uncertainty in income taxes. We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and the tax benefit to be recognized is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.
Recent Accounting Pronouncements
See Note 2, Significant Accounting Policies, in Notes to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on financial condition and results of operations, which is incorporated herein by reference.
Financial Data for the Year Ended December 31, 2013 and 2012 (unaudited):
Total Revenue (in thousands):

54



 
 
Years Ended December 31,
 
Increase/
 
Percent
 
 
2013
 
2012
 
(Decrease)
 
Change
 
 
 
 
(unaudited)
 
 
 
 
License and milestone revenue
 
$
235,000

 
$
155,000

 
$
80,000

 
52
%
Collaboration services revenue
 
11,596

 
9,708

 
1,888

 
19
%
Product revenue, net
 
13,573

 

 
13,573

 
100
%
Total revenue
 
$
260,169

 
$
164,708

 
$
95,461

 
58
%
Total revenue increased by $95,461,000 for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to an $80,000,000 increase in milestone revenue earned under the worldwide collaboration and license agreement with Janssen ("Agreement"), a $13,573,000 increase in product revenue, net due to product sales which began during the period due to the FDA approval of IMBRUVICATM on November 13, 2013 and a $1,888,000 increase in collaboration services revenue primarily related to the Janssen agreement.
License and milestone revenue
License and milestone revenue of $235,000,000 for the year ended December 31, 2013 was comprised of the following milestone payments that were earned under the Agreement:
Approval milestone of $60,000,000 earned on November 13, 2013 upon the FDA approval of IMBRUVICATM as a single agent for the treatment of patients with mantle cell lymphoma (MCL) who have received at least one prior therapy,
Regulatory milestone of $75,000,000 earned upon the FDA's acceptance for filing of the new drug application upon the FDA's acceptance for filing of the new drug application for IMBRUVICATM, for previously treated MCL and previously treated chronic lymphocytic leukemia/small lymphocytic lymphoma ("CLL/SLL")
Regulatory milestone of $50,000,000 earned upon the European Medicines Agency's confirmation that Janssen's Marketing Authorization Application (MAA) for IMBRUVICATM for the treatment of adult patients with relapsed or refractory CLL/SLL and relapsed or refractory MCL was valid.
Development milestone of $50,000,000 earned as a result of the enrollment of a fifth patient in our Phase III clinical trial of IMBRUVICATM in a monotherapy trial using IMBRUVICATM versus chlorambucil in elderly patients with newly diagnosed chronic lymphocytic leukemia/small lymphocytic leukemia (CLL/SLL)
In comparison, for the year ended December 31, 2012, license and milestone revenue included $150,000,000 in connection with our achievement of three development milestones earned during the period under the Agreement and $5,000,000 of license revenue related to our license agreement with Novo Nordisk (A/S).
Collaboration services revenue
Collaboration services revenue for the years ended December 31, 2013 and 2012 consists primarily of amounts earned under our worldwide collaboration and license agreement with Janssen (the "Agreement"). In December 2011, we entered into the Agreement which provided for a $150,000,000 non-refundable upfront payment upon execution (see Note 5 to the consolidated financial statements). The revenue related to the upfront payment was allocated $70,605,000 to the licenses, $14,982,000 to the committee services and $64,413,000 to the development services. The $14,982,000 and $64,413,000 allocated to committee and development services, respectively, is being recognized as revenue as the related services are provided over the estimated service periods of 17 years and 9 years, which are equivalent to the estimated remaining life of the underlying technology and the estimated remaining development period, respectively.
For the year ended December 31, 2013, total collaboration services revenue related to the Agreement was $10,970,000 which was comprised of $10,089,000 of amortization of development services and $881,000 of amortization of committee services. For the year ended December 31, 2012, total collaboration services revenue related to the Agreement was $8,715,000 which was comprised of $7,834,000 of amortization of development services and $881,000 of amortization of committee services. The increase in collaboration services revenue recognized under the Agreement was due to an increase in development efforts under the collaboration with Janssen.
As of December 31, 2013, approximately $59,530,000 was included in deferred revenue related to the committee and development services under the Agreement, of which $52,025,000 was included in deferred revenue non-current.

55



Product revenue, net
Product revenue, net consists of revenue recorded on sales of IMBRUVICATM. IMBRUVICATM was approved by the FDA and commercially launched on November 13, 2013 for MCL. IMBRUVICATM is currently marketed in the United States as a single agent for the treatment of patients with MCL and since February 12, 2014 also for the treatment of patients with CLL, who in each case have received at least one prior therapy. We recognize revenue from sale of IMBRUVICATM when the product’s title and risk of loss transfers to the customer. We derive product revenue, net based on net sales to our specialty pharmacy and specialty distributor customers, less estimated government rebates, charge-backs, returns reserve and prompt payment discounts.
Product revenue, net was calculated as follows (in thousands):
 
 
Year Ended
 
 
December 31, 2013
Product revenue, gross
 
$
14,968

Government rebates, charge-backs and other
 
(1,018
)
Returns reserve and cash discounts
 
(377
)
Product revenue, net
 
$
13,573

Cost of goods sold (in thousands):
 
 
Year Ended
 
 
December 31, 2013
Cost of goods sold
 
$
3,501

Cost of goods sold includes third-party manufacturing costs of products sold, royalty fees, and other indirect costs such as employee compensation.
Costs incurred prior to September 30, 2013 were recorded as research and development expenses, net in the consolidated statements of operations. This zero cost inventory primarily consisted of raw materials for which the shelf life has not yet started. As a result, as of December 31, 2013, we had approximately $16,100,000 of zero cost inventory on hand which had been previously charged to research and development expenses (as those costs were incurred prior to FDA approval). We expect to incur additional costs to bring the inventory to saleable state (such costs will be capitalized to inventory and charged to cost of goods sold at the time when revenue is recognized from that sale) and we estimate that such inventory will be sold within the next 12 to 18 months.
Research and development, net (in thousands):
 
 
Years Ended December 31,
 
Increase/
 
Percent
 
 
2013
 
2012
 
(Decrease)
 
Change
 
 
 
 
(unaudited)
 
 
 
 
Research and development
 
$
170,865

 
$
77,852

 
$
93,013

 
119
%
Less: Excess Amounts related to Research and development
 
(85,732
)
 
(17,306
)
 
(68,426
)
 
395
%
Research and development, net
 
$
85,133

 
$
60,546

 
$
24,587

 
41
%
Research and development expense for the year ended December 31, 2013 increased by $24,587,000, or 41%, compared to the year ended December 31, 2012. The increase was primarily attributable to a $28,200,000 increase in payroll and related expenses primarily due to an increase in headcount, a $20,200,000 increase in drug manufacturing costs, a $16,500,000 increase in costs related to our clinical trials, $15,600,000 increase in stock-based compensation expense primarily due to the timing and accounting of grants for performance-based stock options, an increase in our stock price which resulted in a higher fair value for options granted and growth in our employee base and other increases related to an increase in expense for research activities, consulting expenses, outside services and recruiting and relocation expenses. Partially offsetting these

56



increases in expense was a $81,983,000 increase in the reduction to Research and development expense related to the Agreement, of which $13,557,000 represented an increase in Janssen's share of expenses incurred under the cost sharing arrangement and $68,426,000 represented an increase in Excess Amounts. See Note 5 to the consolidated financial statements for a description of the Agreement.
Average research and development headcount was 222 for the year ended December 31, 2013, compared to 133 for the year ended December 31, 2012. In the near term, we expect to hire additional research and development employees, as well as incur costs under our collaboration agreements as we continue to invest in the development of our products.
Excess Amounts, which are recorded as a reduction to costs and expenses, reduced research and development expense by $85,732,000 and $17,306,000 for the years ended December 31, 2013 and 2012, respectively. In the event that we achieve a third profitable calendar quarter from sales of IMBRUVICATM, which was commercially launched during the year ended December 31, 2013, or once we fully utilize the maximum Excess Amounts provided for in the Agreement, we will no longer receive Excess Amounts and our research and development expense will increase (see Note 5 to the consolidated financial statements).
Research and development costs are identified as either directly attributed to one of our research and development programs or as an indirect cost, with only direct costs being tracked by specific program. Direct costs consist of personnel costs directly associated with a program, preclinical study costs, clinical trial costs, and related clinical drug and manufacturing costs, drug formulation costs, contract services and other research expenditures. Indirect costs consist of personnel costs not directly associated with a program, overhead and facility costs and other support service expenses.
The following table summarizes our principal product development initiatives, including the related stages of development for each product, the direct costs attributable to each product and total indirect costs for each respective period.
For a discussion of the risks and uncertainties associated with the timing and cost of completing a product development phase, see the Risk Factors discussed in this Annual Report.
Direct costs by program and indirect costs were as follows (in thousands):
 
 
 
 
 
 
R&D Expenses
 
 
 
 
 
 
Years Ended December 31,
Product
 
Description
 
Phase of Development
 
2013
 
2012
 
 
 
 
 
 
 
 
(unaudited)
BTK Inhibitors
 
Cancer/autoimmune
 
Phase I/II/III, Pre-clinical
 
$
120,850

 
$
56,945

HDAC Inhibitors
 
Cancer
 
Phase I/II
 
1,232

 
1,928

Factor VIIa Inhibitor
 
Cancer
 
Phase II
 
410

 
1,664

 
 
Total direct costs
 
 
 
122,492

 
60,537

 
 
Indirect costs
 
 
 
48,373

 
17,315

 
 
Less: Excess Amounts related to Research and development
 
 
 
(85,732
)
 
(17,306
)
 
 
Research and development, net
 
 
 
$
85,133

 
$
60,546

Selling, general and administrative, net (in thousands):
 
 
Years Ended December 31,
 
Increase/
 
Percent
 
 
2013
 
2012
 
(Decrease)
 
Change
 
 
 
 
(unaudited)
 
 
 
 
Selling, general and administrative
 
$
104,016

 
$
20,374

 
$
83,642

 
411
%
Less: Excess Amounts related to Selling, general and administrative
 
(30,405
)
 
(819
)
 
(29,586
)
 
3,612
%
Selling, general and administrative, net
 
$
73,611

 
$
19,555

 
$
54,056

 
276
%

57



Selling, general and administrative expense for the year ended December 31, 2013 increased by $54,056,000, or 276%, compared to the year ended December 31, 2012. The increase was primarily attributable to a $22,000,000 increase in stock-based compensation expense primarily due to the timing and accounting of grants for performance-based stock options, an increase in our stock price which resulted in a higher fair value for options granted and growth in our employee base, a $21,100,000 increase in payroll and related expenses primarily due to the increase in headcount, a $10,400,000 increase in cost sharing expenses under the Janssen arrangement, $10,300,000 increase in marketing related expenses due to activities related to the launch of IMBRUVICATM, a $4,100,000 increase in medical affairs expenses and increases in other expenses including patent and legal costs, consulting expenses, travel related expense and recruitment fees and expenses. Partially offsetting these increases was a $29,586,000 increase in Excess Amounts which were recorded as a reduction to selling, general and administrative expense (see Note 5 to the consolidated financial statements).
Average selling, general and administrative headcount was 133 for the year ended December 31, 2013 compared to 31 for the year ended December 31, 2012. In the near term, we expect to hire additional selling, general and administrative employees, as well as incur costs under our collaboration agreements as we continue to invest in the development of our products.
Excess Amounts, which are recorded as a reduction to costs and expenses, reduced selling, general and administrative expense by $30,405,000 and $819,000 for the years ended December 31, 2013 and 2012, respectively. In the event that we achieve a third profitable calendar quarter from sales of IMBRUVICATM, which was commercially launched during the year ended December 31, 2013, or once we fully utilize the maximum Excess Amounts provided for in the Agreement, we will no longer receive Excess Amounts and our selling, general and administrative expense will increase (see Note 5 to the consolidated financial statements).
Income tax provision (benefit) (in thousands):
 
 
Years Ended December 31,
 
Increase/
 
Percent
 
 
2013
 
2012
 
(Decrease)
 
Change
 
 
 
 
(unaudited)
 
 
 
 
Income tax provision (benefit)
 
$
31,126

 
$
(2,965
)
 
$
34,091

 
(1,150
)%
For the year ended December 31, 2013, we recorded an income tax provision of $31,126,000, compared to an income tax benefit of $2,965,000 for the year ended December 31, 2012. The estimated annual effective tax rate for the year ended December 31, 2013 was 31.72%. The income tax provision for the year ended December 31, 2013 and the income tax benefit for the year ended December 31, 2012 was calculated based upon tax provision amounts for respective years spanning multiple tax return fiscal years, which for the year ended December 31, 2012 was comprised of tax provision amounts for the last six month period underlying the tax return year ended June 30, 2012 and first six months for the tax year ended June 30, 2013 and, which for the year ended December 31, 2013 was comprised of tax provision amounts for the last six months period underlying the tax return year ended June 30, 2013 and for the short tax return year ended December 31, 2013.
We have established and are expanding our international operations and staff to better support our future expansion into international markets which have relatively low statutory tax rates when compared with the U.S. statutory rate. In 2011, we formed two entities, Pharmacyclics Switzerland GmbH, a wholly-owned subsidiary of Pharmacyclics, Inc., and Pharamcyclics Cayman Ltd., a wholly-owned subsidiary of Pharmacyclics Switzerland GmbH. On December 8, 2011, Pharmacyclics, Inc. transferred certain intellectual property rights to Pharmacyclics Cayman Ltd.
Through the year ended June 30, 2013, we had a tax year end that is different from our fiscal year end and are applying for a change in tax year to align the tax return period with the fiscal year.
Financial Data for the Years Ended June 30, 2012 and 2011
Revenue (in thousands):

58



 
 
Years Ended
 
 
June 30,
 
 
2012
 
2011
License and milestone revenue
 
$
77,605

 
$
4,355

Collaboration services revenue
 
4,385

 
3,878

Total revenue
 
$
81,990

 
$
8,233

In December 2011, we received an upfront payment of $150,000,000 from Janssen under the Agreement (See Note 5 to the Consolidated Financial Statements). The revenue related to the payment was allocated $70,605,000 to the licenses, $14,982,000 to the committee services and $64,413,000 to the development services.
Total revenue related to the Agreement for the year ended June 30, 2012 was $74,622,000 and consisted of $70,605,000 of license revenue which is included in license and milestone revenue and $4,017,000 of collaboration services revenue. For the year ended June 30, 2012, the collaboration services revenue related to the Agreement was comprised of $498,000 amortization of committee services and $3,519,000 of amortization of development services. As of June 30, 2012, approximately $75,378,000 was included in deferred revenue related to the committee and development services, of which $67,324,000 was included in deferred revenue non-current. The $14,982,000 and $64,413,000 allocated to committee and development services, respectively, is being recognized as revenue as the related services are provided over the estimated service periods of 17 years and 9 years, which are equivalent to the estimated remaining life of the underlying technology and the estimated remaining development period, respectively.
We recorded $7,157,000 and $8,228,000 in revenue in the years ended June 30, 2012 and 2011, respectively, associated with our collaboration and license agreement with Servier which was entered into in April 2009. For the year ended June 30, 2012, total revenue related to the Servier agreement consisted of $7,000,000 of milestone revenue which was included in license and milestone revenue and $157,000 of collaboration services revenue. In April 2011, we received a $7,000,000 advance development milestone payment from Servier. In October 2011, the related milestone was reached and we recognized the $7,000,000 as revenue in the year ended June 30, 2012. Of the total revenue for the year ended June 30, 2011, $4,355,000 represented amortization of the $11,000,000 upfront payment from Servier received in April 2009 and the remainder represented the pro-rata completion of services associated with research payments, our supply commitment and reimbursement of patent expenses.
Research and development (in thousands):
 
 
Years Ended
 
 
 
 
June 30,
 
Percent
 
 
2012
 
2011
 
Change
Research and development
 
$
54,537

 
$
34,482

 
58
%
Research and development costs are identified as either directly attributed to one of our research and development programs or as an indirect cost, with only direct costs being tracked by specific program. Direct costs consist of personnel costs directly associated with a program, preclinical study costs, clinical trial costs, and related clinical drug and manufacturing costs, drug formulation costs, contract services and other research expenditures. Indirect costs consist of personnel costs not directly associated with a program, overhead and facility costs and other support service expenses. The following table summarizes our principal product development initiatives, including the related stages of development for each product, the direct costs attributable to each product and total indirect costs for each respective period.
For a discussion of the risks and uncertainties associated with the timing and cost of completing a product development phase, see the Risk Factors discussed in this Annual Report.
Direct costs by program and indirect costs were as follows (in thousands):

59



 
 
 
 
 
 
Years Ended
 
 
 
 
 
 
June 30,
Product
 
Description
 
Phase of Development
 
2012
 
2011
BTK Inhibitors
 
Cancer/autoimmune
 
Phase I/II/III
 
$
37,212

 
$
21,734

HDAC Inhibitors
 
Cancer
 
Phase I/II
 
1,449

 
2,082

Factor VIIa Inhibitor
 
Cancer
 
Phase II
 
2,083

 
2,142

 
 
Total direct costs
 
 
 
40,744

 
25,958

 
 
Indirect costs
 
 
 
13,793

 
8,524

 
 
Research and development, net
 
 
 
$
54,537

 
$
34,482

Research and development expenses increased $20,055,000, or 58%, for the year ended June 30, 2012 compared with the year ended June 30, 2011.
BTK program costs increased $15,478,000, or 71%, driven by increased clinical trial activity. Increases included $9,551,000 in outside clinical trial costs, $2,608,000 in personnel costs, $2,398,000 in outside service and consulting costs and $776,000 in drug-related costs. BTK program costs of $37,212,000 for the year ended June 30, 2012 represents total BTK program costs of $55,593,000, less $18,381,000 received from or due to us from Janssen under the Agreement (See Note 5 to the Consolidated Financial Statements).
HDAC program costs decreased $633,000, or 30%. Decreases included $298,000 in drug-related costs, $117,000 in outside service and consulting costs and $79,000 in personnel costs.
Factor VIIa program costs decreased $59,000, or 3%, primarily due to a $289,000 decrease in personnel costs, partially offset by a $208,000 increase in drug-related costs and a $45,000 increase in clinical trial costs.
Indirect costs increased $5,269,000, or 62%, driven by a $2,258,000 increase in personnel costs and a $1,640,000 increase in share-based compensation expense.
Selling, general and administrative (in thousands):
 
 
Years Ended
 
 
 
 
June 30,
 
Percent
 
 
2012
 
2011
 
Change
Selling, general and administrative expenses
 
15,575

 
9,125

 
71
%
The increase of 71% or $6,450,000 in Selling, general and administrative expenses for the year ended June 30, 2012 compared with the year ended June 30, 2011, was primarily due to $1,412,000 increase in payroll and related costs, a $1,878,000 increase in patent and legal related costs, $1,257,000 increase in accounting and reporting costs, a $728,000 increase in consulting and outside service costs, and a $259,000 increase in recruiting and relocation costs.
Interest and other income (expense), net (in thousands):
 
 
Years Ended
 
 
 
 
June 30,
 
Percent
 
 
2012
 
2011
 
Change
Interest income
 
$
178

 
$
169

 
5
 %
Other, net
 
(31
)
 
2

 
(1,650
)%
Interest and other income (expense), net
 
$
147

 
$
171

 
(14
)%
The decrease of $24,000 in interest and other income (expense), net, for the year ended June 30, 2012 compared with the year ended June 30, 2011, was primarily due to a loss on disposal of equipment and leasehold improvements, partially offset by higher interest income due to a higher invested balance.

60



Income tax provision (benefit) (in thousands):
 
 
Years Ended
 
 
 
 
June 30,
 
Percent
 
 
2012
 
2011
 
Change
Income tax provision (benefit)
 
$
39

 
$

 
100%
At June 30, 2012, we had federal and state net operating loss carry forwards of approximately $148,200,000 and $95,000,000, respectively. The federal and state net operating loss carryforwards will begin to expire in 2013. Federal and state tax credit carry forwards of $4,500,000 and $10,700,000, respectively, are available to offset future taxable income. The federal tax credits will begin to expire in 2013. State research and development credits can be carried forward indefinitely.
We are tracking the portion of our net operating losses attributable to stock option benefits in a separate memo account pursuant to ASC 718-740. Therefore, these amounts are no longer included in our gross or net ending deferred tax assets. Pursuant to ASC 718-740-25-10, the stock option benefits of approximately $16,800,000 will be only recorded to equity when they reduce cash taxes payable.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2013 and 2012 were as follows (in thousands):
 
December 31,
 
December 31,
 
2013
 
2012
Cash and cash equivalents
$
623,956

 
$
307,433

Our principal sources of working capital have been private and public equity financings as well as proceeds from collaborative research and development agreements and interest income.
Our primary cash inflows and outflows for the years ended December 31, 2013 and 2012 were as follows (in thousands):
 
Years Ended
 
December 31,
 
2013
 
2012
Net cash flow provided by (used in):
 
 
(unaudited)
Operating activities
$
88,772

 
$
72,877

Investing activities
(20,313
)
 
(3,640
)
Financing activities
248,064

 
7,982

Net increase (decrease) in cash and cash equivalents
$
316,523

 
$
77,219

Net cash provided by operating activities of $88,772,000 for the year ended December 31, 2013 resulted primarily from our net income of $67,010,000, adjusted by $50,210,000 for stock-based compensation expense, a $55,753,000 increase in accrued liabilities due to higher accrued payroll and related expenses due to the increase in headcount and a new bonus plan for employees, higher accrued clinical trial costs due to the expansion of our BTK program, an increase in accrued property and equipment purchases due to our capital expansion and an increase in value added taxes. These increases in cash flows provided by operating activities were partially offset by decreases of $25,260,000 due to the increase in the Receivable from Collaboration Partners which was driven by an increase in receivables from Janssen related to Excess Amounts under the Agreement, $20,316,000 from the increase in advances to manufacturers, $12,419,000 from the increase inventory as a result of the capitalization of inventory, $11,095,000 from the decrease in deferred revenue due to higher collaboration services revenue recognized under the Agreement and $11,044,000 from the increase in Accounts Receivable, net due to product sales of IMBRUVICATM.
Net cash provided by operating activities of $72,877,000 for the year ended December 31, 2012 resulted primarily from net income of $87,804,000, adjusted by $12,769,000 for stock-based compensation expense, and a $7,017,000 increase in

61



accrued liabilities. These increases were partially offset by decreases of $25,615,000 due to the increase in Receivable from Collaboration Partners which was driven by an increase in receivables from Janssen related to cost sharing and Excess Amounts under the Agreement, $8,514,000 from the decrease in deferred revenue due to higher collaboration services revenue recognized under the Agreement and $4,262,000 from the decrease in income taxes payable.
Net cash used in investing activities of $20,313,000 for the year ended December 31, 2013 consisted primarily of $18,318,000 used for the purchase of property and equipment and $14,800,000 used for purchases of marketable securities, partially offset by $480,000 of proceeds from the maturities of marketable securities. Net cash used in investing activities of $3,640,000 for the year ended December 31, 2012 consisted primarily $4,086,000 used for the purchase of property and equipment and the net effect of purchases and maturities of marketable securities.
Net cash provided by financing activities of $248,064,000 for the year ended December 31, 2013 consisted primarily of net proceeds of $201,023,000 from the issuance of shares in a public offering, $17,008,000 of proceeds from the exercise of stock options and the sale of stock under our employee stock purchase plan and the excess tax benefit from stock-based compensation arrangements of $30,033,000. Net cash provided by financing activities of $7,982,000 for the year ended December 31, 2012 resulted primarily from the exercise of stock options and the sale of stock under our employee stock purchase plan.
In December 2011, we received a $150,000,000 upfront payment from our collaboration and license agreement with Janssen. The collaboration and license agreement provided us with the potential to receive future milestone payments of up to $825,000,000. As of December 31, 2013, $385,000,000 in milestone payments have been earned by us under the Agreement and we may receive up to an additional $440,000,000 in development, regulatory and approval milestone payments. However, clinical development entails risks and we have no assurance as to whether or when the milestone targets might be achieved (See Note 5 to the consolidated financial statements for additional information).
Subsequent to December 31, 2013, we announced that the FDA approved IMBRUVICATM as a single agent for the treatment of patients with CLL who have received at least one prior therapy. This approval of IMBRUVICATM in CLL triggered a $60,000,000 milestone payment to us under the Agreement (see Note 15 to the consolidated financial statements).
During the year ended December 31, 2012, we entered into a license agreement ("Novo Agreement") with Novo Nordisk A/S (see Note 5 to the consolidated financial statements). Under the terms of the Novo Agreement, Novo Nordisk acquired the exclusive worldwide rights for our small molecule Factor VIIa inhibitor, PCI-27483, in a restricted disease indication outside of oncology. Novo Nordisk will utilize PCI-27483 as an excipient in a product within Novo Nordisk's biopharmaceutical unit. Novo Nordisk is solely responsible for all further research and development activities within the restricted disease indication outside of oncology. In connection with entering into the Novo Agreement, we received an upfront payment of $5,000,000 in October 2012. The $5,000,000 upfront payment was for the license delivered by us to Novo Nordisk and we have no additional obligation related to the delivery of the license. Accordingly, we recognized the $5,000,000 upfront payment as license revenue during the year ended December 31, 2012. In addition to the upfront payment received, we may receive up to $55,000,000 based on the achievement of cert