10-Q 1 form10q.htm 10-Q 10Q Q2 2001 DOC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q

     (Mark One)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2000 or


[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission File Number: 0-27066

PHARMACYCLICS, INC.
(Exact name of registrant as specified in its charter)

 
Delaware
94-3148201
 (State or other jurisdiction of incorporation or organization) 
(IRS Employer Identification Number)

995 E. Arques Avenue
Sunnyvale, California    94085
(Address of principal executive offices including zip code)

(408) 774-0330
(Registrant's telephone number, including area code)

    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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [  ],

    As of January 31, 2001, there were 16,084,804 shares of the Registrant's Common Stock outstanding, par value $0.0001 per share.










PHARMACYCLICS, INC.
TABLE OF CONTENTS

PART I. Financial Information Page No.
     
Item 1. Financial Statements (unaudited):
 
     
       Condensed Balance Sheets as of
         December 31, 2000 and June 30, 2000
3
     
       Condensed Statements of Operations for the
         three and six months ended December 31, 2000 and 1999.
4
     
       Condensed Statements of Cash Flows for the
         six months ended December 31, 2000 and 1999.
5
     
           Notes to Condensed Financial Statements
6
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
8
     
PART II. Other Information
 
     
Item 1. legal Proceedings
20
     
Item 2: Changes in Securities and Use of Proceeds
20
     
Item 3: Defaults Upon Senior Securities
20
     
Item 4: Submission of Matters to a Vote of Security Holders
20
     
Item 5: Other Information
21
     
Item 6. Exhibits and Reports on Form 8-K
21
     
Signatures
22

PHARMACYCLICS® , the "pentadentate" logo, XCYTRIN® , ANTRIN® , and LUTRIN® , are registered U.S. trademarks; OPTRIN™ is a trademark of Pharmacyclics, Inc. Other trademarks, trade names or service marks used herein are the property of their respective owners.





PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)





PHARMACYCLICS, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
(unaudited; in thousands) 

                                                      December 31,   June 30,
                                                          2000         2000
                                                      -----------  -----------
ASSETS
   Current assets:
     Cash and cash equivalents ..................... $    53,587  $    43,536
     Short-term marketable investments .............      75,552       65,174
     Accounts and other receivables ................         189           15
     Prepaid expenses and other current assets .....       2,902        2,925
                                                      -----------  -----------
          Total current assets .....................     132,230      111,650
   Long-term marketable investments ................      37,193       69,537
   Property and equipment, net .....................       4,330        3,796
   Other assets ....................................         290          140
                                                      -----------  -----------
                                                     $   174,043  $   185,123
                                                      ===========  ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
   Current liabilities:
     Accounts payable .............................. $     5,518  $     2,851
     Accrued liabilities ...........................         869          764
     Current portion of capital lease obligations ..          14           59
                                                      -----------  -----------
          Total current liabilities ................       6,401        3,674
   Deferred rent ...................................          26           35
                                                      -----------  -----------
          Total liabilities ........................       6,427        3,709
                                                      -----------  -----------
   Stockholders' equity:
     Preferred stock ...............................          --           --
     Common stock ..................................           2            2
     Additional paid-in capital ....................     274,584      272,685
     Deferred stock compensation ...................        (658)          --
     Accumulated other comprehensive income (loss) .         547         (506)
     Deficit accumulated during development stage ..    (106,859)     (90,767)
                                                      -----------  -----------
         Total stockholders' equity ................     167,616      181,414
                                                      -----------  -----------
                                                     $   174,043  $   185,123
                                                      ===========  ===========

The accompanying notes are an integral part of these financial statements.





PHARMACYCLICS, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except per share data) 


                                            Three Months Ended   Six Months Ended
                                                December 31,        December 31,
                                           ------------------  ------------------
                                             2000      1999      2000      1999
                                           --------  --------  --------  --------
Revenues:
     License and grant revenues ......... $     --  $  1,000  $     --  $  1,000
     Contract revenue ...................      229       168       339       303
                                           --------  --------  --------  --------
       Total revenues ...................      229     1,168       339     1,303
                                           --------  --------  --------  --------
Operating expenses:
     Research and development ...........    9,159     7,458    19,198    10,967
     Marketing, general and
        administrative ..................    1,626       996     2,860     1,934
                                           --------  --------  --------  --------
       Total operating expenses .........   10,785     8,454    22,058    12,901
                                           --------  --------  --------  --------
Loss from operations ....................  (10,556)   (7,286)  (21,719)  (11,598)
Interest and other income (expense), net     2,679     1,879     5,627     2,549
                                           --------  --------  --------  --------
Net loss ................................ $ (7,877) $ (5,407) $(16,092) $ (9,049)
                                           ========  ========  ========  ========
Basic and diluted net loss per
    share (Note 2) ...................... $  (0.49) $  (0.36) $  (1.00) $  (0.65)
                                           ========  ========  ========  ========
Shares used to compute basic and
    diluted net loss per share ..........   16,062    15,072    16,047    13,831
                                           ========  ========  ========  ========

The accompanying notes are an integral part of these financial statements.





PHARMACYCLICS, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited; in thousands) 


                                                                     Six Months Ended
                                                                       December 31,
                                                                   --------------------
                                                                      2000       1999
                                                                   ---------  ---------
Cash flows from operating activities:
Net loss ........................................................ $ (16,092) $  (9,049)
Adjustments to reconcile net loss to net cash used in
operating activities:
   Depreciation and amortization ................................       667        563
   Stock compensation expense ...................................        86         44
   Loss on sale of investments ..................................       135        --
   Changes in assets and liabilities:
      Accounts and other receivables ............................      (174)       239
      Prepaid expenses and other assets .........................      (127)      (662)
      Accounts payable ..........................................     2,667     (1,825)
      Accrued liabilities .......................................       105       (260)
      Deferred rent .............................................        (9)        27
                                                                   ---------  ---------
Net cash used in operating activities ...........................   (12,742)   (10,923)
                                                                   ---------  ---------
Cash flows from investing activities:
   Purchases of property and equipment ..........................    (1,201)      (164)
   Purchases of marketable investments ..........................   (16,623)   (56,064)
   Proceeds from maturities and sales of marketable investments .    39,507     27,704
                                                                   ---------  ---------
Net cash provided by (used in) investing activities .............    21,683    (28,524)
                                                                   ---------  ---------
Cash flows from financing activities:
   Payments under capital lease obligations .....................       (45)      (111)
   Proceeds from sale of stock ..................................     1,155     96,792
                                                                   ---------  ---------
Net cash provided by financing activities .......................     1,110     96,681
                                                                   ---------  ---------
Net increase in cash and cash equivalents .......................    10,051     57,234
Cash and cash equivalents at the beginning of the period ........    43,536      3,930
                                                                   ---------  ---------
Cash and cash equivalents at the end of the period .............. $  53,587  $  61,164
                                                                   =========  =========

The accompanying notes are an integral part of these financial statements.





PHARMACYCLICS, INC.
(a development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Principles

 

Basis of Presentation

The accompanying unaudited condensed financial statements of Pharmacyclics, Inc. (the "company" or "Pharmacyclics") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited, condensed financial statements reflect all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of the company's interim financial information. These financial statements and notes should be read in conjunction with the audited financial statements of the company included in the company's Annual Report on Form 10-K for the year ended June 30, 2000 filed with the Securities and Exchange Commission on September 27, 2000.

The results of operations for the three and six months ended December 31, 2000 are not necessarily indicative of the operating results that may be reported for the fiscal year ending June 30, 2001 or for any other future period.

 

Revenue Recognition

License fees are recognized as revenue when earned over the period of the arrangement, as evidenced by achievement of the specified milestones and the absence of any ongoing performance obligation. Contract revenue is recognized as earned, primarily based on costs incurred to total estimated costs at completion, pursuant to the terms of each agreement. License and contract revenues are not subject to repayment. Any amounts received in advance of performance are recorded as deferred revenue.

 

Research and Development Costs

Research and development costs are expensed as incurred and include costs associated with contract research performed pursuant to collaborative agreements. Research and development costs consist of direct and indirect internal costs related to specific projects as well as fees paid to other entities which conduct certain research activities on behalf of the company.

 

Cash Equivalents and Investments

All highly liquid investments purchased with an original maturity date of three months or less are considered to be cash equivalents. The company has classified all its investments as "available-for- sale." Unrealized gains and losses on available-for-sale securities are included in other comprehensive income (loss). Gains and losses on securities sold are recorded based on the specific identification method and are included in interest and other income (expense), net in the statements of operations.

 

 

Note 2 - Basic and Diluted Net Loss Per Share

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Options and warrants to purchase 2,603,239 and 1,939,646 shares of common stock were outstanding at December 31, 2000 and 1999, respectively. However, such amounts have been excluded from the computation of dilutive earnings per share because their effect is anti- dilutive.

 

Note 3 - Equity

In March 2000, the company sold 820,000 shares of its common stock at $73.25 per share resulting in net cash proceeds of approximately $57,600,000. In September and October 1999, the company sold a total of 2,645,000 shares of its common stock at $38.75 per share which resulted in net proceeds to the company of approximately $96,200,000.

 

Note 4 - Comprehensive Income (Loss)

Comprehensive income (loss) includes unrealized gains (losses) on available-for-sale securities which are excluded from the results of operations.

The company's total comprehensive losses were as follows (in thousands):


                                       Three Months Ended     Six Months Ended
                                           December 31,          December 31,
                                      --------------------  --------------------
                                        2000       1999       2000       1999
                                      ---------  ---------  ---------  ---------
Net loss ........................... $  (7,877) $  (5,407) $ (16,092) $  (9,049)
Change in net unrealized gains on
  available-for-sale securities ....       520       (231)     1,053       (213)
                                      ---------  ---------  ---------  ---------
Comprehensive net loss ............. $  (7,357) $  (5,638) $ (15,039) $  (9,262)
                                      =========  =========  =========  =========

Note 5 - Recent Accounting Pronouncement

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 requires that license and other upfront fees received from research collaborators be recognized over the term of the agreement unless the fee is in exchange for products delivered or services performed that represent the culmination of a separate earning process. SAB 101, as amended, is effective in the fourth quarter of fiscal 2001. The company does not expect the adoption of SAB 101 to have a material effect on its financial statements.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Factors that May Affect Future Operating Results

 

In addition to historical information, this report contains predictions, estimates 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 factors, including those discussed in "Factors That May Affect Future Operating Results," elsewhere in this report and in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000.

 

Overview

Pharmacyclics is a pharmaceutical company focused on the development of products that improve existing therapeutic approaches to cancer, atherosclerosis and retinal disease. We are conducting a multicenter international Phase III clinical trial of XCYTRIN® (motexafin gadolinium) Injection to improve the efficacy of radiation therapy of tumors that have spread to the brain resulting from a variety of cancers, including those of the lung and breast. We plan to enroll approximately 425 adult patients in this study. As of January 31, 2001, the study had enrolled over 400 patients. We are conducting a Phase IIb clinical trial for LUTRIN® (motexafin lutetium) Injection as a photosensitizer for use in the photodynamic therapy of patients with recurrent breast cancers to the chest wall that have failed standard therapies. Through our Cooperative Research and Development Agreement, the National Cancer Institute is conducting Phase I trials of XCYTRIN for treatment of both primary adult and pediatric brain tumors, pancreatic cancer and lung cancer and of LUTRIN for prostate cancer. The National Cancer Institute also intends to conduct several additional Phase I clinical trials of XCYTRIN and LUTRIN, each for a variety of additional cancer indications. We are now conducting a multicenter randomized Phase II clinical trial with ANTRIN® (motexafin lutetium) Injection photoangioplasty for treatment of patients with peripheral arterial disease and a Phase I trial for treatment of coronary artery disease. In addition, Alcon is conducting a Phase II clinical trial with OPTRIN™ (motexafin lutetium) Injection for the photodynamic therapy of patients with a degenerative disease of the retina caused by growths of small blood vessels in the retina known as age-related macular degeneration. Alcon is conducting this trial under a 1997 evaluation and license agreement that gave Alcon the right to conduct worldwide development, marketing and sales of OPTRIN for ophthalmology indications. Also in 1997, we entered into a collaborative agreement with Nycomed to sell and market LUTRIN for cancer therapy outside the United States, Canada and Japan.

To date, we have devoted substantially all of our resources to research and development. We have not derived any commercial revenues from product sales, and we do not expect to receive product revenues for at least the next several years. We have incurred significant operating losses since our inception in 1991 and, as of December 31, 2000, had an accumulated deficit of approximately $106.9 million. We expect to continue to incur significant operating losses over the next several years as we continue to incur increasing research and development costs, in addition to costs related to clinical trials and manufacturing activities. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Our achieving profitability depends upon our ability, alone or with others, to successfully complete the development of our products under development, and obtain required regulatory clearances and successfully manufacture and market our products.

 

 

 

Results of Operations

Revenues

Revenues were $229,000 for the three months ended December 31, 2000, compared to $1,168,000 for the three months ended December 31, 1999. The revenue decrease in fiscal 2001 was primarily related to the recognition, in the prior fiscal year, of a non-refundable milestone payment from Alcon in connection with their continuing clinical development of OPTRIN. Revenues for the six month period ended December 31, 2000 were $339,000, compared to $1,303,000 in the comparable fiscal 2000 period.

 

Research and Development

Research and development expenses for the three months ended December 31, 2000, were $9,159,000, compared to $7,458,000 for the three months ended December 31, 1999, which represents a 22.8% increase. The increase was due primarily to increased clinical trial and personnel costs associated with supporting the company's clinical trials. These cost increases were partially offset by reduced drug purchase costs. Drug purchase costs have declined with the completion of large scale manufacturing capability. Our contract manufacturers have produced enough XCYTRIN to treat more than 20,000 patients, once XCYTRIN has been approved by the FDA. Until the commercial viability of XCYTRIN has been demonstrated and the necessary regulatory approvals received, all XCYTRIN purchases are charged to research and development expense.

For the six months ended December 31, 2000 and 1999, research and development expenses were $19,198,000 and $10,967,000, respectively. Expenses in the six months ended December 31, 1999 were reduced by a credit of $3,540,000 associated with the termination of our manufacturing development and supply agreement with Celanese, Ltd. Pursuant to the termination agreement, Celanese assigned to us all rights, title and interest in the manufacturing technology and intellectual property for the Company's texaphyrin-based products and agreed to make a cash payment to the Company of $750,000. The termination agreement also relieved us of all obligations to pay Celanese for shared development costs incurred prior to termination of the Agreement. As of June 30, 1999, we had accrued $2,790,000 associated with such costs. Excluding the impact of the Celanese termination agreement, research and development expenses increased $4,691,000, (32.3%), to $19,198,000 for the six months ended December 31, 2000 compared to $14,507,000 for the six months ended December 31, 1999. The increase was due primarily to increased clinical trial and personnel costs associated with supporting the company's clinical trials. We expect research and development spending to increase further over the next several years as product development, clinical trials and core research efforts continue to expand.

 

Marketing, General and Administrative

Marketing, general and administrative expenses for the three months ended December 31, 2000 were $1,626,000, compared to $996,000 for the three months ended December 31, 1999, which represents a 63.3% increase. For the six months ended December 31, 2000 and 1999, marketing, general and administrative expenses were $2,860,000 and $1,934,000, respectively, an increase of 47.9%. The increase in both periods was primarily related to greater spending associated with building awareness of our XCYTRIN product among physicians and higher personnel costs needed to support our growth.

 

Interest and Other Income (Expense), Net

Interest and other income (expense), net was $2,679,000 and $1,879,000 for the three months ended December 31, 2000 and 1999, respectively, an increase of 42.6%. For the six months ended December 31, 2000 and 1999, interest and other income, net was $5,627,000 and $2,549,000, respectively, an increase of 20.8%. The increases were primarily attributable to increased earnings from higher investment balances resulting from the proceeds of a public equity offering of our common stock completed in September and October 1999, and a private placement of common stock completed in March 2000.

 

 

Liquidity and Capital Resources

Our principal sources of working capital have been private and public equity financings and proceeds from collaborative research and development agreements, as well as grant and contract revenues and interest income.

As of December 31, 2000, we had approximately $166,332,000 in cash, cash equivalents and investments. Net cash used in operating activities of $12,742,000 during the six months ended December 31, 2000 resulted primarily from the net loss for the period, partially offset by an increase in accounts payable. Net cash used in operating activities of $10,923,000 during the six months ended December 31, 1999 resulted primarily from the net loss for the period and an increase in accounts payable.

Cash provided by investing activities of $21,683,000 for the six months ended December 31, 2000, consisted primarily of proceeds of maturities and sales of investments, net of purchases of investments. Cash used in investing activities of $28,524,000 for the six months ended December 31, 1999 consisted primarily of purchases of investments, net of proceeds of maturities of investments.

Net cash provided by financing activities of $1,110,000 and $96,681,000 for the six months ended December 31, 2000 and 1999, respectively, primarily consisted of proceeds from the sale of common stock.

Based on the current status of our product development and commercialization plans, we believe cash, cash equivalents and short and long- term investments will be adequate to satisfy our capital needs through at least the calendar year 2002. However, our actual capital requirements will depend on many factors, including: the status of product development; the time and cost involved in conducting clinical trials and obtaining regulatory approvals; filing, prosecuting and enforcing patent claims; competing technological and market developments; and our ability to market and distribute our products and establish new collaborative and licensing arrangements.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward- looking statement that involves risks and uncertainties, and actual results could vary materially. The factors described above will impact our future capital requirements and the adequacy of our available funds. We may be required to raise additional funds through public or private financings, collaborative relationships or other arrangements. There can be no assurance that such additional funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to existing stockholders and debt financing, if available, may involve restrictive covenants. Collaborative arrangements, if necessary to raise additional funds, may require us to relinquish rights to certain of our technologies, products or marketing territories. Our failure to raise capital when needed could have a material adverse effect on our business, financial condition and results of operations.

 

Recent Accounting Pronouncement

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 requires that license and other upfront fees received from research collaborators be recognized over the term of the agreement unless the fee is in exchange for products delivered or services performed that represent the culmination of a separate earning process. SAB 101, as amended, is effective in the fourth quarter of fiscal 2001. The company does not expect the adoption of SAB 101 to have a material effect on its financial statements.

 

 

Market Risk

Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities may have their fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. The primary objective of our investment activities is to preserve principal while at the same time maximize yields without significantly increasing risk. To achieve this objective, we invest our excess cash in debt instruments of the U.S. Government and its agencies and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than two years.

One of our cancelable drug supply agreements is denominated in a foreign currency. We have not entered into any agreements or transactions to hedge the risk associated with potential fluctuations in currencies; accordingly, we are subject to foreign currency exchange risk related to this contract. 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.

 

 

 

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

 

Risks Related to Pharmacyclics

 

All of our product candidates are in development, and we cannot be certain that any of our products under development will be commercialized

To be profitable, we must successfully research, develop, obtain regulatory approval for, manufacture, introduce, market and distribute our products 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 through preclinical (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 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 to produce their intended effects.

The completion rate of our clinical trials depends upon, among other factors, the rate of patient enrollment. We may fail to obtain adequate levels of patient enrollment in our clinical trials. Delays in planned patient enrollment may result in increased costs, delays or termination of clinical trials, which could have a material adverse effect on us.

Additionally, demands on our clinical staff have been increasing and we expect they will continue to increase as a result of later- stage clinical trials of our products in development and our monitoring of additional clinical trials. We may fail to effectively oversee and monitor these many simultaneous clinical trials, which would result in increased costs or delays of our clinical trials. Even if these clinical trials are completed, we may fail to complete and submit a new drug application as scheduled. Even if we are able to submit a new drug application as scheduled, the Food and Drug Administration may not clear our application in a timely manner or may deny the application entirely.

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 such as ours is susceptible to varying interpretations which could delay, limit or prevent regulatory approval. A number of companies in the pharmaceutical industry, including biotechnology companies like us, 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 delay or prevent regulatory clearance 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

We have incurred significant operating losses since our inception in 1991 and, as of December 31, 2000, had an accumulated deficit of approximately $106.9 million. We expect to continue to incur significant operating losses over the next several years as we continue to incur increasing costs for research and development, clinical trials and manufacturing. Our ability to achieve profitability depends upon our ability, alone or with others, to successfully complete the development of our proposed products, obtain the required regulatory clearances and manufacture and market our proposed products. To date, we have not generated revenue from the commercial sale of our products and do not expect to receive any such revenue in the near future. All revenues to date are primarily from license and milestone payments and, to a lesser extent, funding from one government research grant.

 

 

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 clearance to market a product, we will have to demonstrate that the product is safe and effective on the patient population and for the diseases that will be treated. Clinical trials, 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 which could delay, limit or prevent regulatory clearances. We compared the results of our Phase Ib/II clinical trial of XCYTRIN to historical data using a 528-patient database containing information on clinical features and outcomes in comparable patients receiving treatment with identical doses of radiation alone. Historical analyses have many limitations and, while supportive, are not considered proof that XCYTRIN improved the outcome of patients enrolled in the study.

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. We may be unable to obtain requisite approvals from the FDA and foreign regulatory authorities, and even if obtained, such approvals may not be on a timely basis, or they may not cover the clinical uses that we specify.

Marketing or promoting a drug for an unapproved use is subject to very strict controls. Furthermore, clearance 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 would have a material adverse effect on our business, financial condition and results of operations:

  • failure to obtain or maintain requisite governmental approvals;

  • failure to obtain approvals of clinically intended uses of our products under development; or

  • identification of serious and unanticipated adverse side effects in our products under development.

Manufacturers of drugs also must comply with the applicable FDA good manufacturing practice 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 be licensed 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 good manufacturing practice regulations and other FDA regulatory requirements. We have not been subject to a GMP inspection by the FDA. We may be subject to delays in commercializing our products for photodynamic therapies due to delays in approvals of the third- party light sources required for these products.

Acceptance of our products in the marketplace is uncertain, and failure to achieve market acceptance will harm our business

Even if approved for marketing, our products may not achieve market acceptance. The degree of market acceptance will depend upon a number of factors, including:

  • the receipt of regulatory approvals for the uses that we are studying;

  • the establishment and demonstration in the medical community of the safety and clinical efficacy of our products and their potential advantages over existing therapeutic products and diagnostic and/or imaging techniques; and

  • pricing and reimbursement policies of government and third-party payors such as insurance companies, health maintenance organizations and other plan administrators.

Physicians, patients, payors or the medical community in general may be unwilling to accept, utilize or recommend any of our products.

We may fail to adequately protect or enforce our intellectual property rights or secure rights to third-party patents

A number of third-party patent applications have been published, and some have issued, relating to biometallic and expanded porphyrin chemistries. It is likely that competitors and other third parties have and will continue to file applications for and receive patents relating to similar or even the same compositions, methods or designs as those of our products. If any third-party patent claims are asserted against the company's products and are upheld as valid and infringed, we could be prevented from practicing the subject matter claimed in such patents, require license(s) or have to redesign our products or processes to avoid infringement. Such licenses may not be available or, if available, may not be on terms acceptable to us. Alternatively, we may be unsuccessful in any attempt to redesign our products or processes to avoid infringement. Litigation or other legal proceedings may be necessary to defend against claims of infringement, to enforce our patents, or to protect our trade secrets, and could result in substantial cost to the company, and diversion of our efforts.

We are aware of several U.S. patents owned or licensed to Schering AG that relate to pharmaceutical formulations and methods for enhancing magnetic resonance imaging. We have obtained the opinion of special patent counsel that the technologies we employ for our imaging product under development and magnetic resonance imaging detectable compounds do not infringe the claims of such patents. Nevertheless, Schering AG may still choose to assert one or more of those patents. If any of our products were legally determined to be infringing a valid and enforceable claim of any such patents, our business could be materially adversely affected. Further, any allegation by Schering AG that we infringed their patents would likely result in significant legal costs and require the diversion of substantial management resources. Schering AG sent communications to us suggesting that our oral magnetic resonance imaging contrast agent, CITRA VU, may infringe certain of their patents. We are aware that Schering AG has asserted patent rights against at least one other company in the contrast agent imaging market and that a number of companies have entered into licensing arrangements with Schering AG with respect to one or more of such patents. We cannot be certain that we would be successful in defending a lawsuit or able to obtain a license on commercially reasonable terms from Schering AG, if required.

We also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. We require our employees, consultants, advisors and collaborators to execute appropriate confidentiality and assignment-of-inventions agreements with us. These agreements typically provide that all materials and confidential information developed or made known to the individual during the course of the individual's relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances, and that all inventions arising out of the relationship with Pharmacyclics shall be our exclusive property. These agreements may be breached, and in some instances, we may not have an appropriate remedy available for breach of the agreements. Furthermore, 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.

 

 

We rely heavily on third parties

We currently depend heavily and will depend heavily in the future on third parties for support in product development, manufacturing, marketing and distribution. We have a collaboration agreement with Nycomed. We rely on Nycomed for a portion of our LUTRIN development costs in the form of milestone payments, and for the commercialization, when and if LUTRIN is approved, of this product outside the United States, Canada and Japan. In the field of retinal degeneration, we depend on Alcon for preclinical and clinical studies, regulatory filings and sales and marketing of OPTRIN for ophthalmology uses worldwide. Alcon may terminate their agreement with us at their election. We cannot be certain that any of these parties will fulfill their obligations in a manner that maximizes our revenues. Our failure to receive milestone payments or any reduction or discontinuance of efforts by our partners or the termination of these alliances could have a material adverse effect on our business, financial condition and results of operations.

We also depend upon the National Cancer Institute for the sponsoring and funding of certain of the clinical trials of our XCYTRIN radiation enhancer and LUTRIN photosensitizer products in development. We cannot be certain that the National Cancer Institute will enlist support for all such trials or that it will continue the funding of these trials. If the National Cancer Institute did not support such trials, we may have to fund the continuation of such trials ourselves or reduce the number of disease indications in our clinical trials.

We may be unsuccessful in entering into additional strategic alliances for the development or commercialization of other product candidates. Even if we did enter into any such alliances, they may not be on terms favorable to us or they may ultimately be unsuccessful.

We have no expertise in the development of light sources and associated light delivery devices required for our photoangioplasty and photodynamic therapy products under development. Successful development, manufacturing, approval and distribution of our photosensitization products will require third party participation for the required light sources, associated light delivery devices and other equipment. We currently obtain lasers from Diomed, Inc. and cylindrically diffusing light fibers from CardioFocus, Inc. on a purchase order basis, and such entities are under no obligation to continue to deliver light devices on an ongoing basis. Failure to maintain such relationships may require us to develop additional supply sources which may require additional clinical trials and regulatory approvals and could materially delay commercialization of our LUTRIN and ANTRIN products under development. We may be unable to establish or maintain relationships with other supply sources on a commercially reasonable basis, if at all, or alternatively, the enabling devices may not receive regulatory approval for use in photoangioplasty or photodynamic therapy.

 

We have limited manufacturing experience and thus rely heavily upon contract manufacturers

We must manufacture our products in commercial quantities, either directly or through third parties, in compliance with regulatory requirements and at an acceptable cost. We do not own manufacturing facilities necessary to provide clinical and commercial quantities of our products.

In September 1996, we entered into an agreement with Hoechst Celanese Corporation, a manufacturer of chemicals and pharmaceutical components, to optimize and scale up a manufacturing process for and supply of our texaphyrin-based products. In October 1997, Hoechst Celanese assigned the agreement to Celanese, Ltd., in connection with Hoechst Celanese's corporate restructuring. This agreement granted Celanese exclusive worldwide manufacturing rights and required Celanese to supply all of our texaphyrin-based products for late-stage clinical and commercial use. As a result of the change in its business focus, Celanese requested that we pursue alternative supply sources. On August 27, 1999, we entered into an agreement to terminate the manufacturing and supply agreement with Celanese. Pursuant to that agreement, Celanese assigned to us all right, title and interest in and to the manufacturing technology and intellectual property for our texaphyrin-based products.

 

 

During discussions with Celanese that resulted in termination of the manufacturing and supply agreement, we entered into agreements with three new manufacturers to evaluate their ability to supply us with the components of the texaphyrin-based products. These three manufacturers have completed delivery of commercial quantities of XCYTRIN drug substance to us in accordance with the agreements. Due to the addition of alternative manufacturers, we must demonstrate to the FDA the substantial equivalence of the materials produced by these manufacturers to the materials used in our clinical trials to date. Failure to demonstrate equivalence of the material produced by these manufacturers could involve performing additional clinical trials and could have a material adverse effect on our business, financial condition and results of operations. We have entered into commercial supply agreements with two of the three manufacturers and are negotiating a supply agreement with the third manufacturer. We cannot be certain that we will be able to successfully negotiate this third supply agreement at all or on commercially acceptable terms.

We have entered into an agreement with Cook Pharmaceutical Solutions to formulate, fill, package and label clinical and commercial quantities of XCYTRIN. Cook also supplies us with clinical quantities of ANTRIN and LUTRIN. Any interruption of supply of our products from Cook could have a material adverse affect on our business, financial condition and results of operations.

Any failure by these third parties to supply our requirements or the National Cancer Institute's requirements for clinical trial materials would jeopardize the completion of such trials and could therefore have a material adverse effect on us.

 

We lack marketing and sales experience

We currently do not have marketing, sales or distribution experience. Therefore, to service markets in which we have retained sales and marketing rights and in the event that either of our agreements with Alcon or Nycomed is terminated, we must develop a sales force with technical expertise. We have no experience in developing, training or managing a sales force. We will incur substantial additional expenses in developing, training and managing such an organization. We may be unable to build such a sales force, the cost of establishing such a sales force may exceed any product revenues, or our direct marketing and sales efforts may be unsuccessful. In addition, we compete with many other companies that currently have extensive and well-funded marketing and sales operations. Our marketing and sales efforts may be unable to compete successfully against such other companies.

 

Our capital requirements are uncertain and we may have difficulty raising needed capital in the future

We have expended and will continue to expend substantial funds to complete the research, development and clinical testing of our products. We will require additional funds for these purposes, to establish additional clinical-and commercial-scale manufacturing arrangements and to provide for the marketing and distribution of our products. Additional funds may not be available on acceptable terms, if at all. If adequate funds are unavailable from operations or additional sources of financing, we may have to delay, reduce the scope of or eliminate one or more of our research or development programs which would materially and adversely affect our business, financial condition and operations.

We believe that our cash, cash equivalents and investments, will be adequate to satisfy our capital needs through at least calendar year 2002. However, our actual capital requirements will depend on many factors, including:

  • continued progress of our research and development programs;

  • our ability to establish additional collaborative arrangements;

  • changes in our existing collaborative relationships;

  • progress with preclinical studies and clinical trials;

  • the time and costs involved in obtaining regulatory clearance;

  • the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;

  • competing technological and market developments; and

  • our ability to market and distribute our products and establish new collaborative and licensing arrangements.

We may seek to raise any necessary additional funds through equity or debt financings, collaborative arrangements with corporate partners or other sources which may be dilutive to existing stockholders. 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.

 

Risks Related to Our Industry

We face rapid technological change and intense competition

The pharmaceutical industry is subject to rapid and substantial technological change. 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, 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.

We are a relatively new enterprise and are engaged in the development of novel therapeutic technologies. As a result, 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, diagnostic and imaging effects than our products. We are aware that one of our competitors in the market for photodynamic therapy drugs has received marketing approval of a product for certain uses in the United States and other countries. 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.

The widespread acceptance of therapies that are alternatives to ours may limit market acceptance of our 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 and chemotherapy, and in the case of atherosclerosis, by surgery, angioplasty, drug therapy and the use of devices to maintain and open blood vessels. 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 our products to receive widespread acceptance if commercialized.

 

 

The price of our common stock may be volatile

The market prices for securities of small capitalization biotechnology companies, including ours, have historically been highly volatile. The market has from time to time experienced significant price and volume fluctuations unrelated to the operating performance of particular companies. The market price of our common stock may fluctuate significantly due to a variety of factors, including:

  • the results of preclinical testing and clinical trials by us or our competitors;

  • technological innovations or new therapeutic products;

  • governmental regulation;

  • developments in patent or other proprietary rights;

  • litigation;

  • public concern as to the safety of products developed by us or others;

  • comments by securities analysts; and

  • general market conditions in our industry.

In addition, if any of the risks described in these "Risk Factors" actually occurred, it could have a dramatic and material adverse impact on the market price of our common stock.

We are subject to uncertainties regarding health care reimbursement and reform

The continuing efforts of government and insurance companies, health maintenance organizations and other payors of healthcare costs to contain or reduce costs of health care may affect our future revenues and profitability, and the future revenues and profitability of our potential customers, suppliers and collaborative partners and the availability of capital. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States, given recent federal and state government initiatives directed at lowering the total cost of health care, the U.S. Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of such proposals could have a material adverse effect on our business, financial condition and results of operations.

Our ability to commercialize our products successfully will depend in part on the extent to which appropriate reimbursement levels for the cost of our products and related treatment are obtained from governmental authorities, private health insurers and other organizations, such as HMOs. Third-party payors are increasingly challenging the prices charged for medical products and services. Also, the trend toward 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 health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for or rejection of our products. The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could materially adversely affect 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. Although we are insured against such risks up to a $10,000,000 annual aggregate limit in connection with clinical trials and commercial sales of our products, 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 accidental 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.

Part II. Other Information

 

Item 1. Legal Proceedings

None

Item 2. Changes in Securities

None

Item 3. Defaults Upon Senior Securities

None

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

On December 7, 2000, at the Company's 2000 Annual Meeting of Stockholders, the following matters were submitted and voted on by stockholders and were adopted:

  1. The election of Phyllis I. Gardner, M.D., Miles R. Gilburne, Richard M. Levy, Ph.D., Richard A. Miller, M.D., William R. Rohn and Craig C. Taylor by the stockholders to serve on the Board of Directors.

    2. The results of the vote are as follows:

     

    Total Vote for Each Director

    Total Vote Withheld from Each Director

    Phyllis I. Gardner, M.D.

    12,939,582

    64,313

    Miles R. Gilburne

    12,940,118

    63,777

    Richard M. Levy, Ph.D.

    12,935,763

    68,132

    Richard A. Miller, M.D.

    12,940,282

    63,613

    William R. Rohn

    12,935,699

    68,196

    Craig C. Taylor

    12,939,682

    64,213

  2. The amendment of the Company's 1995 Stock Option Plan in order to increase the total number of shares of common stock authorized for issuance over the term of the Plan by an additional 600,000 shares.

    3. The results of the vote are as follows:

    For

    Against

    Abstain

    8,543,520

    4,449,623

    10,752

  3. The amendment of the Company's Non-Employee Directors Stock Option Plan (the "Directors Option Plan") in order to increase the total number of shares of common stock authorized for issuance over the term of the Directors Option Plan by an additional 50,000 shares.

    4. The results of the vote are as follows:

    For

    Against

    Abstain

    10,728,385

    2,263,516

    11,994

  4. The ratification of the appointment of PricewaterhouseCoopers LLP as the Company's independent accountants for the fiscal year ending June 30, 2001.

    5. The results of the vote are as follows:

For

Against

Abstain

12,996,907

33,273

3,715

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

    1. Exhibits

      2. Exhibit No.

      Exhibit Description

      10.1+

      Supply Agreement dated December 11, 2000, by and between Dixie Chemical Company and the Registrant

      10.2+

      Supply Agreement dated December 18, 2000, by and between Lonza, AG and the Registrant

      + Confidential treatment has been requested for certain portions of this agreement. Such omitted confidential information has been designated by an asterisk and has been filed separately with the Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended, pursuant to an application for confidential treatment.

    2. Reports on Form 8-K

      3. None

 







SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  PHARMACYCLICS, INC.
  (Registrant)

Dated: February 12, 2001

  By:  /s/ RICHARD A. MILLER, M.D.
 
  Richard A. Miller, M.D.
  President and Chief Executive Officer

Dated: February 12, 2001

  By:  /s/ LEIV LEA
 
  Leiv Lea
  Vice President, Finance and Administration and Chief Financial Officer







INDEX TO EXHIBITS

Exhibit No.

Exhibit Description

10.1+

Supply Agreement dated December 11, 2000, by and between Dixie Chemical Company and the Registrant

10.2+

Supply Agreement dated December 18, 2000, by and between Lonza, AG and the Registrant

+ Confidential treatment has been requested for certain portions of this agreement. Such omitted confidential information has been designated by an asterisk and has been filed separately with the Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended, pursuant to an application for confidential treatment.