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| SCLN > SEC Filings for SCLN > Form 10-Q on 1-Aug-2008 | All Recent SEC Filings |
1-Aug-2008
Quarterly Report
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements are based on our current expectations, estimates and
projections about our business, industry, management's beliefs and certain
assumptions made by us. Words such as "anticipate," "expect," "intend," "plan,"
"believe" or similar expressions are intended to identify forward-looking
statements including those statements we make regarding our future financial
results; anticipated product sales; the sufficiency of our resources to complete
clinical trials and other new product development initiatives; the timing and
outcome of clinical trials; the timing of completion of therapy and observation
for our clinical trials; ZADAXIN's ability to complement existing therapies;
prospects for ZADAXIN and our plans for its enhancement and commercialization;
future size of the worldwide hepatitis C virus and other markets; research and
development and other expense levels; cash and other asset levels; and the
allocation of financial resources to certain trials and programs. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict. Therefore,
our actual results could differ materially and adversely from those expressed in
any forward-looking statements as a result of various factors including, but not
limited to, those described under the caption "Risk Factors" in this Quarterly
Report on Form 10-Q. We undertake no obligation to revise or update publicly any
forward-looking statements for any reason.
Overview
SciClone Pharmaceuticals, Inc. is a biopharmaceutical company engaged in the development and commercialization of novel therapeutics to treat life-threatening diseases. Our strategy is to in-license products in the areas of cancer and viral infectious diseases, and to develop them for commercialization in the major pharmaceutical markets with a particular focus on the People's Republic of China ("China"), one of the world's fastest growing pharmaceutical markets. ZADAXIN®, our brand of thymalfasin, is one of the largest imported drugs, as measured by revenue, in China today, and currently is in late-stage clinical development for the treatment of hepatitis C virus (HCV) in Europe. Our proprietary in-licensed compound RP101 entered phase 2 clinical development for the treatment of pancreatic cancer in combination with gemcitabine in January 2008. Our proprietary in-licensed compound SCV-07 entered phase 2 clinical development for viral infectious disease in June 2007. We also submitted a regulatory application to the Chinese State Food and Drug Administration (SFDA) in December 2006 related to DC BeadTM, a product for the treatment of liver cancer, or hepatocellular carcinoma (HCC), for which we obtained Chinese marketing rights in June 2006 from Biocompatibles UK Ltd., a UK-based company.
In addition to our current product portfolio, we believe we are well-positioned to in-license additional therapeutics for both China and the significantly larger U.S. and European markets, in part because of our opportunity to develop and commercialize such products in China. Also, we intend to use our clinical work in China to support and accelerate regulatory applications in the United States and Europe.
Our European partner, Sigma-Tau, is conducting a triple therapy combination (ZADAXIN plus pegylated interferon alpha and ribavirin) hepatitis C clinical trial in Europe. In a press release dated February 11, 2008, we reported what we believe were promising interim blinded results and in a press release dated June 26, 2008, we reported that this trial has been successfully completed and that we expect the unblinded results of the trial to be released in the fourth quarter of 2008.
In June 2007, we reported positive data from a phase 2 trial, also conducted by Sigma-Tau, treating patients with stage IV malignant melanoma indicating that thymalfasin in combination with dacarbazine (DTIC) chemotherapy and low dose interferon alpha met its primary endpoint by reaching the tumor response rate required to reject the null hypothesis. In fact, two of the thymalfasin treated groups had a tripled overall response rate compared to malignant melanoma patients treated with DTIC, the current standard of care, and low dose interferon alpha. In addition, survival, a key secondary endpoint, was extended by nearly 3 months. We and Sigma-Tau are planning the design of a phase 3 melanoma trial and our regulatory strategy including a Special Protocol Assessment (SPA) to be filed with the FDA. Thymalfasin phase 3 clinical development and commercialization plans for HCV and melanoma have potentially significantly different timelines, costs, and sales potential, and the markets for these two products differ in terms of competitive products and other factors. Consequently, before proceeding with a further melanoma trial, we expect that we and Sigma-Tau will review the final results for the current HCV clinical trial anticipated in the fourth quarter of 2008 in order to determine the next steps for an optimal thymalfasin development program.
We manufacture ZADAXIN for sale and for our clinical trials through third party contract manufacturers, and we conduct our research and development efforts principally through arrangements with clinical research sites, contract research organizations and universities.
As of June 30, 2008, we have an accumulated deficit of approximately $174,480,000. At least over the next few years, we expect net losses due to increased operating expenses as we expand our research and development and clinical testing efforts and our sales and marketing capabilities. Our ability to achieve and sustain operating profitability is dependent on
expansion of sales of ZADAXIN and securing regulatory approval for DC Bead in China, the execution and successful completion of ZADAXIN, SCV-07, and RP101 clinical trials and securing regulatory approvals for these products in the major pharmaceutical markets of the United States and Europe. If regulatory approval is secured in those territories, our ability to achieve and sustain operating profitability will depend on the successful commercialization and marketing of these products. Clinical development involves numerous risks and uncertainties and, in addition to our successes, we have experienced setbacks in clinical development in the past. In particular, in December 2005 and June 2006, we reported results from our two U.S. phase 3 trials evaluating the double therapy combination of ZADAXIN and pegylated interferon alpha to treat HCV patients who had failed previous therapy. The results from these trials did not demonstrate that ZADAXIN in combination with pegylated interferon alpha provides a statistically significant clinical benefit when compared with pegylated interferon alpha alone. In addition, other factors may also impact our ability to achieve and sustain operating profitability, including the pricing of ZADAXIN and its manufacturing and marketing costs, our ability to compete in pharmaceutical markets, the cost of product development and commercialization programs including SCV-07, DC Bead, and RP101, the timing and costs of acquiring rights to additional drugs, our ability to fund our operations and the entrance into and extension of agreements for product development and commercialization, where appropriate.
For the six months ended June 30, 2008 and 2007, product sales in China were $23,058,000 and $16,243,000, respectively. We expect net sales to increase for the remainder of fiscal 2008, compared to the same period in 2007. For the overall consolidated Company, primarily due to the level of research and development activities and other operations, we expect a net loss and a reduction in cash, cash equivalents and short-term investments for 2008. We are considering raising additional funding in 2008 to finance our operations, including anticipated clinical trials. We are exploring various alternatives for financing in addition to sales of equity of SciClone, including a line of credit, debt financing and financing of our Chinese operations either through debt, equity or joint venture transactions, but we have not determined the timing or structure of any transaction.
Our operating results may fluctuate from quarter to quarter and these fluctuations may be substantial as a result of, among other factors, the number, timing, costs and results of pre-clinical and clinical trials of our products, market acceptance of ZADAXIN, and potentially of SCV-07, DC Bead, and RP101, and the timing of orders for ZADAXIN from international markets, particularly China, the regulatory approval process, the timing of FDA or international regulatory approvals, and the acquisition of additional product rights and the funding, if any, provided as a result of corporate partnering arrangements.
Recent Accounting Pronouncements
Adopted January 1, 2008
Effective January 1, 2008, we adopted Emerging Issues Task Force ("EITF") Issue No. 07-3 "Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development activities" ("EITF 07-3"). EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. The adoption did not have a material impact on our consolidated results of operations or financial condition.
We adopted the provisions of the Financial Accounting Standards Board ("FASB") Statement No. 157 "Fair Value Measurements" ("SFAS No. 157"), effective January 1, 2008. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157", which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we deferred adoption of SFAS 157 as it relates to our non financial assets and liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. Our assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. The three levels of input are:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The adoption of this statement did not have a material impact on our consolidated results of operations and financial condition.
Effective January 1, 2008, we adopted SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. We did not elect to adopt the fair value option for any financial assets or liabilities under this Statement.
Not Yet Adopted
In December 2007, EITF Issue No. 07-1, "Accounting for Collaborative
Arrangements" ("EITF 07-1") was issued. EITF 07-1 provides guidance concerning:
determining whether an arrangement constitutes a collaborative arrangement
within the scope of this Issue; how costs incurred and revenue generated on
sales to third parties should be reported in the income statement; how an entity
should characterize payments on the income statement; and what participants
should disclose in the notes to the financial statements about a collaborative
arrangement. EITF 07-1 is effective as of the beginning of an entity's fiscal
year that begins after December 15, 2008, which will be our fiscal year
beginning January 1, 2009. We are in the process of evaluating the impact, if
any, of adopting EITF 07-1 on our financial statements.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our consolidated financial statements and accompanying notes. Actual results could differ from those estimates. We believe there have been no significant changes in our critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2007 other than the adoption of SFAS No. 157.
Results of Operations
Total Revenues
Product sales were $13,834,000 and $24,468,000 for the three and six-month periods ended June 30, 2008, respectively, as compared to $8,955,000 and $17,599,000 for the corresponding period in 2007. All product sales in each period were derived from sales of ZADAXIN. The increase was attributable to a higher volume of product sold and a slight increase in prices between the 2008 and 2007 periods. Sales to customers in China are denominated in U.S. dollars and accounted for approximately 94% of product sales for both the three and six-month periods ended June 30, 2008, as compared to approximately 93% and 92% of product sales for the three and six-month periods ended June 30, 2007, respectively.
For the three-month period ended June 30, 2008, sales to three importing agents in China accounted for approximately 65%, 17%, and 12% of our product sales. For the three-month period ended June 30, 2007, sales to three importing agents in China accounted for approximately 56%, 19%, and 18% of our product sales. For the six-month period ended June 30, 2008, sales to two importing agents in China accounted for approximately 67% and 21% of our product sales. For the six-month period ended June 30, 2007, sales to three importing agents in China accounted for approximately 57%, 20% and 16% of our product sales. The three largest customers were the same importing agents in each of these periods.
We expect that product revenues for the remainder of fiscal 2008 will be at or somewhat above the product sales for the six months ended June 30, 2008.
Cost of Product Sales and Gross Margin on Product Sales
Gross margin on product sales was 82% for both the three and six-month periods ended June 30, 2008, as compared to 81% for the corresponding periods in 2007. We expect cost of product sales, and hence gross margin on product sales, to vary slightly from period to period, depending upon the level of ZADAXIN sales, the absorption of product-related fixed costs, and any charges associated with excess or expiring finished product inventory. For the three and six-month periods ended June 30, 2008, we recorded a charge of $630,000 associated with our finished goods inventory related to vials made obsolete due to labeling requirements arising from our new import license. No charges were recorded by us associated with product inventory during the three or six month periods ended June 30, 2007. We believe that cost of goods sold for the third quarter of fiscal 2008 will be lower than the second quarter of fiscal 2008 due to the charge associated with our finished goods inventory during the second quarter of 2008 as we do not expect any further charges to be recorded related to our finished goods inventory.
Research and Development
Research and development expenses were $4,535,000 for the three-month period ended June 30, 2008, as compared to $4,712,000 for the corresponding period in 2007. Included in research and development expense for the three months ended June 30, 2007 was approximately $2,200,000 of acquisition and legal costs related to the acquisition of exclusive rights for the United States and Canada to develop and commercialize RP101. We did not record any similar expenditure in the three months ended June 30, 2008; however, the resulting decrease was partially offset by an increase in clinical trial expenses for the three months ended June 30, 2008 related to our phase 2 trials for RP101 and SCV-07, and to the development planning for a phase 3 clinical trial for Melanoma.
Research and development expenses were $12,084,000 for the six-month period ended June 30, 2008, as compared to $7,135,000 for the corresponding period in 2007. The increase in research and development expenses of $4,949,000 is related to our phase 2 clinical trials for RP101 and SCV-07, and to the development planning for a phase 3 clinical trial for melanoma. These increases included approximately $2,369,000 for clinical trial management, statistician services and investigator expenses; an increase of approximately $1,955,000 for drug development and manufacturing costs related to the scale up of RP101 and purchase of gemcitabine for the RP101 clinical trial, and manufacturing of SCV-07 for the SCV-07 clinical trial; a $1,320,000 milestone payment upon first patient dosing in the RP101 phase 2 clinical trial; an increase in compensation and benefits expense and recruiting fees due to increases in the number of research and development personnel; and an increase in consulting and travel expenses. These increases were partially offset by a decrease of approximately $2,200,000 of acquisition and legal costs related to the acquisition of exclusive rights for the United States and Canada to develop and commercialize RP101 recorded during the six months ended June 30, 2007. We expect that our research and development expenses for the third and fourth quarters of 2008 will increase compared to the second quarter of 2008 related to our clinical trials for RP101 and SCV-07. In general, we expect research and development expenses to vary substantially from quarter to quarter as we pursue our strategy of initiating additional preclinical and clinical trials, acquiring product rights, and expanding regulatory activities.
Sales and Marketing
Sales and marketing expenses were $4,192,000 and $8,140,000 for the three and six-month periods ended June 30, 2008, respectively, as compared to $3,139,000 and $6,163,000, respectively, for the corresponding period in 2007. The higher level of sales and marketing expenses was primarily due to increases in the number of sales and marketing personnel, and increases in promotional activities and operating expense related to our expanding sales and marketing efforts. We expect that our future sales and marketing expenses will remain at similar or somewhat higher levels for the remainder of fiscal 2008 and may increase in future years if we are successful in expanding our commercialization and marketing efforts.
General and Administrative
General and administrative expenses were $2,860,000 for the three months ended June 30, 2008, as compared to $2,444,000 for the three months ended June 30, 2007. The higher levels of general and administrative expenses were primarily due to increased severance costs of approximately $322,000 and employment recruiting costs of approximately $106,000 recorded during the three month period ending June 30, 2008.
General and administrative expenses were $5,881,000 for the six months ended June 30, 2008, as compared to $5,054,000 for the six months ended June 30, 2007. The higher levels of general and administrative expenses were primarily due to increases in severance costs of approximately $322,000, accounting and professional fees of approximately $326,000 and employment recruiting costs of approximately $169,000 recorded during the six month period ended June 30, 2008. We believe that general and administrative expenses for the third quarter of fiscal 2008 will be comparable to the second quarter of fiscal 2008.
Interest and Investment Income
Interest and investment income was approximately $124,000 and $385,000, respectively, for the three and six-month periods ended June 30, 2008, as compared to $419,000 and $873,000, respectively, for the corresponding period in 2007. The decrease was primarily due to lower cash and investment balances in the 2008 period.
Provision for Income Tax
Provision for income tax was approximately $196,000 and $302,000, respectively, for the three and six-month periods ended June 30, 2008, as compared to $28,000 and $49,000, respectively, for the corresponding period in 2007. The increase in provision for income tax for both the 2008 periods compared to the corresponding 2007 period was due to increased net operating income and an increased tax rate related to the Company's foreign operations in the People's Republic of China.
Liquidity and Capital Resources
Days' sales outstanding in accounts receivable, using the average receivables method, were 121 and 150 days as of June 30, 2008 and 2007, respectively. The majority of our sales are to customers in China, where our accounts receivable collections have standard credit terms of 180 days. For the six-month periods ended June 30, 2008 and 2007, such receivables were collected within these terms. Days' sales outstanding decreased from 2007 to 2008, due to normal fluctuations in the timing of customer payments received.
On June 30, 2008 and December 31, 2007, we had $21,885,000 and $35,281,000, respectively, in cash, cash equivalents, and short-term investments. Based on our clinical trial activities including RP101, SCV07, and the development planning for a melanoma trial, and expected further net losses in fiscal 2008, we currently estimate cash, cash equivalents and short and long-term investments at December 31, 2008 will be approximately $12,000,000 to $14,000,000.
Our short-term investments consist of highly liquid marketable securities. Our restricted short-term investment of $78,000 relates to a letter of credit secured by a certificate of deposit to facilitate our value added tax filings in Europe.
As of June 30, 2008, we held approximately $1,679,000 of auction rate securities with an auction reset feature whose underlying assets are generally student loans which are substantially backed by the federal government. In February 2008, auctions began to fail for these securities and each auction has failed since February 2008. Based on the overall failure rate of these auctions, the frequency of the failures, the underlying maturities of the securities, a portion of which are greater than 30 years, and our estimation of future liquidity of such investments, we have classified the investments as long-term assets on our June 30, 2008 balance sheet. These investments were recorded at fair value as of June 30, 2008.
All of our auction rate securities are currently rated AAA, the highest rating by a rating agency. If the issuers are unable to successfully close future auctions or refinance their debt in the near term and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments. We believe that even with the possible requirement to hold all such securities for an indefinite period of time, our remaining cash and cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for at least the next twelve months.
Net cash used in operating activities amounted to $11,705,000 for the six-month period ended June 30, 2008 as compared to net cash used in operating activities in the amount of $5,293,000 in the corresponding period in 2007. The $11,705,000 of net cash used in operating activities for the six-month period ended June 30, 2008 was comprised primarily of net loss of $5,978,000 which was adjusted for non-cash items such as stock-based compensation expense of $992,000 and depreciation and amortization of $157,000, and $6,876,000 of net cash outflow related to changes in operating assets and liabilities. Such changes included a $1,842,000 decrease in accounts payable and other accrued expenses and a $1,144,000 decrease in our accrued clinical trials expense, both decreases related primarily to payments made to vendors during the six months ended June 30, 2008 related to the phase 2 RP101 and SCV-07 clinical trials, and to the development planning for a phase 3 melanoma clinical trial. Further change resulted from an increase of $5,004,000 in our accounts receivable due to an increase in sales and fluctuations in the timing of customer payments received. In addition, prepaid expenses and other assets decreased $762,000 mainly due to receipt of gemcitabine for the phase 2 RP101 clinical trial during the six months ended June 30, 2008.
Net cash used in operating activities of $5,293,000 for the six-month period ended June 30, 2007 was comprised primarily of net loss of $3,281,000 which was adjusted for non-cash items such as stock-based compensation expense of $1,158,000, depreciation and amortization of $135,000, and $3,305,000 of net cash outflow related to changes in operating assets and liabilities. Such changes included an increase of $1,222,000 in our inventory as our supplier of bulk active pharmaceutical ingredient (API) product for the manufacture of ZADAXIN was able to produce larger quantities enabling us to increase our inventory levels, compared to the lower than expected inventory levels in the prior period.
Net cash provided by investing activities amounted to $1,365,000 for the six-month period ended June 30, 2008, compared to cash provided by investing activities of $6,838,000 for the six-month period ended June 30, 2007. The change in the 2008 period was primarily due to a decrease in net proceeds from the sales, maturities and purchases of marketable securities as compared to the prior year period.
Net cash provided by financing activities amounted to $149,000 and $225,000 for the six-month periods ended June 30, 2008 and 2007, respectively, and consisted mainly of proceeds from issuance of common stock under our employee stock option plan.
Our existing capital resources and funds from product sales are not sufficient to complete our plans with RP101, SCV-07 and thymalfasin including conducting and completing clinical trials, including phase 3 trials, relating to these products, and, if we proceed with all the development efforts we are planning, we would need to raise additional financing. The unavailability or the inopportune timing of any financing could prevent or delay our long-term product development and commercialization programs, either of which would severely hurt . . .
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