Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SCLN > SEC Filings for SCLN > Form 10-K on 17-Mar-2014All Recent SEC Filings

Show all filings for SCICLONE PHARMACEUTICALS INC

Form 10-K for SCICLONE PHARMACEUTICALS INC


17-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the "Selected Financial Data" and our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report on Form 10-K contain forward-looking statements which involve risks and uncertainties. See "Note Regarding Forward-Looking Statements" and "Risk Factors" contained in this Annual Report on Form 10-K.

SciClone Pharmaceuticals, Inc. (NASDAQ: SCLN) is a United States ("US")-headquartered, China-focused, specialty pharmaceutical company with a substantial commercial business and a product portfolio of therapies for oncology, infectious diseases and cardiovascular. We are focused on continuing to grow our revenue and profitability in the future. Our business and corporate strategy is focused primarily on the People's Republic of China ("China") where we have built a solid reputation and established a strong brand through many years of experience marketing our lead product, ZADAXIN (thymalfasin). In addition, we have an established product promotion business model with large pharmaceutical partners and we are focused on establishing profitability in all of these collaborations. We believe our sales and marketing strengths position us to benefit from the long-term expansion of the pharmaceutical market in China. This pharmaceutical market currently ranks third among the global pharmaceutical markets, and we believe China will rank second among global pharmaceutical markets by 2020. We seek to expand our presence in China and increase revenues by growing sales and profits of our current product portfolio, launching new products from our development pipeline, adding new, profitable product services agreements and leveraging our strong cash position to in-license additional products.

We operate in two segments which are generally based on the nature and location of our customers: 1) China and 2) the rest of the world, which includes our US and Hong Kong operations.

We have two categories of revenues: "product sales revenues" and "promotion services revenues." Our product sales revenues result from our proprietary and in-licensed products, including our lead product, ZADAXIN, and products from Pfizer International Trading (Shanghai) Ltd. ("Pfizer") and Correvio LLC (formerly Iroko Cardio, LLC). ZADAXIN has the highest margins in our portfolio as it is a premium product sold exclusively by SciClone. Aggrastat®, an intervention cardiology product launched in China in 2009, is an in-licensed product with higher margins than the products we promote under services agreements and we anticipate revenues from this product will grow significantly as it further penetrates the China market. In addition, we anticipate that new marketed products, when and if introduced, can increase the future revenues and profitability of our pharmaceutical business in China over the coming years. Our "promotion services revenues" result from fees we receive for exclusively promoting products under services agreements with certain pharmaceutical partners including Baxter International, Inc. ("Baxter") in China. We refer to these agreements as promotion agreements, service agreements and distribution contract rights agreements. We recognize promotion services revenues as a percentage of our collaborators' product sales revenue for these exclusively promoted products. Over time, as additional proprietary or in-licensed products come to the market, we aim to shift our product mix towards those products providing higher margin for us.

Our promotion agreements with Sanofi Aventis S.A. ("Sanofi"), consisting of individual promotional agreements for certain pharmaceutical products and supplementary agreements extending the terms thereof, were not renewed and expired on December 31, 2013. We received initial notification of non-renewal from Sanofi in early October 2013. Subsequent thereto, we believe that Sanofi breached its obligations under these agreements by, among other things, failing to place orders for and supply product for the fourth quarter of 2013 in relation to sales we generated, and failing to pay promotion fees due to NovaMed under the agreements. As of December 31, 2013, we had $4.3 million of uncollected receivables due from Sanofi that related to revenue recognized during the first three quarters of 2013. We have demanded that Sanofi make full payment of the promotional fees due to NovaMed. If this matter is not resolved to our satisfaction, we intend to vigorously pursue our claims against Sanofi in arbitration.


Table of Contents

Our agreements with Sanofi contain provisions (identical regardless of individual product promotion agreement) that required a refund of a portion of promotion service fees received during interim periods from them if defined annual sales targets were not achieved. Consistent with our past practice, and consistent with our achievement (or excess achievement) of annual revenue targets in each prior period, based on Method 2 of Accounting Standards Codification 605-20-S99-1, "Accounting for Management Fees Based on a Formula," we recognized revenue during interim periods without reduction for amounts subject to refund because we met and substantially exceeded such targets on a "pro rata" basis at interim dates. Our treatment of the subject-to-refund portion is consistent with the contractual provisions, which provide that the sales targets will be measured on a pro-rated basis if an agreement were to hypothetically terminate as of any given date.

Due to Sanofi's failure to place orders for shipment in the fourth quarter and fully meet the demand we generated, our actual promotional fees receivable in the fourth quarter of 2013 were negatively impacted. Due to this failure, we did not achieve the defined annual sales targets for fiscal 2013. Under our agreements with Sanofi, a failure to reach the annual sales target would result in approximately $6.2 million subject to refund related to our performance in the first three quarters of 2013. However, our agreements required that Sanofi continue to support our sales efforts by continuing to provide product through the end of the terms of the agreements. We believe we have no obligation to refund any amounts subject to this provision because our inability to achieve the defined annual sales was the result of a failure to perform by Sanofi.

As we are in a dispute with Sanofi concerning their performance, we therefore deferred revenue recognition of approximately $2.9 million of Sanofi promotion fees for the fourth quarter of 2013, pending resolution of the dispute. As we are legally entitled to at least the $2.9 million recorded as a receivable, the non-recognition of revenue resulted in an equal and offsetting amount of deferred revenue. Our revenues for 2013, 2012 and 2011 with Sanofi were approximately $25.0 million, $30.8 million, and $19.7 million, respectively.

In June 2013, we renewed our promotion agreement with Baxter for a 5-year term, through December 2017. Our other significant promotion agreement is with Pfizer International Trading (Shanghai) Ltd. ("Pfizer") and is expected to be renewed month-to-month until our negotiation for an extended or renegotiated agreement is concluded. Revenues for 2013, 2012 and 2011 related to our agreement with Pfizer were approximately $3.1 million, $8.8 million, and $5.5 million, respectively. We are actively negotiating renewal or extension of this agreement.

We are pursuing additional promotion service agreements to generate additional revenue. At the same time, we continue to assess the financial performance of the products we promote under our agreements and their overall value within our entire portfolio of products. As part of this process, we have recently discontinued promotion of certain products including certain oncology products for Pfizer. Revenues related to these discontinued products were approximately $0.7 million, $1.5 million, and $2.7 million in 2013, 2012, and 2011, respectively. Over time, we anticipate the product mix that we promote will change, which may affect our revenues and profitability in the future. If any of these agreements are determined to no longer be beneficial to us and are allowed to expire, or if third parties will not renegotiate, renew or extend the agreements on terms acceptable to us, our revenues would be adversely affected and our profitability may be adversely or beneficially affected. If on the other hand our efforts to renegotiate result in better terms, there may be a positive impact on our revenues and profitability.

ZADAXIN is approved in over 30 countries and may be used for the treatment of HBV, HCV, and certain cancers, and as a vaccine adjuvant according to the local regulatory approvals we have in these countries. In China, thymalfasin is included in the treatment guidelines issued by the Ministry of Health ("MOH") for liver cancer, as well as guidelines for treatment of chronic HBV (issued by both the Chinese Medical Association and the Asian-Pacific Association for the Study of the Liver) and invasive fungal infections of critically ill patients (issued by the Chinese Medical Association). Our sales force is focused on increasing sales to the country's largest hospitals (class 3 with over 500 beds) as well as mid-size hospitals (class 2). These hospitals serve Tier 1 and Tier 2 cities located mostly in the eastern part of China, which are the largest and generally have the most


Table of Contents

affluent populations. We are widening our market strategies by targeting numerous smaller hospitals as well as hospitals that are in more rural areas. We are also seeking to expand the indications for which ZADAXIN could be used, including sepsis.

We are also pursuing the registration of several other therapeutic products in China. These include: DC Bead®, an embolic-acting bead with drug-loading capabilities that can be used for targeted delivery of cancer chemotherapy drugs directly to the tumor; Loramyc®, a mucoadhesive tablet formulation of miconazole lauriad to treat oropharyngeal candidiasis; Rapinyl®, a sublingual tablet formulation of fentanyl to treat breakthrough cancer pain; and RapidFilm®, an oral film formulation of ondansetron to treat nausea induced by chemotherapy.

We continue to seek in-licensing arrangements for approved or late-stage, branded, well-differentiated products that if not yet approved, have a clear regulatory approval pathway in China based on existing regulatory approval outside of China. Our objective is to in-license products that provide us with higher margins, augmenting our product sales revenue and profitability, and we continue to explore opportunities to optimize our promotion services revenues. In May 2013, we entered into a framework agreement with Zensun (Shanghai) Science & Technology Co., Ltd. ("Zensun") for the exclusive promotion, marketing, distribution and sale of NeucardinTM in China, Hong Kong and Macau. Neucardin is a novel, first-in-class therapeutic for the treatment of patients with intermediate to advanced heart failure, for which a New Drug Application was submitted to and accepted for review by the China Food and Drug Administration ("CFDA") in 2012.

In June 2013, we entered into a license agreement with Taiwan Liposome Company ("TLC") which granted us a license and the exclusive rights in China, Hong Kong and Macau to promote, market, distribute and sell ProFlow® for the treatment of peripheral arterial disease ("PAD") and other indications. PAD is a serious cardiovascular condition in which blood flow to the limbs (usually the legs) is restricted due to arterial plaque build-up. Under the terms of the agreement, TLC will be responsible for the continued development including potential clinical trials and regulatory activities, as well as the manufacture and supply of ProFlow, and we will be responsible for all aspects of commercialization including pre-and post-launch activities. ProFlow has been submitted to CFDA for clinical trial approval, and it is expected that some additional clinical testing may be required prior to approval. The agreement provides for the principal terms of the arrangement between SciClone and TLC, and in March 2014, the companies entered into a supplemental collaboration and license agreement.

We believe that these licensing agreements for Neucardin and ProFlow provide us the opportunity to use our considerable sales and marketing expertise to expand our product portfolio with differentiated, high-quality products that have significant therapeutic advantages and near-term commercial potential, and that can contribute to our long-term growth.

ZADAXIN Inventories and Sales

ZADAXIN revenues for 2013 were lower compared to 2012. During the third quarter of 2012 and particularly in September 2012, we estimated there was a substantial increase in ZADAXIN channel inventory levels, and we believed that sales to our customers, importers and distributors exceeded the pace at which they were able to sell ZADAXIN through to hospital pharmacies and other parties, resulting in lower commercial sales to our importer in the fourth quarter of 2012 and for the first half of fiscal 2013. We believe ZADAXIN channel inventory has returned to normalized levels. We also believe that we will continue to see increases in hospital demand for ZADAXIN in the future through increased penetration in the market.

We believe our cash and investments as of December 31, 2013 and ongoing revenue generating business operations will be sufficient to support our current operating plan for at least the next 12 months. Our results may fluctuate from quarter to quarter and we may report losses in the future.


Table of Contents

Results of Operations

Revenues:

The following table summarizes the year over year changes in our product sales
and promotion services revenues (in thousands):



                                               Years Ended December 31,
                             2013         Change         2012        Change         2011
      Product Sales, net   $  99,414          -19 %    $ 123,171          10 %    $ 111,951
      Promotion Services      27,644          -16 %       33,098          61 %       20,614

      Total Net Revenues   $ 127,058          -19 %    $ 156,269          18 %    $ 132,565

Product sales were $99.4 million, $123.2 million and $112.0 million for the years ended December 31, 2013, 2012, and 2011, respectively. The decrease of $23.8 million, or 19%, for the year ended December 31, 2013 compared to 2012, was primarily attributable to a decrease in ZADAXIN unit sales and weaker demand for certain oncology and Aggrastat products. We believe our ZADAXIN product revenues in the fourth quarter of 2012 and for the year ended December 31, 2013 were adversely affected by the increase in channel inventory we experienced in the third quarter of 2012. We believe channel inventory for ZADAXIN has returned to normalized levels, and we anticipate that ZADAXIN revenues in 2014 will be higher than 2013.

The increase in product sales of $11.2 million, or 10%, for the year ended December 31, 2012, compared to 2011, was primarily attributable to increased unit sales of ZADAXIN and to a lesser extent related to oncology and Aggrastat products. ZADAXIN sales were $96.3 million for the year ended December 31, 2013, compared to $112.2 million and $104.8 million for the years ended December 2012 and 2011, respectively.

In China, pharmaceutical products are imported and distributed through a tiered method of distribution. For our proprietary product ZADAXIN, we manufacture our product using our US and European contract manufacturers, and we generate our product sales revenue through sales of ZADAXIN product to SinoPharm Lingyun Biopharmaceutical (Shanghai) Co. Ltd. ("SinoPharm"). SinoPharm and its affiliates act as an importer, and also as the top "tier" of the distribution system ("Tier 1") in China. Our ZADAXIN sales occur when SinoPharm purchases product from us without any right of return except for damaged product or quality control issues. Passage of title and risk of loss are transferred to SinoPharm at the time of shipment. After the sale, SinoPharm clears products through China import customs, sells directly to large hospitals and holds additional product it has purchased in inventory for sale to the next tier in the distribution system. The second-tier distributors are responsible for the further sale and distribution of the products they purchase from the importer, either through sales of product directly to the retail level (hospitals and pharmacies), or to third-tier local or regional distributors who, in turn, sell products to hospitals and pharmacies.

Promotion services revenue was $27.6 million, $33.1 million and $20.6 million for the years ended 2013, 2012, and 2011, respectively. Promotion services revenue decreased $5.5 million or 16% for the year ended December 31, 2013, compared to 2012, mainly related to the non-renewal of our promotion agreements with Sanofi and the wind down of our services with them.

Our promotion agreements with Sanofi, consisting of individual promotional agreements for certain pharmaceutical products and supplementary agreements extending the terms thereof, were not renewed and expired on December 31, 2013. We received initial notification of non-renewal from Sanofi in early October 2013. Subsequent thereto, we believe that Sanofi breached its obligations under these agreements by, among other things, failing to place orders for and supply product for the fourth quarter of 2013 in relation to sales we generated, and failing to pay promotion fees due to NovaMed under the agreements. As of December 31, 2013, we had $4.3 million of uncollected receivables due from Sanofi that related to revenue recognized during the first three quarters of 2013. We have demanded that Sanofi make full payment of the promotional fees due to NovaMed. If this matter is not resolved to our satisfaction, we intend to vigorously pursue our claims against Sanofi in arbitration.


Table of Contents

Our agreements with Sanofi contain provisions (identical regardless of individual product promotion agreement) that required a refund of a portion of promotion service fees received during interim periods from them if defined annual sales targets were not achieved. Consistent with our past practice, and consistent with our achievement (or excess achievement) of annual revenue targets in each prior period, based on Method 2 of Accounting Standards Codification 605-20-S99-1, "Accounting for Management Fees Based on a Formula," we recognized revenue during interim periods without reduction for amounts subject to refund because we met and substantially exceeded such targets on a "pro rata" basis at interim dates. Our treatment of the subject-to-refund portion is consistent with the contractual provisions, which provide that the sales targets will be measured on a pro-rated basis if an agreement were to hypothetically terminate as of any given date.

Due to Sanofi's failure to place orders for shipment in the fourth quarter and fully meet the demand we generated, our actual promotional fees receivable in the fourth quarter of 2013 were negatively impacted. Due to this failure, we did not achieve the defined annual sales targets for fiscal 2013. Under our agreements with Sanofi, a failure to reach the annual sales target would result in approximately $6.2 million subject to refund related to our performance in the first three quarters of 2013. However, our agreements required that Sanofi continue to support our sales efforts by continuing to provide product through the end of the terms of the agreements. We believe we have no obligation to refund any amounts subject to this provision because our inability to achieve the defined annual sales was the result of a failure to perform by Sanofi.

As we are in a dispute with Sanofi concerning their performance, we therefore deferred revenue recognition of approximately $2.9 million of Sanofi promotion fees for the fourth quarter of 2013, pending resolution of the dispute. As we are legally entitled to at least the $2.9 million recorded as a receivable, the non-recognition of revenue resulted in an equal and offsetting amount of deferred revenue. Our revenues for 2013, 2012 and 2011 with Sanofi were approximately $25.0 million, $30.8 million, and $19.7 million, respectively.

The termination of these agreements will negatively affect our promotion services revenues in 2014; however, due to our planned restructuring activities, including a significant reduction in our sales force, we believe it will have only a modest effect on our profitability in 2014.

The increase in promotion services revenue of $12.5 million or 61% for the year ended December 31, 2012, compared to 2011 reflects the addition of promotion services revenue as a result of the NovaMed acquisition in April 2011 and also reflects an increase in Depakine product sales in the year ended December 31, 2012.

In June 2013, we renewed our promotion agreement with Baxter for a 5-year term, through December 2017. Our other significant promotion agreement with Pfizer International Trading (Shanghai) Ltd. ("Pfizer") is expected to be renewed month-to-month until our negotiation for an extended or renegotiated agreement is concluded. Revenues for 2013, 2012, and 2011 related to our agreement with Pfizer were approximately $3.1 million, $8.8 million, and $5.5 million, respectively. We are actively negotiating the renewal or extension of this agreement. We continue to assess the financial performance of the products we promote under our agreements and their overall value within our entire portfolio of products. As part of this process, we have recently discontinued promotion of certain oncology products for Pfizer. Revenues related to these products were approximately $0.7 million, $1.5 million, and $2.7 million, in 2013, 2012, and 2011, respectively. Over time, we anticipate the product mix that we promote will change, which may affect our revenues and profitability in the future. If any of these agreements are determined to no longer be beneficial to us and are allowed to expire, or if third parties will not renegotiate, renew or extend the agreements on terms acceptable to us, our revenues would be adversely affected and our profitability may be adversely or beneficially affected. On the other hand, if we are successful in negotiating better terms, there may be a positive impact on our revenues and profitability.

All of our promotion services revenue and a majority of our product revenues related to our China segment. Total China revenues were $122.6 million, $152.2 million and $128.9 million, or 97%, 97%, and 97% of sales for the years ended December 31, 2013, 2012, and 2011, respectively. Rest of the World segment revenues were $4.4 million, $4.0 million, and $3.6 million, or 3%, 3%, and 3% for the years ended December 31, 2013, 2012 and 2011, respectively, and related to sales of ZADAXIN product.


Table of Contents

For the year ended December 31, 2013, sales to two customers in China accounted for approximately 75% and 20% of our revenues. For the year ended December 31, 2012, sales to three customers in China accounted for approximately 59%, 20% and 12% of our revenues. For the year ended December 31, 2011, sales to three customers in China accounted for approximately 66%, 15% and 15% of our revenues. Our experience with our customers has been good and we anticipate that we will continue to sell a majority of our product to them.

Cost of Product Sales:

The following table summarizes the year over year changes in our cost of product sales (in thousands):

Years Ended December 31, 2013 Change 2012 Change 2011 Cost of Product Sales $ 17,668 -20 % $ 21,996 13 % $ 19,409

Cost of product sales was $17.7 million for the year ended December 31, 2013, compared to $22.0 million and $19.4 million for years ended December 31, 2012 and 2011, respectively. The decrease of $4.3 million, or 20%, for the year ended December 31, 2013, compared to 2012, was attributable to a $0.6 million decrease in ZADAXIN cost of product sales related to a decrease in ZADAXIN unit sales and a $3.7 million decrease in Aggrastat and oncology cost of sales as a result of lower sales volume of Aggrastat and Methotrexate product and discontinued sales of Adriamycin and Daunoblastina. The increase of $2.6 million, or 13%, for the year ended December 31, 2012, compared to the year ended December 31, 2011, was attributable to an increase of $1.2 million in ZADAXIN cost of sales related to an increase in ZADAXIN unit sales and was attributable to an increase of $1.4 million in oncology and Aggrastat cost of sales related to an increase in those product sales and deliveries.

ZADAXIN cost of sales were $15.5 million for the year ended December 31, 2013, compared to $16.2 million and $15.0 million for the years ended December 31, 2012 and 2011, respectively. Gross margin for ZADAXIN was 83.9% for the year ended December 31, 2013, compared to 85.7% for both the years ended December 31, 2012 and 2011. The decrease in gross margin for ZADAXIN for the year ended December 31, 2013, compared to the years ended December 31, 2012 and 2011 was due primarily to costs incurred related to planned manufacturing process improvements for ZADAXIN, costs incurred for product warehousing fees related to the renewal of our ZADAXIN China import license, higher overhead costs related to lower production volume, and to a reduction in the list price of ZADAXIN since October 2012.

We expect our ZADAXIN cost of product sales and gross margins to fluctuate from period to period depending on the level of sales and price of our products, the absorption of product-related fixed costs, currency exchange fluctuations, any charges associated with excess or expiring finished product inventory, and the timing of other inventory period costs such as manufacturing process improvements for the goal of future cost reductions.

Overall, we expect our gross margin percentages in 2014 to remain comparable to 2013, although they may fluctuate from quarter to quarter.

Sales and Marketing:

The following table summarizes the year over year changes in our sales and marketing expenses (in thousands):

Years Ended December 31, 2013 Change 2012 Change 2011 Sales and Marketing $ 55,821 -21 % $ 70,327 44 % $ 48,853


Table of Contents

Sales and marketing expenses were $55.8 million, $70.3 million, and $48.9 million for the years ended December 31, 2013, 2012, and 2011, respectively. Sales and marketing expenses decreased $14.5 million or 21%, for the year ended December 31, 2013, compared to 2012. In 2013, we began expense-saving measures in our sales and marketing activities. We have also strategically reduced our sales force by over 300 salespersons compared to December 31, 2012. Sales and marketing expenses increased $21.5 million or 44% for the year ended December 31, 2012, compared to the year ended December 31, 2011 and related to increased growth in support of our commercial efforts to expand more deeply and widely throughout the China market.

. . .

  Add SCLN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SCLN - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.