| SCICLONE PHARMACEUTICALS INC Item 1A Risk Factors You should carefully consider the risks described below, in addition to the other information in this report on Form 10-K, before making an investment decision |
| Each of these risk factors could adversely affect our business, financial condition, and operating results as well as adversely affect the value of an investment in our common stock |
| Additional clinical trials will be required for the successful commercialization of ZADAXIN and if the results of our clinical trials are not favorable, we will be unable to obtain regulatory approval for the intended indications we are evaluating |
| Our ability to achieve and sustain operating profitability depends in large part on our ability to commence, execute and complete clinical programs and obtain additional regulatory approvals for ZADAXIN and other drug 18 ______________________________________________________________________ [46]Table of Contents candidates, particularly in the United States and Europe |
| We are also dependent on our ability to increase ZADAXIN sales in China and other markets |
| In particular, our ability to achieve and sustain profitability will depend in large part on our ability to commercialize ZADAXIN for the treatment of HCV or malignant melanoma in the United States and Europe |
| To obtain regulatory approvals, we must, among other requirements, complete carefully controlled and well-designed clinical trials demonstrating that a particular drug is safe and effective for the applicable disease |
| We cannot depend on data from prior trial results to predict or demonstrate that our potential drug products are safe and efficacious under regulatory guidelines to qualify for commercial sale |
| We cannot assure you, nor can you rely on our previous clinical trial results to predict, that our ongoing or future clinical trials will yield favorable results |
| Adverse or inconclusive clinical results would prevent us from filing for regulatory approval of ZADAXIN (thymosin alpha 1) for the indications that we are evaluating, and our current programs in those areas would fail |
| In the past, Alpha 1 Biomedical, from which we acquired certain rights to thymosin alpha 1, conducted a phase 3 clinical trial of thymosin alpha 1 as a therapy for HBV that did not produce statistically significant results and Alpha 1 Biomedical did not submit an NDA to the FDA In December 2005 we announced results from the first of our two US phase 3 HCV clinical trials |
| This clinical trial did not demonstrate that the combination of ZADAXIN and pegylated interferon alpha provides a statistically significant clinical benefit when compared to the use of pegylated interferon alpha alone in non-responder patients without cirrhosis of the liver, although a positive ZADAXIN treatment-related trend was observed |
| Data from the second US phase 3 HCV clinical trial using ZADAXIN in combination with pegylated interferon alpha to treat non-responder HCV patients with early cirrhosis is expected to be reported in June 2006 |
| Given the FDA general requirement of successful results from two phase 3 clinical trials to support an approvable New Drug Application, it is unlikely that an NDA based on these two clinical trials would be approved by the FDA The current standard of care for HCV therapy is the combination of pegylated interferon alpha with ribavirin |
| This combination is not approved by the FDA or the EMEA for the treatment of non-responders, however, in clinical practice pegylated interferon alpha with ribavirin is widely used for the treatment of both treatment naïve and non-responder HCV patients |
| The European HCV phase 3 clinical trial being conducted by Sigma-Tau has been designed to compare the efficacy of the triple combination of ZADAXIN, pegylated interferon alpha and ribavirin with the current standard of care |
| As with the FDA, the EMEA generally requires two confirmatory phase 3 clinical trials to support their equivalent of an NDA Therefore, results of the current triple therapy combination trial, even if positive and statistically significant, would by themselves be insufficient to support an NDA to the EMEA, and results from a second confirmatory phase 3 clinical trial would be needed |
| We cannot assure you that we or our European partner, Sigma-Tau, will undertake such trial, that any clinical trial of the triple therapy combination will yield favorable results, that the second US phase 3 HCV clinical trial will show statistical significance, that we will receive approval for ZADAXIN for the treatment of HCV in Europe or the United States or for the treatment of HCV in other countries, or that we will achieve significant levels of sales |
| In December 2005, we and Sigma-Tau announced promising interim results from a large phase 2 clinical trial in Europe evaluating ZADAXIN in combination with dacarbazine (DTIC) chemotherapy with and without low-dose interferon alpha to treat patients with stage IV, the most advanced and imminently fatal form of, malignant melanoma |
| These preliminary data show a distinct ZADAXIN dose-dependent response in combination with DTIC chemotherapy with and without low-dose interferon alpha |
| The trial’s primary endpoint is overall tumor response |
| Preliminary survival information on the first 320-patient cohort is expected in mid-2006 |
| We and Sigma-Tau plan to initiate phase 3 clinical trials in late 2006 to study the efficacy of ZADAXIN in combination with chemotherapy for the treatment of malignant melanoma |
| We cannot assure you that the final results of the phase 2 clinical trial will be favorable or support the design and initiation of phase 3 clinical trials, that we or Sigma-Tau will receive approval for the indication or that we will achieve significant levels of sales |
| 19 ______________________________________________________________________ [47]Table of Contents We may have difficulty in recruiting patients for our clinical trials |
| Higher than anticipated patient drop out rates in our clinical trials could adversely affect trial results and make it more difficult to obtain regulatory approval |
| In December 2005 we announced results from the first of our two US phase 3 HCV clinical trials |
| These results may make Sigma-Tau’s efforts to fully recruit patients for the currently ongoing ZADAXIN phase 3 HCV triple therapy combination trial more difficult and take longer than planned |
| In addition, HCV clinical trials are lengthy |
| The trials require patient treatment for 48 weeks and a follow-up observation period for an additional 24 weeks |
| Patient dropouts are expected and each of our two phase 3 HCV clinical trials in the United States enrolled more than the planned number of 500 patients, but even then dropouts were higher than anticipated |
| A patient who drops out at any point in the 72 weeks of the trial is considered a “failure to respond” in results of the clinical trial |
| In general, the fewer patients who complete each trial, the higher the positive response rate for the group of remaining ZADAXIN treated patients in such trial needs to be in order to demonstrate statistical significance |
| Therefore, a higher than anticipated dropout rate lowers the chances of proving statistical significance which could adversely affect our clinical trial results |
| Dropouts did not prevent us from completing our first US phase 3 HCV clinical trial and are not expected to prevent completion of our second trial, however, the European phase 3 HCV triple therapy combination trial is still enrolling patients and dropouts may affect the ability to fully enroll the trial in a reasonable period of time and the final results of the trial |
| We cannot predict the safety profile of the use of ZADAXIN when used in combination with other drugs |
| Many of our trials involve the use of ZADAXIN in combination with other drugs |
| Some of these drugs, particularly pegylated interferon alpha, ribavirin and dacarbazine are known to cause adverse patient reactions |
| Even if ZADAXIN does not produce adverse side effects when used alone, we cannot predict how it will work with other drugs, including causing possible adverse side effects not directly attributable to the other drugs that could compromise the safety profile of ZADAXIN when used in certain combination therapies |
| If we do not obtain regulatory approval for ZADAXIN for the intended indications that we are evaluating, our revenues will be limited and we may never become profitable |
| Our ability to execute on our business strategy has been largely dependent on our ability to obtain regulatory approval for the use of ZADAXIN, particularly in the United States and Europe |
| The regulatory approval processes in the United States and Europe are demanding and typically require 12 months or more in the United States and 18 months or more in Europe from the date of submission of a New Drug Application (NDA) |
| We have committed significant resources, including capital and time, to develop ZADAXIN, and intend to continue to do so, including the initiation and execution of additional clinical trials, with the goal of obtaining such approvals |
| If we do not obtain these approvals, we will be unable to achieve any substantial increase in our revenue from ZADAXIN and our ZADAXIN sales in other jurisdictions could decline |
| All new drugs, including our products, which have been developed or are under development, are subject to extensive and rigorous regulation by the FDA and comparable agencies in state and local jurisdictions and in foreign countries |
| These regulations govern, among other things, the development, testing, manufacturing, labeling, storage, pre-market approval, importation, advertising, promotion, sale and distribution of our products |
| These regulations may change from time to time and new regulations may be adopted |
| Obtaining regulatory approval in developing countries also is time-consuming and expensive |
| In some countries where we are contemplating marketing and selling ZADAXIN, the regulatory approval process often relies on prior approvals obtained in the United States or in Europe |
| Without such prior approvals, our ability to 20 ______________________________________________________________________ [48]Table of Contents obtain regulatory approvals for ZADAXIN in these countries may be delayed or prevented |
| In addition, to secure these regulatory approvals, we will need, among other things, to demonstrate favorable results from additional clinical trials of ZADAXIN Even if we are able to complete the clinical trials we have sponsored or are planning in a timely or cost-effective manner, these trials may not fulfill the applicable regulatory approval criteria, in which case we will not be able to obtain regulatory approval in these countries, and we have experienced difficulties in preparing for regulatory approval in Japan |
| We cannot assure you that we will ultimately obtain regulatory approvals in our targeted countries in a timely and cost-effective manner or at all |
| If we fail to obtain the required regulatory approvals to develop, market and sell ZADAXIN in countries where we currently do not have such rights, our revenues will be limited, and our future prospects will be dependent upon our ability to in-license or to bring earlier stage products to market, any of which will require substantial financial expenditures |
| Satisfaction of government regulations may take several years and the time needed to satisfy them varies substantially based on the type, complexity and novelty of the pharmaceutical product |
| As a result, government regulation may cause us to delay the introduction of, or prevent us from marketing, our existing or potential products for a considerable period of time and impose costly procedures upon our activities |
| Even if we obtain regulatory approval for our products, such approval may impose limitations on the indicated uses for which our products may be marketed |
| Unsatisfactory data resulting from clinical trials may also adversely affect our ability to market and sell ZADAXIN in markets where it is approved for sale |
| If we lose key personnel or are unable to attract and retain additional, highly skilled personnel required for the expansion of our activities, our business will suffer |
| We are highly dependent upon our ability to attract and retain qualified personnel because of the specialized, scientific and worldwide nature of our business |
| Following the departure of our Chief Executive Officer on July 14, 2004, we established an Office of the President, and believe that the Company continued to function effectively under the Office of the President |
| Our new President and Chief Executive Officer, Dr |
| Ira Lawrence, began his service to the Company on June 1, 2005 |
| However, we may be affected adversely by any future changes in our key management personnel |
| There is intense competition for qualified management, scientific and technical personnel in the pharmaceutical industry, and we may not be able to attract and retain the qualified personnel we need to grow and develop our business globally |
| In addition, we assign numerous key responsibilities to a limited number of individuals, and we would experience difficulty in finding immediate replacements for any of them |
| If we were unable to attract and retain qualified personnel as needed or promptly replace those employees who are critical to our product development and commercialization, the development and commercialization of our products would be adversely affected |
| At this time, we do not maintain “key person” life insurance on any of our personnel |
| Our revenue is dependent on the sale of ZADAXIN in foreign countries, particularly China, and if we experience difficulties in our foreign sales efforts, our operating results and financial condition will be harmed |
| Our product revenue in the near term is highly dependent on the sale of ZADAXIN in foreign countries |
| If we experience difficulties in our foreign sales efforts, our business will suffer and our operating results and financial condition will be harmed |
| In the year ended December 31, 2005, approximately 91prca of our ZADAXIN sales were to customers in China |
| For the years ended December 31, 2004 and 2003, sales to our customers in China accounted for approximately 91prca and 88prca, respectively, of product sales |
| Sales of ZADAXIN in China may be limited due to the low average personal income, lack of patient cost reimbursement, poorly developed infrastructure and existing and potential competition from other products, including generics |
| In China, ZADAXIN is approved only for the treatment of HBV and as a vaccine adjuvant |
| We face competition from certain large, global pharmaceutical companies who are aggressively marketing competing products for the treatment of HBV and other indications where ZADAXIN is used on an off-label basis |
| In addition, several local companies have introduced lower priced locally manufactured generic thymosin which is a competitive product |
| 21 ______________________________________________________________________ [49]Table of Contents We expect such competition to continue and there could be a negative impact on the price and the volume of ZADAXIN sold in China, which would harm our business |
| Our efforts to in-license other pharmaceutical products for marketing in China and other markets may be unsuccessful or may not have a meaningful effect on our dependence on ZADAXIN sales in those markets |
| Our ZADAXIN sales and operations in other parts of Asia, as well as in Latin America and the Middle East, are subject to a number of risks, including difficulties and delays in obtaining registrations, permits, pricing approvals and reimbursement, unexpected changes in regulatory requirements and political instability |
| We are also subject to the laws and regulations of other countries regarding the marketing, sale and distribution of our products in those countries where approvals have been obtained |
| We experience other issues with managing foreign sales operations including long payment cycles, potential difficulties in accounts receivable collection and, especially from significant customers, fluctuations in the timing and amount of orders |
| Operations in foreign countries also expose us to risks relating to difficulties in enforcing our proprietary rights, currency fluctuations and adverse or deteriorating economic conditions |
| If we experience problems with obtaining registrations, complying with reimbursement rules or compliance with other laws, or if we experience difficulties in payments or intellectual property matters in foreign jurisdictions, or if significant political, economic or regulatory changes occur, our results could be adversely affected |
| We do not have product sales in the United States, Europe or Japan with which to offset any decrease in our revenue from ZADAXIN sales in Asia, Latin America and the Middle East, and sales outside of China have not been substantial to date |
| In addition, some countries in these regions, including China, regulate pharmaceutical prices and pharmaceutical importation |
| These regulations may reduce prices for ZADAXIN to levels significantly below those that would prevail in an unregulated market, limit the volume of product which may be imported and sold or place high import duties on the product, any of which may limit the growth of our revenues or cause them to decline |
| In China, individual provinces and, in some cases, individual hospitals can and have established pricing requirements for a product to be included on formulary lists |
| These prices may be lower than our distributors have been selling ZADAXIN in which case we have been removed from formulary lists, which consequently has reduced sales to certain hospitals |
| Because of China’s tiered method of importing and distributing finished pharmaceutical products, our quarterly results may vary substantially from one period to the next |
| China uses a tiered method to import and distribute finished pharmaceutical products |
| At each port of entry, and prior to moving the product forward to the distributors, government-licensed importing agents must process and evaluate each shipment to determine whether such shipment satisfies China’s quality assurance requirements |
| In order to efficiently manage this process, the importing agents typically place large, and therefore relatively few, orders within any six month period |
| Therefore, our sales to an importing agent can vary substantially from quarter to quarter depending on the size and timing of the orders, which has in the past and may in the future cause our quarterly results to fluctuate |
| We rely on four to six importers, in any given quarter, to supply substantially all of our product in China |
| Because we use a small number of importing agents in China, our receivables from any one importing agent are material, and if we were unable to collect receivables from any importer, our business and cash-flow would be adversely affected |
| Our sales of ZADAXIN may fluctuate due to seasonality of product orders and sales in any quarter may not be indicative of future sales |
| Our sales for the quarter ended June 30, 2003 were greatly affected by the demand in China for ZADAXIN in connection with the treatment of SARS To date, SARS has not re-emerged, like influenza, as a seasonal public health problem |
| However, if SARS or a similar epidemic were to emerge, it is not possible to predict what effect, if any, this would have on future sales of ZADAXIN Although we do not market ZADAXIN for use in treating such epidemic diseases, if ZADAXIN is purchased in connection with future outbreaks of seasonal viral contagions, product sales could become more concentrated in certain quarters of the calendar year, quarterly sales levels could fluctuate and sales in any quarter may not be indicative of sales in future periods |
| 22 ______________________________________________________________________ [50]Table of Contents If we fail to protect our products, technologies and trade secrets, we may not be able to successfully use, manufacture, market or sell our products, or we may fail to advance or maintain our competitive position, and we have limited intellectual property protection in China |
| Our success depends significantly on our ability to obtain and maintain meaningful patent protection for our products and technologies and to preserve our trade secrets |
| Our pending patent applications may not result in the issuance of patents in the future |
| Our patents or patent applications may not have priority over others’ applications |
| Our existing patents and additional patents that may be issued, if any, may not provide a competitive advantage to us or may be invalidated or circumvented by our competitors |
| Others may independently develop similar products or design around patents issued or licensed to us |
| Patents issued to, or patent applications filed by, other companies could harm our ability to use, manufacture, market or sell our products or maintain our competitive position with respect to our products |
| Although many of our patents relating to ZADAXIN have expired, including composition of matter patents, we have rights to other patents and patent applications relating to ZADAXIN and ZADAXIN analogues, including method of use patents with respect to the use of ZADAXIN for certain indications |
| We do not have a patent on the use of ZADAXIN as a therapy for the treatment of melanoma |
| If other parties develop generic forms of ZADAXIN for other indications, including conducting clinical trials for such indications, our patents and other rights might not be sufficient to prohibit them from marketing and selling such generic forms of ZADAXIN If other parties develop analogues or derivatives of ZADAXIN, our patents and other rights might not be sufficient to prohibit them from marketing these analogues or derivatives |
| Pharmaceutical products are either not patentable or have only recently become patentable in some of the countries in which we market or may market ZADAXIN We do not have patent protection for ZADAXIN in China, our largest market |
| Other companies market generic thymosin alpha 1 in China, sometimes in violation of our trademark or other rights which we defend by informing physicians and hospitals of the practice as well as through the limited legal recourse |
| Past enforcement of intellectual property rights in many of these countries, including China in particular, has been limited or non-existent |
| Future enforcement of patents and proprietary rights in many other countries will likely be problematic or unpredictable |
| Moreover, the issuance of a patent in one country does not assure the issuance of a similar patent in another country |
| Claim interpretation and infringement laws vary by nation, so the extent of any patent protection is uncertain and may vary in different jurisdictions |
| If we are involved in intellectual property claims and litigation, the proceedings may divert our resources and subject us to significant liability for damages, substantial litigation expense and the loss of our proprietary rights |
| Our commercial success depends in part on us not infringing valid, enforceable patents or proprietary rights of third parties, and not breaching any licenses that may relate to our technologies and products |
| We are aware of a third-party patent that may relate to our products and may cover a method of action used by ZADAXIN We cannot assure you that our mechanism of action does not infringe on their claim |
| In addition, we may not be aware of all patents or patent applications that may impact our ability to make, use or sell any of our potential products |
| For example, US patent applications may be kept confidential for 12 or more months while pending in the Patent and Trademark Office, and patent applications filed in foreign countries are often first published six months or more after filing |
| It is possible that we may unintentionally infringe these patents or other patents or proprietary rights of third parties |
| We may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third-party patents |
| Any legal action against us or our collaborative partners claiming damages and seeking to enjoin commercial activities relating to our products and processes affected by third-party rights may require us or our collaborative partners to obtain licenses in order to continue to manufacture or market the affected products and processes |
| Our efforts to defend against any of these claims, regardless of merit, would require us to devote resources and attention that could have been directed to our operations and growth plans |
| In addition, these actions may subject us to potential liability for damages |
| We or our collaborative partners may not prevail in a patent action and any license required under a patent may not be 23 ______________________________________________________________________ [51]Table of Contents made available on commercially acceptable terms, or at all |
| Any conflicts resulting from the patent rights of others could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection |
| If other companies obtain patents with conflicting claims, we may be required to obtain licenses to those patents or develop or obtain alternative technology to manufacture or market the affected products and processes |
| We may not be able to obtain any such licenses on acceptable terms or at all |
| Any failure to obtain such licenses could delay or prevent us from pursuing the development or commercialization of our potential products |
| Our efforts to defend against any of these claims would require us to devote resources and attention that could have been directed to our operations and growth plans |
| We may need to initiate litigation, which could be time-consuming and expensive, to enforce our proprietary rights or to determine the scope and validity of others’ rights |
| If litigation results, a court may find our patents or those of our licensors invalid or may find that we have infringed on a competitor’s rights |
| If any of our competitors have filed patent applications in the United States which claim technology we also have invented, the Patent and Trademark Office may require us to participate in expensive interference proceedings to determine who has the right to a patent for the technology |
| These actions may subject us to potential liability for damages |
| We or our collaborative partners may not prevail in a patent action and any license required under a patent may not be made available on commercially acceptable terms, or at all |
| We rely on third parties to supply our clinical trial and commercial products |
| Deficiencies in their work could delay or harm one or more important areas of our business including our sales, clinical trials or the regulatory approval process |
| We rely on third parties, who are subject to regulatory oversight, to supply our clinical and commercial products |
| We have been in the process of registering a new manufacturer of ZADAXIN and if we encounter problems with this process of validation, our sales or our clinical trials could be adversely affected |
| If sales of ZADAXIN were to increase dramatically, our third-party suppliers may not be able to supply ZADAXIN quickly enough, which could limit our ability to satisfy increased demand or could adversely affect the ability of these suppliers to provide products for our clinical trials |
| If unanticipated deficiencies in these suppliers occur, we could experience delays in our ability to fulfill regulatory requirements which may adversely affect our sales or prospects for regulatory marketing approvals |
| We have an exclusive supplier of pegylated interferon alpha for our US phase 3 HCV and European phase 3 HCV clinical trials |
| Any recall of the manufacturing lots of the pegylated interferon alpha used in our clinical trials could detract from the integrity of the trial data and its potential use in future regulatory filings |
| If we are not able to establish and maintain adequate manufacturing relationships, the development and sale of our products could be impaired |
| To be successful, our products must be manufactured in commercial quantities, in compliance with stringent regulatory requirements and at an acceptable cost |
| Typically we have at any time only one supplier for each phase of manufacturing of our product |
| Manufacturing interruptions or failure to comply with regulatory requirements could significantly delay clinical development of potential products and reduce third-party or clinical researcher interest and support of proposed trials |
| These interruptions or failures could also impede commercialization of our products, including sales of ZADAXIN in approved markets, and impair our competitive position |
| Any of these developments would harm our business |
| We are in the process of registering a new supplier for ZADAXIN with regulatory agencies in markets where ZADAXIN is approved for sale |
| We have received such registration in China |
| This process, quality assurance and other steps could cause delays or interruptions of supply in certain other markets |
| In some countries, a manufacturing change may require additional regulatory approvals which may delay ZADAXIN marketing approvals in new markets |
| In addition, manufacturing, supply and quality control problems may arise 24 ______________________________________________________________________ [52]Table of Contents as we, either alone or with subcontractors, attempt to scale-up our manufacturing procedures |
| We may not be able to scale-up in a timely manner or at a commercially reasonable cost, either of which could cause delays or pose a threat to the ultimate commercialization of our products and harm our business |
| We may not be able to successfully develop or commercialize our products |
| We may consider strategic alliances with other companies in efforts to broaden our product development pipeline |
| While we have limited sales of ZADAXIN in certain markets, we do not yet have regulatory approval for ZADAXIN for the key markets of the United States, Europe and Japan and, in this respect, ZADAXIN is still being developed |
| Our only other potential product presently is SCV-07 and it is in an earlier stage of development than ZADAXIN We may consider and undertake various strategies to expand our portfolio of potential products, including acquiring product candidate rights through licenses or other relationships, or through other strategic relationships including acquisitions of other companies that may have proprietary rights to other development candidates or the capability to discover new drug candidates |
| Such transactions could require a substantial amount of our financial resources, or, if equity is involved, may result in substantial dilution to current stockholders |
| Strategic transactions also require substantial management time and effort and are subject to various risks that could adversely affect us or our financial results |
| To fully develop our products, we will need to commit substantial resources to extensive research, development, pre-clinical testing, clinical trials, manufacturing scale-up and regulatory approval prior to the potential products being ready for sale |
| We cannot assure that our efforts will produce commercially viable products |
| We face significant technological risks inherent in developing these products |
| We may also abandon some or all of our proposed products before they become commercially viable |
| If any of our products, even if developed and approved, cannot be successfully commercialized in a timely manner, our business will be harmed and the price of our stock may decline |
| We have not yet sold any product other than ZADAXIN and our sales have been primarily in a single country, China |
| Our future revenue growth depends to great extent on increased market acceptance and commercialization of ZADAXIN in additional countries, particularly in the United States, Europe and Japan |
| If we fail to successfully market ZADAXIN, or if we cannot commercialize this drug in the United States and other additional markets, our revenue and operating results will be limited |
| Our future revenue will also depend in part on our ability to develop other commercially viable and accepted products |
| Market acceptance of our products will depend on many factors, including our ability to convince prospective customers to use our products as an alternative to other treatments and therapies and to convince prospective strategic partners to market our products effectively and to manufacture our products in sufficient quantities with acceptable quality and at an acceptable cost |
| In addition, doctors must opt to use treatments involving our products |
| If doctors elect to use a different course of treatment, demand for our drug products would be reduced |
| Failure to do any of the above will lead to an unfavorable outcome on the results of our operations |
| We rely on third-party clinical investigators to conduct our clinical trials and, as a result, we may encounter delays outside our control |
| We have limited experience in conducting and managing clinical trials and we rely, in part, on third parties, particularly clinical research organizations and our development partners, to assist us in managing and monitoring clinical trials |
| Our reliance on these third parties may result in delays in completing, or failure to complete, these clinical trials if third parties fail to fulfill their obligations to us |
| We may need to obtain additional capital to support our long-term product development and commercialization programs |
| We believe our existing resources will be sufficient to fund our operations, including anticipated clinical trials, into late 2008 |
| However, we cannot assure that such funds will be sufficient, or that we will attain 25 ______________________________________________________________________ [53]Table of Contents profitable operations in that period if ever |
| In addition to development plans for ZADAXIN, we intend to develop other products and we may need additional funds in the future to support such development and to support future growth and achieve profitability |
| If we need to raise additional funds in the future and such funds are not available on reasonable terms, if at all, our commercialization efforts may be impeded, our revenues may be limited and our operating results may suffer |
| We have a history of operating losses and an accumulated deficit |
| We expect to continue to incur losses in the near term and may never achieve profitability |
| We have experienced significant operating losses since our inception, and as of December 31, 2005, we had an accumulated deficit of approximately dlra159 million |
| We expect our operating expenses to increase over the next several years as we plan to dedicate substantially all of our resources to expanding our development, testing and marketing capabilities, and these losses may increase if we cannot increase or sustain revenue |
| As a result, we may never achieve profitability |
| We have limited sales, marketing and distribution capabilities outside of China, which may adversely affect our ability to successfully commercialize our products |
| Outside of our current principal market of China, we have limited sales, marketing and distribution capabilities, and we anticipate that we may be relying on third-party collaborators to sell, market and distribute our products for the foreseeable future particularly in the major pharmaceutical markets of the United States, Europe and Japan should we receive regulatory approval to market our products in those territories |
| If our arrangements with these third parties are not successful, or if we are unable to enter into additional third-party arrangements, we may need to substantially expand our sales, marketing and distribution force |
| Our efforts to expand may not succeed, or we may lack sufficient resources to expand in a timely manner, either of which will harm our future operating results |
| Moreover, if we are able to further expand our sales, marketing and distribution capabilities, we will begin competing with other companies that have experienced and well-funded operations |
| If we cannot successfully compete with these larger companies, our revenues may not grow and our business may suffer |
| Commercialization of some of our products depends on collaborations with others |
| If our collaborators are not successful, or if we are unable to find future collaborators, we may not be able to properly develop and commercialize our products |
| We depend in part on our distributors and business partners to develop or promote our drugs, and if they are not successful in their efforts or fail to do so, our business will suffer |
| For example, Sigma-Tau is responsible for the development and marketing of ZADAXIN in most of Europe |
| We generally do not have control over the amount and timing of resources that our business partners devote to ZADAXIN, and they have not always performed as or when expected |
| If they do not perform their obligations as we expect, particularly obligations regarding clinical trials, our development expenses would increase and the development or sale of our products could be limited or delayed, which could hurt our business and cause our stock price to decline |
| In addition, our relationships with these companies may not be successful |
| Disputes may arise with our collaborators, including disputes over ownership rights to intellectual property, know-how or technologies developed with our collaborators |
| We may not be able to negotiate similar additional arrangements in the future to develop and commercialize ZADAXIN or other products |
| We may lose market share or otherwise fail to compete effectively in the intensely competitive biopharmaceutical industry |
| Competition in the biopharmaceutical industry is intense, and we expect that competition will increase |
| Our success depends on our ability to compete in this industry, but we cannot assure you that we will be able to successfully compete with our competitors |
| Increased competitive pressure could lead to intensified price-based competition resulting in lower prices and margins, which would hurt our operating results |
| 26 ______________________________________________________________________ [54]Table of Contents We are focused on developing ZADAXIN as a treatment for HCV and HBV and certain cancers |
| Several large biopharmaceutical companies have substantial commitments to interferon alpha, an approved drug for treating HBV and HCV, and to lamivudine and adefovir, approved drugs to treat HBV We cannot assure you that we will compete successfully against our competitors or that our competitors, or potential competitors, will not develop drugs or other treatments for HCV, HBV, cancer and other diseases that will be superior to ours |
| If third-party reimbursement is not available or patients cannot otherwise pay for ZADAXIN, we may not be able to successfully market ZADAXIN Significant uncertainty exists as to the reimbursement status of new therapeutic products, such as ZADAXIN We cannot assure you that third-party insurance coverage and reimbursement will be available for therapeutic products we might develop |
| We cannot assure you that we will be able to maintain or increase third-party payments for ZADAXIN in China |
| The failure to obtain or maintain third-party reimbursement for our products would harm our business |
| Further, we cannot assure you that additional limitations will not be imposed in the future in the United States or elsewhere on drug coverage and reimbursement due to proposed health care reforms |
| In many emerging markets where we have marketing rights to ZADAXIN, but where government resources and per capita income may be so low that our products will be prohibitively expensive, we may not be able to market our products on economically favorable terms, if at all |
| Efforts by governmental and third-party payers to contain or reduce health care costs or the announcement of legislative proposals or reforms to implement government controls could cause us to reduce the prices at which we market our drugs, which would reduce our gross margins and may harm our business |
| Settlements regarding our claims relating to the Japanese clinical trials may not be favorable |
| Based on recent information received from Schering Plough KK (SPKK) and in conjunction with our own investigative efforts, we have determined that we cannot submit a Japanese new drug application (JNDA), or apply for a pre-JNDA preliminary review, for ZADAXIN as a therapy for HBV to the Ministry of Health in Japan |
| This conclusion is based on SPKK’s failure to conduct certain audits and generate certain reports during the pre-2001 studies that it managed and our conclusion that such documentation cannot be created at this time |
| This conclusion is not based on the substantive results of the Japan trials, which showed ZADAXIN to have competitive efficacy and safety in the treatment of HBV We and SPKK continue to investigate and discuss the issues involved, and how this matter should be fairly resolved |
| We and SPKK are in the process of mediation which we expect to conclude by the end of our first fiscal quarter of 2006 |
| We cannot provide any assurance as to the outcome of the mediation |
| If mediation concludes without satisfactory results, we intend to pursue arbitration |
| Arbitration can be expensive and protracted and there can be no assurance that this dispute will be concluded in the near future or resolved favorably to us |
| SciClone is now determining the appropriate development strategy for ZADAXIN in Japan, however, it is unlikely that SciClone will be able to submit a JNDA for ZADAXIN in Japan for some years, if at all |
| If this process is restarted, it could be lengthy and could incur significant management time and expense |
| We may be subject to product liability lawsuits, and our insurance may be inadequate to cover damages |
| Clinical trials or marketing of any of our current and potential products may expose us to liability claims from the use of these products |
| We currently carry product liability insurance |
| However, we cannot be certain that we will be able to maintain insurance on acceptable terms, if at all, for clinical and commercial activities or that the insurance would be sufficient to cover any potential product liability claim or recall |
| If we fail to have sufficient coverage, our business, results of operations and cash flows could be adversely affected |
| We depend on international sales, and global conditions could negatively affect our operating results |
| Heightened tensions resulting from the current geopolitical conditions in the Middle East, North Korea and elsewhere could worsen, causing disruptions in foreign trade, 27 ______________________________________________________________________ [55]Table of Contents which would harm our sales |
| In particular, our commercial product is manufactured in Europe and distributed by us from our operations in Hong Kong |
| Any disruption of our supply and distribution activities due to geopolitical conditions could decrease our sales and harm our operating results |
| If we are unable to comply with environmental and other laws and regulations, our business may be harmed |
| We are subject to various federal, state and local laws, regulations and recommendations relating to the use, manufacture, storage, handling and disposal of hazardous materials and waste products (including radioactive compounds and infectious disease agents), as well as safe working conditions, laboratory and manufacturing practices and the experimental use of animals |
| The extent of government regulation that might result from future legislation or administrative action in these areas cannot be accurately predicted |
| We do not currently maintain hazardous materials at our facilities |
| While we outsource our research and development programs involving the controlled use of biohazardous materials, if in the future we conduct these programs ourselves, we might be required to incur significant cost to comply with environmental laws and regulations |
| Further, in the event of an accident, we would be liable for any damages that result, and the liability could exceed our resources |
| Our stock price may be volatile, and an investment in our stock could suffer a decline in value |
| The market price of our common stock has experienced, and may continue to experience, substantial volatility due to many factors, some of which we have no control over, including: • progress and results of clinical trials involving ZADAXIN; • progress of ZADAXIN through the regulatory process, especially regulatory actions and the adequacy of clinical data and documentation for regulatory purposes in the United States, Europe and Japan; • timing and achievement of milestones; • announcements of technological innovations or new products by us or our competitors; • announcement and completion of corporate acquisition, merger, licensing or marketing arrangements, or sales of assets; • government regulatory action affecting our drug products or our competitors’ drug products in both the United States and foreign countries; • developments or disputes concerning patent or proprietary rights; • changes in the composition of our management team or board of directors; • changes in company assessments or financial estimates by securities analysts; • actual or anticipated fluctuations in our quarterly operating results; • changes in assessments of our internal controls over financial reporting; • general stock market conditions and fluctuations for the emerging growth and biopharmaceutical market sectors; • economic conditions in the United States or abroad; and • broad financial market fluctuations in the United States, Europe or Asia |
| In the past, following periods of large price declines in the public market price of a company’s securities, securities class action litigation has often been initiated against that company |
| Litigation of this type could result in substantial costs and diversion of our attention and resources, which would hurt our business |
| Any adverse determination in litigation could also subject us to significant liabilities |
| 28 ______________________________________________________________________ [56]Table of Contents Substantial sales of our stock or the exercise or conversion of options or convertible securities may impact the market price of our common stock |
| Our collaborative partner Sigma Tau and affiliates hold a substantial amount of our stock |
| The stock is freely tradeable and Sigma Tau is not under any obligation to SciClone which would prevent it from selling some or all of the stock it holds |
| Future sales of substantial amounts of our common stock could adversely affect the market price of our common stock |
| Similarly, if we raise additional funds through the issuance of common stock or securities convertible into or exercisable for common stock, the percentage ownership of our present stockholders will be reduced and the price of our common stock may fall |
| Sales of our common stock by officers and directors could affect our stock price |
| Our board of directors has approved an amendment to our trading policy that permits officers and directors to enter into trading plans that comply with the requirements of Rule 10b5-1 of the Securities Exchange Act of 1934, as amended |
| Rule 10b5-1 allows corporate officers and directors to adopt written, pre-arranged stock trading plans when they do not have material, non-public information |
| Using these plans, officers and directors can gradually diversify their investment portfolios, can spread stock trades out over an extended period of time to reduce any market impact and can avoid concerns about initiating stock transactions at a time when they might be in possession of material, non-public information |
| As of February 13, 2006, one director has adopted such a plan, and other directors or officers may do so in the future |
| We expect future sales by officers and directors either under 10b5-1 plans or otherwise as a result of their personal financial planning |
| We do not believe the volume of such sales would affect our trading price; however, the market could react negatively to sales by our officers and directors, which could affect the trading price of our stock |
| Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition of us, which may be beneficial to our stockholders, more difficult |
| Certain anti-takeover provisions of Delaware law and our charter documents as currently in effect may make a change in control of our company more difficult, even if a change in control would be beneficial to our stockholders |
| Our charter documents contain certain anti-takeover provisions, including provisions in our certificate of incorporation providing that stockholders may not cumulate votes, stockholders’ meetings may be called by stockholders only if they hold 25prca or more of our common stock and provisions in our bylaws providing that the stockholders may not take action by written consent |
| Additionally, our board of directors has the authority to issue 10 million shares of preferred stock and to determine the terms of those shares of stock without any further action by the stockholders |
| The rights of holders of our common stock are subject to the rights of the holders of any preferred stock that may be issued |
| The issuance of preferred stock could make it more difficult for a third-party to acquire a majority of our outstanding voting stock |
| Delaware law also prohibits corporations from engaging in a business combination with any holders of 15prca or more of their capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction |
| Our board of directors may use these provisions to prevent changes in the management and control of our company |
| Also, under applicable Delaware law, our board of directors may adopt additional anti-takeover measures in the future |
| If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results |
| As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock |
| Effective internal controls are necessary for us to provide reliable financial reports |
| If we cannot provide reliable financial reports, our business and operating results could be harmed |
| We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement |
| For example, in the quarter 29 ______________________________________________________________________ [57]Table of Contents ended June 30, 2005, we identified a material weakness in our internal controls over financial reporting as defined in Public Company Accounting Oversight Board (PCAOB) Standard Nodtta 2 |
| This material weakness related to our failure, due to our lack of familiarity with certain technical stock option accounting matters, to evaluate the correct accounting effect of a stock price performance based option granted to our Chief Executive Officer on June 1, 2005, the date he commenced his employment |
| Due to the terms of this option, Accounting Principles Board Opinion Nodtta 25 (APB 25) requires the application of variable accounting and specifically requires the recognition of non-cash expense in the period that portions of the option vest or are deemed probable of vesting at the end of the reporting period |
| The vesting of this option is directly determined by the price level of trading activity in our stock, and the conditions required to recognize a related non-cash expense did not occur in the interim period ended June 30, 2005 |
| However, had the conditions required the recognition of a non-cash expense related to this option under APB 25, our accounting procedures at June 30, 2005 would not have correctly applied APB 25 |
| Because of the material weakness described above, management concluded that the Company did not maintain effective internal control over financial reporting as of June 30, 2005 |
| The Company’s management identified the steps necessary to address the material weakness described above, and executed remediation plans, as discussed in “Item 4 |
| Controls and Procedures” of our September 30, 2005 quarterly report on Form 10-Q incorporated by reference |
| Any failure to implement and maintain the improvements in the controls over our financial reporting, or difficulties encountered in the implementation of these improvements in our controls, could cause us to fail to meet our reporting obligations |
| Any failure to improve our internal controls to address these identified weaknesses could also cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock |
| New accounting pronouncements may impact our financial position or results of operations |
| Future changes in financial accounting standards may cause adverse, unexpected fluctuations in the timing of the recognition of revenues or expenses and may affect our financial position or results of operations |
| New pronouncements and varying interpretations of pronouncements have occurred with frequency and may occur in the future and this may lead to changes in our accounting policies in the future |
| One such new pronouncement issued in December 2004 by the Financial Accounting Standards Board (FASB) is FASB Statement Nodtta 123 (revised 2004), “Share-Based Payment” (SFAS 123R) |
| SFAS 123R requires share-based payments to employees and directors, including grants of stock options, to be recognized in the statement of operations based on their fair values |
| The Company currently accounts for share-based payments to employees and directors using Accounting Principles Board Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee and director stock options and employee stock purchase plans |
| Accordingly, the adoption of SFAS 123R’s fair value method will have a significant impact on our results of operations, although it will have no impact on our cash or overall financial position |
| New legislation may impact our financial position or results of operations |
| Compliance with changing regulations concerning corporate governance and public disclosure has resulted in and may continue to result in additional expenses |
| Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Market rules, are creating uncertainty for companies such as ours and costs are increasing as a result of this uncertainty and other factors |
| We are committed to maintaining high standards of corporate governance and public disclosure |
| As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment has and may continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities |
| We may be subject to currency exchange rate fluctuations, which could adversely affect our financial performance |
| Substantially all of our product sales are denominated in US dollars |
| Fluctuation in the US dollar exchange rate with local currency directly affects the customer’s cost for our product |
| In particular, a stronger 30 ______________________________________________________________________ [58]Table of Contents US dollar vis-à-vis the local currency would tend to have an adverse effect on sales and potentially on collection of accounts receivable |
| Through the periods ended December 31, 2005, this exposure to currency exchange rate fluctuations had been minimal because the Chinese currency had been pegged to the US dollar |
| However, the Chinese currency is no longer pegged to the US dollar and consequently, our foreign operations may expose us to greater risk of decreased sales due to currency exchange rate fluctuations in the future |
| In addition, we are subject to currency exchange rate fluctuations as a result of expenses incurred by our foreign operations |
| In particular, one of our supply arrangements under which we purchase finished products is denominated in euros and costs of our marketing efforts in China are paid in local currency |
| Consequently, changes in exchange rates could unpredictably and adversely affect our operating results and could result in exchange losses |
| To date, we have not hedged against the risks associated with fluctuations in exchange rates and, therefore, exchange rate fluctuations could have a material adverse impact on our future operating results and stock price |