SciClone Pharmaceuticals, Inc.
SCICLONE PHARMACEUTICALS INC (Form: 10-Q, Received: 11/09/2012 16:54:59)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2012

OR

 

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

For the transition period from              to             

Commission file number: 0-19825

 

 

SCICLONE PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   94-3116852

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

Identification no.)

950 Tower Lane, Suite 900, Foster City, California   94404
(Address of principal executive offices)   (Zip code)

(650) 358-3456

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of November 5, 2012, 55,246,520 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.

 

 

 


Table of Contents

SCICLONE PHARMACEUTICALS, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2012

INDEX

 

          PAGE NO.  

PART I.

   FINANCIAL INFORMATION   

Item 1.

  

Financial Statements (Unaudited)

  
  

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

     3   
  

Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2012 and 2011

     4   
  

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three- and nine-month periods ended September 30, 2012 and 2011

     5   
  

Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September  30, 2012 and 2011

     6   
  

Notes to Unaudited Condensed Consolidated Financial Statements

     7   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     15   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     26   

Item 4.

  

Controls and Procedures

     26   

PART II.

   OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     27   

Item 1A.

  

Risk Factors

     27   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     43   

Item 3.

  

Defaults Upon Senior Securities

     43   

Item 4.

  

Mine Safety Disclosures

     43   

Item 5.

  

Other Information

     43   

Item 6.

  

Exhibits

     44   

Signature

        45   

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

     September 30,
2012
    December 31,
2011
 
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 86,543      $ 66,654   

Accounts receivable, net of allowance of $124 and $212 at September 30, 2012 and December 31, 2011, respectively

     36,974        42,226   

Inventories

     6,199        8,813   

Restricted cash and investments

     2,674        —     

Prepaid expenses and other current assets

     1,166        1,646   

Deferred tax assets

     94        1,732   
  

 

 

   

 

 

 

Total current assets

     133,650        121,071   

Property and equipment, net

     1,481        984   

Restricted investments

     —          364   

Intangible assets, net

     —          45,185   

Goodwill

     32,135        31,973   

Other assets

     605        749   
  

 

 

   

 

 

 

Total assets

   $ 167,871      $ 200,326   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable

   $ 1,889      $ 5,592   

Accrued and other current liabilities

     20,521        17,192   

Short-term borrowing on line of credit

     —          2,500   

Contingent consideration

     562        —     
  

 

 

   

 

 

 

Total current liabilities

     22,972        25,284   

Contingent consideration

     —          15,400   

Deferred tax liabilities

     —          8,715   

Other long-term liabilities

     269        469   

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock; $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding

     —          —     

Common stock; $0.001 par value; 100,000,000 shares authorized; 55,663,484 and 57,847,367 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively

     56        58   

Additional paid-in capital

     273,441        266,913   

Accumulated other comprehensive income

     2,693        2,341   

Accumulated deficit

     (131,560     (118,854
  

 

 

   

 

 

 

Total stockholders’ equity

     144,630        150,458   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 167,871      $ 200,326   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2012     2011     2012     2011  

Net revenues:

        

Product sales

   $ 32,130      $ 30,433      $ 95,596      $ 79,484   

Promotion services

     8,556        6,992        24,546        12,711   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

     40,686        37,425        120,142        92,195   

Operating expenses:

        

Cost of product sales

     5,475        5,024        15,631        13,301   

Sales and marketing

     17,042        15,222        52,371        33,311   

Amortization of acquired intangible assets, related to sales and marketing

     879        858        2,645        1,572   

Research and development

     864        3,035        5,750        9,235   

General and administrative

     5,673        5,202        14,089        19,419   

Intangible asset impairment (Note 5)

     42,728        —          42,728        —     

Contingent consideration (Note 3)

     (12,773     (2,231     (14,860     (1,423
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     59,888        27,110        118,354        75,415   

Income (loss) from operations

     (19,202     10,315        1,788        16,780   

Non-operating income (expense):

        

Interest and investment income

     28        15        73        48   

Interest and investment expense

     (57     (49     (167     (159

Other (expense) income, net

     (7     (5     (22     6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income tax

     (19,238     10,276        1,672        16,675   

(Benefit) provision for income tax

     (5,696     46        (4,085     613   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (13,542   $ 10,230      $ 5,757      $ 16,062   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share

   $ (0.24   $ 0.18      $ 0.10      $ 0.30   

Diluted net income (loss) per share

   $ (0.24   $ 0.17      $ 0.10      $ 0.28   

See accompanying notes to unaudited condensed consolidated financial statements.

 

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SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2012     2011     2012      2011  

Net income (loss)

   $ (13,542   $ 10,230      $ 5,747       $ 16,062   

Other comprehensive income:

         

Net change in unrealized gain (loss) and foreign currency translation on foreign currency denominated available-for-sale securities

     9        (41     9         (6

Foreign currency translation

     698        667        344         1,449   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total other comprehensive income

     707        626        353         1,443   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income (loss)

   $ (12,835   $ 10,856      $ 6,110       $ 17,505   
  

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Nine Months  Ended
September 30,
 
     2012     2011  

Operating activities:

    

Net income

   $ 5,757      $ 16,062   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Non-cash expense related to stock-based compensation

     3,199        2,130   

Depreciation and amortization

     3,246        1,911   

Intangible asset impairment

     42,728        —     

Change in fair value of contingent consideration

     (14,860     (1,423

Deferred taxes, net

     (7,052     (871

Other long-term liabilities

     (199     (456

Changes in operating assets and liabilities:

    

Accounts receivable, net

     5,252        (12,264

Inventories

     2,690        (2,017

Prepaid expenses and other assets

     565        604   

Accounts payable

     (3,703     (2,279

Accrued and other current liabilities

     3,329        2,713   
  

 

 

   

 

 

 

Net cash provided by operating activities

     40,952        4,110   

Investing activities:

    

Acquisition of NovaMed, net of cash acquired

     —          (21,257

Purchases of available-for-sale investments

     —          (1,580

Proceeds from the sale or maturities of available-for-sale investments

     —          3,725   

Purchases of property and equipment

     (1,036     (558
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,036     (19,670

Financing activities:

    

Repurchase of common stock

     (18,465     —     

Repayment of line of credit

     (2,500     —     

Increase in restricted cash related to line of credit

     (2,300     —     

Proceeds from issuances of common stock

     3,250        6,019   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (20,015     6,019   

Effect of exchange rate changes on cash and cash equivalents

     (12     145   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     19,889        (9,396

Cash and cash equivalents, beginning of period

     66,654        53,017   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 86,543      $ 43,621   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Income taxes paid related to foreign operations

   $ 1,178      $ 767   
  

 

 

   

 

 

 

Interest and unused line fees paid related to line of credit

   $ 125      $ 126   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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SCICLONE PHARMACEUTICALS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of SciClone Pharmaceuticals, Inc. (“SciClone” or the “Company”) have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) consistent with those applied in, and should be read in conjunction with, the audited financial statements for the year ended December 31, 2011 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission. The Company prepared the unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes or other information that are normally required by GAAP can be condensed or omitted.

On April 18, 2011, SciClone acquired NovaMed Pharmaceuticals, Inc. (“NovaMed”). Commencing April 18, 2011, the Company’s financial statements include the assets, liabilities, operating results and cash flows of NovaMed.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The interim financial information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented and are not necessarily indicative of results for subsequent interim periods or for the full year. The condensed consolidated balance sheet data at December 31, 2011 is derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates.

Customer Concentration

The People’s Republic of China (“China”) uses a tiered method to import and distribute products. The distributors make the sales in the country, but the product is imported for them by licensed importers. Product sales revenues result from the sale of the Company’s proprietary or in-licensed products to importing agents and distributors. Promotion services revenues result from fees received for exclusively promoting products for certain partners. These importing agents, distributors and partners are the Company’s customers.

For the three months ended September 30, 2012 and 2011, revenues to three and two customers in China accounted for 86% of the Company’s revenues. For the nine months ended September 30, 2012 and 2011, revenues from three customers in China accounted for 88% and 92%, respectively, of the Company’s revenues. No other customer accounted for more than 10% during the three or nine months ended September 30, 2012 or 2011. The Company’s two largest customers were the same for both periods. A third party holds a majority interest in the Company’s largest customer. As of September 30, 2012, approximately $35.6 million, or 96%, of the Company’s accounts receivable were attributable to five customers in China. The Company generally does not require collateral from its customers.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered or delivery has occurred, the price to the buyer is fixed or determinable and collectability is reasonably assured.

Product Revenue . The Company earns product revenue from selling manufactured ZADAXIN product at the time of delivery. Sales of ZADAXIN to importing agents or distributors are recognized at time of shipment when title to the product is transferred to them. The Company also earns product revenue from purchasing medical products from pharmaceutical companies and selling them directly to importers or distributors. Sales are recognized when the medical products have been delivered to the importers or distributors. Payments by the importing agents and distributors are not contingent upon sale to the end user by the importing agents or distributors. The Company considers the levels of channel inventory as well as the risk of concessions in concluding whether fees due pursuant to an arrangement to sell products to an importer or distributor are fixed or determinable and collectible. Revenue is recognized only if the Company can reasonably estimate the effects of rights of return or other rights given to a distributor or conclude that it will not grant a future concession to the distributor.

Net Income (Loss) Per Share

Basic net income (loss) per share has been computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common equivalent shares outstanding for the period. Diluted net income (loss) per share includes any dilutive impact from outstanding stock options, restricted stock units (“RSUs”) and the employee stock purchase plan using the treasury stock method.

 

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The following is a reconciliation of the numerator and denominators of the basic and diluted net income (loss) per share computations (in thousands, except per share amounts):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012     2011      2012      2011  

Numerator:

          

Net income (loss)

   $ (13,542   $ 10,230       $ 5,757       $ 16,062   

Denominator:

          

Weighted-average shares outstanding used to compute basic net income (loss) per share

     56,617        58,331         57,184         54,044   

Effect of dilutive securities

     —          2,106         1,977         2,382   
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted-average shares outstanding used to compute diluted net income (loss) per share

     56,617        60,437         59,161         56,426   
  

 

 

   

 

 

    

 

 

    

 

 

 

Basic net income (loss) per share

   $ (0.24   $ 0.18       $ 0.10       $ 0.30   

Diluted net income (loss) per share

   $ (0.24   $ 0.17       $ 0.10       $ 0.28   

For the three months ended September 30, 2012 and 2011, outstanding stock options and RSUs for 5,298,836 and 2,744,796 shares, respectively, were excluded from the calculation of diluted net income (loss) per share because the effect from the assumed exercise of these options and RSUs calculated under the treasury stock method would have been anti-dilutive. In addition, for the three months ended September 30, 2012 and 2011, shares subject to market or performance conditions of 112,500 and 280,000, respectively, were excluded from the calculation of diluted net income (loss) per share because the performance or market criteria had not been met. For the nine months ended September 30, 2012 and 2011, outstanding stock options and RSUs for 3,272,577 and 2,796,688 shares, respectively, were excluded from the calculation of diluted net income (loss) per share because the effect from the assumed exercise of these options and RSUs calculated under the treasury stock method would have been anti-dilutive. In addition, for the nine months ended September 30, 2012 and 2011, shares subject to market or performance conditions of 126,113 and 190,073, respectively, were excluded from the calculation of diluted net income (loss) per share because the performance or market criteria had not been met.

 

2. Available-for-Sale Investments

The following is a summary of available-for-sale investments as of (in thousands):

 

     September 30, 2012  
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses  for
More Than
12 Months
    Estimated
Fair  Value
 

Money market funds

   $ 53,506       $ —         $ —        $ 53,506   

Restricted Italian state bonds maturing in 2013

     451         —           (77     374   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale investments

   $ 53,957       $ —         $ (77   $ 53,880   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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     December 31, 2011  
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses for
More Than
12 Months
    Estimated
Fair
Value
 

Money market funds

   $ 31,849       $ —         $ —        $ 31,849   

Restricted Italian state bonds maturing in 2013

     450         —           (86     364   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale investments

   $ 32,299       $ —         $ (86   $ 32,213   
  

 

 

    

 

 

    

 

 

   

 

 

 

The cost of securities sold is based on the specific identification method.

The Company’s restricted Italian state bonds secure its Italian value added tax filing arrangements. The unrealized losses on the bonds mainly relate to loss on foreign currency translation. The Company has concluded that it has the ability and is more likely than not that it will hold its restricted Italian state bond investments until maturity or recovery of its cost basis.

The Company’s money market funds include $2.3 million of cash in a restricted account to secure a letter of credit associated with its loan agreement with Shanghai Pudong Development Bank Co. Ltd. Refer also to Note 6 for further information regarding the Company’s loan agreement.

 

3. Fair Value Measurements

Fair value is defined 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 must maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. 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 following table represents the Company’s fair value hierarchy for its financial assets (cash, cash equivalents, and investments) and liability measured at fair value on a recurring basis (in thousands):

 

     Fair Value Measurements at September 30, 2012 Using  

Description

   Quoted Prices in
Active Markets

for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance
as of
September 30, 2012
 

Assets:

           

Money market funds

   $ 53,506       $ —         $ —         $ 53,506   

Restricted Italian state bonds

     374         —           —           374   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 53,880       $ —         $ —         $ 53,880   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liability:

           

Contingent consideration

   $ —         $ —         $ 562       $ 562   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 562       $ 562   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Fair Value Measurements at December 31, 2011 Using  

Description

   Quoted Prices in
Active Markets

for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance
as of
December 31, 2011
 

Assets:

           

Money market funds

   $ 31,849       $ —         $ —         $ 31,849   

Restricted Italian state bonds

     364         —           —           364   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,213       $ —         $ —         $ 32,213   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liability:

           

Contingent consideration

   $ —         $ —         $ 15,400       $ 15,400   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 15,400       $ 15,400   
  

 

 

    

 

 

    

 

 

    

 

 

 

Contingent Consideration

As part of the acquisition of NovaMed, the Company may be required to pay up to an additional $43.0 million in earn-out payments upon the successful achievement of revenue and earnings targets for the 2011 and 2012 fiscal years (the “earn-out” or “contingent consideration”). Under the Agreement, the earn-out is based upon certain financial performance metrics, including a revenue-based formula and an adjusted EBITDA (earnings before interest, depreciation and taxes) based formula. The earn-out provisions provide that: (i) if cumulative revenue in China for legacy NovaMed products for the two fiscal years ending December 31, 2012 exceed $94.2 million, a cash payment ranging from $9.2 million to $11.5 million will be paid, with the full amount payable if such revenue is $117.8 million or more; and (ii) if adjusted EBITDA for the two year period ending December 31, 2012 exceeds $91.8 million, a cash payment from $17.2 million to $21.5 million will be paid with the full amount payable if such adjusted EBITDA is $137.8 million or more. Adjusted EBITDA is defined in the Agreement to exclude certain expenses which are not generally related to operating results in China, including SciClone’s US research and development expense, certain share-based compensation, license fees paid by SciClone for new products, certain legal and advisory fees related to the Agreement or to change-in-control transactions, and certain fees and expenses, including legal fees and governmental fines or settlements paid with respect to the pending formal, non-public investigation being conducted by the US Securities and Exchange Commission (“SEC”).

The earn-out provisions are subject to a number of adjustments and acceleration provisions. The total earn-out payments described above may be increased by $10.0 million (a total maximum contingent cash consideration of $43.0 million) or reduced by $10.0 million, depending upon whether the Company is able to achieve targets relating to the renewal of the Depakine services agreement with Sanofi. The earn-out payments are due 20 business days after completion of the Company’s audit for the fiscal year ending December 31, 2012. However, the earn-out payments may be accelerated in certain conditions. If there is a change-in-control of the Company before December 31, 2012, then the earn-out payment would become due and the payment would range between $11.5 million and $23.0 million depending upon achievement against the adjusted EBITDA and revenue targets through the date of the change-in-control. In addition, if either (i) Mark Lotter is terminated without cause (as defined in the Agreement) prior to December 31, 2012, or (ii) if the Company fails to meet certain obligations to appoint and retain Mark Lotter and Peter Barrett (or their replacements) on the Company’s Board through December 31, 2012, the earn-out payment would be deemed to be $23.0 million and would be due 20 business days after completion of the Company’s audit for the fiscal year ending December 31, 2012. If the earn-out obligations are accelerated, the payment of the specified earn-out amount satisfies all of the Company’s obligations under the earn-out and no further payment is due. The earn-out and acceleration provisions are subject to various limitations and conditions specified in the Agreement.

The Company uses the assistance of a third-party valuation expert to estimate the fair value of the contingent consideration using a Monte Carlo simulation model. The estimated fair value of the contingent consideration is subject to fluctuations as a result of adjustments to certain performance metric projections used to estimate the fair value. The significant unobservable inputs used in the fair value measurement of the contingent consideration are revenue volatility of 40%; revenue discount rate of 20%; risk free rate of 0.13%; earn-out discount rate, including counterparty risk of 5%; estimates of projected revenues and earnings before taxes; and other assumptions regarding customer conditions, and probability of change of control and employment termination considerations. Significant increases (decreases) in the estimated revenues, earnings before taxes, customer conditions, and revenue volatility would result in a significantly higher (lower) fair value measurement. Generally, an increase (decrease) in the assumption used for revenue discount rate is accompanied by a decrease (increase) in the fair value of the contingent consideration.

 

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The Company initially recorded $18.9 million as the estimated fair value of the contingent consideration. The fair value of the contingent consideration is remeasured each quarter, and changes to the fair value are recorded to contingent consideration expense or gain. As of September 30, 2012, the Company estimated the fair value of the contingent consideration to be $0.6 million, resulting in a non-cash gain of $12.8 million and $14.9 million for the three- and nine-month periods ended September 30, 2012, respectively. The significant reduction in the valuation of the contingent consideration expense during the three months ended September 30, 2012 was primarily related to the decrease in the estimated probability of achieving targets relating to NovaMed’s product distribution agreements, including the renewal of the Depakine services agreement with Sanofi for a five-year term. The Depakine services agreement expires June 20, 2013. The Company is currently negotiating an extension of that agreement, but believes that any initial extension will be for less than a five-year term.

The following represents the change in the estimated fair value of the contingent consideration (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Contingent Consideration:

        

Balance at beginning of period

   $ 13,325      $ 19,663      $ 15,400      $ —     

Fair value at acquisition date

     —          —          —          18,870   

Foreign currency translation

     10        1        22        (14

Change in the estimated fair value of the contingent consideration liability

     (12,773     (2,231     (14,860     (1,423
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 562      $ 17,433      $ 562      $ 17,433   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

4. Inventories

Inventories consisted of the following (in thousands):

 

     September 30,
2012
     December 31,
2011
 

Raw materials

   $ 1,999       $ 1,797   

Work in progress

     808         84   

Finished goods

     3,392         6,932   
  

 

 

    

 

 

 
   $ 6,199       $ 8,813   
  

 

 

    

 

 

 

 

5. Intangible Assets

Intangible assets are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable. The Company’s policy is to identify and record impairment losses on intangible product rights when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. It is the Company’s policy to expense costs as incurred in connection with the renewal or extension of its intangible assets.

As part of the acquisition of NovaMed, the Company recorded intangible assets related to promotion and distribution contract rights that were included in the Company’s China segment. During the three months ended September 30, 2012, the Company identified impairment indicators related to the intangible assets. The Company determined that the undiscounted cash flows estimated to be generated by the intangible assets were less than the carrying amounts. The Company further performed a discounted cash flow analysis related to the intangible assets and determined that a full impairment should be recorded. As a result, the Company recognized a non-cash impairment loss of approximately $42.7 million on its Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2012.

The Company recorded a net benefit for income tax of $5.7 million and $4.1 million for the three- and nine-month periods ended September 30, 2012, respectively, primarily due to the impairment of intangible assets, which resulted in a reversal of deferred tax liabilities, partially offset by the impact of recording a full valuation allowance on any remaining NovaMed deferred tax assets.

 

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6. Loan Agreement

In August 2012, the Company’s subsidiary, NovaMed Pharmaceuticals (Shanghai) Co. Ltd., entered into a loan agreement with Shanghai Pudong Development Bank Co. Ltd. for 12.5 million renminbi (approximately $2.0 million USD). As of September 30, 2012, no borrowings were outstanding on the loan. The loan is secured by a $2.3 million letter of credit. The Company is required to maintain $2.3 million of cash in a restricted bank account to secure the letter of credit. The loan bears interest on borrowed funds at 7.5% and expires August 29, 2013. Any amounts borrowed must be repaid by the expiration date.

 

7. Accrued and Other Current Liabilities

Accrued and other current liabilities consisted of the following (in thousands):

 

     September 30,
2012
     December 31,
2011
 

Accrued sales and marketing expenses

   $ 7,657       $ 6,192   

Accrued taxes, tax reserves and interest

     4,843         3,267   

Accrued compensation and benefits

     3,217         4,409   

Accrued professional fees

     1,441         666   

Accrued clinical trial expense

     312         797   

Accrued manufacturing costs

     971         251   

Other

     2,080         1,610   
  

 

 

    

 

 

 
   $ 20,521       $ 17,192   
  

 

 

    

 

 

 

 

8. Reduction in Workforce

In March 2012, the Company implemented a reduction in its workforce of 11 full-time employees, primarily in research and development. The restructuring follows the discontinuation of the Company’s SCV-07 phase 2b clinical trial. The reduction in workforce resulted in severance-related charges of approximately $1.0 million, of which no expense was recognized in the condensed consolidated statement of operations for the three-month period ended September 30, 2012, and $0.1 million and $0.9 million was recognized in general and administrative and research and development expense, respectively, in the condensed consolidated statement of operations for the nine-month period ended September 30, 2012. As of September 30, 2012, the Company had paid $0.7 million and had accrued $0.3 million of the severance-related charges. The Company had substantially completed its restructuring activities as of September 30, 2012.

 

9. Stockholders’ Equity

Stock-based Compensation

The following table summarizes the stock-based compensation expenses included in the Condensed Consolidated Statements of Operations ( in thousands ):

 

     Three Months  Ended
September 30,
     Nine Months  Ended
September 30,
 
     2012      2011      2012      2011  

Sales and marketing

   $ 353       $ 273       $ 969       $ 520   

Research and development

     71         97         249         252   

General and administrative

     739         511         1,981         1,358   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,163       $ 881       $ 3,199       $ 2,130   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Stock Options

During the nine months ended September 30, 2012, the Company granted options to purchase a total of 1,887,000 shares of common stock and options to purchase 1,170,419 shares of common stock were exercised. As of September 30, 2012, there was approximately $8.5 million of unrecognized compensation expense cost, net of forfeitures, related to non-vested stock options, which is expected to be recognized over a weighted average remaining period of approximately 2.63 years.

The Company has granted certain performance-based options to purchase shares of the Company’s common stock at an exercise price equal to the closing price of a share of the Company’s common stock as of the grant date. The options will fully vest upon meeting a performance goal within an established time frame. If the performance goal is met for the option within the established time frame, the option generally has a ten-year term measured from the date of grant. If the performance goal is not met within the established time frame, the option expires in its entirety. The grant date fair value per share of the performance-based awards has been calculated using the Black-Scholes option pricing model using the following assumptions: expected term of 5.22-5.28 years, volatility factor of 63.66-65.14%, and risk free interest rate of 0.96-1.96%. The Company recognizes expense related to a performance-based option over the period of time the Company determines that it is probable that the performance goal will be achieved. If it is subsequently determined that the performance goal is not probable of achievement, the expense related to the performance-based option is reversed. For the three-month period ended September 30, 2012 and 2011, the Company recognized ($69,000) and $0, respectively, of (benefit) expense related to performance-based options. For the nine-month periods ended September 30, 2012 and 2011, the Company recognized ($7,000) and $0.1 million of (benefit) expense, respectively, related to performance-based options.

RSUs

During the nine months ended September 30, 2012, the Company granted 190,000 RSUs at a weighted average fair value at grant date of $6.49, and 43,863 RSUs vested. As of September 30, 2012, there was approximately $1.3 million of unrecognized compensation cost, net of forfeitures, related to non-vested RSUs, which is expected to be recognized over a weighted average remaining period of approximately 1.78 years.

Repurchase of Common Stock

In May 2012, the Company’s Board of Directors approved an increase of approximately $10.5 million to the existing $20 million share repurchase program initiated in October 2011, bringing the total authorized under the program since inception to approximately $30.5 million. The Company repurchased and retired 1,838,202 and 3,419,431 shares at a cost of $9.5 million and $18.4 million during the three- and nine-month periods ended September 30, 2012, respectively. As of September 30, 2012, $8.7 million of the $30.5 million share repurchase program authorized by the Board was available for future share repurchases. Repurchased shares have been retired and constitute authorized but unissued shares.

 

10. Other Corporate Matters

On August 5, 2010, SciClone was contacted by the SEC and advised that the SEC has initiated a formal, non-public investigation of SciClone, and the SEC issued a subpoena to SciClone requesting a variety of documents and other information. The subpoena requests documents relating to a range of matters including, but not limited to, potential payments or transfers of anything of value to regulators and government-owned entities in China, bids or contracts with state or government-owned entities in China, any joint venture partner, intermediary or local agent of the Company in China, the Company’s ethics and anti-corruption policies, training, and audits, and certain company financial and other disclosures. On August 6, 2010, the Company received a letter from the US Department of Justice (“DOJ”) indicating that the DOJ was investigating Foreign Corrupt Practices Act (“FCPA”) issues in the pharmaceutical industry generally, and that the DOJ had information about the Company’s practices suggesting possible violations. The Company will continue to cooperate fully with the SEC and DOJ in the conduct of their investigations.

In response to these matters, the Company’s Board appointed a Special Committee of independent directors (the “Special Committee”) to oversee the Company’s response to the government inquiry. Based on an initial review, the Special Committee decided to undertake an independent investigation as to matters reflected in and arising from the SEC and DOJ investigations including, but not limited to, certain sales and marketing matters in China, in order to evaluate whether any violation of the FCPA or other laws occurred.

During the investigation, the Special Committee instructed management to (i) evaluate and to expand the Company’s training of employees regarding understanding and compliance with laws including the FCPA and other anti-bribery laws and regulations, (ii) evaluate existing compliance and anti-bribery policies and guidelines and to prepare new, more detailed policies and guidelines for implementation after review by SciClone’s Board and/or committees of the Board, (iii) implement a pre-approval policy for certain expenses including payments for, or reimbursement of, travel and entertainment expenses, and sponsorships of certain third party events, and (iv) hire a Vice President of Compliance and Internal Audit to monitor and enforce compliance with the Company’s policies.

 

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The Special Committee has substantially concluded its investigation and on May 4 and 5, 2011 reported its findings and recommendations to the Board of Directors. The Special Committee has also reported findings to the SEC and DOJ. The SEC’s and DOJ’s formal investigations are continuing. Government investigations related to FCPA matters often result in the imposition of fines or penalties for the companies involved. However, due to the significant uncertainty as to the outcome of the investigation, the Company is unable to reasonably estimate the loss or range of loss that may be incurred. As of September 30, 2012, the Company has therefore not accrued a liability for the contingent loss related to the FCPA investigation. Any fines or penalties that may be imposed, or other losses that may be realized related to the investigations, could materially impact the Company’s financial statements. The Company will continue to reassess the potential liability related to the investigations and adjust its estimates accordingly in future periods.

 

11. Segment Information and Geographic Data

The Company reports segment information based on the internal reporting used by management for evaluating segment performance based on management’s estimates of the appropriate allocation of resources to segments.

The Company operates and manages its business primarily on a geographic basis. Accordingly, the Company determined its operating and reporting segments, which are generally based on the nature and location of its customers, to be 1) China and 2) Rest of the World, including the US.

The Company evaluates the performance of its operating segments based on revenues and operating income (loss). Revenues for geographic segments are generally based on the location of customers. Operating income for each segment includes revenues, related cost of sales and operating expenses directly attributable to the segment. Operating income (loss) for each segment excludes non-operating income and expense. The operating income (loss) for the China segment includes the impairment charge on the intangible asset. Operating income (loss) for the Rest of the World segment includes the change in the fair value of the contingent consideration and all research and development expense for the Company’s SCV-07 trial, which was discontinued in the first quarter of 2012.

Summary information by operating segment for the three- and nine-month periods ended September 30, 2012 and 2011 is as follows ( in thousands ):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

China:

        

Revenues

   $ 39,675      $ 36,391      $ 117,560      $ 89,667   

Operating income (loss)

   $ (29,414   $ 16,286      $ (3,528   $ 35,382   

Rest of the World (including the US):

        

Revenues

   $ 1,011      $ 1,034      $ 2,582      $ 2,528   

Operating income (loss)

   $ 10,212      $ (5,971   $ 5,316      $ (18,602

Long-lived assets as of September 30, 2012 by operating segment are as follows ( in thousands ):

 

China

   $ 33,274   

Rest of the World (including the US)

     947   
  

 

 

 
   $ 34,221   
  

 

 

 

 

12. Subsequent Event

The Company repurchased and retired 421,620 shares at a cost of $2.5 million from October 1, 2012 through November 6, 2012 under its share repurchase program. In November 2012, the Company’s Board of Directors approved an increase of $10.0 million to the existing $30.5 million share repurchase program initiated in October 2011, bringing the total authorized under the program since inception to $40.5 million. As of November 6, 2012, $16.2 million of the total $40.5 million was available for future share repurchases.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 of current or anticipated products; the sufficiency of our resources to complete clinical trials and other new product development initiatives; government regulatory actions that may affect product reimbursement, product pricing or otherwise affect the scope of our sales and marketing; the timing and outcome of clinical trials; prospects for ZADAXIN ® and our plans for its enhancement and commercialization as well as our expectations regarding other products; future size of the worldwide hepatitis B virus (“HBV”) and hepatitis C virus (“HCV”) and other markets; research and development and other expense levels; the ability of our suppliers to continue financially viable production of our products; cash and other asset levels; the allocation of financial resources to certain trials and programs, and expenses related to litigation and regulatory investigations. 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 (NASDAQ: SCLN) is a revenue-generating, profitable, United States (“US”)-based, China-focused, specialty pharmaceutical company with a substantial commercial business and a product portfolio of therapies for oncology, infectious diseases, cardiovascular, urological, respiratory, and central nervous system disorders. We are focused on continuing international sales growth through our strong sales and marketing efforts and growing our profitability. 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 our many years of experience marketing our lead product, ZADAXIN. We believe our strengths position us to benefit from the long-term expansion of the pharmaceutical market in China. We believe China will rank second among global pharmaceutical markets by 2016, with projected growth rates of 15% or more annually over the next several years. We seek to grow sales of our current product portfolio in the region while we leverage our strong cash position for product in-licensing.

We aim to expand our presence in China by increasing revenues from our key products, launching products in our pipeline, in-licensing additional products and adding new product services agreements. Our current portfolio spans major therapeutic areas including oncology, infectious diseases, cardiovascular, urological, respiratory and central nervous system disorders. We operate in two segments which are generally based on the nature and location of our customers: 1) China and 2) rest of the world, including the US.

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 Inc. and Iroko Pharmaceuticals LLC. ZADAXIN has the highest margins in our portfolio as it is a premium proprietary product sold exclusively by SciClone. Aggrastat ® , an in-licensed product, has higher margins than our products we promote under services agreements and we expect that 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, such as DC Bead ® , Tramadol ® , and ondansetron RapidFilm ® , can increase the future revenues and profitability of our pharmaceutical business in China over the coming years. In the first quarter of 2012, we received notification of the approval in China of Tramadol for use in the treatment of moderate to severe pain. See Part II, Item 1 “Legal Proceedings” regarding the status of our agreement with MEDA Pharma GmbH & Co. KG (“MEDA”) regarding Tramadol and other products in development. Our “promotion services revenues” result from fees we receive for exclusively promoting products under services agreements with certain partners, including Sanofi and Baxter International, Inc. in China. We refer to these agreements as promotion agreements, service agreements and distribution contract rights. We recognize promotion services revenues as a percentage of our collaborators’ product sales revenue for our exclusively promoted products, such as Depakine ® , Stilnox ® , and Tritace ® . Over time, as additional proprietary or in-licensed products come to the market, we aim to shift our product mix towards those higher margin products. We are also attempting to improve margins under our product services agreements through changes in terms as we seek renewals of those agreements, as well as through managing expenses relating to generating our product services revenue.

 

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SciClone’s ZADAXIN (thymalfasin) is approved in over 30 countries and may be used for the treatment of HBV, hepatitis C (“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). To grow ZADAXIN sales to China, our sales force is focused on increasing sales to the country’s largest hospitals (class 3 with over 500 beds) as well as midsize 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 affluent populations. We are also seeking to expand the indications for which ZADAXIN is used, including sepsis.

SciClone’s marketed portfolio also includes Depakine, the most widely prescribed broad-spectrum anti-convulsant in China; Tritace, an ACE inhibitor for the treatment of hypertension; Stilnox, a fast-acting hypnotic for the short-term treatment of insomnia (marketed as Ambien ® in the US); and Aggrastat, an intervention cardiology product launched in 2009.

SciClone is also pursuing the registration of several other therapeutic products in China. These include: DC Bead, an embolic drug-eluting bead 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 acquired NovaMed Pharmaceuticals, Inc. (“NovaMed”) on April 18, 2011 and our results of operations include the operations of NovaMed as of that date forward. Since the acquisition of NovaMed, we have put strategies in place designed to expand and strengthen our sales and marketing infrastructure in China, with the goal of meeting the growing demand for pharmaceuticals in the China market. The expansion of our sales force with the addition of more than 130 sales, marketing, and sales support representatives since last year, and organization of the sales force into business units focusing on ZADAXIN, primary care and oncology, were consistent with this goal. We believe that these strategies had a positive effect on our business in the year following the acquisition. However, we believe that several developments in the third quarter of 2012 had, or may yet have, material impacts on the growth rate of our business in China and the Company’s financial results in the second half of 2012. We are responding to these developments by taking actions to strengthen our business and improve our financial performance in subsequent quarters. These developments pertain to: a reduction in the retail price for ZADAXIN and other products that occurred later in the year than expected; the channel inventory of ZADAXIN; NovaMed acquisition matters, including our licensing and product services agreements with third parties and contingent consideration remeasurement; issues in internal control over financial reporting primarily within the NovaMed subsidiary; and management turnover.

Price Reduction for ZADAXIN and Other Products

ZADAXIN’s national reimbursement retail list price in China was recently reviewed by regulatory authorities consistent with the China government’s review of pharmaceutical prices once a product has been included into the Reimbursement Drug List (“RDL”). As a result of this review, the retail list price (or the price at the hospital pharmacy level) of ZADAXIN was reduced by approximately 18% in China. The reduction was announced September 2012 and become effective October 8, 2012. Based on an agreement with our primary importer of ZADAXIN into China, our importer will take a larger share of the price reduction impact, and the actual impact on SciClone’s revenue and margins is expected to be less than a 5% decrease in our future sales price of ZADAXIN to the importer in China. In exchange for this favorable arrangement, we expanded exclusivity for the importer. In addition, the National Development and Reform Commission (“NDRC”) price of Aggrastat, as well as several of our oncology products exclusively promoted in China for Pfizer and Baxter were reduced ranging from 10 to 20%.

We have not negotiated any particular arrangement regarding the sharing of these price reductions for products other than ZADAXIN with our partners, but generally, under our agreements, the effect on our per unit revenues would be approximately half of the reduction in price at the retail level.

Over the long term, we anticipate that the price reductions may positively affect our sales volumes and result in broader penetration into Tier 3 and Tier 2 cities in target geographies, potentially increasing our total sales revenues from these products.

ZADAXIN Inventory and Sales

China uses a tiered method to import and distribute products. The distributors make the sales in the country, but the product is imported for them by licensed importers. Our product sales revenues result from the sale of our products to our customers, the importing agents and distributors. It takes approximately seven weeks for our customers to clear a shipment of ZADAXIN through the importation process for sale in China. Our customers tend to purchase infrequent large orders of ZADAXIN inventory to facilitate the distribution and sale to Chinese hospital pharmacies. The timing of infrequent large orders may significantly affect the ZADAXIN channel inventory levels and may cause fluctuations to our reported sales and profitability for each quarterly period.

 

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During the third quarter and particularly in September 2012, we estimate there was an increase of approximately $14 million in ZADAXIN channel inventory levels. We believe the overall market for thymalfasin has continued to grow, but that our strategy of increasing demand for ZADAXIN through various measures, including the expansion of our ZADAXIN sales force, has not led to the increased demand for ZADAXIN in the hospital pharmacies we anticipated in 2012. We continue to believe that we can increase penetration in the market and grow demand for ZADAXIN. During the nine months ended September 30, 2012, we believe that our sales to our customers have exceeded the pace at which our customers have been able to sell ZADAXIN through to other parties, primarily hospital pharmacies. During the six months ended June 30, 2012, we believe that the levels of ZADAXIN channel inventory grew moderately. During the three months ended September 30, 2012, we believe that the levels of ZADAXIN channel inventory grew significantly. We estimate that approximately $14 million of our revenue recognized in the three months ended September 30, 2012 related to the increase of ZADAXIN channel inventory levels at our customers in China. This increase in ZADAXIN channel inventory may adversely affect our revenue in future quarters.

We have revised and we are implementing changes in our strategy for ZADAXIN market penetration. In addition, we believe that our sales organization’s efforts may have been affected by changes to and turnover in senior management. We are recruiting experienced new senior-level sales and other management, particularly following the announced departures of two of our senior executives in China. We are also taking other measures which may address the channel build up, including working with one importer on an exclusive basis and implementing various programs to expand market demand. There may be additional departures among senior sales personnel in our ZADAXIN business unit. During this transition period, if we are unable to achieve our objectives for increased demand, we may experience declines in our quarterly sales revenue in the near term and our sales and profitability for the next few quarters may significantly decrease.

To expand market penetration and growth, particularly for ZADAXIN, we are widening our market strategies by targeting numerous smaller hospitals as well as hospitals that are in more rural areas. We are also piloting a program for “cross selling” ZADAXIN with our oncology sales force to further leverage their market reach. The implementation of these strategies has commenced in the fourth quarter. These additional strategies are intended to positively affect sales growth over the next several quarters. In addition, we have already been successful in making significant changes in our China organization with the recruitment of additional senior level management, and we are aggressively recruiting additional management for our China operations to address recent departures. Our recent and continuing executive recruiting is intended to bring added multi-national pharmaceutical company experience in the China market to grow ZADAXIN sales, to manage profitability and to improve and implement our sales strategies.

NovaMed: Intangible Asset Impairment; Contingent Consideration Remeasurement

We acquired NovaMed on April 18, 2011, and our results of operations include the operations of NovaMed as of that date forward. The acquisition increased our portfolio of commercial and development-stage products through exclusive licensing and product service agreements with a number of leading pharmaceutical companies. However, although revenues from the NovaMed business have grown since the acquisition, and are expected to continue to grow in the fourth quarter, overall revenue growth and profitability have not met our expectations as forecast at the time of the acquisition. This condition is considered to be an impairment indicator with respect to the intangible assets related to our promotion and distribution contract rights. We determined that the undiscounted cash flows estimated to be generated by the intangible assets were less than the carrying amounts. We further performed a discounted cash flow analysis related to the intangible assets and determined that a full impairment should be recorded. As a result, we recognized a non-cash impairment loss of approximately $42.7 million on our Condensed Consolidated Statement of Operations for the three- and nine-month periods ended September 30, 2012.

Certain of our product services agreements with third parties will be expiring over the next several months unless renewed, extended or re-negotiated; most importantly, our agreement with Sanofi to promote Depakine expires on June 30, 2013. We are actively negotiating renewals or extensions of these agreements. We are also in the process of assessing the financial performance of the products we promote under these agreements and their overall value within our entire portfolio of products. We are also assessing the terms and conditions of our agreements with the intent to secure more favorable terms to us relative to profitability. 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 re-negotiate, renew or extend the agreements on terms acceptable to us, our revenues and profitability would be adversely affected.

 

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We continue to seek to establish profitable 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 with higher margins that can augment our product sales revenue, and we continue to explore opportunities to optimize our promotion services revenues. We are also working on the final stage of the regulatory approval in China for our in-licensed candidate DC Bead, and on the approval process for our other product candidates, all of which are in clinical trials or in other stages of the regulatory approval process in China.

The terms of our acquisition of NovaMed provided for the payment of an additional $43.0 million in earn-out payments upon the successful achievement of revenue and earnings targets for the 2011 and 2012 fiscal years (the “earn-out” or “contingent consideration”). We initially recorded $18.9 million as the estimated fair value of the contingent consideration. The fair value of the contingent consideration is remeasured each quarter, and changes to the fair value are recorded to contingent consideration expense or gain. As of September 30, 2012, we estimated the fair value of the contingent consideration will be $0.6 million, resulting in a non-cash gain of $12.8 million and $14.9 million for the three- and nine-month periods ended September 30, 2012, respectively. The significant reduction in the valuation of the contingent consideration expense during the third quarter was primarily related to the decrease in the estimated probability of achieving targets relating to NovaMed’s product distribution agreements, including the renewal of the Depakine services agreement with Sanofi for a five-year term. The Depakine services agreement expires in June 2013. We currently are negotiating an extension of that agreement, but believe that any initial extension will be for less than a five-year term.

Internal Control Issues – Material Weakness

During the quarter ended September 30, 2012, we identified deficiencies in the design and operation of controls primarily associated with our Aggrastat product line related to product returns reserves and the override of certain controls in the financial statement close process related to our NovaMed subsidiary. These deficiencies were identified through the performance of controls and processes recently implemented at our NovaMed subsidiary as part of our process supporting our assessment of internal control over financial reporting in 2012. We have concluded the aggregation of these deficiencies is a material weakness. A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. For the three- and nine-month periods ended September 30, 2012, we recorded adjustments to correct identified misstatements in the condensed consolidated financial statements related to accrued liabilities for product returns, cost of sales, and sales and marketing expenses. We continue to seek ways to strengthen operation of our controls at our NovaMed subsidiary, including the recent hiring of our Chief Financial Officer, China Operations who joined the Company in the third quarter of this year. We have terminated personnel who were involved in the override of certain controls in the financial statement close process at our NovaMed subsidiary that resulted in the material weakness. Our investigation of this situation continues, and we may experience additional turnover as a result.

Management Turnover

We recently announced departures of key personnel from our NovaMed subsidiary, including the individual who is our Chief Executive Officer of SciClone’s China operations and former CEO of NovaMed who announced he will resign prior to December 31, 2012, and our Chief Operating Officer in China who left the Company in October 2012. There may be additional departures among senior sales personnel in our business units. We are recruiting executives to address these departures and to expand and strengthen our China operations.

Other Ongoing Third Quarter Matters

We were developing SCV-07 in a phase 2b clinical trial for the prevention of oral mucositis (“OM”). On March 2, 2012, we announced the discontinuation of this trial based on the pre-planned interim analysis results that indicated the trial would not meet the pre-specified efficacy endpoints, and our intention to further curtail our US-based development efforts. In March 2012, we implemented a reduction in our workforce of 11 full-time employees, primarily in research and development, and recorded severance-related charges of approximately $1.0 million, of which approximately $0.1 million and $0.9 million were recognized to general and administrative and research and development expense, respectively, for the nine-month period ended September 30, 2012. We have substantially completed the restructuring.

 

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The United States Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”) are each conducting formal investigations of SciClone regarding a range of matters including the possibility of violations of the Foreign Corrupt Practices Act (“FCPA”). We will continue to cooperate fully with the SEC and DOJ in the conduct of their investigations. In response to these matters, our Board appointed a Special Committee of independent directors (the “Special Committee”) to oversee our response to the government inquiry. The Special Committee has substantially concluded its investigation and on May 4 and 5, 2011 reported its findings and recommendations to the Board of Directors. The Special Committee has also reported findings to the SEC and DOJ. The SEC’s and DOJ’s formal investigations are continuing. These continuing investigations could result in administrative orders against us, the imposition of significant penalties and/or fines against us, and/or the imposition of civil or criminal sanctions against us or certain of our officers, directors and/or employees. We cannot predict what the outcome of those investigations will be, or the timing of any resolution. Refer to Footnote 10 “Other Corporate Matters” and Part II, Item 1 “Legal Proceedings” in this Form 10-Q for further information regarding the investigation and remedial measures, and related litigation.

We believe our cash and investments as of September 30, 2012 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 quarterly losses in the future.

Results of Operations

Revenues:

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

 

     Three Months  Ended
September 30,
           Nine Months  Ended
September 30,
        
     2012      2011      Change     2012      2011      Change  

Product Sales

   $ 32,130       $ 30,433         6   $ 95,596       $ 79,484         20

Promotion Services

     8,556         6,992         22     24,546         12,711         93
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Net Revenues

   $ 40,686       $ 37,425         9   $ 120,142       $ 92,195         30
  

 

 

    

 

 

      

 

 

    

 

 

    

Product sales were $32.1 million for the three-month period ended September 30, 2012, compared to $30.4 million for the corresponding period in 2011. The increase of $1.7 million, or 6%, for the three-months ended September 30, 2012, compared to the same period in the prior year, was primarily attributable to increased sales of ZADAXIN, partially offset by decreased revenues of approximately $1.6 million due to the impact of the ZADAXIN price reduction. ZADAXIN sales were $31.2 million for the three-month period ended September 30, 2012, compared to $27.9 million for the corresponding period of 2011. During the three months ended September 30, 2012, we believe that the levels of ZADAXIN channel inventory grew significantly. We estimate that approximately $14 million of our revenue recognized in the three months ended September 30, 2012 related to the increase of ZADAXIN channel inventory levels at our customers in China. This increase channel inventory may adversely affect our revenue in future quarters. Product sales were $95.6 million for the nine-month period ended September 30, 2012, compared to $79.5 million for the corresponding period in 2011. The increase of $16.1 million, or 20%, for the nine-months ended September 30, 2012, compared to the same period in the prior year, was primarily attributable to increased sales of ZADAXIN product sales. ZADAXIN sales were $91.4 million for the nine-month period ended September 30, 2012, compared to $75.1 million for the corresponding period of 2011.

Promotion services revenue was $8.6 million, for the three-month period ended September 30, 2012, compared to $7.0 million for the corresponding period in 2011, and related to the distribution of products under promotional contracts. Promotion services revenue increased $1.6 million mainly related to Depakine sales. Promotion services revenue was $24.5 million, for the nine-month period ended September 30, 2012, compared to $12.7 million for the corresponding period in 2011. The increase of $11.8 million reflects the addition of promotion services revenue as a result of the acquisition of NovaMed in April 2011 and also reflects an increase in Depakine product sales in the nine-month period ended September 30, 2012.

Total China revenues were $39.7 million, or 98% of total revenues for the three-month period ended September 30, 2012, compared to $36.4 million, or 97% of total revenues for the corresponding period in 2011. Total China revenues were $117.6 million, or 98% of total revenues for the nine-month period ended September 30, 2012, compared to $89.7 million, or 97% of total revenues for the corresponding period in 2011.

For the three-month period ended September 30, 2012, revenues to three customers in China accounted for approximately 54%, 20% and 12% of our revenues. For the three-month period ended September 30, 2011, revenues to two customers in China accounted for approximately 69% and 18% of our revenues. For the nine-month period ended September 30, 2012, revenues to three customers in China accounted for approximately 53%, 19% and 16% of our revenues. For the nine-month period ended September 30, 2011, revenues to three customers in China accounted for approximately 59%, 19% and 13% of our revenues. Our experience with our largest customers has been good and we anticipate that we will continue to sell a majority of our product to them.

 

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We expect total revenues and cost of product sales to increase in 2012 compared to 2011 due to increased unit sales of ZADAXIN into China, partially offset by the impact of the price reduction of ZADAXIN, and as a result of the addition of revenues from NovaMed’s product portfolio. However there are several factors that may affect our revenues as described below.

ZADAXIN’s national reimbursement retail list price in China was recently reviewed by regulatory authorities and as a result the retail list price of ZADAXIN has been reduced. We expect the impact of this reduction to be less than a 5% decrease in our future sale price of ZADAXIN to the importer in China. The reduction was announced September 2012 and became effective October 8, 2012.

China uses a tiered method to import and distribute products. The distributors make the sales in the country, but the product is imported for them by licensed importers. Our product sales revenues result from the sale of the Company’s proprietary or in-licensed products to importing agents or distributors. Our promotion services revenues result from fees received for exclusively promoting products for certain partners. These importing agents, distributors and partners are the Company’s customers. It takes approximately seven weeks for our customers to clear a shipment of ZADAXIN through the importation process for sale in China. Our customers tend to purchase infrequent large orders of ZADAXIN inventory to facilitate the distribution and sale to Chinese hospital pharmacies. The timing of infrequent large orders may significantly affect the ZADAXIN channel inventory levels and may cause fluctuations to our reported sales and profitability for each quarterly period.

During the third quarter and particularly in September 2012, we estimate that there was an increase of approximately $14 million in ZADAXIN channel inventory levels. We believe the overall market for thymalfasin has continued to grow, but that our strategy of increasing demand for ZADAXIN through various measures, including the expansion of our ZADAXIN sales force, has not led to increased demand for ZADAXIN in the hospital pharmacies we anticipated in 2012. We continue to believe that we can increase penetration in the market and grow demand for ZADAXIN. We believe the uncertainty around the timing of the ZADAXIN price reduction had a dampening effect on sales growth to the hospital pharmacies during 2012. During the nine months ended September 30, 2012, we believe that our sales to our customers have exceeded the pace at which our customers have been able to sell ZADAXIN through to other parties, primarily hospital pharmacies. During the six months ended June 30, 2012, we believe that the levels of ZADAXIN channel inventory grew moderately. During the three months ended September 30, 2012, we believe that the levels of ZADAXIN channel inventory grew significantly. We estimate that approximately $14 million of our revenue recognized in the three months ended September 30, 2012 related to the increase of ZADAXIN channel inventory levels at our customers in China. This increase in channel inventory may adversely affect our revenue in future quarters.

We have revised and we are implementing changes in our strategy for ZADAXIN market penetration. In addition, we believe that our sales organization’s efforts may have been affected by turnover, particularly at senior management levels. We are recruiting experienced new senior-level sales and other management, particularly following the announced departures of two of our senior executives in China. We are also taking other measures which may address the channel build up, including working with one importer on an exclusive basis and implementing various programs to expand market demand. We anticipate additional departures including among senior sales personnel in our ZADAXIN business unit. During this transition period, and if we are unable to achieve our objectives for increased demand, we may experience fluctuations in our quarterly sales revenue in the near term and our sales and profitability for the next few quarters may significantly decrease as compared to the preceding quarter.

Certain of our product services agreements with third parties will be expiring over the next several months unless renewed, extended or re-negotiated; most importantly, our agreement with Sanofi to promote Depakine expires on June 30, 2013. We are actively negotiating renewals or extensions of these agreements. We are also in the process of assessing the financial performance of the products we promote under these agreements and their overall value within our entire portfolio of products. We are also assessing the terms and conditions of our agreements with the intent to secure more favorable terms to us relative to profitability. 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 re-negotiate, renew or extend the agreements on terms acceptable to us, our revenues and profitability would be adversely affected.

Cost of Product Sales:

The following tables summarize the period over period changes in our cost of product sales (in thousands) :

 

     Three Months  Ended
September 30,
           Nine Months Ended
September 30,
        
     2012      2011      Change     2012      2011      Change  

Cost of Product Sales

   $ 5,475       $ 5,024         9   $ 15,631       $ 13,301         18

Cost of product sales was $5.5 million and $5.0 million for the three-month periods ended September 30, 2012 and 2011, respectively. ZADAXIN cost of sales were $4.7 million for the three-month period ended September 30, 2012, compared to $3.8 million for the corresponding period in 2011. Gross margin for ZADAXIN was 84.9% and 86.3% for the three months ended September 30, 2012 and 2011, respectively. The decrease in gross margin for ZADAXIN for the three-month period ended September 30, 2012, compared to the three-month period ended September 30, 2011, was due primarily to a lower ZADAXIN average sale price.

 

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Cost of product sales were $15.6 million for the nine-month period ended September 30, 2012, compared to $13.3 million for the same period in the prior year. The increase of $2.3 million, or 18%, for the nine-month period ended September 30, 2012 compared to the same period in the prior year was attributable to higher ZADAXIN sales and the addition of NovaMed cost of product sales as a result of the acquisition of NovaMed. ZADAXIN cost of sales was $13.1 million for the nine-month period ended September 30, 2012, compared to $12.0 million for the corresponding period in 2011. Gross margin for ZADAXIN was 85.7% and 84.1% for the nine months ended September 30, 2012 and 2011, respectively. The increase in gross margin for ZADAXIN for the nine-month period ended September 30, 2012, compared to the nine-month period ended September 30, 2011, was due primarily to lower ZADAXIN per vial production costs mainly as a result of manufacturing volume efficiencies, partially offset by a lower ZADAXIN average sale price.

We expect our ZADAXIN cost of product sales and gross margins to fluctuate from period to period depending upon 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, but expect it to be comparable for the remainder of 2012.

Sales and Marketing:

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

 

     Three Months  Ended
September 30,
           Nine Months  Ended
September 30,
        
     2012      2011      Change     2012      2011      Change  

Sales and Marketing

   $ 17,042       $ 15,222         12   $ 52,371       $ 33,311         57

Sales and marketing expenses for the three months ended September 30, 2012 increased by $1.8 million, or 12%, compared to the same period in 2011. Sales and marketing expenses for the nine months ended September 30, 2012 increased by $19.1 million, or 57%, compared to the same period in 2011. For the nine month period ended September 30, 2012, we recorded nine months of sales and marketing expense for NovaMed, compared to the same period of 2011 that included sales and marketing expenses for NovaMed from the date of acquisition on April 18, 2011 through September 30, 2011. Increases in sales and marketing expenses for both the three- and nine-month periods related to increased growth in China of over 130 additional sales, marketing and sales support professionals since last year, and in support of our commercial efforts to expand more deeply and widely throughout the China market. We expect sales and marketing expenses to be higher in 2012 compared to 2011 due to increased sales efforts of ZADAXIN and Depakine, primarily in China, and the addition of NovaMed sales and marketing expenses as a result of our acquisition of NovaMed.

Amortization and Impairment of Acquired Intangible Assets:

For the three- and nine-months ended September 30, 2012, we recognized $0.9 million and $2.6 million, respectively, in amortization of acquired intangible assets expense, compared to $0.9 million and $1.6 million for the three- and nine-months ended September 30, 2011, respectively. Amortization of acquired intangible assets reflects the amortization of promotion and distribution contract intangible assets acquired as part of the NovaMed acquisition on April 18, 2011.

During the third quarter ended September 30, 2012, we identified an impairment indicator with respect to the intangible assets related to our promotion and distribution contract rights. We determined that the undiscounted cash flows estimated to be generated by the intangible assets were less than the carrying amounts. We further performed a discounted cash flow analysis related to the intangible assets and determined that a full impairment should be recorded. As a result, we recognized a non-cash impairment loss of approximately $42.7 million for the three- and nine-month periods ended September 30, 2012. No further amortization expense will be recorded in future periods related to our acquired intangible assets.

Research and Development (“R&D”):

The following table summarizes the period over period changes in our R&D expenses (in thousands):

 

     Three Months Ended
September 30,
           Nine Months Ended
September 30,
        
     2012      2011      Change     2012      2011      Change  

Research and Development

   $ 864       $ 3,035         –72   $ 5,750       $ 9,235         –38

 

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R&D expenses for the three months ended September 30, 2012 decreased by $2.2 million, or 72%, compared to the same period in 2011, and R&D expenses for the nine months ended September 30, 2012 decreased by $3.5 million, or 38%, compared to the same period in 2011. On March 2, 2012, we announced the discontinuation of our SCV-07 phase 2b clinical trial for the delay to onset of severe OM based on the results of the pre-planned interim analysis that indicated that the trial would not meet the pre-specified efficacy endpoints. The decreases in R&D expenses for both the three- and nine-month periods ended September 30, 2012, as compared to the same periods in 2011, related primarily to the discontinuation of this trial. These decreases were offset partially by employee severance costs of $0 and $0.9 million recognized to R&D expenses for the three- and nine-month periods ended September 30, 2012, respectively.

The major components of R&D expenses include salaries and other personnel-related expenses, including associated stock-based compensation, facility-related expenses, depreciation of facilities and equipment, license-related fees, services performed by clinical research organizations and research institutions and other outside service providers.

We expect our research and development expenses to decrease significantly in 2012, compared to 2011, as a result of the discontinuation of the SCV-07 phase 2b clinical trial, and further curtailment of our US-based development expenses. We continue to evaluate opportunities to in-license the marketing rights to proprietary products primarily in China, which may result in increased research and development expenses due to license fee payments, local registration clinical trials, or other expenses related to in-licensing and development of new products in the future.

General and Administrative:

The following table summarizes the period over period changes in our general and administrative expenses (in thousands):

 

     Three Months Ended            Nine Months Ended         
     September 30,            September 30,         
     2012      2011      Change     2012      2011      Change  

General and Administrative

   $ 5,673       $ 5,202         9   $ 14,089       $ 19,419         –27

General and administrative expenses for the three-month period ended September 30, 2012 increased by $0.5 million, or 9%, compared to the same period in 2011. The increase was attributable to higher professional expenses related to legal, accounting and tax matters. General and administrative expenses for the nine-month period ended September 30, 2012 decreased by $5.3 million, or 27%, compared to the same period in 2011. The decrease was attributable to $3.8 million lower NovaMed acquisition-related costs, lower corporate and legal expenses related to the SEC and DOJ investigations and shareholder litigations that had been filed following the announcement of those investigations, and lower professional expenses primarily for tax consulting services, offset partially by increased general and administrative expenses related to NovaMed as a result of our acquisition of NovaMed on April 18, 2011.

We expect our general and administrative expenses will decrease in 2012 compared to 2011 primarily as a result of lower legal, accounting and professional expenses, partially offset in the fourth quarter by increased expenses as a result of the matters underlying our material weakness in internal controls and an increase in expenses related to our arbitration with MEDA and negotiations or arbitration regarding our claim for indemnification against the former stockholders of NovaMed. We cannot predict whether any potential settlement with the SEC and DOJ and any resulting fine or penalty could affect our expenses or the timing thereof. We do not expect to incur any significant acquisition-related costs in 2012, though we continue to evaluate opportunities in China, which may result in increased general and administrative expenses in the future. See Part II, Item 1 “Legal Proceedings”.

Contingent Consideration:

As part of the acquisition of NovaMed, we may be required to pay up to an additional $43.0 million in earn-out payments upon the successful achievement of revenue and earnings targets for the 2011 and 2012 fiscal years (the “earn-out” or “contingent consideration”). We initially recorded $18.9 million as the estimated fair value of the contingent consideration. The fair value of the contingent consideration is re-measured each quarter, and changes to the fair value are recorded to contingent consideration expense or gain. As of September 30, 2012, we estimated the fair value of the contingent consideration will be $0.6 million, resulting in a gain of $12.8 million and $14.9 million for the three- and nine-months ended September 30, 2012, respectively, compared to a gain of $2.2 million and $1.4 million recorded for the three-and nine month periods ended September 30, 2011, respectively. Our fair value estimates are based on a variety of factors that may significantly fluctuate from period to period, including the likelihood that earn-out targets will be achieved and present value factors associated with the timing of the earn-out targets, and may result in significant fluctuations to contingent consideration expense in the future. The earn-out provisions are subject to a number of adjustments and acceleration provisions. The total earn-out payments may be increased by $10.0 million or reduced by $10.0 million, depending upon whether the Company is able to achieve targets relating to product distribution agreements. In the third quarter of 2012, the significant reduction in the valuation of the contingent consideration expense was primarily related to the decrease in the estimated probability of achieving targets relating to NovaMed’s product distribution agreements, including the renewal of the Depakine services agreement with Sanofi for a five-year term. The Depakine services agreement expires in June 2013. We currently are negotiating an extension of that agreement, but believe that any initial extension will be for less than a five-year term.

 

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(Benefit) Provision for Income Tax:

The (benefit) provision for income tax relates to our foreign operations in China. The benefit for income tax was $5.7 million for the three-month period ended September 30, 2012, compared to $46,000 of expense for the three-month period ended September 30, 2011. The benefit for income tax was $4.1 million for the nine-month period ended September 30, 2012, compared to expense of $0.6 million for the nine-month period ended September 30, 2011. The tax benefit increased $5.7 million for the three-month period and $4.7 million for the nine-month period ended September 30, 2012, compared to the same periods in 2011, primarily related to the reversal of deferred tax liabilities due to the impairment loss of approximately $42.7 million recorded related to our intangible assets, partially offset by the impact of recording a full valuation allowance on NovaMed deferred tax assets, and by increased tax expense related to growth in our China operations. Our statutory tax rate in China was 24-25% in 2011 and 2012. We expect that our tax expense will decrease in 2012 compared to 2011 due to the tax benefits recorded during the third quarter of 2012.

Liquidity and Capital Resources

The majority of our sales are to importers and distributors in China where our accounts receivable collections have standard credit terms generally ranging from 60 to 180 days.

The following tables summarize our cash and investments and our cash flow activities as of the end of, and for each of, the periods presented (in thousands):

 

     As of      As of  
     September 30, 2012      December 31, 2011  

Cash and investments

   $ 86,543       $ 66,654   

As of September 30, 2012, we had $86.5 million in cash and investments of which $70.1 million was located in subsidiaries of the Company outside the US. Cash held by subsidiaries outside the US is held primarily in US dollars. Such cash is used to fund the operating activities of our foreign subsidiaries and for further investment in foreign operations which may include in-licensing new products, particularly for China, and for potential acquisitions. Generally, we consider such cash to be permanently reinvested in our foreign operations. Based on our current operating plan for the next 12 months, we do not anticipate the repatriation of cash held by foreign subsidiaries, if any, would result in payment of US Federal taxes.

 

     Nine Months Ended  
     September 30,  
     2012     2011  

Cash provided by (used in):

    

Operating activities

   $ 40,952      $ 4,110   

Investing activities

   $ (1,036   $ (19,670

Financing activities

   $ (20,015   $ 6,019   

Net cash provided by operating activities was $41.0 million for the nine months ended September 30, 2012 and primarily reflected the net income for the period, adjusted for non-cash items such as stock-based compensation expense, depreciation and amortization expense, intangible asset impairment, the change in the fair value of the contingent consideration, and changes in operating assets and liabilities. Such changes included a $5.3 million increase in cash received from customers for accounts receivable, and a $2.7 million planned reduction in inventory levels in anticipation of the renewal of our ZADAXIN China import license. Import drug licenses are routinely subject to renewal every five years to continue sales into China, and the next renewal is expected to occur in 2013. We expect to modify our label with the next renewal, and are managing our inventory levels accordingly. The changes also included a $3.7 million decrease in accounts payable related to payments for products sold under marketing agreements and the discontinuation of our SCV-07 phase 2b clinical trial for the delay to onset of severe OM, offset by a $3.3 million increase in accrued liabilities mainly related to increases in sales and marketing and tax accruals.

Net cash provided by operating activities was $4.1 million for the nine months ended September 30, 2011 and primarily reflected the net income for the period adjusted for non-cash items such as stock-based compensation expense, depreciation and amortization expense and changes in operating assets and liabilities. Such changes included a decrease in cash received for accounts receivable of $12.3 million related to increases in sales volume and normal fluctuations in the timing of customer receipts. Changes also included an increase in inventory levels of $2.0 million related to higher stock levels to support increased demand for ZADAXIN product.

Net cash used in investing activities was $1.0 million and $20.0 million for the nine months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012, cash used in investing activities was related to the purchases of property and equipment. For the nine months ended September 30, 2011, cash used in investing activities was primarily related to the acquisition of NovaMed for a net cash use of approximately $21.3 million, and to a lesser extent related to the sale of available-for-sale investments, net of purchases of available-for-sale investments, and purchases of property and equipment.

 

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Net cash (used in) provided by financing activities was ($20.0) million and $6.0 million for the nine months ended September 30, 2012 and 2011, respectively. During the nine months ended September 30, 2012, we used $18.5 million to repurchase and retire approximately 3.4 million shares of our common stock under our stock repurchase program, $2.5 million for the repayment of borrowings on our loan and security agreement with Silicon Valley Bank (“SVB”) (“the Credit Facility”), and we used $2.3 million for restricted cash to secure a letter of credit related to our loan agreement with Shanghai Pudong Development Bank Co. Ltd. For the nine months ended September 30, 2012 and 2011, we also received $3.3 million and $6.0 million, respectively, of proceeds from the issuances of common stock made under our stock award plans.

The following summarizes our future contractual obligations as of September 30, 2012 ( in thousands ):

 

     Payments Due by Period  
            Less than                    More Than  

Contractual Obligations

   Total      1 Year      1-3 Years      3-5 Years      5 Years  

Operating leases (1)

     6,406         3,316         2,658         418         14   

Purchase obligations (2)

     13,992         13,992         —           —           —     

Contingent consideration (3)

     562         562         —           —           —     

Uncertain tax position (4)

     3,119         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,079       $ 17,870       $ 2,658       $ 418       $ 14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) These are future minimum rental commitments for office space and copiers leased under non-cancelable operating lease arrangements.
(2) These consist of purchase obligations with manufacturers and distributors.
(3) As part of the acquisition of NovaMed, we may be required to pay up to $43.0 million in contingent consideration upon the successful achievement of revenue and earnings targets for the 2011 and 2012 fiscal years. The timing of the contingent consideration payment, if any, is dependent upon several factors, including whether there is a change-in-control. The contingent consideration is expected to be paid no later than the first half of 2013.
(4) As we are not able to reasonably estimate the timing of the payments or the amount by which our obligations for uncertain tax positions will increase or decrease over time, the related balances have not been reflected in the “Payments Due by Period” section of the table.

Our loan and security agreement with Silicon Valley Bank (“SVB”) (“the Credit Facility”) for a financing facility up to $15 million expired on October 1, 2012. As of September 30, 2012, there were no borrowings on the Credit Facility. The Credit Facility bore interest on borrowed funds at the bank’s prime rate plus 1.25% (5.25% at September 30, 2012) on outstanding balances.

In August 2012, our subsidiary, NovaMed Pharmaceuticals (Shanghai) Co. Ltd. entered into a loan agreement with Shanghai Pudong Development Bank Co. Ltd to borrow up to 12.5 million renminbi (approximately $2.0 million USD as of September 30, 2012). As of September 30, 2012, there were no borrowings under the loan agreement. The loan agreement is secured by a $2.3 million letter of credit. We are required to maintain $2.3 million of cash in a restricted bank account to secure the letter of credit. The loan agreement bears interest on borrowed funds at 7.5% and expires August 29, 2013. Any amounts borrowed must be repaid by the expiration date.

On March 15, 2012, we filed a shelf registration with the SEC under which we may offer and sell up to $100.0 million of our securities, assuming we continue to meet the SEC’s eligibility requirements for primary offerings on Form S-3. Subsequently, affiliates of Sigma-Tau sold approximately 6.3 million shares for an aggregate price of approximately $33.1 million under this registration statement, and we have approximately $66.9 million available for future use. On April 18, 2011, we issued 8,298,110 shares of common stock to former stockholders of NovaMed as part of our acquisition of NovaMed.

In May 2012, we announced that our Board of Directors has approved an increase of $10.5 million to the Company’s stock repurchase program bringing the total authorized since the program’s inception in October 2011 to $30.5 million. Under this program, we repurchased and retired approximately 4.2 million shares at a cost of $21.8 million through September 30, 2012. As of September 30, 2012, $8.7 million of the $30.5 million share repurchase program authorized by our Board was available for future share repurchase. Subsequent to September 30, 2012, our Board of Directors approved an additional increase of $10.0 million to the Company’s stock repurchase program bringing the total authorized since the program’s inception to $40.5 million, and as of November 6, 2012 the total remaining available for repurchase was $16.2 million. We consider several factors in determining when to make share repurchases including, among other things, our cash needs, the availability of funding and the market price our stock. We expect that cash provided by future operating activities, as well as available cash and cash equivalents and short-term investments, will be the sources of funding for our share repurchase program.

 

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We believe that our existing cash and investments and ongoing revenue generating business operations will be sufficient to support our current operating plan for at least the next 12 months. We have no current commitments to offer and sell any securities that may be offered or sold pursuant to our registration statement. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may subject us to restrictive covenants and significant interest costs. To the extent that we raise additional funds through collaboration and licensing arrangements, we would be required to relinquish some rights to our technologies, product candidates or marketing territories. Additional financing or collaboration and licensing arrangements may not be available when needed either at all or, on favorable terms.

We intend to continue to explore alternatives for financing to provide additional flexibility in managing our operations, in-licensing new products, particularly for China, and potential acquisitions. The unavailability or the inopportune timing of any financing could prevent or delay our long-term product development and commercialization programs, either of which could hurt our business. We cannot assure you that funds from financings, if any, will be sufficient to in-license additional products. The need, timing and amount of any such financing would depend upon numerous factors, including the status of the pending regulatory investigations and pending litigations, the level and price of our products, the timing and amount of manufacturing costs related to our products, the availability of complementary products, technologies and businesses, the initiation and continuation of preclinical and clinical trials and testing, the timing of regulatory approvals, developments in relationships with existing or future collaborative parties, the status of competitive products, and various alternatives for financing. We have not determined the timing or structure of any transaction.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Estimates and Assumptions

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 condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

For a discussion of the Company’s significant accounting policies, please see our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. There have been no material changes in our critical accounting policies, estimates and judgments during the nine months ended September 30, 2012 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011.

Measurement of Intangible Assets

Intangible assets are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable. Our policy is to identify and record impairment losses on intangible product rights when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. It is our policy to expense costs as incurred in connection with the renewal or extension of its intangible assets.

As part of the acquisition of NovaMed, we recorded intangible assets related to promotion and distribution contract rights. The promotion and distribution contracts expire in one to ten years, with the majority expiring in one to two years, but are subject to renewal or extension. The estimated useful life was approximately 13.5 years. However, although revenues from the NovaMed business have grown since the acquisition, and are expected to continue to grow in the fourth quarter, overall revenue growth and profitability have not met the Company’s expectations at the time of the acquisition. This condition is considered to be an impairment indicator with respect to the intangible assets related to our promotion and distribution contract rights. The Company determined that the undiscounted cash flows estimated to be generated by the intangible assets were less than the carrying amounts. The Company further performed a discounted cash flow analysis related to the intangible assets and determined that a full impairment should be recorded. As a result, the Company recognized a non-cash impairment loss of approximately $42.7 million for the three- and nine-month periods ended September 30, 2012.

Product Revenue

The Company earns product revenue from selling manufactured ZADAXIN product at the time of delivery. Sales of ZADAXIN to importing agents or distributors are recognized at time of shipment when title to the product is transferred to them. The Company also earns product revenue from purchasing medical products from pharmaceutical companies and selling them directly to importers or distributors. Sales are recognized when the medical products have been delivered to the importers or distributors. Payments by the importing agents and distributors are not contingent upon sale to the end user by the importing agents or distributors. During the third quarter and particularly in September 2012, the Company estimated that there was a significant increase of approximately $14 million in ZADAXIN channel inventory levels. The Company considers the levels of channel inventory as well as the risk of concessions in concluding whether fees due pursuant to an arrangement to sell products to an importer or distributor are fixed or determinable and collectible. Revenue is recognized only if the Company can reasonably estimate the effects of rights of return or other rights given to a distributor or conclude that it will not grant a future concession to the distributor.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our market risk during the nine months ended September 30, 2012 compared to the disclosure in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December  31, 2011.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the CEO and CFO concluded that our disclosure controls and procedures were not effective in timely alerting them to material information relating to us and our consolidated subsidiaries as required to be disclosed in the reports we file and submit under the Exchange Act as of September 30, 2012 due to the material weakness disclosed below. In particular, the Company’s policies and procedures were not sufficient to give reasonable assurance that matters involving product returns reserves related to our NovaMed subsidiary were correctly calculated and recorded and that certain controls in the financial statement close process related to our NovaMed subsidiary were operating effectively.

Changes in Internal Controls

During the quarter ended September 30, 2012, we identified deficiencies in the design and operation of controls primarily associated with our Aggrastat product line related to product returns reserves and the override of certain controls in the financial statement close process related to our NovaMed subsidiary. These deficiencies were identified through the performance of controls and processes recently implemented at our NovaMed subsidiary as part of our process supporting our assessment of internal control over financial reporting in 2012. We have concluded the aggregation of these deficiencies is a material weakness. A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. For the three- and nine-month periods ended September 30, 2012, we recorded adjustments to correct identified misstatements in the consolidated financial statements related to accrued liabilities for product returns, cost of sales, and sales and marketing expenses.

We have discussed these matters with our independent registered public accounting firm and our Audit Committee. We are implementing additional controls related to our product returns reserve process to strengthen our controls and ensure that all available information is properly considered in estimating product returns reserves. We continue to seek ways to strengthen the operation of our controls at our NovaMed subsidiary, including the recent hiring of our Chief Financial Officer, China Operations who joined the Company in the third quarter of this year. We have terminated personnel who were involved in the override of certain controls in the financial statement close process at our NovaMed subsidiary that resulted in the material weakness. We are evaluating whether further corrective action is necessary.

There were no other changes in our internal controls over financial reporting during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Under the supervision and with the participation of our management, we assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. We had excluded from our assessment the internal control over financial reporting of NovaMed Pharmaceuticals, Inc. (“NovaMed”), which we acquired April 18, 2011, as it was determined that management could not complete an assessment of the internal control over financial reporting of the acquired business in the period between the acquisition date and December 31, 2011.

Limitations of the Effectiveness of Internal Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of inherent limitations in any control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. We are continuously seeking to improve the efficiency and effectiveness of our operations and of our internal controls. This results in refinements to processes throughout our organization.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The SEC and the DOJ are each conducting formal investigations of us regarding a range of matters including the possibility of violations of the FCPA. We will continue to cooperate fully with the SEC and DOJ in the conduct of their investigations.

In response to these matters, our Board appointed a Special Committee of independent directors (the “Special Committee”) to oversee our response to the government inquiry. Based on an initial review, the Special Committee decided to undertake an independent investigation as to matters reflected in and arising from the SEC and DOJ investigations including, but not limited to, certain sales and marketing matters in China, in order to evaluate whether any violation of the FCPA or other laws occurred.

During the investigation, the Special Committee instructed management to (i) evaluate and to expand the Company’s training of employees regarding understanding and compliance with laws including the FCPA and other anti-bribery laws and regulations, (ii) evaluate existing compliance and anti-bribery policies and guidelines and to prepare new, more detailed policies and guidelines for implementation after review by our Board and/or committees of the Board, (iii) implement a pre-approval policy for certain expenses including payments for, or reimbursement of, travel and entertainment expenses, and sponsorships of certain third party events, and (iv) hire a Vice President of Compliance and Internal Audit to monitor and enforce compliance with our policies.

The Special Committee has substantially concluded its investigation and on May 4 and 5, 2011 reported its findings and recommendations to the Board of Directors. The Special Committee has also reported findings to the SEC and DOJ.

The SEC’s and DOJ’s formal investigations are continuing. These continuing investigations could result in administrative orders against us, the imposition of significant penalties and/or fines against us, and/or the imposition of civil or criminal sanctions against us or certain of our officers, directors and/or employees. We cannot predict what the outcome of those investigations will be, or the timing of any resolution.

NovaMed is a party to a Distribution and Supply Agreement with MEDA. Following our acquisition of NovaMed, NovaMed continued to perform this agreement; however, MEDA claimed it had a right to terminate the agreement under a change of control provision. NovaMed does not believe that MEDA had a right of termination under the agreement. NovaMed and MEDA were in negotiations since the acquisition regarding potential amendments to the agreement that would resolve the disagreement. However no resolution was reached. MEDA notified NovaMed that the termination was effective as of May 2011, however as provided in the agreement, disputes, including disputes regarding termination must be resolved in binding arbitration. We do not expect any significant revenues from this agreement until 2014. NovaMed filed an application for binding arbitration with the China International Economic and Trade Arbitration Commission (“CIETAC”) on July 26, 2012. On October 10, 2012, MEDA filed a response and counterclaim with CIETAC claiming MEDA’s termination was valid and demanding the transfer of certain information and rights, as well as demanding the award of damages, including attorneys’ fees in an unspecified amount. NovaMed continues to perform its obligations under the agreement pending resolution of the dispute, and has notified MEDA that the dispute has been submitted to arbitration. We cannot predict the outcome of this matter at this time.

On October 16, 2012, we made a claim against the former stockholders of NovaMed pursuant to the acquisition agreement relating to our acquisition of NovaMed. As a result of our claim, approximately $1.4 million in cash held in escrow and 622,363 shares of our common stock held in escrow were not released to the former NovaMed stockholders pending the outcome of our claim. The claim relates to damages we incurred as a result of various matters, including in particular the understatement in the balance sheet of NovaMed at the date of the acquisition, of the product returns reserves for the Aggrastat product and related expenses and damages. On October 29, 2012, the shareholder representative of the former NovaMed stockholders sent us a response notice disputing the validity of our claims. If the matter is not resolved in negotiation between the parties it will be submitted to binding arbitration. We cannot predict the outcome of this matter at this time.

Item 1A. Risk Factors

Consider these risks and uncertainties before investing in our common stock. We have marked with an asterisk (*) those risk factors below that reflect substantive changes from the risk factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2012 .

Our stock price may be volatile, and an investment in our stock could suffer a decline in value. *

Although we reported net income for the nine month period ended September 30, 2012, we have experienced significant operating losses in the past, and as of September 30, 2012, we had an accumulated deficit of approximately $131.6 million. If our operating expenses were to increase or if we were not able to increase or sustain revenue, we may not achieve profitability over the next 12 months.

 

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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:

 

   

developments related to the pending SEC and DOJ investigations, our efforts to cooperate with the investigations and events related to pending litigations;

 

   

government regulatory action affecting our Company or our drug products or our competitors’ drug products in China, the US and other foreign countries, including the effect of government initiatives in China to reduce health care costs, including the change in the governmentally permitted maximum listed price for ZADAXIN (“thymosin alpha 1” or “thymalfasin”) and our other products on the market in China;

 

   

actual or anticipated fluctuations in our quarterly operating results some of which may result from acquisition-related expenses including the variation in the valuation of the earn-out, and periodic impairment charges that have and may result from the goodwill and intangible assets recorded in the acquisition;

 

   

progress and results of clinical trials and the regulatory approval process in Europe and in China;

 

   

our ability to manage the risks associated with our acquisition of NovaMed Pharmaceuticals, Inc. (“NovaMed”);

 

   

timing and achievement of our corporate milestones;

 

   

changes in our agreements or relationships with collaborative partners;

 

   

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;

 

   

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;

 

   

changes in assessments of our internal controls over financial reporting;

 

   

general stock market conditions and fluctuations for the emerging growth and pharmaceutical market sectors;

 

   

unanticipated increases in our G&A expense due to legal and accounting expenses, including expenses relating to our disputes with MEDA and with the former stockholders of NovaMed and to matters relating to any additional or uncorrected control deficiency or related matters;

 

   

economic and political conditions in the US or abroad particularly in China; and

 

   

broad financial market fluctuations in the US, Europe or Asia.

Our acquisition of NovaMed involves a number of risks and although we believe we have substantially completed the integration there are some challenges that still could affect us and we may not realize the anticipated benefits of the acquisition; and we may acquire other companies or products that present similar risks. *

Although we believe we have substantially completed the integration of our NovaMed acquisition and the two companies’ operations and personnel and have begun to utilize common business, information and communication systems, operating procedures, financial controls and human resources practices, including benefits, training and professional development programs, SciClone’s China operations and NovaMed’s business are conducted in separate subsidiaries and some of the challenges that still could affect us include:

 

   

retaining key employees of both organizations, including recently announced executive departures and other anticipated turnover;

 

   

managing the acquisition and continuing operations in both organizations to successfully achieve the anticipated benefits of the acquisition;

 

   

preserving important relationships of both SciClone and NovaMed, including NovaMed’s contractual relationships with pharmaceutical partners;

 

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diversion of management’s attention from normal daily operations of the business which could adversely affect on-going operations, including matters relating to the material weakness in our internal controls identified in the third quarter of 2012;

 

   

costs and delays in implementing common systems and procedures;

 

   

consolidating and rationalizing information technology and administrative infrastructures;

 

   

the potential for disputes or litigation related to the earn-out and escrow provisions, which are frequently a source of disputes in acquisition transactions, and potentially unanticipated results of any such dispute;

 

   

variability in our financial results which may result from acquisition-related expenses including the variation in the valuation of the earn-out, and periodic impairment charges that have and may result from the recording of goodwill and intangible assets in the acquisition;

 

   

implementing procedures, policies and processes related to FCPA compliance; and

 

   

integrating and documenting processes and controls in conformance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 which were not applicable to NovaMed prior to the acquisition.

We may enter into other acquisition transactions in the future which could present similar risks and may also cause us to:

 

   

issue common stock that would dilute our current shareholders’ percentage ownership;

 

   

assume liabilities, some of which may be unknown at the time of such acquisitions;

 

   

record goodwill and intangible assets that have been and will be subject to impairment testing and potential periodic impairment charges;

 

   

incur amortization expenses related to certain intangible assets;

 

   

incur large and immediate write-offs of in-process research and development costs; or become subject to litigation.

Any one or all of these factors, many of which are outside of our control, may increase operating costs or lower anticipated financial performance following the NovaMed acquisition, or following any future acquisition. In addition, the combined company may lose customers, distributors, suppliers, manufacturers, partners and employees. Any diversion of management’s attention to address these factors and any difficulties associated with the acquisition of NovaMed, or of companies or products we may acquire in the future could have a material adverse effect on the operating results of the company and on the value of our common stock, and could result in our not achieving the anticipated synergies and benefits of the acquisition underlying the two companies’ reasons for the merger. Failure to achieve our objectives could have a material adverse effect on the business and operating results of the company.

Charges to earnings resulting from the NovaMed acquisition may adversely affect our financial results and could adversely affect the market value of our common stock and the cash portion of the purchase price and other expenses will reduce our working capital.

In accordance with US generally accepted accounting principles, we have accounted for the NovaMed acquisition using the purchase method of accounting, which has and will continue to result in charges to earnings that could have a material adverse effect on our results of operations. Under the purchase method of accounting, the total acquisition-date fair value of the assets and liabilities are recognized as of the closing date, and the excess of the consideration transferred over the acquisition date fair value of net assets acquired is recorded as goodwill. In addition, the purchase price includes an estimate of the value of the earn-out that may be payable in the future. The amount of employee stock compensation expense has and will increase as a result of grants to a larger base of employees. We will also incur an expense if the valuation of the earn-out increases, which would occur if in any quarter it appears that the likelihood of payment of any portion of the earn-out has become more likely. The accounting measurement of the earn-out will be subject to change through December 2012 and may create earnings volatility for us every quarterly reporting period through December 2012. In addition, to the extent the value of goodwill or intangible assets becomes impaired, we may be required to incur material impairment charges. During the three-months ended September 30, 2012, we determined that the carrying value of our intangible assets related to the promotion and distribution contract rights we acquired as part of the acquisition of NovaMed were no longer recoverable. As a result, we recognized a non-cash impairment loss of approximately $42.7 million. If the value of our goodwill asset becomes impaired, we may be required to incur further material impairment charges.

We made substantial cash payments in the NovaMed acquisition and we have incurred significant other costs related to the acquisition which reduced our liquidity and could affect our operating results.

 

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We used approximately $21.3 million of cash, net of cash acquired, as part of the purchase price to acquire NovaMed. In addition, we estimate that we incurred investment banker costs of approximately $2.6 million and we have also incurred substantial legal and accounting and professional costs associated with the acquisition. These costs have reduced our cash and cash equivalents substantially.

Our revenue will continue to be substantially dependent on our sale of ZADAXIN in China. The China government recently imposed price restrictions on ZADAXIN, Aggrastat and several of our oncology products. If we experience difficulties in our sales efforts as a result, our operating results and financial condition will be harmed. *

Our product revenue is highly dependent on the sale of ZADAXIN in China. We expect that the percentage of our revenues that come from the sale of ZADAXIN in China will decline significantly as a result of the NovaMed acquisition in 2011 and 2012. However, we anticipate that sales of ZADAXIN will continue to be a majority of our revenue for at least the next two years. For the nine months ended September 30, 2012 and 2011, approximately 98% and 97%, respectively, of our ZADAXIN sales were to customers in China. Sales of ZADAXIN in China may be limited due to the low average personal income, lack of patient cost reimbursement, poorly developed infrastructure and competition from other products, including generics. ZADAXIN sales growth in recent years has benefited from the rapidly growing Chinese economy and growing personal disposable income. Sales of ZADAXIN in China could be adversely affected by a slowing or downturn of the Chinese economy and from the recent decisions of the National Development and Reform Commission (“NDRC”) pricing reform.

In China, ZADAXIN is approved for the treatment of hepatitis B virus (“HBV”) and as a vaccine adjuvant. We face competition from pharmaceutical companies who are aggressively marketing competing products for the treatment of HBV and for other indications where we believe ZADAXIN may be used on an off-label basis. In addition, several local companies are selling lower-priced, locally manufactured generic thymalfasin, which is a competitive product and is selling in substantial and increasing quantities. While generic products outsell ZADAXIN in unit volumes, we have been able to maintain a pricing advantage through the reputation of our imported, branded product. We believe such competition to continue with added new local manufacturers of generic thymalfasin 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 or acquire other pharmaceutical products for marketing in China and other markets may be unsuccessful or even if successful may not have a meaningful effect on our dependence on ZADAXIN sales in those markets.

The Chinese government is increasing its efforts to reduce overall health care costs, including pricing controls on pharmaceutical products. Individual provinces in China and, in some cases, individual hospitals can and have established pricing requirements for a product to be included on formulary lists. In some cases, these prices have been significantly 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 and could adversely affect our future sales. The price for pharmaceutical products is regulated in China both at the national and at the provincial level. The process and timing for price restrictions is unpredictable. In addition, we are aware that ZADAXIN may be used on an off-label basis, and the Chinese government’s pricing, reimbursement or other actions might reduce such uses.

In November 2009, thymalfasin, the generic chemical name for our pharmaceutical product ZADAXIN, was included as a Category B product in the National Reimbursed Drug List (“NRDL”) and pricing for ZADAXIN on the NRDL was recently reviewed by the authorities. As a result of this review, the retail list price (or the price at the hospital pharmacy level) of ZADAXIN was reduced by approximately 18% in China. The reduction was announced in September 2012 and became effective October 8, 2012. Based on an agreement with our primary importer of ZADAXIN into China, our importer will take a larger share of the price reduction impact, and the actual impact on SciClone’s revenue and margins is expected to be less than a 5% decrease in our future sales price of ZADAXIN to the importer in China. In exchange for this favorable arrangement, we expanded exclusivity for the importer. In addition, the NDRC price of Aggrastat, as well as several of our oncology products exclusively promoted in China for Pfizer and Baxter were reduced ranging from 10 to 20%. We have not negotiated any particular arrangement regarding the sharing of these price reductions for products other than ZADAXIN with our partners, but generally, under our agreements, the effect on our per unit revenues would be approximately half of the reduction in retail price at the hospital level.

These regulations, as well as regulation of the importation of pharmaceutical products have reduced and may further reduce prices for ZADAXIN or our other products 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.

We expected that a price reduction for ZADAXIN and Aggrastat would be announced this year and assumed a price reduction in our operating plan, and we believe we will be able to successfully manage our business in China through this process; however, further price reductions could be set at some time in the future which could adversely affect our results or require substantial changes in our business model which may be difficult to implement.

 

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Sales of ZADAXIN may also fluctuate significantly from quarter to quarter due to financing limitations on importers, changes in inventory levels at our customers, and surges in sales and inventories due to epidemics. Importers and distributors of ZADAXIN borrow funds in China from banks to purchase, hold and distribute ZADAXIN. Substantial increases in restrictions on fund availability and/or increases in borrowing costs could limit the ability of our importers and distributors to finance their import and distribution process. Further, our customers tend to purchase large orders, and if channels or distribution change, inventory levels may fluctuate significantly, potentially affecting quarter periodic results.

During the third quarter and particularly in September 2012, we estimate that there was an increase of approximately $14 million in ZADAXIN channel inventory levels. We believe the overall market for thymalfasin has continued to grow, but that our strategy of increasing demand for ZADAXIN through various measures, including the expansion of our ZADAXIN sales force, has not led to increased demand during 2012 for ZADAXIN in the hospital pharmacies. We continue to believe that we can increase penetration in the market and grow demand for ZADAXIN. During the nine months ended September 30, 2012, we believe that our sales to our customers have exceeded the pace at which our customers have been able to sell ZADAXIN through to other parties, primarily hospital pharmacies. During the six months ended June 30, 2012, we believe that the levels of ZADAXIN channel inventory grew moderately. During the three months ended September 30, 2012, we believe that the levels of ZADAXIN channel inventory grew significantly. We estimate that approximately $14 million of our revenue recognized in the three months ended September 30, 2012 related to the increase of ZADAXIN channel inventory levels at our customers in China. The increase in ZADAXIN channel inventory may adversely affect our revenue in future quarters.

We have revised and we are implementing changes in our strategy for ZADAXIN market penetration. In addition, we believe that our sales organization’s efforts may have been affected by turnover, particularly at senior management levels. We are recruiting experienced new senior-level sales and other management, particularly following the announced departures of two of our senior executives in China. We are also taking other measures which may address the channel build up, including working with one importer on an exclusive basis and implementing various programs to expand market demand. We anticipate additional departures including among senior sales personnel in our ZADAXIN business unit. During this transition period, and if we are unable to achieve our objectives for increased demand, we may experience declines in our quarterly sales revenue in the near term and our sales and profitability for the next few quarters may significantly decrease as compared to the preceding quarter.

In addition, during the second quarter of 2009, we experienced a strong upsurge in ZADAXIN sales which we believe was attributable both to the increasing penetration of ZADAXIN within the Chinese market, as well as concerns in China from the H1N1 influenza virus. If distributors and hospitals that purchase ZADAXIN stockpile more ZADAXIN than needed for current use, our sales of ZADAXIN may suffer as distributors and hospitals use ZADAXIN already in their inventory before purchasing additional product from us. This could lead to uneven future revenue results for ZADAXIN and in turn materially impact our cash flow and business condition.

Our revenue will continue to be substantially dependent on our maintaining regulatory licenses and compliance with other regulations.

We have received regulatory approvals to import and market ZADAXIN in China and to manufacture ZADAXIN and export the product from Italy. In order to continue our sales to China, we need to maintain these approvals. Our license to import ZADAXIN into China needs to be renewed every five years and the next renewal is required in 2013. Although we were successful in obtaining a renewal in 2008 and 2003, there is no assurance that we will receive renewals in the future when applied for or that the renewals will not be conditioned or limited in ways that limit our ability to sell ZADAXIN to China.

Our licenses to manufacture and export ZADAXIN from Italy are dependent upon our continuing compliance with regulations in Italy. Our business would be adversely affected if we are not able to maintain these approvals. In order to sell ZADAXIN to the licensed importers in China, our manufacturers must 1) be approved by the Italian Ministry of Health (“AIFA”) and 2) be accepted by the State Food and Drug Administration of China (“SFDA”). Some manufacturing changes may require: 1) approval by AIFA in Italy and/or 2) be accepted by the SFDA, the Chinese equivalent of the FDA. In addition, we must obtain an Imported Drug License (“IDL”) from the SFDA permitting the importation of ZADAXIN into China in order to sell ZADAXIN to the licensed importers in China. ZADAXIN registration in Italy has been essential to the renewal of our IDL from the SFDA permitting the importation of ZADAXIN into China. Our ability to continue to renew our IDL from the SFDA permitting the importation of ZADAXIN into China could be adversely affected, if we were to fail to maintain ZADAXIN registration in Italy. The SFDA, AIFA and other regulatory agencies may, and have, changed their internal administrative rules in ways that may delay or complicate the regulatory approval process. Those changes are not always disclosed or known to us and we may experience unexpected delays or additional costs as a result of such changes. Our product has been distributed in Italy through BioFutura Pharma Srl (“BioFutura”), a subsidiary of Sigma-Tau Finanziaria, S.p.A. (“Sigma-Tau”). In August 2012, we entered into an agreement with BioFutura to continue to distribute ZADAXIN for SciClone in Italy. However, if we are not able to continue this arrangement, we will need to establish alternative distribution operations in Italy to ensure continuing compliance with regulations in Italy and maintain our Italian licenses.

 

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Our ZADAXIN sales and operations in other parts of China and the world are subject to a number of risks and increasing regulations, including difficulties and delays in obtaining registrations, renewals of registrations, permits, pricing approvals and reimbursement, increasing regulation of product promotion and selling practices, unexpected changes in regulatory requirements and political instability.

We face risks related to the potential outcomes of the SEC investigation regarding FCPA compliance and other matters and DOJ investigation regarding the FCPA including potential penalties, substantial expenses and the use of significant management time and attention, and changes in our marketing and sales practices that could affect our ability to generate revenue, any of which could adversely affect our business.

In August 2010, we received notices of investigations by US government agencies that relate to our operations in China including compliance with the FCPA and we subsequently initiated an internal investigation regarding these matters. In connection with the formal, non public SEC investigation, the SEC issued a subpoena to us requesting documents regarding a range of matters including but not limited to documents relating to potential payments or transfer of anything of value to regulators and government-owned entities in China; documents relating to bids or contracts with state or government-owned entities in China; documents relating to intermediary or local agent of the Company in China; documents regarding the Company’s ethics and anti-corruption policies, training, and audits; and documents relating to certain Company financial and other disclosures made by the Company. The DOJ is currently conducting an investigation of us in connection with compliance with the FCPA, as to which they have advised us that the DOJ has information about the Company’s practices suggesting possible violations. We have been cooperating with, and will continue to cooperate with, the investigations by and inquiries from the SEC and DOJ. In response to these matters, our Board of Directors appointed the Special Committee of independent directors to oversee our response to the government inquiry. The Special Committee conducted an independent investigation as to matters reflected in and arising from the SEC and DOJ investigations including, but not limited to, certain sales and marketing matters in China, in order to evaluate whether any violation of the FCPA or other laws occurred.

The Special Committee has substantially concluded its investigation and reached a number of findings, including that we lacked appropriate internal controls to assure compliance with laws, including the FCPA, with respect to sales and marketing practices including payments for, or reimbursement of, third party gifts, travel and entertainment expenses, and sponsorships of certain conferences and symposia. The Special Committee identified evidence of sales and marketing activities that might constitute potential violations of the FCPA. We are undertaking certain remedial measures recommended by the Special Committee and adopted by our Board of Directors. However, the SEC’s and DOJ’s formal investigations are continuing.

We are unable to predict what consequences that any investigation by any regulatory agency or by our Special Committee may have on us. These and any other regulatory investigations and our cooperation with them has resulted in substantial legal and accounting expenses, and has diverted management’s attention from other business concerns and could harm our business. If we fail to comply with regulations or to carry out controls on our Chinese or other foreign operations in a manner that satisfies all applicable laws, our business would be harmed. Any civil or criminal action commenced against us by a regulatory agency could result in administrative orders against us, the imposition of significant penalties and/or fines against us, and/or the imposition of civil or criminal sanctions against certain of our officers, directors and/or employees. The investigations, results of the investigations, or remedial actions we have taken or may take, if any, as a result of such investigations, may adversely affect our business in China. If we are subject to adverse findings resulting from the SEC and DOJ investigations, or from our own independent investigation, we could be required to pay damages or penalties or have other remedies imposed upon us. In addition, we will incur additional expenses related to remediative measures we are undertaking, and could incur fines or other penalties. The period of time necessary to resolve the investigations by the DOJ and the SEC is uncertain, and these matters could require significant management and financial resources which could otherwise be devoted to the operation of our business.

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 and to protect from fraudulent, illegal or unauthorized transactions. If we cannot provide effective controls and reliable financial reports, our business and operating results could be harmed. Moreover, as a US-based corporation doing business in China, these controls often need to satisfy the requirements of Chinese law as well as the requirements of US law which frequently differ in certain aspects. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. For example, during the third quarter of 2012, our management determined that we had a material weakness related to the design and operating of our controls primarily associated with product returns reserves and the override of certain controls in the financial statement close process related to our NovaMed subsidiary. As of December 31, 2010, we also had two material weaknesses related to our controls over (i) our implementation of our policy on compliance with laws and (ii) our accounting for income taxes. We continue to work on improvements to our internal controls and there can be no assurance that these or other material weaknesses will not occur in the future. Any failure to implement and maintain controls over our financial reporting or difficulties encountered in the implementation of improvements in our controls, could cause us to fail to meet our reporting obligations. Any failure to improve our internal controls or to address identified weaknesses in the future, if they were to occur, 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 legislation may impact our financial position or results of operations.

 

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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 The NASDAQ Stock 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 are at risk of additional securities class action and derivative lawsuits.

Securities class action and derivative lawsuits are often filed against public companies following a decline in the market price of their securities. We were sued after our announcement regarding SEC and DOJ investigations and we and certain of our officers and directors have been named as parties in purported stockholder class actions and derivative lawsuits. The class action lawsuits have been dismissed and we have settled the derivative lawsuits. However, we may be named in additional litigation, all of which will require significant management time and attention and result in significant legal expenses and may result in an unfavorable outcome which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We may experience stock price volatility in the future, either related to announcements regarding the SEC and DOJ investigation, our own investigations related thereto or other matters. This risk is especially relevant for us because biotechnology companies have experienced greater than average stock price volatility in recent years. Such litigation could result in additional substantial costs and a diversion of management’s attention and resources, which could harm our business.

We may not be able to successfully develop or commercialize our products in China or the US.

Following the acquisition of NovaMed, we have numerous products under development in China and during 2011 and the first quarter of 2012, we were developing SCV-07, a small molecule synthetic peptide with immunomodulating properties, in a phase 2b clinical trial in the US for the delayed onset of oral mucositis (“OM”).

Clinical trials are inherently risky and may reveal that our product candidates are ineffective or have unanticipated side effects and/or drug interactions that may significantly decrease the likelihood of regulatory approval. For example, in March 2012 we announced the discontinuation of our phase 2b clinical trial evaluating SCV-07 for the delayed onset of OM. This decision was based on the results of a pre-planned interim analysis that indicated that the trial would not meet the pre-specified efficacy endpoints, and we have no plans to proceed with further development of SCV-07 at this time.

The regulatory approval processes in the US, Europe and China are demanding, lengthy and expensive. We have committed significant resources, including capital and time, to develop and seek approval for products under development, and if we do not obtain approvals we are seeking, we may be unable to achieve any revenue from these products. All new drugs, including our product candidates, are subject to extensive and rigorous regulation by the FDA, SFDA and similar regulatory agencies. 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.

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. We have experienced delays in the regulatory process and continue to experience delays, and there exists risk that we may not receive approval, including with the approval process for DC Bead. In addition, the Chinese government is increasing its efforts to reduce overall health care costs, including pricing controls on pharmaceutical products. We cannot determine what the potential government pricing constraints are likely to be for products in development in advance. Therefore, we may be required to abandon the development or commercialization of a product after significant effort and expense if we determine at any time that trends in government pricing constraints will make the commercialization of a product unprofitable.

 

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To fully develop these products and other products we may acquire, substantial resources are required for extensive research, development, pre-clinical testing, clinical trials, and 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. We are obligated to make a milestone payment upon regulatory approval of certain products under development. 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.

Market acceptance of any product that is successfully developed and approved will depend on many factors, including our ability to convince prospective customers to use our products as an alternative to other treatments and therapies. 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. In addition, for certain products we may need to convince partners to manufacture or market our products. Failure to do any of the above will lead to an unfavorable outcome on the results of our operations.

Our success is dependent upon the success of our sales and marketing efforts in China, and we may experience difficulties in complying with regulations, slow collections or other matters that could adversely affect our revenue in China. *

Following the acquisition of NovaMed, we have numerous products on the market in China in addition to ZADAXIN. Our future revenue growth depends to a great extent on increased sales of ZADAXIN to China and increased sales of the products promoted or marketed by NovaMed. If we fail to continue to successfully market ZADAXIN or NovaMed’s product portfolio, our revenue and operating results will be limited. If unexpected and serious adverse events are reported, or if expected efficacy results are not achieved, it would have a material adverse effect on our business.

Our sales are concentrated in China and we face risks relating to operating in a China, including pricing and other regulations, slow payment cycles and exposure to fluctuations in the Chinese economy.

The Chinese government is increasing its efforts to reduce overall health care costs, including pricing controls on pharmaceutical products. Individual provinces in China and, in some cases, individual hospitals can and have established pricing requirements for a product to be included on formulary lists. The Chinese government has recently imposed price restrictions on ZADAXIN, Aggrastat and various oncology products we promote. The national reimbursement retail list price, or hospital pharmacy level price, of ZADAXIN has been reduced by approximately 18% in China. Based on an agreement with our primary importer of ZADAXIN into China, our importer will take a larger share of the price reduction impact, and the actual impact on SciClone’s revenue and margins is expected to be less than a 5% decrease in our future sales price of ZADAXIN to the importer in China. In exchange for this favorable arrangement, we expanded exclusivity for the importer. Over the long term, we believe that the price reductions may positively affect our sales volumes and result in broader penetration into Tier 3 and Tier 2 cities in target geographies, potentially increasing our total sales revenues from these products. However, the process and timing for any price restrictions is unpredictable and further price reduction could be imposed that could adversely affect our business. Further, the successful sales and marketing of all of NovaMed’s products requires continuing compliance with other regulations in China relating to the import, manufacture, approval and distribution of products and if we or our partners are not able to obtain or maintain necessary licenses or other approvals, our operations would be adversely affected.

We experience other issues with managing sales operations in China including long payment cycles, potential difficulties in timely accounts receivable collection and, especially from significant customers, fluctuations in the timing and amount of orders and the adverse effect of any of these issues on our business could be increased due to the concentration of our business with a small number of distributors. Problems with collections from, or sales to, any one of those distributors could materially adversely affect our results. Operations in foreign countries including China 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 these matters, or if significant political, economic or regulatory changes occur, our results could be adversely affected.

Our operations throughout the world including China are potentially subject to the laws and regulations of the US including the FCPA, in addition to the laws and regulations of the other countries. Regulation in China of the activities in the pharmaceutical industry has increased and may continue to undergo significant and unanticipated changes. A number of companies have faced significant expenses or fines as a result of the increasing regulation of, and enforcement activity regarding, the pharmaceutical industry.

 

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Currently all of our revenue is generated from customers located outside the US, and a substantial portion of our assets, including employees, are located outside the US. US income taxes and foreign withholding taxes have not been provided on undistributed earnings of non-US subsidiaries, because such earnings are intended to be indefinitely reinvested in the operations of those subsidiaries. The US government may propose initiatives that would substantially reduce our ability to defer US taxes including: repealing deferral of US taxation of foreign earnings, eliminating utilization or substantially reducing our ability to claim foreign tax credits, and eliminating various tax deductions until foreign earnings are repatriated to the US. If any of these proposals are constituted into legislation, they could increase our US income tax liability and as a result have a negative impact on our financial position and results of operations.

Our business strategy is dependent in part upon our agreements with third parties for the rights to develop and commercialize products, or promote products, particularly in China. If we fail to maintain such agreements, or if we fail to enter into additional agreements, our business will suffer.

Our sales and marketing strategy in China depends significantly upon agreements with third parties, and potentially upon entering into additional agreements with third parties, or re-negotiating agreements with third parties. Except for ZADAXIN, our rights to develop, market and sell our products in China, including the products currently promoted or sold by our subsidiary, NovaMed, are held by us under license, promotion, distribution or marketing agreements with third parties. These agreements for products on the market including DepaKine, Stilnox, Tritace and Aggrastat, and products in the regulatory review process, including DC Bead and several of NovaMed’s products in clinical trial, are held under license, distribution or marketing agreements. In addition, our success in the future may be dependent upon entering into similar agreements with other parties and the renewal of any such agreements. The third parties to these agreements are generally not under an obligation to renew the agreements. If any of these agreements are terminated, or if they are not renewed, our ability to distribute, or develop, the products or product candidates could be terminated and our business could be adversely affected. In addition, if any of such agreements acquired in our NovaMed acquisition are not renewed, we could incur a decline in sales revenues. Renegotiation of agreements can also occur prior to discussions of contract renewals. We have had disputes with collaborators in the past, and are in negotiations regarding disputes with current collaborators regarding product candidates in the regulatory approval process. We are currently in a dispute with MEDA regarding NovaMed’s agreement with MEDA which, if not resolved favorably to us, would prevent us from distributing Tramadol in China which would adversely affect our future revenues. See Part II, Item 1 “Legal Proceedings”. Such disputes have arisen, and may arise in the future over the performance of each party’s obligations under the agreements, ownership rights to intellectual property, know-how or technologies developed with our collaborators. Disputes with collaborators or licensors or others could cause us to incur legal costs and could result in the loss of rights to products, loss of potential revenue, or other disruptions in our business.

All of our products were originally obtained by us under licenses, promotion, distribution or similar third-party agreements. We do not conduct product discovery and our ability to bring new products to market is dependent upon our entering into additional acquisition, in-licensing, promotion or distribution agreements, particularly in China. The competition for attractive products is intense, and we cannot assure you that we will be able to negotiate in-license, promotion or distribution agreements for additional products in the future on acceptable terms, if at all.

We may lose market share or otherwise fail to compete effectively in the intensely competitive pharmaceutical industry.

Competition in the pharmaceutical industry in China is intense, and we believe 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. 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 our targeted indications that will be superior to ours.

We depend on sales to China, and global conditions could negatively affect our operating results or limit our ability to expand our operations in and outside of China. Changes in China’s political, social, regulatory and economic environment may affect our financial performance.

Our business is concentrated in China. Heightened tensions resulting from the current geopolitical conditions in the Middle East, North Korea and elsewhere could worsen, causing disruptions in foreign trade, 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.

 

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With respect to China, our financial performance may be affected by changes in China’s political, social, regulatory and economic environment. The role of the Chinese central and local governments in the Chinese economy is significant. Chinese policies toward economic liberalization, and laws and policies affecting foreign companies, currency exchange rates and other matters could change, resulting in greater restrictions on our ability to do business in China. Any imposition of surcharges or any increase in Chinese tax rates could hurt our operating results. The Chinese government could revoke, terminate or suspend our license for national security and similar reasons without compensation to us. If the government of China were to take any of these actions, we would be prevented from conducting all or part of our business. Any failure on our part to comply with governmental regulations could result in the loss of our ability to market our products in China.

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. *

Imported products in China, including ZADAXIN and NovaMed’s imported products, are distributed through a tiered method to import and distribute finished pharmaceutical products. Promoted products are typically sold from our partner companies within China to the primary distributor with the following distribution being the same for imported as well as promoted 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 imported product shipment to determine whether it 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 an annual period. Therefore, 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 a limited number of importers, in any given quarter, to supply our products and most of our ZADAXIN sales are now through three importers, including one newly established importer, and our receivables from those importers are material, and if we were unable to collect receivables from those importers or any other importer, our business and cash-flow would be adversely affected. Our importers are not obligated to place purchase orders for our product, and if they determined for any reason not to place purchase orders, we would need to seek alternative licensed importers, which could cause fluctuations in our revenue.

The existence of counterfeit pharmaceutical products in China’s pharmaceutical retail market may damage our brand and reputation and have a material adverse effect on our business, financial condition, results of operations and prospects.

Certain medicine products distributed or sold in China’s pharmaceutical retail market, including those appearing to be our products, may be counterfeit. Counterfeit products are products sold under the same or very similar brand names and/or having a similar appearance to genuine products. Counterfeit products, including counterfeit pharmaceutical products, are a significant problem in China. Such products divert sales from genuine products, often are of lower cost, often are of lower quality (having different ingredients or formulations, for example), and have the potential to damage the reputation for quality and effectiveness of the genuine product. The counterfeit pharmaceutical product regulation control and enforcement system in China is not able to completely eliminate production and sale of counterfeit pharmaceutical products. Any sale of counterfeit products resulting in adverse side effects to consumers may subject us to negative publicity and expenses. It could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may be subject to currency exchange rate fluctuations, which could adversely affect our financial performance.

A majority of our product sales are denominated in US dollars and a significant portion of our sales and expenses are denominated in renminbi. Fluctuation in the US dollar exchange rate with local currency directly affects the customer’s cost for our product. In particular, a stronger US dollar vis-à-vis the local currency would tend to have an adverse effect on sales and potentially on collection of accounts receivable. China currently maintains the value of the renminbi in a narrow currency trading band that may or may not fluctuate based upon government policy. Depending on market conditions and the state of the Chinese economy, China has intervened in the foreign exchange market in the past to prevent significant short-term fluctuations in the renminbi exchange rate, and it could make future adjustments, including moving to a managed float system, with opportunistic interventions. This reserve diversification may negatively impact the US dollar and US interest rates. A trend to a stronger US dollar would erode margins earned by our Chinese importers and prompt them to ask us to lower our prices. A weaker US dollar would increase our in-country China operating expenses, and with the addition of NovaMed, our China operating expenses have increased. 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 operations 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.

 

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We cannot predict the safety profile of the use of ZADAXIN, Depakine, or other drugs we may develop or market when used in combination with other drugs. *

Many of our prior trials involved the use of ZADAXIN in combination with other drugs. We cannot predict how ZADAXIN, Depakine, or other drugs we may develop or market 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, Depakine, or other drugs we may develop or market when used in certain combination therapies.

If third-party reimbursement is not available or patients cannot otherwise pay for ZADAXIN, Depakine, or other drugs we may develop we may not be able to successfully market them. *

Significant uncertainty exists as to the reimbursement status of therapeutic products, such as ZADAXIN and Depakine or other drugs we may develop. We cannot assure you that third-party insurance coverage and reimbursement will be available for therapeutic products we might develop. Although ZADAXIN receives some limited reimbursement in certain provinces in China, we cannot assure you that we will be able to maintain existing reimbursements or increase third-party payments for ZADAXIN or obtain third-party payments for other products which we sell or develop 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 US 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.

Recent efforts by governmental and third-party payers to contain or reduce health care costs and the announcement of legislative proposals and reforms to implement government controls has caused us to reduce the prices at which we market our drugs in China, and additional reforms, if they were to occur, could cause us to further reduce our prices which could reduce our gross margins and may harm our business.

We rely on third parties who are our sole source suppliers for our clinical trial and commercial products and their inability to deliver products that meet our quality-control standards 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 commercial products. Any deficiencies or shortages in supply of our commercial products would adversely affect our ability to realize our sales plans. For example, the manufacturing of the raw material and the processing to finished product of ZADAXIN is done in few batches in any given three-month period and any manufacturing errors have the potential to require a product recall. We currently have only one approved finished vial manufacturer and two approved active pharmaceutical ingredient (“API”) suppliers. If we experience a problem with the manufacturer or our suppliers our sales may suffer. We and NovaMed have each experienced difficulties with obtaining product from manufacturers in the past. During 2012, we have experienced limitations on supply of Depakine IV, Perenan, Methotrexate, and Rulide and the growth in the sales of those products has been affected. During 2011, we experienced manufacturing delays related to repairs for general, non-production-related facilities equipment at one of our API suppliers. During 2010, we experienced difficulties validating upgrades to equipment with one of our API manufacturers. Although we are taking steps to ensure that such problems do not continue, there is no assurance that we will either be successful in doing so with our current supplier or be able to timely and cost-effectively qualify new suppliers for this component. Manufacturing interruptions or failure or delay of product to meet quality assurance specifications could adversely affect shipments and recognition of sales of our products in any period and impair our relationships with customers and our competitive position and may increase the cost of material produced. In addition, each of the products that are marketed through our new NovaMed subsidiary is manufactured by, or obtained from, a single source.

We also rely on third parties, who are subject to regulatory oversight, to supply drug product for our clinical trials. For example, Biocompatibles is the sole supplier of DC Bead, and Depakine, Stilnox, Tritace and other products in either finished product or active pharmaceutical ingredient are manufactured by or for Sanofi-Aventis, Pfizer and other partners of our subsidiary, NovaMed. Any unanticipated deficiencies in these suppliers, or the suppliers of our raw materials, and/or recall of the manufacturing lots used in our clinical trials could delay the trials or detract from the integrity of the trial data and its potential use in future regulatory filings. In addition, manufacturing interruptions or failure to comply with regulatory requirements by any of these suppliers 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 and impair our competitive position.

If our thymalfasin API or ZADAXIN products are not shipped and stored at precision temperatures, the products could become damaged, which could negatively affect our sales and operating results. *

 

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Thymalfasin API and ZADAXIN are temperature sensitive products. SciClone relies on third party organizations to provide controlled temperature shipping logistics services from the point of ownership transfer from the API contract manufacturer to the point where thymalfasin API is converted to ZADAXIN drug product, and from the ZADAXIN drug product manufacturing site to our storage locations in Hong Kong and then to China. Although some temperature excursions are allowable and thymalfasin and ZADAXIN are relatively stable when exposed to temperatures higher than recommended, if any third party logistics or equipment provider fails to perform their required oversight duties with respect to temperature control or a shipment is delayed in transit for a prolonged period of time, the thymalfasin API or ZADAXIN drug product could become unsuitable for subsequent processing or commercial use. Although we have not experienced cold chain interruptions in the past and our distributors in China may maintain several months supply of our product, were our cold chain distribution or warehouse capability to be interrupted, our ability to timely deliver finished product to China could be adversely affected which in turn could materially adversely affect our sales and operating results.

We rely on third parties for development of our products and the inability of any of these parties to reliably, timely or cost-effectively provide us with their obligated services could materially harm the timing of bringing our products to market and accordingly adversely affect our business.

We rely on third parties, such as contract research organizations, medical institutions, clinical investigators, contract laboratories, and collaborative partners in the conduct of clinical trials for our product candidates. If these parties, whom we do not control, do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines or choose not to continue their relationship with us, if the third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical or clinical activities may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize our product candidates.

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, Biocompatibles is providing SciClone with product samples and the necessary supporting documents to obtain regulatory approval in China for DC Bead. We generally do not have control over the amount and timing of resources that our business partners devote to our collaborative efforts, and some 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.

If we are unable to retain our key personnel, or are unable to attract and retain additional, highly skilled and experienced personnel, including the ability to expand our sales staff, 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. Further, we are also dependent on our ability to appropriately staff these personnel in appropriate positions as our business fluctuates. Further, our efforts to in-license or acquire, develop and commercialize product candidates for China require the addition of clinical and regulatory personnel and the capabilities to expand our sales and marketing operation. 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 were any one of them to choose to leave employment with us. There is intense competition for qualified management, scientific, clinical, regulatory, and sales and marketing personnel in the pharmaceutical industry.

There is significant turnover in the industry in China in particular, and we have also experienced turnover in our sales personnel and key employees. We may not be able to attract and retain the qualified personnel we need to grow and develop our business globally. In particular, if we are unable to retain key personnel from the acquisition of NovaMed, particularly sales and marketing personnel with expertise in the products they promote and regulatory personnel, our business may suffer and could result in our not achieving the anticipated benefits of the acquisition.

We recently announced departures of key personnel from our NovaMed subsidiary, including the individual who is our Chief Executive Officer of SciClone’s China operations and former CEO of NovaMed who announced he will resign prior to December 31, 2012, and our Chief Operating Officer in China who left in October 2012. We anticipate additional departures including among senior sales personnel in our ZADAXIN business unit and our future success will depend in part on our recruiting senior sales personnel in China. We are currently recruiting executives to address departures and to expand and strengthen our China operations. In addition, we terminated personnel who were involved in the override of certain controls in the financial statement close process at our NovaMed subsidiary that resulted in a material weakness.

 

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Conversely, if we need to reduce the size of a particular aspect of our business including if we have contracts that are not renewed or re-negotiated for products we market or promote, we are also dependent on our ability to make such adjustments while retaining suitably skilled personnel. We have taken corrective measures based upon the findings of our Special Committee relating to its investigation of matters relating to the FCPA and have, and expect to continue to take corrective measures relating to managements’ evaluation of internal control over financial reporting which could have adverse effects on our business, including the loss of personnel, and changes in marketing, sales and educational practices or programs.

If we were unable to attract and retain qualified personnel as needed or promptly replace those employees who are critical to our sales, development and other operations, and in particular senior executives, our financial results and operations would be adversely affected. At this time, we do not maintain “key person” life insurance for any of our personnel.

We may need to obtain additional funding to support our long-term product development and commercialization programs. *

We believe our existing cash and investments and ongoing revenue generating business operations will be sufficient to support our current operating plan for at least the next 12 months. However, we used $21.3 million of our cash and cash equivalents, net of cash acquired, to acquire NovaMed, and have incurred substantial investment banking, legal and other fees, some of which will continue and the potential earn-out payments related to the acquisition, if targets are met, could be up to $43.0 million in cash. In addition, in May 2012, we announced that our Board of Directors has approved an increase in our share repurchase program that authorizes the Company to repurchase up to a total of $30.5 million of its outstanding common stock. As of September 30, 2012, $8.7 million of the $30.5 million remained available under the repurchase program for future share repurchases. Subsequent to September 30, 2012, our Board of Directors approved an additional increase of $10 million to the Company’s stock repurchase program bringing the total authorized since the program’s inception to $40.5 million, and as of November 6, 2012 the total remaining available for repurchase was $16.2 million. Further, we may use cash to acquire additional product rights or for future acquisitions. Our ability to achieve and sustain operating profitability is dependent on numerous factors including our ability to achieve our goal of increasing sales of ZADAXIN, securing regulatory approval for DC Bead in China, and for our other products and products we acquired as a result of the NovaMed acquisition, the execution and successful completion of clinical trials in China, securing partnerships for those programs that lead to regulatory approvals in major pharmaceutical markets, and successfully continuing NovaMed’s sales and integrating NovaMed into our business. We cannot assure you that such funds from operating activities will be sufficient, or that we will attain profitable operations in future periods. In addition, 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 are subject to the risk of increased income taxes which could reduce our future operating income.

We have structured our operations in a manner designed to maximize income in countries where:

 

   

tax incentives have been extended to encourage foreign investment; or

 

   

income tax rates are low.

Our taxes could increase if certain tax holidays or incentives are not renewed upon expiration, or if tax rates applicable to us in such jurisdictions are otherwise increased. For example, on March 16, 2007, the Chinese government passed a unified enterprise income tax law which became effective on January 1, 2008. Among other things, the law cancels many income tax incentives previously applicable to one of our subsidiaries in China. The law provides a transition rule which increased the tax rate of one of our subsidiaries in China over a 5 year period to 25% by 2012. The law also increased the standard withholding rate on earnings distributions to between 5% and 10% depending on the residence of the shareholder. The ultimate effect of these and other changes in Chinese tax laws on our overall tax rate will be affected by, among other things, our China income, the manner in which China interprets, implements and applies the new tax provisions, and by our ability to qualify for any exceptions or new incentives.

In addition, the Company and its subsidiaries are regularly subject to tax return audits and examinations by various taxing jurisdictions, particularly in the US and China. In determining the adequacy of our provision for income taxes, we regularly assess the likelihood of adverse outcomes resulting from tax examinations. While it is often difficult to predict the final outcome or the timing of the resolution of a tax examination, we believe that our reserves for uncertain tax positions reflect the outcome of tax positions that are more likely than not to occur. However, we cannot be certain that the final determination of any tax examinations will not be materially different than that which is reflected in our income tax provisions and accruals. Should additional taxes be assessed as a result of a current or future examination, there could be a material adverse effect on our tax provision, operating results, financial position and cash flows in the period or periods for which that determination is made.

 

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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 thymalfasin have expired, including composition of matter patents, we have rights to other patents and patent applications relating to thymalfasin and thymalfasin analogues, including method of use patents with respect to the use of thymalfasin for certain indications. Additionally, thymosin alpha 1 (“thymalfasin”), the chemical composition of thymalfasin, has received Orphan Drug designation in the US for the treatment of stage 2b through stage 4 melanoma. If other parties develop generic forms of thymalfasin 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 thymalfasin. If other parties develop analogues or derivatives of thymalfasin, 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 thymalfasin. We do not have composition patent claims directed to the same form of thymalfasin currently marketed in China, our largest market, although we do have other type of patent claims, pending or issued, directed to other aspects of thymalfasin therapy. Other companies market generic thymalfasin in China, sometimes in violation of our patent, trademark or other rights which, to date, we have defended by informing physicians and hospitals of the practice. 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 our not infringing valid, enforceable patents or proprietary rights of third parties, and not breaching any licenses that may relate to our technologies and products. 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 nine 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 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.

 

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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 US 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.

Substantial sales of our stock or the exercise or conversion of options may impact the market price of our common stock. *

In March 2012, we filed a Form S-3 Shelf registration with the SEC under which we may offer and sell up to $100.0 million of our securities, assuming we continue to meet the SEC’s eligibility requirements for primary offerings on Form S-3. Subsequently, affiliates of Sigma-Tau sold approximately 6.3 million shares for an aggregate price of approximately $33.1 million under this registration statement, and we have approximately $66.9 million available for future use. In addition, we issued 8,298,110 shares of the Company’s common stock to NovaMed under the terms of the acquisition in April 2011 and former NovaMed stockholders own approximately 15% of our outstanding common stock after the transaction. We have granted registration rights for those shares and the shares are freely tradable. Sales of the shares could lead to a decrease in the market price of our common stock.

Future issuances 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 or sell equity in a subsidiary, the percentage ownership of our present stockholders of the respective entities will be reduced and the price of our common stock may fall.

Our cash and investments are subject to certain risks which could materially adversely affect our overall financial position.

We invest our cash in accordance with an established internal policy and customarily in instruments which historically have been highly liquid and carried relatively low risk. However, with turmoil in the credit markets, similar types of investments have experienced losses in value or liquidity issues which differ from their historical pattern. For example, we routinely have invested in money market funds with large financial institutions. One or more of these funds could experience losses or liquidity problems and, although to date some of the largest financial institutions who sponsor such funds have offset similar losses, there is no assurance that our financial institutions would either not incur losses or would offset any losses were they to occur.

Any adjustment to decrease the ratings of our investments by an Interest Rate Rating Agency may have a negative impact on the value of our investments.

Should any of our cash investments permanently lose value or have their liquidity impaired, it would have a material and adverse effect on our overall financial position by imperiling our ability to fund our operations and forcing us to seek additional financing sooner than we would otherwise and such financing may not be available on commercially attractive terms.

In addition, financial instruments may subject us to a concentration of credit risk. Most of our cash, and cash equivalents are held by a limited number of financial institutions. To date, we have not experienced any losses on our deposits of cash and cash equivalents. However, if any of these instruments permanently lost value or had their liquidity impaired, it would also have a material and adverse effect on our overall financial position by imperiling our ability to fund our operations and forcing us to seek additional financing sooner than we would otherwise and such financing may not be available on commercially attractive terms.

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.

 

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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 25% 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 15% 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, on December 18, 2006, our Board of Directors declared a dividend distribution of one Preferred Stock Purchase Right (collectively, the “Rights”) for each outstanding share of our Common Stock, each Right which entitles the registered holder to purchase from the Company one one-thousandth of a share of the Company’s Series D Preferred Stock, $0.001 par value, at a price of $25.00 pursuant to a Rights Agreement dated as of December 19, 2006, between the Company and Mellon Investor Services LLC. The Rights have certain anti-takeover effects. Under certain circumstances the Rights could cause substantial dilution to a person or group who attempts to acquire the Company on terms not approved by our Board of Directors. Although the Rights should not interfere with an acquisition of the Company approved by the board, the Rights may have the effect of delaying and perhaps improving the terms of an acquisition for our stockholders, or deterring an acquisition of the Company. Also, under applicable Delaware law, our Board of Directors may adopt additional anti-takeover measures in the future.

We may be subject to product liability lawsuits, and our insurance may be inadequate to cover damages.*

Clinical trials of any of our current and potential products or the actual commercial sales of our product 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, that any insurance we have will cover any particular claim that is asserted, 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.

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 business and operations are subject to the risks of being based in particular locations known for earthquakes, other natural catastrophic disasters and service interruptions.

Our corporate headquarters are located in the Silicon Valley area of Northern California, a region known for seismic activity. Although we maintain a disaster recovery policy that includes storage of important corporate data in a different geographic region of the US, all of our significant corporate data is stored in our headquarters facility and accordingly, a significant natural disaster, such as an earthquake, could have a material adverse impact on our business, operating results, and financial condition. Most of our sales are into China for which we maintain our warehouses for finished goods in Hong Kong, which can experience severe typhoon storms, earthquakes or other natural catastrophic disasters. Although our distributors in China may maintain several months supply of our product, were our warehouse capability to be interrupted, either through a natural disaster such as flooding or through a service interruption, such as a lack of electricity to power required air conditioning, our ability to timely deliver finished product to China could be adversely affected which in turn would materially adversely affect our sales and ensuing operating results.

We May Be Affected by Climate Change and Market or Regulatory Responses to Climate Change.

Climate change, including the impact of global warming, could have a material adverse effect on our results of operations, financial condition, and liquidity if it were to disrupt the demand, supply or delivery of product, management of our business, or result in cost increases as a result of government regulation.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The table below summarizes our stock repurchase activity for the three months ended September 30, 2012 ( in thousands, except per share amounts ):

 

                   Total Number      Approximate  
                   of Shares      Dollar  
                   Purchased as Part      Value of Shares  
     Total      Average      of Publicly      that May Yet Be  
     Number      Price      Announced      Purchased  
     of Shares      Paid      Plans      Under the  
     Purchased      per Share      or Programs      Plans or  Programs (1)  

July 1, 2012 through July 31, 2012

     388       $ 6.40         388       $ 15,687   

August 1, 2012 through August 31, 2012

     750       $ 4.96         750         11,966   

September 1, 2012 through September 30, 2012

     700       $ 4.70         700         8,674   
  

 

 

       

 

 

    

Total

     1,838       $ 5.17         1,838      
  

 

 

       

 

 

    

 

(1) “Approximate dollar Value of shares that May Yet Be Purchased Under the Plans or Programs” reflects an increase of $10.5 million announced May 2012, bringing the total authorized since the program’s inception in October 2011 to $30.5 million, less the $21.8 million we repurchased through September 30, 2012. Subsequent to September 30, 2012, our Board of Directors approved an additional increase of $10 million to the Company’s stock repurchase program bringing the total authorized since the program’s inception to $40.5 million, and as of November 6, 2012 the total remaining available for repurchase was $16.2 million.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

 

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Item 6. Exhibits

 

Exhibit
Number

 

Description

  10.1 (1) **   Change in Control Agreement effective August 3, 2012 by and between Stephanie Wong and SciClone Pharmaceuticals, Inc.
  10.2 (1) **   Change in Control Agreement effective August 3, 2012 by and between Lan Xie and SciClone Pharmaceuticals, Inc.
  10.3 (1) **   Executive Severance Agreement effective August 3, 2012 by and between Stephanie Wong and SciClone Pharmaceuticals, Inc.
  10.4 (1) **   Executive Severance Agreement effective August 3, 2012 by and between Lan Xie and SciClone Pharmaceuticals, Inc.
  31.1 (1)   Rule 13a-14(a) Certification of Chief Executive Officer.
  31.2 (1)   Rule 13a-14(a) Certification of Chief Financial Officer.
  32.1 (1)   Section 1350 Certification of Chief Executive Officer.
  32.2 (1)   Section 1350 Certification of Chief Financial Officer.
101***   The following materials from Registrant’s Quarterly Report on Form 10-Q for the three- and nine-months ended September 30, 2012, formatted in Extensible Business Reporting Language (XBRL) includes: (i) Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, (ii) Condensed Consolidated Statements of Income for the Three- and Nine-Months Ended September 30, 2012 and 2011, (iii) Condensed Consolidated Statements of Comprehensive Income for the Three- and Nine-Months Ended September 30, 2012 and 2011, (iv) Condensed Consolidated Statements of Cash Flows for the Nine-Months Ended September 30, 2012 and 2011, and (v) Notes to Condensed Consolidated Financial Statements.

 

(1) Filed Herewith.
** Management compensatory plan or arrangement.
*** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Exchange Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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SIGNATURE

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

 

    SCICLONE PHARMACEUTICALS, INC.
    (Registrant)
Date: November 9, 2012    

/s/ Gary S. Titus

    Gary S. Titus
    Senior Vice President, Finance and Chief Financial Officer

 

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INDEX TO EXHIBITS

 

Exhibit

Number

 

Exhibit

  10.1 (1) **   Change in Control Agreement effective August 3, 2012 by and between Stephanie Wong and SciClone Pharmaceuticals, Inc.
  10.2 (1) **   Change in Control Agreement effective August 3, 2012 by and between Lan Xie and SciClone Pharmaceuticals, Inc.
  10.3 (1) **   Executive Severance Agreement effective August 3, 2012 by and between Stephanie Wong and SciClone Pharmaceuticals, Inc.
  10.4 (1) **   Executive Severance Agreement effective August 3, 2012 by and between Lan Xie and SciClone Pharmaceuticals, Inc.
  31.1 (1)   Rule 13a-14(a) Certification of Chief Executive Officer.
  31.2 (1)   Rule 13a-14(a) Certification of Chief Financial Officer.
  32.1 (1)   Section 1350 Certification of Chief Executive Officer.
  32.2 (1)   Section 1350 Certification of Chief Financial Officer.
101***   The following materials from Registrant’s Quarterly Report on Form 10-Q for the three- and nine-months ended September 30, 2012, formatted in Extensible Business Reporting Language (XBRL) includes: (i) Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, (ii) Condensed Consolidated Statements of Income for the Three- and Nine-Months Ended September 30, 2012 and 2011, (iii) Condensed Consolidated Statements of Comprehensive Income for the Three- and Nine-Months Ended September 30, 2012 and 2011, (iv) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011, and (v) Notes to Condensed Consolidated Financial Statements.

 

(1) Filed Herewith.
** Management compensatory plan or arrangement.
*** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Exchange Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

46

Exhibit 10.1

SCICLONE PHARMACEUTICALS, INC.

CHANGE IN CONTROL AGREEMENT

This Change in Control Agreement (the “Agreement” ) is effective as of August 3, 2012, by and between Stephanie Wong (the “Employee” ) and SciClone Pharmaceuticals, Inc., a Delaware corporation (the “Company” ).

RECITALS

A. The Employee presently serves as Vice President, Finance and Controller of the Company and performs significant strategic and management responsibilities necessary to the continued conduct of the Company’s business and operations.

B. The Board of Directors of the Company (the “Board” ) has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of the Employee, notwithstanding the possibility or occurrence of a Change in Control (as defined below) of the Company.

C. The Board believes that it is imperative to provide the Employee with certain severance benefits upon the Employee’s termination of employment following a Change in Control that will provide the Employee with enhanced financial security and provide sufficient incentive and encouragement to the Employee to remain with the Company following a Change in Control.

AGREEMENT

The Employee and the Company agree as set forth below:

1. Terms of Employment . The Company and the Employee agree that the Employee’s employment is “at will” and that their employment relationship may be terminated by either party at any time, with or without cause, and, if applicable, in accordance with section 2 below. If the Employee’s employment with the Company terminates for any reason following a Change in Control, but on or before the first anniversary of the Change in Control, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement. During her employment with the Company, the Employee agrees to devote her full business time, energy and skill to her duties with the Company. These duties shall include, but not be limited to, any duties consistent with the Employee’s position that may be assigned to the Employee from time to time by the Company or the Board.

 

1


2. Severance Benefits Upon Termination following a Change in Control . Subject to the limitations set forth in Sections 3 and 4 below, if the Employee’s employment with the Company terminates following a Change in Control but on or before the first anniversary of such Change in Control, then the Employee shall be entitled to receive, in addition to the compensation and benefits earned by the Employee through the date of her termination, severance benefits as follows:

(a) Involuntary Termination . If the Employee’s employment with the Company is terminated as a result of Involuntary Termination, then the Employee shall be entitled to receive the following severance benefits:

(i) The Employee shall be entitled to receive severance pay in an amount equal to one hundred percent (100%) of her annual base salary as in effect at the time of such termination. Any severance to which the Employee is entitled pursuant to this section shall be paid in a lump sum, less applicable withholding, within thirty (30) days following the Employee’s termination.

(ii) The Executive shall be entitled to receive a separation bonus equal to the gross amount of fifty percent (50%) of the average annual performance bonus paid to the Executive for the two (2) most recent fiscal years for which bonuses have been paid prior to the termination date.

(iii) With respect to any unvested options to purchase shares of the stock of the Company held by the Employee; Section 12.1 (b) of the 2005 Equity Incentive Plan, as amended (the “Plan”), notwithstanding, if a Change in Control occurs and the “Acquiror”, as defined in the Plan, does not assume the “Awards”, as defined in the Plan, held by Employee, then all such Awards held by Employee shall become fully vested and exercisable as of a date ten (10) business days prior to the occurrence of the closing of the transaction resulting in the Change in Control, with any acceleration and exercise subject to, and conditional upon, the actual closing of such transaction.”

(iv) The Employee shall be entitled to exercise all vested options to purchase shares of the stock of the Company held be the Employee (including any options to purchase shares that become vested for a period of twelve (12) months after the date of such termination (notwithstanding anything to the contrary otherwise provided under the terms and conditions of such options).

(v) The Company shall, if permitted under the Company’s existing health insurance plans, continue the Executive’s existing group health insurance coverage. If not so permitted, the Company shall reimburse the Executive for any COBRA premiums paid by the Executive for continued group health insurance coverage. Such health insurance coverage or reimbursement of COBRA premiums shall continue until the earlier of (i) twelve (12) months after the date of the Executive’s Involuntary Termination or (ii) the date on which the Executive commences New Employment.

(b) Voluntary Resignation; Termination For Cause . If the Employee’s employment terminates by reason of the Employee’s voluntary resignation (but not as a result of an Involuntary Termination) or as a result of the Employee’s termination for Cause, then the Employee shall not be entitled to receive any severance pay or benefits under this Agreement.

(c) Disability; Death . If the Company terminates the Employee’s employment as a result of the Employee’s Disability, or death, then the Employee shall not be entitled to receive any severance pay or benefits under this Agreement.

 

2


3. Release of Claims; Resignation . The Employee’s entitlement to any severance pay or benefits under Section 2(a) is conditioned upon the Employee’s execution and delivery to the Company of (a) a general release of known and unknown claims in the form attached hereto as Exhibit A and (b) a resignation from all of the Employee’s positions with the Company, including from the Board of Directors and any committees thereof on which the Employee serves, in a form satisfactory to the Company.

4. Parachute Payments . In the event that any payment or benefit received or to be received by the Employee pursuant to this Agreement or otherwise (collectively, the “Payments” ) would result in a “parachute payment” as described in section 280G of the Internal Revenue Code of 1986, as amended, notwithstanding the other provisions of this Agreement, the amount of such Payments will not exceed the amount which produces the greatest after-tax benefit to the Employee. For purposes of the foregoing, the greatest after-tax benefit will be determined within thirty (30) days of the occurrence of such payment to the Employee, in the Employee’s sole and absolute discretion. If no such determination is made by the Employee within thirty (30) days of the occurrence of such payment, the Company will promptly make such determination in a fair and equitable manner.

5. Consulting Services . During the six (6) months following any Involuntary Termination for which the Employee receives the severance pay and benefits described in Section 2(a), the Employee shall be retained by the Company as an independent contractor to provide consulting services to the Company at its request for up to eight (8) hours per week. These services shall include any reasonable requests for information or assistance by the Company, including, but not limited to, the transition of the Employee’s duties. Such services shall be provided at mutually convenient times. For the actual provision of such services, the Company shall pay to the Employee a consulting fee of $1,000 per eight hour day, plus reasonable out-of-pocket expenses (for example, travel and lodging).

6. Company’s Successors . Any successor to the Company or to all or substantially all of the Company’s business and/or assets will be bound by this Agreement in the same manner and to the same extent as the Company. For all purposes under this Agreement, the term “Company” will include any successor to the Company’s business and/or assets.

7. Employee’s Successors . All rights of Employee hereunder will inure to the benefit of, and be enforceable by, Employee’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. The Employee will have no right to assign any of his obligations or duties under this Agreement to any other person or entity.

8. Definition of Terms . The following terms referred to in this Agreement shall have the following meanings:

(a) Cause shall mean any of the following:

(i) the Employee’s theft, dishonesty, misconduct or falsification of any records of the Company, its successor, or any subsidiary of the Company or its successor (collectively, the “Company Group” );

 

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(ii) the Employee’s misappropriation or improper disclosure of confidential or proprietary information of the Company Group;

(iii) any intentional action by the Employee which has a material detrimental effect on the reputation or business of the Company Group;

(iv) the Employee’s failure or inability to perform any reasonable assigned duties after written notice from the Company Group of, and a reasonable opportunity to cure, such failure or inability;

(v) any material breach by the Employee of any employment agreement between the Employee and the Company Group, which breach is not cured pursuant to the terms of such agreement; or

(vi) the Employee’s conviction of any criminal act which impairs the Employee’s ability to perform his or her duties for the Company Group.

(b) Change in Control shall mean: (i) a merger or other transaction in which the Company or substantially all of its assets is sold or merged and as a result of such transaction, the holders of the Company’s common stock prior to such transaction do not own or control a majority of the outstanding shares of the successor corporation, (ii) the election of nominees constituting a majority of the Board which nominees were not approved by a majority of the Board prior to such election, or (iii) the acquisition by a third party of twenty percent (20%) or more of the Company’s outstanding shares which acquisition was without the approval of a majority of the Board in office prior to such acquisition.

(c) Constructive Termination shall mean any one or more of the following:

(i) without the Employee’s express written consent, the assignment to the Employee, following the Change in Control, of any title or duties, or any limitation of the Employee’s responsibilities, that are substantially inconsistent with the Employee’s title(s), duties, or responsibilities with the Company Group immediately prior to the date of the Change in Control;

(ii) without the Employee’s express written consent, the relocation of the principal place of the Employee’s employment, following the Change in Control, to a location that is more than fifty (50) miles from the Employee’s principal place of employment immediately prior to the date of the Change in Control, or the imposition of travel requirements substantially more demanding of the Employee than such travel requirements existing immediately prior to the date of the Change in Control;

 

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(iii) any failure by the Company Group, following the Change in Control, to pay, or any material reduction by the Company Group of, (1) the Employee’s base salary in effect immediately prior to the date of the Change in Control, or (2) the Employee’s bonus compensation, if any, in effect immediately prior to the date of the Change in Control (subject to applicable performance requirements with respect to the actual amount of bonus compensation earned by the Employee), unless base salary and/or bonus reductions comparable in amount and duration are concurrently made for a majority of the other employees of the Company Group who have substantially similar titles and responsibilities as the Employee; and

(iv) any failure by the Company Group, following the Change in Control, to (1) continue to provide the Employee with the opportunity to participate, on terms no less favorable than those in effect for the benefit of any employee group which customarily includes a person holding the employment position or a comparable position with the Company Group then held by the Employee, in any benefit or compensation plans and programs, including, but not limited to, the Company Group’s life, disability, health, dental, medical, savings, profit sharing, stock purchase and retirement plans, if any, in which the Employee was participating immediately prior to the date of the Change in Control, or in substantially similar plans or programs, or (2) provide the Employee with all other fringe benefits (or substantially similar benefits), including, but not limited to, relocation benefits, provided to any employee group which customarily includes a person holding the employment position or a comparable position with the Company Group then held by the Employee, which the Employee was receiving immediately prior to the date of the Change in Control.

However, the foregoing conditions shall not constitute a Constructive Termination unless the Employee has given written notice of any such condition(s) to the Chairman of the Board and allowed the Company Group at least twenty (20) days thereafter to correct such condition(s). If such condition(s) are not corrected within that twenty (20) day period, the Employee may give written notice of her Constructive Termination to the Board, which shall be an Involuntary Termination.

(d) Disability means the inability of the Employee, in the opinion of a qualified physician, to perform the essential functions of the Employee’s position with the Company Group, with or without reasonable accommodation, because of the sickness or injury of the Employee.

(e) Involuntary Termination shall mean the occurrence of either of the following events after a Change in Control, but on or before the first anniversary of such Change in Control:

(i) termination by Company Group of the Employee’s employment without Cause; or

(ii) the Employee’s Constructive Termination.

“Involuntary Termination” shall not include any termination of the Employee’s employment that is (1) for Cause, (2) a result of the Employee’s death or Disability, or (3) a result of the Employee’s voluntary resignation.

(f) New Employment shall mean any employment obtained by the Employee after the termination of the Employee’s employment with the Company.

 

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9. Nonsolicitation . During his or her employment with the Company, and for a period of one (1) year following the termination of his or her employment for any reason, the Employee shall not directly or indirectly recruit, solicit, or induce any person who on the date hereof is, or who subsequently becomes, an employee, sales representative or consultant of the Company, to terminate his or her relationship with the Company.

10. Successors .

(a) Company’s Successors . Any successor to the Company or to all or substantially all of the Company’s business and/or assets shall be bound by this Agreement in the same manner and to the same extent as the Company. For all purposes under this Agreement, the term “Company” shall include any successor to the Company’s business and/or assets.

(b) Employee’s Successors . All rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. The Employee shall have no right to assign any of her obligations or duties under this Agreement to any other person or entity.

11. Notice .

(a) General . Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to the Employee at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.

(b) Notice of Termination . Any termination by the Company Group or the Employee of their employment relationship shall be communicated by a written notice of termination to the other party.

12. Miscellaneous Provisions .

(a) No Duty to Mitigate . The Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking New Employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source.

(b) Waiver . No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by an authorized officer of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

 

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(c) Choice of Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California.

(d) Severability . The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.

(e) Arbitration . In the event of any dispute or claim relating to or arising out of the Employee’s employment relationship with the Company, this Agreement, or the termination of the Employee’s employment with the Company for any reason (including, but not limited to, any claims of breach of contract, wrongful termination, fraud or age, race, sex, national origin, disability or other discrimination or harassment), the Employee and the Company agree that all such disputes shall be fully, finally and exclusively resolved by binding arbitration conducted by the American Arbitration Association in San Mateo County, California. Judgment upon any decision or award rendered by the arbitrator may be entered in any court having jurisdiction over the matter. The Employee and the Company knowingly and willingly waive their respective rights to have any such disputes or claims tried to a judge or jury.

(f) Prior Agreements . This Agreement supersedes all prior understandings and agreements, whether written or oral, regarding the subject matter of this Agreement.

IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

 

SCICLONE PHARMACEUTICALS, INC.
By:  

/s/ Gary Titus

EMPLOYEE

/s/ Stephanie Wong

STEPHANIE WONG

 

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Exhibit A

RELEASE

In exchange for the severance pay and benefits described in the Executive Severance Agreement between SciClone Pharmaceuticals, Inc. (the “ Company ”) and me of August 3, 2012, I hereby release the Company, its parents and subsidiaries, and their officers, directors, employees, attorneys, stockholders, successors, assigns and affiliates, of and from any and all claims, liabilities, and causes of action of every kind and nature, whether known or unknown, based upon or arising out of any agreements, events, acts, omissions or conduct at any time prior to and including the execution date of this Release, including, but not limited to: all claims concerning my employment with the Company or the termination of that employment; all claims pursuant to any federal, state or local law, statute, or cause of action, including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Americans with Disabilities Act of 1990; the federal Age Discrimination in Employment Act of 1967, as amended (“ADEA”); the California Fair Employment and Housing Act, as amended; tort law; contract law; wrongful discharge; race, sex, age or other discrimination or harassment; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing.

I am knowingly, willingly and voluntarily releasing any claims I may have under the ADEA. I acknowledge that the consideration given for the release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (a) this Release does not apply to any rights or claims that may arise after I sign it; (b) I have the right to consult with an attorney prior to signing this Release; (c) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily sign this Release earlier); (d) I have seven (7) days after I sign this Release to revoke it; and (e) this Release shall not be effective until the eighth day after it is signed by me.

In giving this release, which includes claims that may be unknown to me at present, I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: “A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.” I hereby waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any unknown claims I may have, and I affirm that it is my intention to release all known and unknown claims that I have or may have against the parties released above.


This Release contains the entire agreement between the Company and me regarding the subjects above, and it cannot be modified except by a document signed by me and an authorized representative of the Company.

 

      EMPLOYEE
Date:  

 

   

 

      STEPHANIE WONG
      SCICLONE PHARMACEUTICALS, INC.
Date:  

 

    By:  

 

      Its:  

 

Exhibit 10.2

SCICLONE PHARMACEUTICALS, INC.

CHANGE IN CONTROL AGREEMENT

This Change in Control Agreement (the “Agreement” ) is effective as of August 3, 2012, by and between Lan Xie (the “Employee” ) and SciClone Pharmaceuticals, Inc., a Delaware corporation (the “Company” ).

RECITALS

A. The Employee presently serves as Vice President Finance and Chief Financial Officer China operations of the Company and performs significant strategic and management responsibilities necessary to the continued conduct of the Company’s business and operations.

B. The Board of Directors of the Company (the “Board” ) has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of the Employee, notwithstanding the possibility or occurrence of a Change in Control (as defined below) of the Company.

C. The Board believes that it is imperative to provide the Employee with certain severance benefits upon the Employee’s termination of employment following a Change in Control that will provide the Employee with enhanced financial security and provide sufficient incentive and encouragement to the Employee to remain with the Company following a Change in Control.

AGREEMENT

The Employee and the Company agree as set forth below:

1. Terms of Employment . The Company and the Employee agree that the Employee’s employment is based on the original offer letter and labor contract terms and that their employment relationship may be terminated by either party at any time, with or without Cause, and, if applicable, in accordance with Section 2 below. If the Employee’s employment with the Company terminates for any reason following a Change in Control, but on or before the first anniversary of the Change in Control, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement. During her employment with the Company, the Employee agrees to devote her full business time, energy and skill to her duties with the Company. These duties shall include, but not be limited to, any duties consistent with the Employee’s position that may be assigned to the Employee from time to time by the Company or the Board.

 

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2. Severance Benefits Upon Termination following a Change in Control . Subject to the limitations set forth in Sections 3 and 4 below, if the Employee’s employment with the Company terminates following a Change in Control but on or before the first anniversary of such Change in Control, then the Employee shall be entitled to receive, in addition to the compensation and benefits earned by the Employee through the date of her termination, severance benefits as follows:

(a) Involuntary Termination . If the Employee’s employment with the Company is terminated as a result of Involuntary Termination, then the Employee shall be entitled to receive the following severance benefits:

(i) The Employee shall be entitled to receive severance pay in an amount equal to one hundred percent (100%) of her annual base salary as in effect at the time of such termination. Any severance to which the Employee is entitled pursuant to this section shall be paid in a lump sum, less applicable withholding, within thirty (30) days following the Employee’s termination.

(ii) The Executive shall be entitled to receive a separation bonus equal to the gross amount of fifty percent (50%) of the average annual performance bonus paid to the Executive for the two (2) most recent fiscal years for which bonuses have been paid prior to the termination date.

(iii) With respect to any unvested options to purchase shares of the stock of the Company held by the Employee; Section 12.1 (b) of the 2005 Equity Incentive Plan, as amended (the “Plan”), notwithstanding, if a Change in Control occurs and the “Acquiror”, as defined in the Plan, does not assume the “Awards”, as defined in the Plan, held by Employee, then all such Awards held by Employee shall become fully vested and exercisable as of a date ten (10) business days prior to the occurrence of the closing of the transaction resulting in the Change in Control, with any acceleration and exercise subject to, and conditional upon, the actual closing of such transaction.”

(iv) The Employee shall be entitled to exercise all vested options to purchase shares of the stock of the Company held be the Employee (including any options to purchase shares that become vested for a period of twelve (12) months after the date of such termination (notwithstanding anything to the contrary otherwise provided under the terms and conditions of such options).

(v) The Company shall, if permitted under the Company’s existing health insurance plans, continue the Executive’s existing group health insurance coverage. If not so permitted, the Company shall reimburse the Executive for any health insurance premiums paid by the Executive for continued group health insurance coverage. Such health insurance coverage or reimbursement of premiums shall continue until the earlier of (i) twelve (12) months after the date of the Executive’s Involuntary Termination or (ii) the date on which the Executive commences New Employment.

(b) Voluntary Resignation; Termination For Cause . If the Employee’s employment terminates by reason of the Employee’s voluntary resignation (but not as a result of an Involuntary Termination) or as a result of the Employee’s termination for Cause, then the Employee shall not be entitled to receive any severance pay or benefits under this Agreement.

(c) Disability; Death . If the Company terminates the Employee’s employment as a result of the Employee’s Disability, or death, then the Employee shall not be entitled to receive any severance pay or benefits under this Agreement.

 

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3. Release of Claims; Resignation . The Employee’s entitlement to any severance pay or benefits under Section 2(a) is conditioned upon the Employee’s execution and delivery to the Company of (a) a general release of known and unknown claims in the form attached hereto as Exhibit A and (b) a resignation from all of the Employee’s positions with the Company, including from the Board of Directors and any committees thereof on which the Employee serves, in a form satisfactory to the Company.

4. Parachute Payments . In the event that any payment or benefit received or to be received by the Employee pursuant to this Agreement or otherwise (collectively, the “Payments” ) would result in a “parachute payment” as described in section 280G of the Internal Revenue Code of 1986, as amended, notwithstanding the other provisions of this Agreement, the amount of such Payments will not exceed the amount which produces the greatest after-tax benefit to the Employee. For purposes of the foregoing, the greatest after-tax benefit will be determined within thirty (30) days of the occurrence of such payment to the Employee, in the Employee’s sole and absolute discretion. If no such determination is made by the Employee within thirty (30) days of the occurrence of such payment, the Company will promptly make such determination in a fair and equitable manner.

5. Consulting Services . During the six (6) months following any Involuntary Termination for which the Employee receives the severance pay and benefits described in Section 2(a), the Employee shall be retained by the Company as an independent contractor to provide consulting services to the Company at its request for up to eight (8) hours per week. These services shall include any reasonable requests for information or assistance by the Company, including, but not limited to, the transition of the Employee’s duties. Such services shall be provided at mutually convenient times. For the actual provision of such services, the Company shall pay to the Employee a consulting fee of $1,000 per eight hour day, plus reasonable out-of-pocket expenses (for example, travel and lodging).

6. Company’s Successors . Any successor to the Company or to all or substantially all of the Company’s business and/or assets will be bound by this Agreement in the same manner and to the same extent as the Company. For all purposes under this Agreement, the term “Company” will include any successor to the Company’s business and/or assets.

7. Employee’s Successors . All rights of Employee hereunder will inure to the benefit of, and be enforceable by, Employee’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. The Employee will have no right to assign any of his or her obligations or duties under this Agreement to any other person or entity.

8. Definition of Terms . The following terms referred to in this Agreement shall have the following meanings:

(a) Cause shall mean any of the following:

(i) the Employee’s theft, dishonesty, misconduct or falsification of any records of the Company, its successor, or any subsidiary of the Company or its successor (collectively, the “Company Group” );

 

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(ii) the Employee’s misappropriation or improper disclosure of confidential or proprietary information of the Company Group;

(iii) any intentional action by the Employee which has a material detrimental effect on the reputation or business of the Company Group;

(iv) the Employee’s failure or inability to perform any reasonable assigned duties after written notice from the Company Group of, and a reasonable opportunity to cure, such failure or inability;

(v) any material breach by the Employee of any employment agreement between the Employee and the Company Group, which breach is not cured pursuant to the terms of such agreement; or

(vi) the Employee’s conviction of any criminal act which impairs the Employee’s ability to perform his or her duties for the Company Group.

(b) Change in Control shall mean: (i) a merger or other transaction in which the Company or substantially all of its assets is sold or merged and as a result of such transaction, the holders of the Company’s common stock prior to such transaction do not own or control a majority of the outstanding shares of the successor corporation, (ii) the election of nominees constituting a majority of the Board which nominees were not approved by a majority of the Board prior to such election, or (iii) the acquisition by a third party of twenty percent (20%) or more of the Company’s outstanding shares which acquisition was without the approval of a majority of the Board in office prior to such acquisition.

(c) Constructive Termination shall mean any one or more of the following:

(i) without the Employee’s express written consent, the assignment to the Employee, following the Change in Control, of any title or duties, or any limitation of the Employee’s responsibilities, that are substantially inconsistent with the Employee’s title(s), duties, or responsibilities with the Company Group immediately prior to the date of the Change in Control;

(ii) without the Employee’s express written consent, the relocation of the principal place of the Employee’s employment, following the Change in Control, to a location that is more than fifty (50) miles from the Employee’s principal place of employment immediately prior to the date of the Change in Control, or the imposition of travel requirements substantially more demanding of the Employee than such travel requirements existing immediately prior to the date of the Change in Control;

(iii) any failure by the Company Group, following the Change in Control, to pay, or any material reduction by the Company Group of, (1) the Employee’s base salary in effect immediately prior to the date of the Change in Control, or (2) the Employee’s bonus compensation, if any, in effect immediately prior to the date of the Change in Control (subject to applicable performance requirements with respect to the actual amount of bonus compensation earned by the Employee), unless base salary and/or bonus reductions comparable in amount and duration are concurrently made for a majority of the other employees of the Company Group who have substantially similar titles and responsibilities as the Employee; and

 

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(iv) any failure by the Company Group, following the Change in Control, to (1) continue to provide the Employee with the opportunity to participate, on terms no less favorable than those in effect for the benefit of any employee group which customarily includes a person holding the employment position or a comparable position with the Company Group then held by the Employee, in any benefit or compensation plans and programs, including, but not limited to, the Company Group’s life, disability, health, dental, medical, savings, profit sharing, stock purchase and retirement plans, if any, in which the Employee was participating immediately prior to the date of the Change in Control, or in substantially similar plans or programs, or (2) provide the Employee with all other fringe benefits (or substantially similar benefits), including, but not limited to, relocation benefits, provided to any employee group which customarily includes a person holding the employment position or a comparable position with the Company Group then held by the Employee, which the Employee was receiving immediately prior to the date of the Change in Control.

However, the foregoing conditions shall not constitute a Constructive Termination unless the Employee has given written notice of any such condition(s) to the Chairman of the Board and allowed the Company Group at least twenty (20) days thereafter to correct such condition(s). If such condition(s) are not corrected within that twenty (20) day period, the Employee may give written notice of her Constructive Termination to the Board, which shall be an Involuntary Termination.

(d) Disability means the inability of the Employee, in the opinion of a qualified physician, to perform the essential functions of the Employee’s position with the Company Group, with reasonable accommodation, because of the sickness or injury of the Employee.

(e) Involuntary Termination shall mean the occurrence of either of the following events after a Change in Control, but on or before the first anniversary of such Change in Control:

(i) termination by Company Group of the Employee’s employment without Cause; or

(ii) the Employee’s Constructive Termination.

“Involuntary Termination” shall not include any termination of the Employee’s employment that is (1) for Cause, (2) a result of the Employee’s death or Disability, or (3) a result of the Employee’s voluntary resignation.

(f) New Employment shall mean any employment obtained by the Employee after the termination of the Employee’s employment with the Company.

9. Nonsolicitation . During his or her employment with the Company, and for a period of one (1) year following the termination of his or her employment for any reason, the Employee shall not directly or indirectly recruit, solicit, or induce any person who on the date hereof is, or who subsequently becomes, an employee, sales representative or consultant of the Company, to terminate his or her relationship with the Company.

 

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10. Successors .

(a) Company’s Successors . Any successor to the Company or to all or substantially all of the Company’s business and/or assets shall be bound by this Agreement in the same manner and to the same extent as the Company. For all purposes under this Agreement, the term “Company” shall include any successor to the Company’s business and/or assets.

(b) Employee’s Successors . All rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. The Employee shall have no right to assign any of her obligations or duties under this Agreement to any other person or entity.

11. Notice .

(a) General . Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to the Employee at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.

(b) Notice of Termination . Any termination by the Company Group or the Employee of their employment relationship shall be communicated by a written notice of termination to the other party.

12. Miscellaneous Provisions .

(a) No Duty to Mitigate . The Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking New Employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source.

(b) Waiver . No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by an authorized officer of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

(c) Choice of Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California.

 

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(d) Severability . The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.

(e) Arbitration . Any dispute, controversy or claim arising out of or relating to this contract, including the validity, invalidity, breach or termination thereof, shall be settled by arbitration in Hong Kong under the Hong Kong International Arbitration Centre Administered Arbitration Rules in force with the Notice of Arbitration is submitted in accordance with these rules. Judgment upon any decision or award rendered by the arbitrator may be entered in any court having jurisdiction over the matter. The Employee and the Company knowingly and willingly waive their respective rights to have any such disputes or claims tried to a judge or jury.

(f) Prior Agreements . This Agreement supersedes all prior understandings and agreements, whether written or oral, regarding the subject matter of this Agreement.

IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

 

SCICLONE PHARMACEUTICALS, INC.
By:  

/s/ Gary Titus

EMPLOYEE

/s/ Lan Xie

LAN XIE

 

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Exhibit A

RELEASE

In exchange for the severance pay and benefits described in the Executive Severance Agreement between SciClone Pharmaceuticals, Inc. (the “ Company ”) and me of August 3, 2012, I hereby release the Company, its parents and subsidiaries, and their officers, directors, employees, attorneys, stockholders, successors, assigns and affiliates, of and from any and all claims, liabilities, and causes of action of every kind and nature, whether known or unknown, based upon or arising out of any agreements, events, acts, omissions or conduct at any time prior to and including the execution date of this Release, including, but not limited to: all claims concerning my employment with the Company or the termination of that employment; all claims pursuant to any PRC Labor Contract Law and the regulations promulgated by the local government having jurisdiction over the employment.

I am knowingly, willingly and voluntarily releasing any claims I may have under relevant local laws. I acknowledge that the consideration given for the release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled.

I hereby waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any unknown claims I may have, and I affirm that it is my intention to release all known and unknown claims that I have or may have against the parties released above.


This Release contains the entire agreement between the Company and me regarding the subjects above, and it cannot be modified except by a document signed by me and an authorized representative of the Company.

 

      EMPLOYEE
Date:  

 

   

 

      LAN XIE
      SCICLONE PHARMACEUTICALS, INC.
Date:  

 

    By:  

 

      Its:  

 

Exhibit 10.3

SCICLONE PHARMACEUTICALS, INC.

EXECUTIVE SEVERANCE AGREEMENT

This Executive Severance Agreement (the Agreement ) is effective as of August 3, 2012, by and between Stephanie Wong (the Executive ) and SciClone Pharmaceuticals, Inc., a Delaware corporation (the Company ).

RECITALS

A. The Executive presently serves as Vice President, Finance and Controller of the Company, and performs significant strategic and management responsibilities necessary to the continued conduct of the Company’s business and operations.

B. The Board of Directors of the Company (the Board ) through its Compensation Committee has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of the Executive of the Company.

C. The Board believes that it is imperative to provide the Executive with certain severance benefits upon the Executive’s termination of employment without Cause that will provide the Executive with enhanced financial security and provide sufficient incentive and encouragement to the Executive to remain with the Company.

AGREEMENT

The Executive and the Company agree as set forth below:

1. Terms of Employment . The Company and the Executive agree that the Executive’s employment is “at will” and that their employment relationship may be terminated by either party at any time, with or without Cause, and, if applicable, in accordance with Section 2 below. If the Company terminates Executive’s employment without Cause, the Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement. During her employment with the Company, the Executive agrees to devote her full business time, energy and skill to her duties with the Company. These duties shall include, but not be limited to, any duties consistent with the Executive’s position that may be assigned to the Executive from time to time by the Company or the Board.

2. Severance Benefits Upon Termination without Cause . Subject to the limitations set forth in Sections 3 and 4 below, if the Executive’s employment with the Company is terminated without Cause, then the Executive shall be entitled to receive, in addition to the compensation and benefits earned by the Executive through the date of her termination, severance benefits as follows:

(a) The Executive shall be entitled to receive severance pay in the form of continuation of Employee’s base salary in effect on Employee’s termination date for twelve (12) months following such termination date. These payments will be made on the Company’s ordinary payroll dates starting with the first pay date after the termination date, and will be subject to standard payroll deductions and withholdings.

 

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(b) The Executive shall be entitled to receive a separation bonus equal to the gross amount of fifty percent (50%) of the total sum of the Executive’s performance bonus paid for the two (2) most recent fiscal years for which bonuses have been paid prior to the termination date.

(c) The Company shall, if permitted under the Company’s existing health insurance plans, continue the Executive’s existing group health insurance coverage. If not so permitted, the Company shall reimburse the Executive for any COBRA premiums paid by the Executive for continued group health insurance coverage. Such health insurance coverage or reimbursement of COBRA premiums shall continue until the earlier of (i) twelve (12) months after the date of the Executive’s Involuntary Termination or (ii) the date on which the Executive commences New Employment.

(d) Disability; Death . If the Company terminates the Executive’s employment as a result of the Executive’s Disability, or death, then the Executive shall not be entitled to receive any severance pay or benefits under this Agreement.

3. Release of Claims; Resignation . The Executive’s entitlement to any severance pay or benefits under Section 2 is conditioned upon the Executive’s execution and delivery to the Company of (a) a general release of known and unknown claims in the form attached hereto as Exhibit A and (b) a resignation from all of the Executive’s positions with the Company, including from the Board and any committees thereof on which the Executive serves, in a form satisfactory to the Company.

4. Parachute Payments . In the event that any payment or benefit received or to be received by the Executive pursuant to this Agreement or otherwise (collectively, the Payments ) would result in a “parachute payment” as described in section 280G of the Internal Revenue Code of 1986, as amended, notwithstanding the other provisions of this Agreement, the amount of such Payments will not exceed the amount which produces the greatest after-tax benefit to the Executive. For purposes of the foregoing, the greatest after-tax benefit will be determined within thirty (30) days of the occurrence of such payment to the Executive, in the Executive’s sole and absolute discretion. If no such determination is made by the Executive within thirty (30) days of the occurrence of such payment, the Company will promptly make such determination in a fair and equitable manner.

5. Consulting Services . During the six (6) months following any termination without Cause for which the Executive receives the severance pay and benefits described in Section 2, the Executive shall be retained by the Company as an independent contractor to provide consulting services to the Company at its request for up to eight (8) hours per week. These services shall include any reasonable requests for information or assistance by the Company, including, but not limited to, the transition of the Executive’s duties. Such services shall be provided at mutually convenient times. For the actual provision of such services, the Company shall pay to the Executive a consulting fee of $1,000 on a full eight hour day basis, pro-rated for the number of hours of service, plus reasonable out-of-pocket expenses (for example, travel and lodging).

 

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6. Definition of Terms . The following terms referred to in this Agreement shall have the following meanings:

(a) Cause shall mean any of the following:

(i) the Executive’s theft, dishonesty, misconduct or falsification of any records of the Company, its successor, or any subsidiary of the Company or its successor (collectively, the Company Group );

(ii) the Executive’s misappropriation or improper disclosure of confidential or proprietary information of the Company Group;

(iii) any intentional action by the Executive which has a material detrimental effect on the reputation or business of the Company Group;

(iv) the Executive’s failure or inability to perform any reasonable assigned duties after written notice from the Company Group of, and a reasonable opportunity to cure, such failure or inability;

(v) any material breach by the Executive of any employment agreement between the Executive and the Company Group, which breach is not cured pursuant to the terms of such agreement; or

(vi) the Executive’s conviction of any criminal act which impairs the Executive’s ability to perform his or her duties for the Company Group.

(b) Disability means the inability of the Executive, in the opinion of a qualified physician, to perform the essential functions of the Executive’s position with the Company Group, with or without reasonable accommodation, because of the sickness or injury of the Executive.

(c) New Employment shall mean any employment obtained by the Executive after the termination of the Executive’s employment with the Company.

7. Nonsolicitation . During his or her employment with the Company, and for a period of one (1) year following the termination of his or her employment for any reason, the Executive shall not directly or indirectly recruit, solicit, or induce any person who on the date hereof is, or who subsequently becomes, an executive, sales representative or consultant of the Company, to terminate his or her relationship with the Company.

8. Successors .

(a) Company’s Successors . Any successor to the Company or to all or substantially all of the Company’s business and/or assets shall be bound by this Agreement in the same manner and to the same extent as the Company. For all purposes under this Agreement, the term “Company” shall include any successor to the Company’s business and/or assets.

 

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(b) Executive’s Successors . All rights of the Executive hereunder shall inure to the benefit of, and be enforceable by, the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. The Executive shall have no right to assign any of his obligations or duties under this Agreement to any other person or entity.

9. Notice .

(a) General . Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Executive, mailed notices shall be addressed to the Executive at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.

(b) Notice of Termination . Any termination by the Company Group or the Executive of their employment relationship shall be communicated by a written notice of termination to the other party.

10. Miscellaneous Provisions .

(a) No Duty to Mitigate . The Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking New Employment or in any other manner), nor shall any such payment be reduced by any earnings that the Executive may receive from any other source.

(b) Waiver . No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

(c) Choice of Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California.

(d) Severability . The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.

 

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(e) Arbitration . In the event of any dispute or claim relating to or arising out of the Executive’s employment relationship with the Company, this Agreement, or the termination of the Executive’s employment with the Company for any reason (including, but not limited to, any claims of breach of contract, wrongful termination, fraud or age, race, sex, national origin, disability or other discrimination or harassment), the Executive and the Company agree that all such disputes shall be fully, finally and exclusively resolved by binding arbitration conducted by the American Arbitration Association in San Mateo County, California. Judgment upon any decision or award rendered by the arbitrator may be entered in any court having jurisdiction over the matter. The Executive and the Company knowingly and willingly waive their respective rights to have any such disputes or claims tried to a judge or jury.

(f) Prior Agreements; Controlling Agreement in the Case of a Change in Control . This Agreement supersedes all prior understandings and agreements, whether written or oral, regarding the subject matter of this Agreement, provided, however, that the Change in Control Agreement dated August 3, 2012 (the “ CIC Agreement ”) between Executive and Company shall remain in place and is not amended or waived in any way hereby. If Executive is entitled to receive severance benefits under the CIC Agreement, then the CIC Agreement shall be controlling.

[Remainder of Page Left Intentionally Blank]

 

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IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

 

SCICLONE PHARMACEUTICALS, INC.
By:  

/s/ GaryTitus

  GARY TITUS
EXECUTIVE

/s/ Stephanie Wong

STEPHANIE WONG

 

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Exhibit A

RELEASE

In exchange for the severance pay and benefits described in the Executive Severance Agreement between SciClone Pharmaceuticals, Inc. (the “ Company ”) and me of August 3, 2012, I hereby release the Company, its parents and subsidiaries, and their officers, directors, employees, attorneys, stockholders, successors, assigns and affiliates, of and from any and all claims, liabilities, and causes of action of every kind and nature, whether known or unknown, based upon or arising out of any agreements, events, acts, omissions or conduct at any time prior to and including the execution date of this Release, including, but not limited to: all claims concerning my employment with the Company or the termination of that employment; all claims pursuant to any federal, state or local law, statute, or cause of action, including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Americans with Disabilities Act of 1990; the federal Age Discrimination in Employment Act of 1967, as amended (“ ADEA ”); the California Fair Employment and Housing Act, as amended; tort law; contract law; wrongful discharge; race, sex, age or other discrimination or harassment; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing.

I am knowingly, willingly and voluntarily releasing any claims I may have under the ADEA. I acknowledge that the consideration given for the release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (a) this Release does not apply to any rights or claims that may arise after I sign it; (b) I have the right to consult with an attorney prior to signing this Release; (c) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily sign this Release earlier); (d) I have seven (7) days after I sign this Release to revoke it; and (e) this Release shall not be effective until the eighth day after it is signed by me.

In giving this release, which includes claims that may be unknown to me at present, I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: “A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.” I hereby waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any unknown claims I may have, and I affirm that it is my intention to release all known and unknown claims that I have or may have against the parties released above.

 

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This Release contains the entire agreement between the Company and me regarding the subjects above, and it cannot be modified except by a document signed by me and an authorized representative of the Company.

 

      EXECUTIVE
Date:  

 

   

 

      STEPHANIE WONG
      SCICLONE PHARMACEUTICALS, INC.
Date:  

 

    By:  

 

      Its:  

 

 

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Exhibit 10.4

SCICLONE PHARMACEUTICALS, INC.

EXECUTIVE SEVERANCE AGREEMENT

This Executive Severance Agreement (the Agreement ) is effective as of August 3, 2012, by and between Lan Xie (the Executive ) and SciClone Pharmaceuticals, Inc., a Delaware corporation (the Company ).

RECITALS

A. The Executive presently serves as Vice President Finance and Chief Financial Officer China operations of the Company, and performs significant strategic and management responsibilities necessary to the continued conduct of the Company’s business and operations.

B. The Board of Directors of the Company (the Board ) through its Compensation Committee has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of the Executive of the Company.

C. The Board believes that it is imperative to provide the Executive with certain severance benefits upon the Executive’s termination of employment without Cause that will provide the Executive with enhanced financial security and provide sufficient incentive and encouragement to the Executive to remain with the Company.

AGREEMENT

The Executive and the Company agree as set forth below:

1. Terms of Employment . The Company and the Executive agree that the Executive’s employment is based on the original offer letter and labor contract terms and that their employment relationship may be terminated by either party at any time, with or without Cause, and, if applicable, in accordance with Section 2 below. If the Company terminates Executive’s employment without Cause, the Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement. During her employment with the Company, the Executive agrees to devote her full business time, energy and skill to her duties with the Company. These duties shall include, but not be limited to, any duties consistent with the Executive’s position that may be assigned to the Executive from time to time by the Company or the Board.

2. Severance Benefits Upon Termination without Cause . Subject to the limitations set forth in Sections 3 and 4 below, if the Executive’s employment with the Company is terminated without Cause, then the Executive shall be entitled to receive, in addition to the compensation and benefits earned by the Executive through the date of his or her termination, severance benefits as follows:

(a) The Executive shall be entitled to receive severance pay in the form of continuation of Employee’s base salary in effect on Employee’s termination date for twelve (12) months following such termination date. These payments will be made on the Company’s ordinary payroll dates starting with the first pay date after the termination date, and will be subject to standard payroll deductions and withholdings.

 

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(b) The Executive shall be entitled to receive a separation bonus equal to the gross amount of fifty percent (50%) of the average annual performance bonus paid to the Executive for the two (2) most recent fiscal years for which bonuses have been paid prior to the termination date.

(c) The Company shall, if permitted under the Company’s existing health insurance plans, continue the Executive’s existing group health insurance coverage. If not so permitted, the Company shall reimburse the Executive for any health insurance premiums paid by the Executive for continued group health insurance coverage. Such health insurance coverage or reimbursement of premiums shall continue until the earlier of (i) twelve (12) months after the date of the Executive’s Involuntary Termination or (ii) the date on which the Executive commences New Employment.

(d) Disability; Death . If the Company terminates the Executive’s employment as a result of the Executive’s Disability, or death, then the Executive shall not be entitled to receive any severance pay or benefits under this Agreement.

3. Release of Claims; Resignation . The Executive’s entitlement to any severance pay or benefits under Section 2 is conditioned upon the Executive’s execution and delivery to the Company of (a) a general release of known and unknown claims in the form attached hereto as Exhibit A and (b) a resignation from all of the Executive’s positions with the Company, including from the Board and any committees thereof on which the Executive serves, in a form satisfactory to the Company.

4. Consulting Services . During the six (6) months following any termination without Cause for which the Executive receives the severance pay and benefits described in Section 2, the Executive shall be retained by the Company as an independent contractor to provide consulting services to the Company at its request for up to eight (8) hours per week. These services shall include any reasonable requests for information or assistance by the Company, including, but not limited to, the transition of the Executive’s duties. Such services shall be provided at mutually convenient times. For the actual provision of such services, the Company shall pay to the Executive a consulting fee of $1,000 on a full eight hour day basis, pro-rated for the number of hours of service, plus reasonable out-of-pocket expenses (for example, travel and lodging).

5. Definition of Terms . The following terms referred to in this Agreement shall have the following meanings:

(a) Cause shall mean any of the following:

(i) the Executive’s theft, dishonesty, misconduct or falsification of any records of the Company, its successor, or any subsidiary of the Company or its successor (collectively, the Company Group );

 

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(ii) the Executive’s misappropriation or improper disclosure of confidential or proprietary information of the Company Group;

(iii) any intentional action by the Executive which has a material detrimental effect on the reputation or business of the Company Group;

(iv) the Executive’s failure or inability to perform any reasonable assigned duties after written notice from the Company Group of, and a reasonable opportunity to cure, such failure or inability;

(v) any material breach by the Executive of any employment agreement between the Executive and the Company Group, which breach is not cured pursuant to the terms of such agreement; or

(vi) the Executive’s conviction of any criminal act which impairs the Executive’s ability to perform his or her duties for the Company Group.

(b) Disability means the inability of the Executive, in the opinion of a qualified physician, to perform the essential functions of the Executive’s position with the Company Group, with or without reasonable accommodation, because of the sickness or injury of the Executive.

(c) New Employment shall mean any employment obtained by the Executive after the termination of the Executive’s employment with the Company.

6. Nonsolicitation . During his or her employment with the Company, and for a period of one (1) year following the termination of his or her employment for any reason, the Executive shall not directly or indirectly recruit, solicit, or induce any person who on the date hereof is, or who subsequently becomes, an executive, sales representative or consultant of the Company, to terminate his or her relationship with the Company.

7. Successors .

(a) Company’s Successors . Any successor to the Company or to all or substantially all of the Company’s business and/or assets shall be bound by this Agreement in the same manner and to the same extent as the Company. For all purposes under this Agreement, the term “Company” shall include any successor to the Company’s business and/or assets.

(b) Executive’s Successors . All rights of the Executive hereunder shall inure to the benefit of, and be enforceable by, the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. The Executive shall have no right to assign any of his or her obligations or duties under this Agreement to any other person or entity.

 

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8. Notice .

(a) General . Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Executive, mailed notices shall be addressed to the Executive at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.

(b) Notice of Termination . Any termination by the Company Group or the Executive of their employment relationship shall be communicated by a written notice of termination to the other party.

9. Miscellaneous Provisions .

(a) No Duty to Mitigate . The Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking New Employment or in any other manner), nor shall any such payment be reduced by any earnings that the Executive may receive from any other source.

(b) Waiver . No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

(c) Choice of Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California.

(d) Severability . The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.

(e) Arbitration . Any dispute, controversy or claim arising out of or relating to this contract, including the validity, invalidity, breach or termination thereof, shall be settled by arbitration in Hong Kong under the Hong Kong International Arbitration Centre Administered Arbitration Rules in force with the Notice of Arbitration is submitted in accordance with these rules. Judgment upon any decision or award rendered by the arbitrator may be entered in any court having jurisdiction over the matter. The Executive and the Company knowingly and willingly waive their respective rights to have any such disputes or claims tried to a judge or jury.

 

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(f) Prior Agreements; Controlling Agreement in the Case of a Change in Control . This Agreement supersedes all prior understandings and agreements, whether written or oral, regarding the subject matter of this Agreement, provided, however, that the Change in Control Agreement dated August 3, 2012 (the “ CIC Agreement ”) between Executive and Company shall remain in place and is not amended or waived in any way hereby. If Executive is entitled to receive severance benefits under the CIC Agreement, then the CIC Agreement shall be controlling.

[Remainder of Page Left Intentionally Blank]

 

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IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

 

SCICLONE PHARMACEUTICALS, INC.
By:  

/s/ Gary Titus

  GARY TITUS
EXECUTIVE

/s/ Lan Xie

LAN XIE

 

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Exhibit A

RELEASE

In exchange for the severance pay and benefits described in the Executive Severance Agreement between SciClone Pharmaceuticals, Inc. (the “ Company ”) and me of August 3, 2012, I hereby release the Company, its parents and subsidiaries, and their officers, directors, employees, attorneys, stockholders, successors, assigns and affiliates, of and from any and all claims, liabilities, and causes of action of every kind and nature, whether known or unknown, based upon or arising out of any agreements, events, acts, omissions or conduct at any time prior to and including the execution date of this Release, including, but not limited to: all claims concerning my employment with the Company or the termination of that employment; all claims pursuant to any PRC Labor Contract Law and the regulations promulgated by the local government having jurisdiction over the employment.

I am knowingly, willingly and voluntarily releasing any claims I may have under relevant local laws. I acknowledge that the consideration given for the release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled.

I hereby waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any unknown claims I may have, and I affirm that it is my intention to release all known and unknown claims that I have or may have against the parties released above.

 

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This Release contains the entire agreement between the Company and me regarding the subjects above, and it cannot be modified except by a document signed by me and an authorized representative of the Company.

 

      EXECUTIVE
Date:  

 

   

 

      LAN XIE
      SCICLONE PHARMACEUTICALS, INC.
Date:  

 

    By:  

 

      Its:  

 

 

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Exhibit 31.1

RULE 13a-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Friedhelm Blobel, Ph.D., certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of SciClone Pharmaceuticals, Inc. (the “Registrant”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2012    

/s/ Friedhelm Blobel, Ph.D.

    Friedhelm Blobel, Ph.D.
    Chief Executive Officer

Exhibit 31.2

RULE 13a-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Gary S. Titus, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of SciClone Pharmaceuticals, Inc. (the “Registrant”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2012    

/s/ Gary S. Titus

    Gary S. Titus
    Senior Vice President, Finance and Chief Financial Officer
    (Principal Financial Officer)

Exhibit 32.1

SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Friedhelm Blobel, Chief Executive Officer, of SciClone Pharmaceuticals, Inc. (the “Registrant”), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:

(1) the Quarterly Report on Form 10-Q of the Registrant, to which this certification is attached as an exhibit (the “Report”), fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

Date: November 9, 2012    

/s/ Friedhelm Blobel, Ph.D.

    Friedhelm Blobel, Ph.D.
    Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to SciClone Pharmaceuticals, Inc. and will be retained by SciClone Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

SECTION 1350 CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Gary S. Titus, Senior Vice President, Finance and Chief Financial Officer, of SciClone Pharmaceuticals, Inc. (the “Registrant”), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:

(1) the Quarterly Report on Form 10-Q of the Registrant, to which this certification is attached as an exhibit (the “Report”), fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

Date: November 9, 2012    

/s/ Gary S. Titus

    Gary S. Titus
    Senior Vice President, Finance and Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to SciClone Pharmaceuticals, Inc. and will be retained by SciClone Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.