SciClone Pharmaceuticals, Inc.
SCICLONE PHARMACEUTICALS INC (Form: 10-Q, Received: 08/11/2014 17:02:32)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

_____________________________________________

 

FORM 10-Q

__________________________________ _______

  (Mark One)

 

 

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

 

For the quarterly period ended June 30 , 2014

 

OR

 

 

 

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

 

For the transition peri od 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

(I.R.S. employer

incorporation or organization)

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           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           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

 

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      

As of August 6 ,   2014 ,   51,079,942 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.

 

 

 


 

SCICLONE PHARMACEUTICALS , INC.

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

  

PAGE   NO.

 

PART I.

 

FINANCIAL INFORMATION

  

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

  

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 201 3

  

 

  

 

 

 

 

 

Condensed Consolidated Statements of Op erations for the three and six -month periods ended June 30, 2014 and 2013

  

 

  

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Incom e (Loss) for the three and six -month periods ended June 30, 2014 and 2013

  

 

  

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six -month periods ended June 30, 2014 and 2013

  

 

  

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

  

 

  

 

 

 

Item 2.

 

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

  

 

19 

  

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

 

29 

  

 

 

 

Item 4.

 

Controls and Procedures

  

 

29 

  

 

 

 

PART II.

 

OTHER INFORMATION

  

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

  

 

30 

  

 

 

 

Item 1A.

 

Risk Factors

  

 

32 

  

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

 

53 

  

 

 

 

Item 3.

 

Defaults Upon Senior Securities

  

 

53 

  

 

 

 

Item 4.

 

Mine Safety Disclosures

  

 

53 

  

 

 

 

Item 5.

 

Other Information

  

 

53 

  

 

 

 

Item 6.

 

Exhibits

  

 

54 

  

 

 

 

Signature  

 

 

  

 

55 

  

 

 

 

2

 


 

Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

SCICLONE PHARMACEUTICALS , INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2014

 

2013

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

86,988 

 

$

85,803 

Accounts receivable, net of allowance of $3,592 and $3,587 as of June 30, 2014 and December 31, 2013, respectively

 

 

35,768 

 

 

40,008 

Inventories

 

 

16,264 

 

 

15,238 

Restricted cash and investments

 

 

75 

 

 

75 

Prepaid expenses and other current assets

 

 

2,244 

 

 

2,287 

Deferred tax assets

 

 

 

 

Total current assets

 

 

141,344 

 

 

143,417 

Property and equipment, net

 

 

1,187 

 

 

843 

Goodwill

 

 

34,521 

 

 

35,357 

Other assets

 

 

404 

 

 

242 

Total assets

 

$

177,456 

 

$

179,859 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

6,567 

 

$

7,190 

Accrued and other current liabilities

 

 

16,735 

 

 

21,464 

Deferred revenue

 

 

 

 

2,915 

Short-term borrowings on credit facilities

 

 

 —

 

 

1,651 

Total current liabilities

 

 

23,307 

 

 

33,220 

Other long-term liabilities

 

 

41 

 

 

44 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

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;  51,225,289 and 52,371,664 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

 

 

51 

 

 

52 

Additional paid-in capital

 

 

281,430 

 

 

278,327 

Accumulated other comprehensive income

 

 

3,402 

 

 

4,176 

Accumulated deficit

 

 

(130,775)

 

 

(135,960)

Total stockholders’ equity

 

 

154,108 

 

 

146,595 

Total liabilities and stockholders’ equity

 

$

177,456 

 

$

179,859 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed co nsolidated financial statements.

3


 

Table of Contents

 

 

SCICLONE PHARMACEUTICALS , INC.

CONDE NSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2014

 

2013

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Product sales, net

 

$

31,551 

 

$

21,683 

 

$

57,615 

 

$

42,216 

Promotion services

 

 

962 

 

 

7,609 

 

 

1,463 

 

 

16,882 

Total net revenues

 

 

32,513 

 

 

29,292 

 

 

59,078 

 

 

59,098 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

5,011 

 

 

3,205 

 

 

9,572 

 

 

7,823 

Sales and marketing

 

 

11,242 

 

 

14,269 

 

 

21,076 

 

 

25,468 

Research and development

 

 

804 

 

 

5,406 

 

 

2,280 

 

 

5,771 

General and administrative

 

 

5,816 

 

 

7,954 

 

 

11,849 

 

 

16,554 

Total operating expenses

 

 

22,873 

 

 

30,834 

 

 

44,777 

 

 

55,616 

Income (loss) from operations

 

 

9,640 

 

 

(1,542)

 

 

14,301 

 

 

3,482 

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest and investment income

 

 

23 

 

 

12 

 

 

42 

 

 

31 

Interest and investment expense

 

 

(19)

 

 

(45)

 

 

(48)

 

 

(82)

Other income (expense), net

 

 

30 

 

 

80 

 

 

(89)

 

 

64 

Income (loss) before provision for income tax

 

 

9,674 

 

 

(1,495)

 

 

14,206 

 

 

3,495 

Provision for income tax

 

 

34 

 

 

488 

 

 

432 

 

 

1,275 

Net income (loss)

 

$

9,640 

 

$

(1,983)

 

$

13,774 

 

$

2,220 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share

 

$

0.19 

 

$

(0.04)

 

$

0.27 

 

$

0.04 

Diluted net income (loss) per share

 

$

0.18 

 

$

(0.04)

 

$

0.26 

 

$

0.04 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing:

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share

 

 

51,620 

 

 

54,124 

 

 

51,788 

 

 

54,104 

Diluted net income (loss) per share

 

 

52,812 

 

 

54,124 

 

 

52,987 

 

 

55,461 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

Table of Contents

 

SCICLONE PHARMACEUTICALS , INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2014

 

2013

Net income (loss)

 

$

9,640 

 

$

(1,983)

 

$

13,774 

 

$

2,220 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 —

 

 

 

 

 —

 

 

(6)

Foreign currency translation

 

 

85 

 

 

76 

 

 

(774)

 

 

254 

Total other comprehensive income (loss)

 

 

85 

 

 

80 

 

 

(774)

 

 

248 

Total comprehensive income (loss)

 

$

9,725 

 

$

(1,903)

 

$

13,000 

 

$

2,468 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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Table of Contents

 

SCICLONE PHARMACEUTICALS , INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)  

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

 

 

 

 

 

 

 

 

2014

 

2013

Operating activities:

 

 

 

 

 

 

Net income

 

$

13,774 

 

$

2,220 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Non-cash expense related to stock-based compensation

 

 

1,775 

 

 

2,263 

Provision for expiring inventory

 

 

275 

 

 

 —

Depreciation and amortization

 

 

431 

 

 

413 

Loss on disposal of fixed assets

 

 

15 

 

 

 —

Deferred income taxes

 

 

 —

 

 

228 

Other long-term liabilities

 

 

(64)

 

 

(215)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

1,432 

 

 

(8,847)

Inventories

 

 

3,559 

 

 

2,187 

Prepaid expenses and other assets

 

 

(47)

 

 

(1,384)

Accounts payable

 

 

(5,858)

 

 

(1,015)

Accrued and other current liabilities

 

 

(4,430)

 

 

(3,498)

Deferred revenue

 

 

(251)

 

 

 —

Net cash provided by (used in) operating activities

 

 

10,611 

 

 

(7,648)

Investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(471)

 

 

(87)

Net cash used in investing activities

 

 

(471)

 

 

(87)

Financing activities:

 

 

 

 

 

 

Repurchase of common stock

 

 

(8,590)

 

 

(2,500)

Proceeds from borrowing on credit facilities

 

 

 —

 

 

568 

Repayment of credit facility

 

 

(1,616)

 

 

 —

Proceeds from issuances of common stock, net

 

 

1,278 

 

 

706 

Net cash used in financing activities

 

 

(8,928)

 

 

(1,226)

Effect of exchange rate changes on cash and cash equivalents

 

 

(27)

 

 

(1)

Net increase (decrease) in cash and cash equivalents

 

 

1,185 

 

 

(8,962)

Cash and cash equivalents, beginning of period 

 

 

85,803 

 

 

84,228 

Cash and cash equivalents, end of period

 

$

86,988 

 

$

75,266 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

 

SCICLONE PHARMACEUTICALS , INC.

Notes to Unaudited Condensed Con solidated 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 consolidated financial statements and the notes thereto for the year ended December 31, 2013 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission (“SEC”). The Company prepared the unaudited condensed consolidated financial statements following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other information that are normally required by GAAP can be condensed or omitted.

The unaudited 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 statement 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 unaudited condensed consolidated balance sheet data as of December 31, 2013 is derived from the audited consolidated 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 unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates.

Customer Concentration

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

Promotion services revenues result from fees received for exclusively promoting products for certain pharmaceutical partners. These importing agents, distributors and partner s are the Company’s customers.

7


 

Customers that exceeded 10% of the Company’s total net revenue and related to the Company’s China segment were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2014

 

2013

Customer A

 

92% 

 

70% 

 

93% 

 

68% 

Customer B

 

 —

 

24% 

 

 —

 

26% 

 

As of June 30 , 2014 , approximately $ 37.5 million, or 95 %, of the Company's accounts rece ivable were attributable to three customers in China. The Company generally does not require collateral from its customers.

Accounts Receivable  

Receivable Reserve.   The Company records a receivable reserve based on a specific review of its overdue invoices. The Company’s estimate for a reserve is determined after considering its existing contractual payment terms, payment patterns of its customers and individual customer circumstances, the age of any outstanding receivables and its current customer relationships. Accounts receivable are charged off at the point when they are considered uncollectible .   As of June 30 , 2014 , the Company had $ 7. 1 million in accounts receivable that were past due ninety days or more. As of   June 30 , 2014 and December 31, 2013 , the Company recorded a receivable reserve of approximately $ 3.5 million related to gross accounts receivable of $3.5 million from   one customer that is more than one year past due .   The accounts receivable reserve was established as a result of continual negotiations that indicate the accounts receivable balance may not be recoverable .   The receivable reserve reflects the Company’s best estimate of the ultimate collection , though actual collections may vary and the Company continues to pursue the full am ount of the accounts receivable . The Company also had an additional receivable reserve of $0.1 million as of June 30 , 2014 and December 31, 20 1 3 due to the Company’s uncertainty of collecting a portion of the remaining outstanding accounts receivable balance s .   The remaining amount past due ninety days or more of approximately $3.5 million related to receivables from affiliates of Sanofi Aventis S. A. (“Sanofi”) and ha d not been reserved for as of June 30 , 2014. Refer to further information regarding this matter under “Revenue Recognition” “ Promotion Services Revenue. ”  

Re venue Reserve .   The Company maintains a revenue reserve for product returns based on estimates of the amount of product to be returned by its customers which may result from expired or damaged product on delivery or for price reductions on the related sales and is based on historical patterns, analysis of market demand and/or a percentage of sales based on industry trends, and management’s evaluation of specific factors that may increase the risk of product returns. Importing agents or distributors do not have contractual rights of return except under limited terms regarding product quality. However, the Company is expected to replace products that have expired on delivery or are deemed to be damaged or defective when delivered. The calculation of the revenue reserve requires estimates and involves a high degree of subjectivity and judgment. As a result of the uncertainties involved in estimating the revenue reserve, there is a possibility that materially different amounts could be reported under different conditions or using different assumptions. As of June 30 ,   2014 and December 31, 2013 , the Company ’s revenue reserves were immaterial.    

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 recognizes product revenue from selling manufactured ZADAXIN product at the time of delivery. Sales of ZADAXIN to SinoPharm and its affiliates 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. The Company recognizes revenue related to these products based on the “sell-in” method, 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.

8


 

Promotion Services Revenue .   The Company recognizes promotion services revenue after designated medical products are delivered to the distributors as specified in the promotion services contract, which marks the period when marketing and promotion services have been rendered and the revenue recognition criteria are met. In certain arrangements, the Company was required to return or refund a portion of promotion services fees received during interim periods from a pharmaceutical customer if defined annual sales targets were not achieved. Under the Company’s agreements with th is customer, if the agreement was terminated, and provided such targets ha d been met on a “pro rata” basis at the date of contract termination, the Company was entitled to retain the amounts paid. Due to the ability to retain amounts paid upon contract termination, provided applicable targets ha d been met on a “pro rata” basis at any interim date, the Company elected to recognize revenue during interim periods without reduction for amounts subject to refund based on Method 2 of Accounting Standards Codification 605-20-S99-1, “Accounting for Management Fees Based on a Formula.”

The Company’s promotion agreements with Sanofi, consisting of individual promotional agreements for certain pharmaceutical products and supplementary agreements extending the terms thereof, were not renewed and expired on December 31, 2013. The Company received initial notification of non-renewal from Sanofi in early October 2013. Subsequent thereto, the Company believes that Sanofi breached its obligations under these agreements by, among other things, failing to place orders for and supply product for the fourth quarter of 2013 in relation to sales the Company generated, and failing to pay promotion fees due to our subsidiary, NovaMed Pharmaceuticals (Shanghai) Co. Ltd. (“NovaMed Shanghai ”) , under the agreements. As of June 30, 2014 and December 31, 2013, the Company had $ 3.5 million and $7.3 million, respectively, of uncollected receivables due from Sanofi. NovaMed Shanghai and Sanofi negotiated a settlement of the matter, effective July 14, 2014. The settlement provide d that Sanofi w ould make a final payment to NovaMed Shanghai of approximately 22 million Renminbi (approximately $3.5 million) within 30 days of the date of the settlement. The Company subsequently received the $3.5 million. The terms of the settlement resulted in the recognition of promotion services revenue for the second quarter of 2014 of appr oximately $0.2 million of Sanofi revenue that had been deferred ,   as had all promotional fees invoiced to Sanofi relating to the fourth quarter of 2013 .   T he remaining deferr ed revenue of approximately $2.6 million was reversed with an equivalent write-down of accounts receivable .   T his contemporaneous write-down of accounts receivable and deferred revenue had no impact on net income. 

Inventories

Inventories consist of raw materials, work in progress and finished products. Inventories are valued at the lower of cost or market (net realizable value), with cost determined on a first-in, first-out basis, and include amounts related to materials, labor and overhead. The Company periodically reviews the inventory in order to identify excess and obsolete items , including pharmaceutical products approaching their expiry dates . If obsolete or excess items are observed and there are no alternate uses for the inventory, the Company will record a write-down to net realizable value. For the three and six - month period s ended   June 30 , 2014 ,   the Company   record ed a charge to cost of product sales of $0.3 million for Aggrastat ®   product due to inventory nearing its expiry dates.

Net Income   (Loss) Per Share

Basic net income (loss) per share has been computed by dividing net income (loss)   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 per share includes any dilutive impact from outstanding stock options and the employee stock purchase plan using the treasury stock method. For the three months ended June 30, 20 13, the impact of stock options and the employee stock purchase plan were not included in the computation of diluted net loss per share because the inclusion would provide an anti-dilutive effect.

9


 

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

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2014

 

2013

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

9,640 

 

$

(1,983)

 

$

13,774 

 

$

2,220 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

51,620 

 

 

54,124 

 

 

51,788 

 

 

54,104 

Effect of dilutive securities

 

 

1,192 

 

 

 —

 

 

1,199 

 

 

1,357 

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

 

 

52,812 

 

 

54,124 

 

 

52,987 

 

 

55,461 

Basic net income (loss) per share

 

$

0.19 

 

$

(0.04)

 

$

0.27 

 

$

0.04 

Diluted net income (loss) per share

 

$

0.18 

 

$

(0.04)

 

$

0.26 

 

$

0.04 

 

For the three months ended June 30 , 2014 , outstanding stock options   for   4,452,535   shares were excluded from the calculation of diluted net income per share because the effect from the as sumed exercise of these options calculated under the treasury stock method would have been anti-dilutive .   In addition, for the three months ended June 30, 2014 ,   50,000 shares under option subject to performance conditions   were excluded from the calculation of diluted net income per share because the performance criteria had not been met. For the three months ended June 30, 2013, outstanding stock options for 5,055,114   shares were not included in the computation of diluted net loss per share because the inclusion would provide an anti-dilutive effect.

Fo r the six months ended June 30, 2014 and 2013, outstanding stock options for 4,025,589 and 3,293,668 shares, respectively, were excluded from the calculation of diluted net income per share because the effect from the assumed exercise of these options calculated under the treasury stock method would have been anti-dilutive. In addition, for the six months ended June 30, 2014 and 2013, shares subject to performanc e conditions of 55,249 and 37,638 shares , respectively, were excluded from the calculation of diluted net income per share because the performance criteria had not been met.

Reclassifications

The Company reclassified approximately   $0.4 million of   deferred tax balances   as of December 31, 2013 to conform to the current year presentation , as permitted by the optional retrospective presentation provisions of Accounting Standards Update (ASU) 2013-11  “ Income Taxes:   Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists” . These reclassifications had no effect on prior years’ net income or stockholders’ equity. 

New Accounting Standards Update

In May 2014, the Financial Accounting Standards Board issue d Accounting Standards Update 2014-09, "Revenue from Contracts with Customers" (ASU 2014-09), which contains new accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for the Company’s fiscal year beginning January 1, 2017, with early application not permitted. The Company is in the process of determining what impact, if any, the adoption of ASU 2014-09 will have on its financial statements and related disclosures. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

 

10


 

2 . 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 equivalents and restricted cash and investments) measured at fair value on a recurring basis (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of June 30, 2014 Using

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

for

 

Observable

 

Unobservable

 

Balance

 

 

Identical Assets

 

Inputs

 

Inputs

 

as of

Description

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

June 30, 2014

Certificate of deposit

 

$

 —

 

$

75 

 

$

 —

 

$

75 

Money market funds

 

 

19,678 

 

 

 —

 

 

 —

 

 

19,678 

Total

 

$

19,678 

 

$

75 

 

$

 —

 

$

19,753 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2013 Using

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

for

 

Observable

 

Unobservable

 

Balance

 

 

Identical Assets

 

Inputs

 

Inputs

 

as of

Description

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

December 31, 2013

Certificate of deposit

 

$

 —

 

$

75 

 

$

 —

 

$

75 

Money market funds

 

 

28,262 

 

 

 —

 

 

 —

 

 

28,262 

Total

 

$

28,262 

 

$

75 

 

$

 —

 

$

28,337 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3 . Inventories

Inventories   consisted of the following (in thousands) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2014

 

2013

Raw materials

 

$

6,832 

 

$

7,746 

Work in progress

 

 

594 

 

 

319 

Finished goods

 

 

8,838 

 

 

7,173 

 

 

$

16,264 

 

$

15,238 

 

Included in the Company’s inventory a s of June 30 , 2014 and December 31, 2013 ,   was  $ 5.0 million and $2. 4 million, respectively, in inventory held at distributors related to products marketed by NovaMed Pharmaceuticals, Inc. and NovaMed Shanghai   subsidiaries .

11


 

4 . Credit Facilities

Credit Facility

In December 2013, the Company’s subsidiary, NovaMed Shanghai ,   entered into a 10.0 million Chinese Yuan R enminbi (“Renminbi”) revolving line of cre dit facility (approximately $1.6 million USD) and a maximum 15.0 million  R enminbi l oan facility (approximately $2.4 million USD) secured by its accounts receivable with Shanghai Pudong Development Bank Co. Ltd. (“the Credit Facility”). As of June 30 , 2014, no borrowings were outst anding on the Credit F acility. The Credit Facility bears interest on borrowed funds at the People’s Bank of China 6-month base rate plus 15% (6.44% as of June 30 , 2014). The Credit Facility expires November 30, 2014 and any amounts borrowed must be repaid by the expiration date. For the three - and six - months ended June 30, 2014, the Company paid interest of approximately $ 22 ,000   and $48,000 , respectively, rel ated to the Credit F acility.

Loan Agreement

The Company’s previous loan agreement for 12.5 million R enminbi (approximately $2.0 million) with Shanghai Pudong Development Bank Co. Ltd. expired August 29, 2013. All amounts borrowed were repaid by the expiration date. The loan bore interest on borrowed funds at 7.5%. For the thr ee -   and six- months ended June 30 , 2013, the Company paid interest of approximately $ 39 ,000 and $70,000, respectively, related to this loan agreement.  

 

5 . Accrued and Other Current Liabilities

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2014

 

2013

Accrued sales and marketing expenses

 

$

4,868 

 

$

6,419 

Accrued taxes, tax reserves and interest

 

 

4,542 

 

 

5,029 

Accrued compensation and benefits

 

 

2,331 

 

 

3,475 

Accrued estimated SEC and DOJ investigation loss (Note 8)

 

 

2,000 

 

 

2,000 

Accrued professional fees

 

 

1,573 

 

 

1,601 

Accrued manufacturing costs

 

 

635 

 

 

1,617 

Other

 

 

786 

 

 

1,323 

 

 

$

16,735 

 

$

21,464 

 

 

 

6 . Accumulated O ther Comprehensive Income (Loss) T

Changes in the composition of accumulated other comprehensive income (loss) for the three and six months ended June 30 , 2014 and 2013 are as follows ( in thousands ):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

 

Currency

 

Available-for-Sale

 

 

 

 

 

Translation

 

Investments

 

Total

Balances as of April 1, 2014

 

$

3,317 

 

$

 —

 

$

3,317 

Other comprehensive income

 

 

85 

 

 

 —

 

 

85 

Balances as of June 30, 2014

 

$

3,402 

 

$

 —

 

$

3,402 

 

 

12


 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

 

Currency

 

Available-for-Sale

 

 

 

 

 

Translation

 

Investments

 

Total

Balances as of January 1, 2014

 

$

4,176 

 

$

 —

 

$

4,176 

Other comprehensive loss

 

 

(774)

 

 

 —

 

 

(774)

Balances as of June 30, 2014

 

$

3,402 

 

$

 —

 

$

3,402 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

 

Currency

 

Available-for-Sale

 

 

 

 

 

Translation

 

Investments

 

Total

Balances as of April 1, 2013

 

$

3,233 

 

$

(77)

 

$

3,156 

Other comprehensive income

 

 

76 

 

 

 

 

80 

Balances as of June 30, 2013

 

$

3,309 

 

$

(73)

 

$

3,236 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

 

Currency

 

Available-for-Sale

 

 

 

 

 

Translation

 

Investments

 

Total

Balances as of January 1, 2013

 

$

3,055 

 

$

(67)

 

$

2,988 

Other comprehensive income (loss)

 

 

254 

 

 

(6)

 

 

248 

Balances as of June 30, 2013

 

$

3,309 

 

$

(73)

 

$

3,236 

 

 

 

 

 

7. Stockholders’ Equity

Stock-based Compensation

The following table summarizes the stock-based compensation expenses included in the unaudited condensed consolidated statements of income ( in thousands ):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2014

 

2013

Sales and marketing

 

$

284 

 

$

308 

 

$

485 

 

$

554 

Research and development

 

 

12 

 

 

23 

 

 

59 

 

 

32 

General and administrative

 

 

597 

 

 

913 

 

 

1,231 

 

 

1,677 

 

 

$

893 

 

$

1,244 

 

$

1,775 

 

$

2,263 

Stock Options

During the six months ended June 30, 2014, the Company granted options to purchase a total of 1,574,500 shares of common stock and options to purchase 432,592 shares of common stock were exercised. As of June 30, 2014, there was approximately $5.3 million of unrecognized compensation expense, net of forfeitures, related to non-vested stock options, which is expected to be recognized over a weighted-average remaining period of approximately 2.86 years.

Restricted Stock Units (RSUs)

During the six months ended June 30, 2014, 7,000 RSUs were granted at a grant date fair value per share of $4.52 and 198,574 RSUs vested. As of June 30, 2014, there was approximately $0. 4 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 1.86 years.  

13


 

Repurchase of Common Stock

Through June 30, 2014, the Company’s Board of Directors had authorized a $50.5 million share repurchase program through December 31, 2014. The Company repurchased and retired 1,721,918 shares at a cost of $8.6 million during the six-month period ended June 30, 2014. As of June 30, 2014, $1.1 million of the $50.5 million share repurchase program authorized by the Board of Directors was available for future share repurchases. Repurchased shares have been retired and constitute authorized but unissued shares.

 

8 . Contingencies and Commitments  

Legal Matters

The Company is a party to various legal proceedings and subject to government investigations, as noted in this section below. All legal proceedings and any government investigations are subject to inherent uncertainties, unfavorable rulings or other adverse events which could occur. Unfavorable outcomes could include substantial monetary damages or awards, injunctions or other remedies, and if any of these were to occur, the possibility exists for a material adverse impact on the Company’s business, results of operations, financial position, and overall trends. The Company might also conclude that settling one or more such matters is in the best interests of its stockholders and its business, and any such settlement could include substantial payments. 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 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 received a further subpoena from the SEC in the fourth quarter of fiscal 2012 on additional matters including, but not limited to, matters related to its acquisition of NovaMed Pharmaceuticals, Inc.   (”NovaMed”) on April 18, 2011 and FCPA matters, and certain sales and marketing expenses.  

In response to these matters, the Company’s Board of Directors appointed a Special Committee of independent directors (the “Special Committee”) to oversee the Company’s response to the government inquiry. The Special Committee has undertaken independent investigations as to matters reflected in and arising from the SEC and DOJ investigations in order to evaluate whether any violation of the FCPA or other laws occurred. The Company will continue to cooperate fully with the SEC and DOJ in the conduct of their investigations.

The Company cannot predict what the outcome of those investigations will be, or the timing of any resolution. However, the Company has determined that a payment of $2.0 million to the government in penalties, fines and/or other remedies is probable. Accordingly, the Company recorded $2.0 million of operating expense in its fourth quarter 2013 results of operations to reflect the Company’s estimate of a probable loss incurred related to potential penalties, fines and/or other remedies in the ongoing investigations with the SEC and DOJ. Any actual fines or penalties that may be imposed, or other losses that may be realized related to the investigations, could materially differ and could be higher from the amount of the Company’s estimated loss and could materially impact the Company’s financial statements. The Company will  r e-assess   the potential liability each quarter and may adjust its estimates accordingly in future periods if it determines that a different amount is both probable of being incurred and is reasonably estimable .  

NovaMed was a party to a Distribution and Supply Agreement with MEDA Pharma GmbH & Co. KG (“MEDA”). Following the Company’s acquisition of NovaMed, 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. As provided in the agreement, disputes, including disputes regarding termination, must be resolved in binding arbitration. NovaMed filed an application for binding arbitration with the China International Economic and Trade Arbitration Commission (“CIETAC”) on July 26, 2012. On April 3, 2014 , CIETAC issued the final Award of the Arbitral Tribunal.

14


 

The Arbitral Tribunal found that MEDA did have a right to terminate the agreement upon a change of control, but that MEDA must make reasonable reimbursement to NovaMed before any products rights are returned to MEDA. The amount that must be paid includes $333,333 as “unjust enrichment” plus an amount for reasonable compensation for such services provided by NovaMed to MEDA. The amount of such payment for services was not determined by the Arbitral Tribunal, but was left to be determined by NovaMed . While NovaMed has the right to make a determination of the reasonable amount of its compensation for services, MEDA may elect to initiate another arbitration if it determines to dispute the reasonableness of NovaMed’s determination. However, NovaMed is not required to return the product rights to MEDA until MEDA either makes payment to NovaMed, or (i) pays $333,333 to NovaMed, (ii) initiates a second CIETAC arbitration and (iii) posts a security bond of $2,666,666 .   On April 30 , 2014, NovaMed informed MEDA that its determination of reasonable compensation for its services was $ 3,314,629 , including the $333,333 for unjust enrichment. MEDA has rejected NovaMed’s determination of reasonable compensation, but has not initiated a second CIETAC arbitration. The parties are attempting to resolve the matter without an additional arbitrations proceeding, but NovaMed may need to take additional legal action to enforce its right to compensation . T he amount of any final payment to NovaMed remains uncertain , and as such the Company has not recognized it as a gain contingency .

On March 11, 2013, Adam Crum filed a derivative lawsuit, purportedly in the name of SciClone, against Friedhelm Blobel, Gary Titus, Jon Saxe, Peter Barrett, Richard Hawkins, Gregg Lapointe and Ira Lawrence in California Superior Court, San Mateo County, captioned Crum v. Blobel, et al., Case No. CIV520331. The lawsuit alleges, based on the restatement of the Company’s consolidated financial statements for the year ended December 31, 2011 and certain quarters of 2011 and 2012, that the Board of Directors and management breached their fiduciary duties to the Company by not exercising oversight in such a way that they allowed the Company to file consolidated financial statements that were materially inaccurate. Plaintiff asserts claims for breach of fiduciary duty, abuse of control and mismanagement. Plaintiff seeks, among other things, injunctive relief, disgorgement, undisclosed damages and attorneys’ fees and costs. The Company and other defendants filed motions to dismiss the complaint. The court granted the motions to dismiss but allowed plaintiff to amend the complaint. An amended complaint has not yet been filed. Given the procedural process and the nature of this case, including that a motion to dismiss has been filed, the Company is unable to make a reasonable estimate of the potential loss or range of losses, if any, that might arise from this matter.

On or about November 20, 2013, counsel for the Company sent a letter on behalf of the Company’s subsidiary, NovaMed Shanghai , to Sanofi  (i) asserting that Sanofi had breached its obligations under various agreements (the “Promotion Agreements”) between the parties for the promotion of Depakine®, Stilnox®, Tritace® and Xatral® (collectively the “Products”) by, among other things, failing to place orders for and supply Products for the fourth quarter of 2013, and failing to pay promotion fees due to NovaMed Shanghai under the Promotion Agreements, and (ii) demanding  that Sanofi make full payment of the promotional fees due to NovaMed Shanghai , and that Sanofi cause orders to be placed for the Products for November and December of 2013 in specified quantities. No formal legal proceedings were initiated by or filed against the Company in connection with this matter. NovaMed Shanghai and Sanofi negotiated a settlement of the matter, effective as of July 14, 2014. The settlement provide d that Sanofi w ould make a final payment to NovaMed Shanghai of approximately 22 million Renminbi (approximately $3.5 million), within 30 days of the date of the settlement. The Company subsequently received the $3.5 million. The terms of the settlement resulted in the recognition of promotion services revenue , for the second quarter of 2014, of approximately $0.2 million of Sanofi revenue that had been deferred , as had all promotional fees invoiced to Sanofi relating to the fourth quarter of 2013 .   The remaining deferred revenue of approximately $2.6 million was reversed with an equivalent write-down of accounts receivable .   T his contemporaneous write-down of accounts receivable and deferred revenue had no impact on net income. 

Purchase Obligations

Under agreements with certain of the Company’s pharmaceutical partners, the Company is committed to certain annual minimum product purchases where the contract is subject to termination if the an nual minimum order is not met. As of June 30 , 2014 , the Company did not have any material unmet purchase obligations.

 

 

 

15


 

9. Research and Development Expense Related to Licensing Agreements

For the three and six-month periods ended June 30, 2013, the Company recorded upfront payments totaling $5.0 million in research and development expense related to its licensing arrangements with Taiwan Liposome Company granting the Company a license and the exclusive rights in China, Hong Kong and Macau to promote, market, and distribute and sell ProFlow® for the treatment of peripheral arterial disease and other indications, and Zensun (Shanghai) Science & Technology Co. Ltd for the exclusive promotion, marketing, distribution and sale of Neucardin TM in China. No similar license expense was recorded during the three and six month periods ended June 30,   2014.

 

 

10. Income Taxes

The provision for income taxes primarily relates to taxable income of the Company’s China operations. The provision for income tax was approximately $34,000 and $0.5 million for the three-month periods ended June 30, 2014 and 2013, respectively. The provision for income tax was $0.4 million and $1.3 million for the six-month periods ended June 30, 2014 and 2013, respectively. The decrease of $0.5 million in the provision for income tax for the three-month period ended June 30, 2014, compared to the same period of the prior year, and the decrease of $0.9 million for the six-month period ended June 30, 2014, compared to the same period of the prior year, was primarily the result of the expiration of the Sanofi distribution agreements resulting in a reduction in the Company’s forecasted profitability for 2014 for it s NovaMed Shanghai operations, compared to the Company’s forecasted profitability as of June 30, 2013 for 2013 , and also related to a reduction of approximately $0.4 million and $0.2 million for the three and six-month periods ended June 30, 2014, respectively, in the Company’s liabilities for uncertain tax positions in China due to certain tax years becoming closed to assessment due to the statute of limitations , offset partially by continued interest accrual on the uncertain tax positions . The Company’s statutory tax rate in China was 25% in 2014 and 2013.

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.

T he 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 and Hong Kong .  

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 (loss) 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.  

16


 

Summary information by operating segment for the three and six- month periods ended June 30 , 2014 and 2013 is as follows ( in thousands ):  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2014

 

2013

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

China

 

$

31,287 

 

$

28,171 

 

$

56,966 

 

$

56,981 

Rest of the World (including the US and Hong Kong)

 

 

1,226 

 

 

1,121 

 

 

2,112 

 

 

2,117 

Total net revenues

 

$

32,513 

 

$

29,292 

 

$

59,078 

 

$

59,098 

Income (loss) from operations:

 

 

 

 

 

 

 

 

 

 

 

 

China

 

$

11,438 

 

$

3,011 

 

$

19,021 

 

$

13,962 

Rest of the World (including the US and Hong Kong)

 

 

(1,798)

 

 

(4,553)

 

 

(4,720)

 

 

(10,480)

Total income (loss) from operations

 

$

9,640 

 

$

(1,542)

 

$

14,301 

 

$

3,482 

Non-operating income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

China

 

$

39 

 

$

69 

 

$

(86)

 

$

42 

Rest of the World (including the US and Hong Kong)

 

 

(5)

 

 

(22)

 

 

(9)

 

 

(29)

Total non-operating income (expense), net

 

$

34 

 

$

47 

 

$

(95)

 

$

13 

Income (loss) before provision for income tax:

 

 

 

 

 

 

 

 

 

 

 

 

China

 

$

11,477 

 

$

3,080 

 

$

18,935 

 

$

14,004 

Rest of the World (including the US and Hong Kong)

 

 

(1,803)

 

 

(4,575)

 

 

(4,729)

 

 

(10,509)

Total income (loss) before provision for income tax

 

$

9,674 

 

$

(1,495)

 

$

14,206 

 

$

3,495 

 

Long-lived assets as of June 30 , 2014 by operating segment are as follows ( in thousands ):

 

 

 

 

 

 

 

 

China

 

$

35,797 

Rest of the World (including the US and Hong Kong)

 

 

314 

 

 

$

36,111 

 

 

 

12 . Subsequent Event s

Sanofi Settlement : The Company’s promotion agreements with Sanofi, consisting of individual promotional agreements for certain pharmaceutical products and supplementary agreements extending the terms thereof, were not renewed and expired on December 31, 2013. The Company received initial notification of non-renewal from Sanofi in early October 2013. Subsequent thereto, the Company believes that Sanofi breached its obligations under these agreements by, among other things, failing to place orders for and supply product for the fourth quarter of 2013 in relation to sales we generated, and failing to pay promotion fees due to NovaMed Shanghai under the agreements. NovaMed Shanghai and Sanofi negotiated a settlement of the matter, effective as of July 14, 2014. The settlement provide d that Sanofi w ould make a final payment to NovaMed Shanghai of approximately 22 million Renminbi (approximately $3.5 million) within 30 days of the date of the settlement. The Company subsequently received the $3.5 million payment. The terms of the settlement resulted in the recognition of promotion services revenue , for the second quarter of 2014, of approximately $0.2 million of Sanofi revenue that had been deferred , as had all promotional fees invoiced to Sanofi relating to the fourth quarter of 2013 .   T he reversal of the remaining deferred revenue of approximately $2.6   million   was

17


 

reversed with an equivalent write-down of accounts receivable .   T his contemporaneous write-down of accounts receivable and deferred revenue had no impact on net income.

Stock Repurchases :   In   July 2014 ,   the Company’s Board of Directors approved an increase of $15 million to the existing $50.5 million share repurchase program initiated in October 2011, bringing the total authorized under the program since inception to $65.5 million .   In addition, the Board of Directors approved extending the repurchase program through December 31, 2015. The Company repurchased and retired 195,347 shares at a cost of $1.1 million from July 1, 2014 through August 6, 2014. As of August 6, 2014, $15 million of the total $65.5 million was available for share repurchase.  

 

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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 hepatitis B virus (“HBV”) and hepatitis C virus (“HCV”) and other markets, particularly in China; 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 the outcome 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-loo king statements for any reason.

Overview  

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

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

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

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Our promotion agreements with Sanofi Aventis S.A. (“Sanofi”), consisting of individual promotional agreements for certain pharmaceutical products and supplementary agreements extending the terms thereof, were not renewed and expired on December 31, 2013. We received initial notification of non-renewal from Sanofi in early October 2013. Subsequent thereto, we believe that Sanofi breached its obligations under these agreements by, among other things, failing to place orders for and supply product for the fourth quarter of 2013 in relation to sales we generated, and failing to pay promotion fees due to our subsidiary, NovaMed Pharmaceuticals (Shanghai) Co. Ltd. (“NovaMed Shanghai ”) , under the agreements. NovaMed Shanghai and Sanofi negotiated a settlement of the matter, effective as of July 14, 2014. The settlement provide d that Sanofi w ould make a final payment to NovaMed Shanghai of approximately 22 million Renminbi (approximately $3.5 million) within 30 days of the date of the settlement. We subsequently received the $3.5 million payment. The terms of the settlement resulted in the recognition of promotion services revenue , for the second quarter of 2014, of approximately $0.2 million of Sanofi revenue that had been deferred , as had all promotional fees invoiced to Sanofi relating to the fourth quarter of 2013 .   T he reversal of the remaining deferred revenue of approximately $2.6 million was reversed with an equivalent write-down of accounts receivable .   T his contemporaneous write-down of accounts receivable and deferred revenue had no impact on net income. Our revenues for the three and six-month periods ended June 30, 2014 and the full years of 2013, 2012 and 2011 with Sanofi were approximately $0.2 million, $25.0 million, $30.8 million, and $19.7 million, respectively.

In June 2013, we renewed our promotion agreement with Baxter for a 5-year term, through December 2017. We had been renewing our promotion agreement with Pfizer month-to-month while negotiating for an extended and renegotiated agreement.   In July 2014, we renewed our promotion agreement with Pfizer for a 5-year term, through June 2019. We are pursuing additional promotion service agreements to generate additional revenue. At the same time, we continue to assess the financial performance of the products we promote under our agreements and their overall value within our entire portfolio of products. Over time, we anticipate the product mix that we promote will change, which may affect our revenues and profitability in the future. If any of these agreements are determined to no longer be beneficial to us and are allowed to expire, or if third parties will not renegotiate, renew or extend the agreements on terms acceptable to us, our revenues would be adversely affected and our profitability may be adversely or beneficially affected. If on the other hand our efforts to renegotiate result in better terms, there may be a positive impact on our revenues and profitability.

ZADAXIN is approved in over 30 countries and may be used for the treatment of HBV, HCV, and certain cancers, and as a vaccine adjuvant according to the local regulatory approvals we have in these countries. In China, thymalfasin is included in the treatment guidelines issued by the Ministry of Health (“MOH”) for liver cancer, as well as guidelines for treatment of chronic HBV (issued by both the Chinese Medical Association and the Asian-Pacific Association for the Study of the Liver) and invasive fungal infections of critically ill patients (issued by the Chinese Medical Association). Our sales force is focused on increasing sales to the country’s largest hospitals (class 3 with over 500 beds) as well as mid-size hospitals (class 2). These hospitals serve Tier 1 and Tier 2 cities located mostly in the eastern part of China, which are the largest and generally have the most affluent populations. We are widening our market strategies by targeting numerous smaller hospitals as well as hospitals in more rural areas. We are also seeking to expand the indications for which ZADAXIN could be used, including sepsis.

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

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

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CFDA subsequently informed Zensun that its Phase 2 data is insufficient , and has asked   Zensun to submit a new NDA once the ongoing Phase 3 study ha d reached its endpoints .  

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

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

We believe our cas h and investments as of June 30 , 2014 and ongoing revenue generating business operations will be sufficient to support our current operating plan for at least the next 12 months. Our results may fluctuate from quarter to quarter and we may report losses in the future.

  Results of Operations                               

Revenues :

The following table summarize s the period over period change s in our product sales and promotion services   (in thousands) :  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

 

 

Six Months Ended

  

 

 

 

June 30,

 

 

 

June 30,