SciClone Pharmaceuticals, Inc.
SCICLONE PHARMACEUTICALS INC (Form: 10-Q, Received: 05/11/2015 17:09:45)

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 March 31 , 2015

 

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 May 5 ,   2015 ,   49,601,589 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 March 31, 2015 and December 31, 2014  

  

 

  

 

 

 

 

 

Condens ed Consolidated Statements of Income for the three- month periods ended March 31, 2015 and  2014

  

 

  

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2015 and 2014

  

 

  

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three -month periods ended March 31, 2015 and 2014

  

 

  

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

  

 

  

 

 

 

Item 2.

 

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

  

 

16 

  

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

 

24 

  

 

 

 

Item 4.

 

Controls and Procedures

  

 

24 

  

 

 

 

PART II.

 

OTHER INFORMATION

  

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

  

 

25 

  

 

 

 

Item 1A.

 

Risk Factors

  

 

26 

  

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

 

48 

  

 

 

 

Item 3.

 

Defaults Upon Senior Securities

  

 

48 

  

 

 

 

Item 4.

 

Mine Safety Disclosures

  

 

48 

  

 

 

 

Item 5.

 

Other Information

  

 

48 

  

 

 

 

Item 6.

 

Exhibits

  

 

49 

  

 

 

 

Signature  

 

 

  

 

51 

  

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2015

 

2014

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

96,036 

 

$

86,228 

Accounts receivable, net of allowances of $1,539 and $998 as of March 31, 2015 and December 31, 2014, respectively

 

 

32,426 

 

 

40,268 

Inventories

 

 

8,934 

 

 

10,703 

Short-term investments

 

 

75 

 

 

75 

Prepaid expenses and other current assets

 

 

2,332 

 

 

2,597 

Deferred tax assets

 

 

253 

 

 

326 

Total current assets

 

 

140,056 

 

 

140,197 

Property and equipment, net

 

 

2,499 

 

 

1,848 

Goodwill

 

 

34,521 

 

 

34,521 

Other assets

 

 

5,266 

 

 

5,265 

Total assets

 

$

182,342 

 

$

181,831 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

2,415 

 

$

5,311 

Accrued and other current liabilities

 

 

16,316 

 

 

20,536 

Deferred revenue

 

 

110 

 

 

596 

Total current liabilities

 

 

18,841 

 

 

26,443 

Other long-term liabilities

 

 

87 

 

 

114 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

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;  49,826,185 and 49,948,897 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively

 

 

50 

 

 

50 

Additional paid-in capital

 

 

288,980 

 

 

287,108 

Accumulated other comprehensive income

 

 

3,320 

 

 

3,264 

Accumulated deficit

 

 

(128,936)

 

 

(135,148)

Total stockholders’ equity

 

 

163,414 

 

 

155,274 

Total liabilities and stockholders’ equity

 

$

182,342 

 

$

181,831 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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Table of Contents

 

 

SCICLONE PHARMACEUTICALS , INC.

CONDE NSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

2014

Revenues:

 

 

 

 

 

 

Product sales, net

 

$

33,168 

 

$

26,064 

Promotion services

 

 

400 

 

 

501 

Total net revenues

 

 

33,568 

 

 

26,565 

Operating expenses:

 

 

 

 

 

 

Cost of product sales

 

 

4,597 

 

 

4,561 

Sales and marketing

 

 

11,057 

 

 

9,834 

Research and development

 

 

1,088 

 

 

1,476 

General and administrative

 

 

7,343 

 

 

6,033 

Total operating expenses

 

 

24,085 

 

 

21,904 

Income from operations

 

 

9,483 

 

 

4,661 

Non-operating income (expense):

 

 

 

 

 

 

Interest and investment income

 

 

112 

 

 

19 

Interest and investment expense

 

 

 —

 

 

(29)

Other expense, net

 

 

(63)

 

 

(119)

Income before provision for income tax

 

 

9,532 

 

 

4,532 

Provision for income tax

 

 

570 

 

 

398 

Net income

 

$

8,962 

 

$

4,134 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.18 

 

$

0.08 

Diluted net income per share

 

$

0.17 

 

$

0.08 

 

 

 

 

 

 

 

Weighted average shares used in computing:

 

 

 

 

 

 

Basic net income per share

 

 

49,964 

 

 

52,026 

Diluted net income per share

 

 

52,278 

 

 

53,234 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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Table of Contents

 

SCICLONE PHARMACEUTICALS , INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

2014

Net income

 

$

8,962 

 

$

4,134 

Other comprehensive income (loss), net of income tax

 

 

 

 

 

 

Foreign currency translation

 

 

56 

 

 

(859)

Total other comprehensive income (loss)

 

 

56 

 

 

(859)

Total comprehensive income

 

$

9,018 

 

$

3,275 

 

 

 

 

 

 

 

 

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)  

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

2014

Operating activities:

 

 

 

 

 

 

Net income

 

$

8,962 

 

$

4,134 

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

 

 

 

 

 

 

Non-cash expense related to stock-based compensation

 

 

806 

 

 

882 

Provision for doubtful accounts

 

 

541 

 

 

 —

Depreciation and amortization

 

 

231 

 

 

207 

Loss on disposal of fixed assets

 

 

 

 

15 

Deferred income taxes

 

 

73 

 

 

 —

Other long-term liabilities

 

 

(26)

 

 

(29)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

7,296 

 

 

7,516 

Inventories

 

 

1,794 

 

 

1,188 

Prepaid expenses and other assets

 

 

417 

 

 

(288)

Accounts payable

 

 

(3,081)

 

 

(4,189)

Accrued and other current liabilities

 

 

(4,233)

 

 

(5,324)

Deferred revenue

 

 

(486)

 

 

Net cash provided by operating activities

 

 

12,295 

 

 

4,117 

Investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(808)

 

 

(111)

Net cash used in investing activities

 

 

(808)

 

 

(111)

Financing activities:

 

 

 

 

 

 

Repurchase of common stock including commissions

 

 

(2,737)

 

 

(2,569)

Proceeds from issuances of common stock, net

 

 

1,007 

 

 

248 

Net cash used in financing activities

 

 

(1,730)

 

 

(2,321)

Effect of exchange rate changes on cash and cash equivalents

 

 

51 

 

 

(18)

Net increase in cash and cash equivalents

 

 

9,808 

 

 

1,667 

Cash and cash equivalents, beginning of period 

 

 

86,228 

 

 

85,803 

Cash and cash equivalents, end of period

 

$

96,036 

 

$

87,470 

 

 

 

 

 

 

 

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

Note 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, 2014 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, 2014 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 Holding Hong Kong 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 passage of title and risk of loss are transferred to Sinopharm at the time of shipment. After the Company’s sale of ZADAXIN to the importer, 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 partners are the Company’s customers.

Sinopharm contributed 91% and 94% of the Company’s total net revenue for the three-month periods ended March 31, 2015 and 2014, respectively, which revenues related to the Company’s China segment. There were no other customers that exceeded 10% of the Company’s total net revenue in the periods presented.

As of March 31, 2015, approximately $ 30.4 million, or 89 %, of the Company's accounts receivable was attributable to one customer, Sinopharm, in China. The Company generally does not require collateral from its customers.

7


 

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 written off at the point when they are considered uncollectible.

As of March 31, 2015, the Company had a receivable reserve of $1.5 million. The reserve includes $0.9 million from one customer that is more than one year past due. During 2014, the Company’s subsidiary, SciClone Pharmaceuticals International China Holding Ltd (“SPIL China”) executed an agreement with this customer providing for settlement of the $0.9 million remaining receivable balance to be paid in installments as follows: (i) $400,000 before May 31, 2015, and (ii) the remaining balance of $500,000 to be paid by December 31, 2015. The Company will continue to maintain a full reserve on the remaining outstanding accounts receivable balance from this customer until payments are received. As of March 31, 2015, the Company had $0.5 million in fully reserved accounts receivable from another customer that were past due. The Company recognized the $0.5 million of bad debt expense in general and administrative expense during the three months ended March 31, 2015 due to uncertainty regarding the collectability of the customer’s outstanding receivable balance.

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.

Promotion Services Revenue . The Company recognizes promotion services revenue after designated medical products are delivered to the distributors as specified in a promotion services contract, which marks the period when marketing and promotion services have been rendered and the revenue recognition criteria are met.

Revenue 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 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 March 31, 2015 and December 31, 2014, the Company’s revenue reserves were $0 and $0. 1 million, respectively.

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 expiration 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-month periods ended March 31, 2015 and 2014, the Company did not record any write-downs related to inventory.  

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Loans Receivable

Loans receivable are due from a single third party (see Note 4). Loans are initially recorded, and continue to be carried, at unpaid principal balances under “other assets” on the unaudited condensed consolidated balance sheet. Carried balances are subsequently adjusted for payments of principal or adjustments to the allowance for loan losses to account for any impairment. Interest income is recognized over the term of the loans and is calculated using the simple-interest method, as the loans do not have associated premium or discount. If the loans were to experience impairment, interest income would not be recognized unless the likelihood of further loss was remote.

Although the measurement basis is unpaid principal (as adjusted for subsequent payments or impairment), not fair value, the loans receivable would qualify as Level 3 measurements under the fair value hierarchy (Note 2) due to the presence of significant unobservable inputs related to the counterparty, which is a private entity.

Management considers impairment to exist when, based on current information or factors (such as payment history, value of collateral, and assessment of the counterparty’s current creditworthiness), it is probable that principal and interest payments will not be collected according to the contractual agreements. Management considers a loan payment delinquent when not received by the due date. As of March 31, 2015 and December 31, 2014, management concluded the loans receivable were not impaired, and there was no allowance for loan losses.

Net Income Per Share

Basic net income 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 per share is computed by dividing net income 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.

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

2014

Numerator:

 

 

 

 

 

 

Net income

 

$

8,962 

 

$

4,134 

Denominator:

 

 

 

 

 

 

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

 

 

49,964 

 

 

52,026 

Effect of dilutive securities

 

 

2,314 

 

 

1,208 

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

 

 

52,278 

 

 

53,234 

Basic net income per share

 

$

0.18 

 

$

0.08 

Diluted net income per share

 

$

0.17 

 

$

0.08 

 

For the three months ended March 31, 2015 and 2014, outstanding stock options and awards for 478,098 and 3,592,835 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 three months ended March 31, 2015 and 2014, outstanding stock options for 50,000 and 62,500 shares, respectively, subject to performance conditions were excluded from the calculation of diluted net income per share because the performance criteria had not been met.

New Accounting Standards Update

In May 2014, the Financial Accounting Standards Board (“FASB”) issued 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. On April 1, 2015 the FASB voted in favor of proposing a one year delay of the effective date and to permit companies to voluntarily adopt the new standard as of the original effective date. Pending

9


 

enactment of a delay in the effective date, 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 full retrospective or modified retrospective 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.

 

Note 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 s   represent the Company’s fair value hierarchy for its financial assets (cash equivalents and short-term investments ) measured at fair value on a recurring basis ( in thousands ):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of March 31, 2015 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)

 

March 31, 2015

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, 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)

 

December 31, 2014

Certificate of deposit

 

$

 —

 

$

75 

 

$

 —

 

$

75 

Money market funds

 

 

19,678 

 

 

 —

 

 

 —

 

 

19,678 

Total

 

$

19,678 

 

$

75 

 

$

 —

 

$

19,753 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10


 

Note 3 —   Inventories

Inventories   consisted of the following (in thousands) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2015

 

2014

Raw materials

 

$

3,529 

 

$

5,009 

Work in progress

 

 

657 

 

 

761 

Finished goods

 

 

4,748 

 

 

4,933 

 

 

$

8,934 

 

$

10,703 

 

Included in the Company’s inventory a s of March 31, 2015 and December 31, 2014 ,   was  $ 2.0 million and $ 3.1 million, respectively, in inventory held at distributors related t o products sold by its NovaMed Pharmaceuticals, Inc. and NovaMed Pharmaceuticals (Shanghai) Co. Ltd. subsidiaries .

Note 4 —   Loans Receivable

As part of the Company’s May 2013 license and supply agreement with Zensun (Shanghai) Science & Technology Co. Ltd (“Zensun”), the Company previously agreed to loan up to $12 million to Zensun. The entry into the license and supply agreement in the second quarter of 2013, pursuant to which the Company licensed the exclusive rights to promote, market, distribute, and sell Neucardin TM , a chronic heart failure product under development by Zensun (such rights licensed for the People’s Republic of China, Hong Kong and Macau) is more fully described in the Company’s quarterly report on Form 10-Q for the second quarter of 2013.

Pursuant to its agreement to loan funds, the Company loaned $4.75 million to Zensun in the second half of 2014. The extension of credit and funding to Zensun was accomplished through two of the Company's subsidiaries, SPIL China and SciClone Pharmaceuticals (China) Ltd. (“SciClone China”).

With respect to lender SPIL China, Zensun can request US-dollar denominated borrowings up to $11.75 million. As of March 31, 2015, borrowings totaling $4.5 million had been requested by Zensun and paid by SPIL China with $2.25 million lent in the third quarter of 2014 and $2.25 million lent in the fourth quarter of 2014. These borrowings bear interest at a fixed rate of 7.5% per annum payable annually in arrears at each interest payment date as defined in the agreement. These borrowings mature on September 26, 2017, with an option electable by the borrower to extend for two additional years provided certain conditions are met. All outstanding balances must be repaid by the maturity date, with prepayments permitted without penalty upon prior notice.

With respect to lender SciClone China, Zensun can request RMB-denominated borrowings for up to RMB 1,550,000 using an entrustment mechanism with a bank as an intermediary. In the third quarter of 2014, SciClone China entered into an entrusted loan agreement for RMB 1,550,000 (approximately US$250,000 as of March 31, 2015) with Zensun, using a major Chinese bank as the lending agent. SciClone China is the principal and ultimately bears the credit risk, not the bank. The loan bears interest at a fixed rate of 7.5% per annum and Zensun is subject to obligations of the borrower as specified in the loan agreements. The loan term is sixty-six months. All outstanding principal and interest balances must be repaid by the maturity date, with prepayments permitted without penalty upon prior notice.

The proceeds of the two separate but related loans are to be used for working capital and general corporate purposes by Zensun. To secure the loans, Zensun pledged its entire equity interest in its subsidiary, Shanghai Dongxin Biochemical Technology Co. Ltd. (whose assets include real property) to SPIL China.

Management, on the basis of (i) a creditworthiness evaluation using recent Zensun financial information, (ii) consideration of the market value of the pledged security, and (iii) consideration of Zensun’s compliance with the terms of the loans and timely payment of interest, concluded there were no indications of loan impairment as of March 31, 2015 or December 31, 2014; accordingly, there is no allowance for losses.

The two loans are included in “other assets” on the Company’s unaudited condensed consolidated balance sheet as of March 31, 2015 and December 31, 2014. Interest income on the loans amounted to $0.1 million for the three months ended

11


 

March 31, 2015 and is included in interest and investment income in the unaudited condensed consolidated statement of income.

Please refer to No te 12, “Subsequent Event ”, for further information concerning the lending of additional funds to Zensun subsequent to March 31, 2015.

Note 5 —   Goodwill

The following table represents the changes in goodwill for the three months ended March 31, 2015 ( in thousands ):

 

 

 

Balance as of December 31, 2014

$

34,521 

Translation adjustments

 

 —

Balance as of March 31, 2015

$

34,521 

 

 

 

 

 

Note 6 Accrued and Other Current Liabilities

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2015

 

2014

Accrued sales and marketing expenses

 

$

4,218 

 

$

5,383 

Accrued taxes, tax reserves and interest

 

 

5,579 

 

 

5,208 

Accrued compensation and benefits

 

 

1,753 

 

 

4,176 

Accrued estimated SEC and DOJ investigation loss (Note 9)

 

 

2,000 

 

 

2,000 

Accrued professional fees

 

 

1,939 

 

 

1,819 

Accrued manufacturing costs

 

 

347 

 

 

95 

Accrued license fee

 

 

 —

 

 

1,000 

Other

 

 

480 

 

 

855 

 

 

$

16,316 

 

$

20,536 

 

 

Note 7 — Accumulated Other Comprehensive Income

Changes in the composition of accumulated other comprehensive income (loss)  f or the three -months ended March 31, 2015 and 2014 are as follows ( in thousands ):

 

 

 

 

 

 

 

 

Balances as of January 1, 2015

 

$

3,264 

Other comprehensive income related to foreign currency translation

 

 

56 

Balances as of March 31, 2015

 

$

3,320 

 

 

 

 

 

 

 

 

Balances as of January 1, 2014

 

$

4,176 

Other comprehensive loss related to foreign currency translation

 

 

(859)

Balances as of March 31, 2014

 

$

3,317 

 

 

 

 

 

12


 

Note 8 — 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

 

 

March 31,

 

 

2015

 

2014

Sales and marketing

 

$

241 

 

$

201 

Research and development

 

 

32 

 

 

47 

General and administrative

 

 

533 

 

 

634 

 

 

$

806 

 

$

882 

Stock Options

During the three months ended March 31, 2015 , the Company granted options to purchase a total of 1,172 ,500 shares of common stock and options to purchase 184,313 shares of common stock were exercised. As of March 31, 2015 , there was approximately $ 6.8 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. 99 years.

Restricted Stock Units (RSUs)

During the three months ended March 31, 2015 ,   88 ,000 RSUs were granted at a grant date fair value per share of $ 8.83 and zer o RSUs vested. As of March 31, 2015 , there was approximately $0. 7 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 2.12 years.  

Repurchase of Common Stock

The Company repurchased and retired 312,466 shares at a cost of $2.8 million during the three -month period ended March 31, 2015 . As of March 31, 2015 , $ 12.5 million of the $80 .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.

 

Note 9  — Commitments and Contingencies  

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.  

13


 

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 previously determined that a payment of at least $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. The Company has monitored developments in the investigations since that time and has not determined that any further adjustments to the estimated loss a re both probable and reasonably estimable. 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 than the amount of the $2.0 million estimated loss and could materially impact the Company’s financial statements. The Company will re-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. 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. 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. 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 made a counter offer and the parties were attempting to resolve the matter without an additional arbitration proceeding. I n December 2014, NovaMed filed a “Request for Second Arbitration” with CIETAC in order to enforce its right to compensation. The arbitration case is pending with CIETAC and no hearing has taken place yet. T he amount of any final payment to NovaMed remains uncertain , and as such the Company has not recognized it as a gain contingency .

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 March 31, 2015 , the Company did not have any material unmet purchase obligations.

 

 

 

Note 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 $0. 6 million and $0. 4 million for the three-month periods ended March 31, 2015 and 2014 , respectively. Th e in crease of $ 0. 2 million in the provision for income tax for the three-month period ended March 31, 2015 , compared to the same period of the prior year ,   related to forecasted growth in our China business. The Company’s statutory tax rate in China was 25% in 2015 and 2014 .  

 

14


 

Note 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 segments and reporting units, 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.   Summary information by operating segment for the three - month periods ended March 31, 2015 and 2014 is as follows ( in thousands ):  

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

2014

Revenue:

 

 

 

 

 

 

China

 

$

32,427 

 

$

25,679 

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

 

 

1,141 

 

 

886 

Total net revenues

 

$

33,568 

 

$

26,565 

Income (loss) from operations:

 

 

 

 

 

 

China

 

$

12,344 

 

$

7,572 

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

 

 

(2,861)

 

 

(2,911)

Total income from operations

 

$

9,483 

 

$

4,661 

Non-operating income (expense), net:

 

 

 

 

 

 

China

 

$

47 

 

$

(125)

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

 

 

 

 

(4)

Total non-operating income (expense), net

 

$

49 

 

$

(129)

Income (loss) before provision for income tax:

 

 

 

 

 

 

China

 

$

12,391 

 

$

7,447 

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

 

 

(2,859)

 

 

(2,915)

Total income before provision for income tax

 

$

9,532 

 

$

4,532 

 

Long-lived assets as of March 31, 2015 by operating segment are as follows ( in thousands ):

 

 

 

 

 

 

 

 

China

 

$

40,974 

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

 

 

1,312 

 

 

$

42,286 

 

Note 12 — Subsequent event

On April 1, 2015, pursuant to its agreement to loan up to $12 million in funds to Zensun, SPIL China loaned $7.25 million to Zensun, bringing the combined total outstanding loans receivable balance to $12 million. The maturity date, interest rate associated with, and other fundamental terms of this additional lending are identical to those of two previous loan draw-downs funded to Zensun in the second half of 2014. Refer to Note 4 for further information on the terms of the loans receivable.  

15


 

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

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

We have two categories of revenues: “product sales revenues” and “promotion services revenues.” Our product sales revenues result from our proprietary and in-licensed products, including our lead product, ZADAXIN; Aggrastat ® an intervention cardiology product launched in China in 2009 in-licensed from Cardiome Pharma Corp (“Cardiome”); and products from Pfizer International Trading (Shanghai) Ltd. (“Pfizer”). ZADAXIN has the highest margins in our portfolio as it is a premium product sold exclusively by SciClone. 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 in China under services agreements with certain pharmaceutical partners including Baxter International, Inc. (“Baxter”). 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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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 3A with over 500 beds) as well as mid-size hospitals (class 2A). 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 some Tier 3 cities. We are also seeking to expand the indications for which ZADAXIN could be used, including sepsis.

In August 2014, we, along with our partner BTG plc (“BTG”), announced that the China Food and Drug Administration has approved the registration of DC Bead ®   for the embolization of malignant hypervascularized tumors. DC Bead may be used to treat liver cancer, a large and growing indication in China, and we believe our oncology sales team and academic marketing liaisons have established high quality relationships with medical professionals and institutions that specialize in cancer treatment, which we believe will be a valuable asset as we prepare for commercial launch of DC Bead, anticipated in mid-2015. BTG and SciClone previously entered into an agreement granting SciClone exclusive licensing and distribution rights to DC Bead in China. Under the agreement, we will purchase product from BTG at a specified price for sale in China.

We are also pursuing the registration of several other therapeutic products in China. These include: 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.

In December 2014, we entered into a strategic partnership with The Medicines Company for two cardiovascular products in China. The partnership includes an agreement granting us a license and the exclusive rights in China to promote two products including 1) Angiomax ®   (bivalirudin) for Injection, an anticoagulant indicated in patients undergoing percutaneous coronary intervention (PCI) with provisional use of glycoprotein IIb/IIIa inhibitor (GPI) and in patients with, or at risk of, heparin-induced thrombocytopenia and thrombosis syndrome undergoing PCI for which a Phase 3 registration trial was completed in China and is currently under review by the China Food and Drug Administration for marketing approval, and 2) Cleviprex ®   (clevidipine) Injectable Emulsion, a third-generation dihydropyridine calcium channel blocker indicated for the reduction of blood pressure when oral therapy is not feasible or desirable for which a clinical trial application (CTA) for China was filed in 2013. Under the terms of the agreement, we will be responsible for all aspects of commercialization, including pre-and post-launch activities, for both products in the China market (excluding Hong Kong and Macao). We have also agreed to participate in the China registration process for both products. Financial terms of the agreement, in addition to net sales royalties payable to The Medicines Company, include the following additional payments to The Medicines Company: an upfront payment   made in the fourth quarter of 2014; a project support services fee; and regulatory/commercial success milestone payments of up to an aggregate of $50.5 million.  

Our agreement with Baxter is for a 5-year term, through December 2017, and our agreement with Pfizer is for a 5-year term, through June 2019. We are pursuing additional agreements to generate additional revenue. We continue to seek in-licensing arrangements for well-differentiated products at various stages of development that, if not yet approved, have a defined regulatory approval pathway in 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 Macao. 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 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 reached its endpoints. In 2014, we loaned Zensun a total of approximately $4.75 million pursuant to the terms of the framework agreement (refer to Note 4 to the unaudited condensed consolidated financial statements appearing under Part I, Item 1). We loaned an additional $7.25 million to

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Zensun on April 1, 2015 (refer to Note 12 in the unaudited condensed consolidated financial statements appearing under Part I, Item 1).

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 Macao 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. 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. TLC was recently notified by the CFDA that ProFlow did not receive clinical trial approval and TLC is in the process of appealing the decision. We are currently in discussions with TLC to revise our license agreement, and as an alternative, may in-license an oncology product from them .

Recent governmental policy changes in China have eliminated national regulation of the maximum retail drug prices for most drugs, effective as of June 1, 2015, including for those on the National Reimbursement Drug List . Decisions by provincial authorities appear to be emerging as the primary governmental mechanism for price controls. As an example, the Zhejiang provincial authority announced a price limitation for sales of Z ADAXIN   in the province in April 2015. For f isc al 2015, we expect the impact of this and other potential decisions in other provinces to be offset by volume increases and changes in our arrangeme nt with our China distributor.  

We believe our cash, cash equivalents and short-term investments as of March 31, 2015 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 in our product sales and promotion services (in thousands):  

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

 

 

 

March 31,

 

 

 

  

2015

  

2014

  

Change

Product sales, net

 

$

33,168 

  

$

26,064 

  

27% 

Promotion services

 

 

400 

 

 

501 

 

-20%

Total net revenues

 

$

33,568 

 

$

26,565 

 

26% 

Product sales were $ 33.2 million for the three-month period ended March 31, 2015 compared to $26.1 million for the corresponding period in 2014, an increase of $ 7.1 million, or 27 %. ZADAXIN sales were $ 31.3 million for the three-month period ended March 31, 2015, compared to $24.7 million for the corresponding period of 2014, an increase of $6.6 million that mainly related to an increase in volume sold. We anticipate that ZADAXIN revenues in 2015 will be higher than 2014.

Deferred revenue includes approximately $ 0.1 million   in revenue related to Aggrastat pro duct delivered during the year ended December 31, 2014   that may be returned because the   certain product s   shipped during the year were within si x months of their expiration date s. Such revenue remains deferred as of March 31, 2015.  

In China, pharmaceutical products are imported and distributed through a tiered method of distribution. For our proprietary product ZADAXIN, we manufacture our product using our US and European contract manufacturers, and we generate our product sales revenue through sales of ZADAXIN product to Sinopharm Holding Hong Kong Co. Ltd. (“Sinopharm”) . Sinopharm and its affiliates act as an importer, and also as the top “tier” of the distribution system (“Tier 1”) in China. Our ZADAXIN sales occur when Sinopharm purchases product from us without any right of return except for damaged product or quality control issues. Passage of title and risk of loss are transferred to Sinopharm at the time of

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shipment. After the sale, Sinopharm clears products through China import customs, sells directly to large hospitals and holds additional product it has purchased in inventory for sale to the next tier in the distribution system. The second-tier distributors are responsible for the further sale and distribution of the products they purchase from the importer, either through sales of product directly to the retail level (hospitals and pharmacies), or to third-tier local or regional distributors who, in turn, sell products to hospitals and pharmacies.

All of our promotion services revenue related to products promoted under our agreement with Baxter .   Promotion services revenue   was $0.4 million for the three-month period ended March 31, 2015, compared to $ 0.5 million for the correspo nding period in 2014.

Our Baxter promotion agreement is for a 5-year term, through December 2017. Our Pfizer product distribution agreement is for a 5-year term, through June 2019. We continue to assess the financial performance of the products we promote and distribute 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. On the other hand, if we are successful in negotiating better terms, there may be a positive impact on our revenues and profitability.

Total China revenues were $ 32.4 million, or 97% of total revenues for the three-month period ended March 31, 2015, compared to $25.7 million, or 97% of total revenues for the corresponding period in 2014. Rest of the World segment revenues were $1.1 million, or 3% of our revenues for the three-month period ended March 31, 2015, compared to $0.9 million, or 3% of our revenues for the three-month period ended March 31, 2014 and related to sales of ZADAXIN product.  

For the three -month period s ended March 31, 2015 and 2014,   sales to   Sinopharm in Chin a accounted for approximately 91 % and 94%, respectively, of our revenues. Our experience with Sinopharm has been good and we anticipate that we will continue to sell a majority of our product to them .  

Cost of Product Sales:

The following table summarize s the period over period change in our cost of product sales   (in thousands ) :

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

 

 

 

March 31,

 

 

 

  

2015

  

2014

  

Change

Cost of product sales

  

$

4,597 

  

$

4,561 

  

1% 

Cost of product sales was $4.6 million for both the three-month periods ended March 31, 2015 and 2014. ZADAXIN cost of sales increased $ 0.2 million for the three-month period ended March 31, 2015, compared to the same period of last year due to increased volume sold. Cost of product sales related to Aggrastat and oncology products decreased $0.2 million for the three-month period ended March 31, 2015, compared to the same period of last year, primarily due to a decrease in the volumes of our oncology products sold.

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

Overall, we expect our gross margin percentages in 2015 to remain comparable to 2014, although they may fluctuate from quarter to quarter.

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Sales and Marketing :

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

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

 

 

 

March 31,

 

 

 

  

2015

  

2014

  

Change

Sales and marketing

  

$

11,057 

  

$

9,834 

  

12% 

Sales and marketing expenses for the three months ended March 31, 2015   in creased by $ 1.2 million, or 12 %, compared to the same period in 2014, related to growth in our sales and marketing efforts for ZADAXIN.

We anticipate total sales and marketing expenses for t he year ending December 31, 2015   to be higher than those incurred for the year ended December 31, 2014 related to growth in our sales and marketing efforts for ZADAXIN and DC Bead, including headcount related expenses.

Research and Development (“R&D”):

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

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

 

 

 

March 31,

 

 

 

  

2015

  

2014

  

Change

Research and development

 

$

1,088 

  

$

1,476 

  

-26%

 

R&D expenses for the three   months ended March 31, 2015, decreased $0.4 million, or 26%, compared to the same period in 2014. For the three-month period ended March 31, 2014, we incurred   costs related to preparation for a potential sepsis clinical study for ZADAXIN we were contemplating that did not recur in the first quarter of 2015.

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 anticipate our total research and development expenses to increase in 2015 compared to 2014, related to potential license fee payments, milestone payments expected to occur under license arrangements and related to research and development activities in China.  

General and Administrative (G&A) :

The following table summarize s the period over period change s in our general and administrative expenses (in thousands):  

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

 

 

 

March 31,

 

 

 

  

2015

  

2014

  

Change

General and administrative

 

$

7,343 

  

$

6,033 

  

22% 

 

G&A expenses for the three-month period ended March 31, 2015 in creased by $1.3 million, or 22%, compared to the same period in 2014. The increases in G&A for the three-month period ended March 31, 2015, compared to the same period in 2014, mainly related to an increase in bad debt expense of $0.5 million for a customer with whom we are experiencing payment difficulties and growth in our China organization.

We expect our general and administrative expenses in 2015 to increase compared to 2014 related to growth in our business. O ur ongoing investigations with the SEC and DOJ are unpredictable and may result in higher legal costs or fines or penalties and could affect our expenses or the timing thereof. See Part II, Item 1 “Legal Proceedings”. We do not expect to incur any significant a cquisition-related costs in 2015 , though we continue to evaluate opportunities in China, which may result in increased general and administrative expenses in the future.

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Provision for Income Tax:  

The provision for income taxes primarily relates to taxable income of our China operations. The provision for income tax was approximately $0.6 million and $0.4 million for the three-month periods ended March 31, 2015 and 2014, respectively. The increase of $0.2 million in the provision for income tax for the three-month period ended March 31, 2015 , compared to the same period of the prior year , related to forecasted growth in our China business. Our statutory tax rate in China was 25% in 2015 and 2014 .   We expect the provision for income tax to in crease for t he year ending December 31, 2015 , compared to the year ended December 31, 2014 , related to our China operations.

Liquidity and Capital Resources

We continue to closely manage our liquidity and capital resources. We rely on our operating cash flows, cash and cash equivalents, and short-term investments to provide for our liquidity requirements. We continue to believe that we have the ability to meet our liquidity needs for at least the next 12 months to fund our working capital requirements of our operations, including investments in our business, share repurchases, and to fund our business development activities.

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

 

 

March 31, 2015

 

December 31, 2014

Cash, cash equivalents and investments

 

$

96,111 

 

$

86,303 

 

As of March 31, 2015 , we had $ 96.1 million in cash, cash equivalents and investments of which $ 90.3 million was located in subsidiaries of the Company outside the US. Cash and cash equivalents held by subsidiaries outside the US are held primarily in US dollars. Such cash and cash equivalents are 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. As of March 31, 2015, we determined that $ 150.0 million of accumulated undistributed earnings of foreign subsidiaries continues to be indefinitely reinvested outside of the US. In making this determination, the following attributes were considered: (i) the expected future needs of the foreign subsidiaries, including working capital, capital expenditures, as well as additional investments   to support the infrastructure in our China subsidiaries, (ii) additional investments to support our expansion in the China market as well as planned business acquisitions and/or product licensing transactions, and (iii) there is no foreseeable need to repatriate any additional undistributed earnings to fund our limited US operations. Should circumstances change and it becomes apparent that some or all of the undistributed earnings will be remitted, we will accrue for income taxes not previously recognized. Upon distribution of those earnings, we may be subject to US federal and state income taxes. Determination of such additional tax is not practicable as it is dependent on several future uncertainties, including the amount of US tax losses, available net operating losses and, potentially, foreign tax credits available at the time of the repatriation. Based on our current operating plan, we do not anticipate the need to repatriate cash and cash equivalents held by foreign subsidiaries in the foreseeable future.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

2014

Cash provided by (used in):

 

  

 

 

 

 

Operating activities

 

$

12,295 

 

$

4,117 

Investing activities

 

$

(808)

 

$

(111)

Financing activities

 

$

(1,730)

 

$

(2,321)

 

Net cash provided by operating activities was $ 12.3 million for the three -months ended March 31, 2015 and primarily reflected the net income for the period, adjusted for non-cash items such as stock-based compensation expense, provision for bad debt expense , depreciation and amortization expense, and changes in operating assets and liabilities. As of March 31, 2015 , we had accounts receiv able totaling approximately $0.9 million from a single customer, which are substantially delinquent and which we are actively trying to collect, and for which we have recorded a reserve of $0. 9   million. We entered into a settlement agreement with the customer in October 2014 to collect the remaining balance. We have reserved an amount of $0.5 million via a bad debt charge recorded in general and administrative expense during the three months ended March 31, 2015, related to another customer whose receivable balance is past due and which we are actively trying

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to collect. Accounts receivable decreased $7. 3 million related to payments received from customers during the three months ended March 31, 2015 . Inventory decreased $1.8 million mainly related to a reduction in thymalfasin active pharmaceutical ingredient raw materials, and a reduction in Aggrastat and Methotrexate inventory during the first quarter of 2015. Accounts payable and ac crued liabilities decreased $7.3 million mainly related to compensation and benefits, sales and marketing , license fees and manufacturing expense payments made during the three months ended March 31, 2015 .

Net cash provided by operating activities was $ 4.1 million for the three months ended March 31, 2014 and primarily reflected the net income for the period adjusted for non-cash items such as stock-base d compensation expense , depreciation and amortization expense and changes in operating assets and liabilities.

Net cash used in investing activities was $ 0.8 million and $0.1 million , respectively, for the three months ended March 31, 2015 and 20 14 and related to purchases of property and equipment .  

Net cash used in financing activities was $ 1.7 million and $ 2.3 million for the three months ended March 31, 2015 and 2014, respectively. For the three months ended March 31, 2015 and 2014 , we used $ 2.7 million and $ 2.6 million to repurchase and retire 312,466 and 500,003 shares of our common stock under our stock repurchase program, respectively. For the three months ended March 31, 2015 and 2014 , we also received $ 1 .0 million and $ 0.2 million of net proceeds, respectively, from the issuances of common stock made pursuant to options exercised, or shares otherwise issued for cash, under our stock award plans.

As part of our license and supply agreement with Zensun, we agreed to loan up to $12 million in total to Zensun under two separate loan agreements. Pursuant to these agreements, we loaned $4.75 million to Zensun during the second half of 2014 ( such lendings are further described in Note 4 to the unaudited condensed consolidated financial statements appearing under Part I, Item 1). In April 2015, we loaned $7.25 million to Zensun, bringing the combined total outstanding loans receivable balance to $12 million. T he proceeds of the loans are to be used for working capital and general corporate purposes by Zensun. To secure the loans, Zensun pledged its entire equity interest in its subsidiary, Shanghai Dongxin Biochemical Technology Co. Ltd. (whose assets include real property) to our subsidiary, SciClone Pharmaceuticals International China Holding Ltd.

The following summarizes our future obligations including uncertain tax positions as of March 31, 2015 ( in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due by Period

 

 

 

 

 

Less than

 

 

 

 

 

 

 

More Than

 

 

Total

 

1 Year

 

1-3 Years

 

3-5 Years

 

5 Years

Operating leases (1)

 

$

6,585 

 

$

2,391 

 

$

3,908 

 

$

286 

 

$

 —

Purchase obligations (2)

 

 

20,198 

 

 

20,198 

 

 

 —

 

 

 —

 

 

 —

Uncertain tax positions (3)

 

 

4,346 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total

 

$

31,129 

 

$

22,589 

 

$

3,908 

 

$

286 

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 we are not able to reasonably estimate the timing of the payments or the amount by which our obligations for unrecognized tax benefits will increase or decrease over time, the related balances have not been reflected in the ”Payments Due by Period” section of the table.

Under our $80.5 million stock repurchase prog ram, we repurchased and retired 312,466 shares at a cost of $2.8 million during the three months ended March 31, 2015 bringing the total repurchases since the program’s inception to approximately 12.0 million shares at a cost of $68.0 million through March 31, 2015. We consider several factors in determining when to make share repurchases including, among other things, our cash needs, the availability of funding and

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the market price of 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. 

We recorded $2.0 million of operating expense in our fourth quarter 2013 results of operations to reflect our estimate of a probable loss incurred related to potential penalties, fines and/or other remedies in the ongoing investigations with the SEC and DOJ. We have monitored developments in the ongoing investigations since that time and have not determined that further adjustments to the estimated loss are warranted. However, we cannot predict what the outcome of the SEC/DOJ investigations will be, or the timing of any resolution. Any actual fines or penalties that may be imposed, or other losses that may be realized related to the investigations, could be materially higher than the amount recorded and could impact our cash and financing needs.

Under our license agreements with third parties we have agreed to various milestone payments related to regulatory and commercial success and other achievements that may require substantial payments in the future and we anticipate making a milestone payment of approximately $2 million in 2015 related to one of these agreements.

We believe that our existing cash, cash equivalents 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 a 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.

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

Our revenue recognition policy is as follows.

Revenue Recognition

We recognize 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 .   We recognize product revenue from selling manufactured ZADAXIN product at the time of del ivery. Sales of ZADAXIN to Sinop harm and its affiliates are recognized at time of shipment when title to the product is transferred to them. We also earn product revenue from purchasing medical products from pharmaceutical companies and selling them directly to importers or distributors. We recognize 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.

Promotion Services Revenue .   We recognize promotion services revenue after designated medical products are delivered to the distributors as specified in the promotion services contracts, which marks the period when marketing and promotion services have been rendered, and the revenue recognition criteria are met.

Revenue Reserve. We generally maintain a revenue reserve for product returns based on estimates of the amount of product to be returned by our 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.

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Importing agents or distributors do not have contractual rights of return except under limited terms regarding product quality. However, we are expected to replace products that have expired or are deemed to be damaged or defective when delivered. The calculation of the product returns reserve requires estimates and involves a high degree of subjectivity and judgment. As a result of the uncertainties involved in estimating the product returns reserve, there is a possibility that materially different amounts could be reported under different conditions or using different assumptions. As of March 31, 2015 and December 31, 2014, our revenue reserves were approximately $0 and $0.1 million, respectively ; the reserves were recorded as accrued liabilities on our unaudited condensed consolidated balances sheets.

For a discussion of the Company’s other significant accounting policies, please see our Annual Report on Form 10-K for the fis cal year ended December 31, 2014 . There have been no material changes in our critical accounting policies, estimates and judgments for the three months ended March 31, 2015 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014

New Accounting Standards Update

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ASU 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. On April 1, 2015 the FASB voted in favor of proposing a one year delay of the effective date and to permit companies to voluntarily adopt the new standard as of the original effective date. Pending enactment of a delay in the effective date, ASU 2014-09 is effective for our fiscal year beginning January 1, 2017, with early application not permitted. We are in the process of determining what impact, if any, the adoption of ASU 2014-09 will have on our financial statements and related disclosures. The standard permits the use of either the full retrospective or modified retrospective transition method. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our market risk for the three months ended March 31, 2015 compare d   to the disclosure in Part II, Item 7A of our Annual Report on Form 10-K for the year ended Dec em ber 31, 201 4 .

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 their evaluation at the end of the period covered by this quarterly report on Form 10-Q, our CEO and CFO have concluded that our disclosure controls and procedures were effective and were operating at the reasonable assurance level as of the end of the period covered by this quarterly report.

Changes in Internal Controls

Our management, including our CEO and CFO, has evaluated any changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2015, and has concluded that there was no change during such quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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 its inherent limitations , internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We are continuously seeking to improve the efficiency and

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effectiveness of our operations and of our internal controls.   This results in refinements to processes throughout our organization.

 

PART II.     OTHER INFORMATION

Item 1.  Legal Proceedings

The US Securities and Exchange Commission (“SEC”) and the US Department of Justice (“DOJ”) are each conducting formal investigations of us 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 of Directors 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 of Directors and/or committees of the Board of Directors, (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, (iv) establish an automated system for recording and approving travel and entertainment expenditures,  and (v) hire a Vice President of Compliance and Internal Audit to monitor and enforce compliance with our policies. Also, upon the recommendation of the Special Committee, the Audit Committee of the Board has retained a forensic accountant to observe and make recommendations regarding our FCPA compliance.

The Special Committee substantially concluded its investigation of those matters and on May 4 and 5, 2011 reported its findings and recommendations to the Board of Directors. The Special Committee has also reported those findings to the SEC and DOJ, and the Special Committee and the Company have continued to cooperate with the on-going SEC and DOJ investigations.

In the Company’s Form 10-Q for the period ended September 30, 2012, filed with the SEC on November 9, 2012, the Company disclosed, among other things, a non-cash impairment loss to fully write down the value of intangible assets recorded as part of the NovaMed Pharmaceuticals, Inc.  (“NovaMed”) acquisition; a remeasurement of the valuation of the contingent consideration recorded as part of the NovaMed acquisition; a significant increase in ZADAXIN channel inventory levels; and internal control issues primarily within the NovaMed organization, and the corporate monitoring thereof, that was concluded to represent a material weakness in internal control over financial reporting. Following our disclosure of these items, the Company received a subpoena from the SEC requesting documents related to these and various other matters regarding the NovaMed acquisition and the Company’s operations in China. After review of the subpoena, and in order to respond to inquiries from the DOJ and SEC and to determine if any wrong-doing occurred, the Audit Committee determined to undertake an independent investigation as to additional matters, including but not limited to our acquisition of NovaMed and FCPA matters, including certain sales and marketing expenses.

We are unable to predict what consequences any investigation by any regulatory agency or by our Audit Committee may have on us. Our cooperation with these investigations has resulted in substantial legal and accounting expenses, has diverted management’s attention from other business concerns and could harm our business. The ongoing investigations and any other regulatory investigations that might be initiated in the future, will result in similar substantial expenses, management diversion and harm to our business. If we fail to comply with regulations or to carry out controls in 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

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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. In the quarter ended December 31, 2013, we determined that a payment of at least $2.0 million to the government in penalties, fines and/or other remedies is probable. Accordingly, we recorded $2.0 million of operating expense in our fourth quarter 2013 results of operations to reflect our estimate of a probable loss incurred related to potential penalties, fines and/or other remedies in the ongoing investigations with the SEC and DOJ. Since the fourth quarter of 2013, we have monitored the results of the ongoing investigations; developments in such investigations have not indicated any further estimated loss that is both probable and reasonably estimable. If we are subject to adverse findings resulting from the SEC and DOJ investigations, or from our own independent investigations, we could be required to pay higher or lower damages or penalties or have other remedies imposed upon us. In addition, we will incur additional expenses related to remedial 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 are requiring significant time from management and the Board of Directors, as well as significant financial resources which could otherwise be devoted to the operation of our business.

NovaMed was a party to a Distribution and Supply Agreement with MEDA originally entered into in early 2007. Following our acquisition of NovaMed on April 18, 2011, NovaMed continued to perform this agreement; however, MEDA claimed it had a right to terminate the agreement under a change of control provision. A dispute arose over MEDA’s right to terminate the agreement and 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. 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 since the entry into the Distribution and Supply Agreement and up to the date of the Award. 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 made a counter offer and the parties were attempting to resolve the matter without an additional arbitration proceeding. In December 2014, NovaMed filed a “Request for Second Arbitration” with CIETAC in order to enforce its right to compensation. The arbitration case is pending with CIETAC and no hearing has taken place yet. The amount of any final payment to NovaMed remains uncertain, and as such the Company has not recognized it as a gain contingency.

Item 1A.  Risk Factors

C onsider these risks and uncertainties before investing in our common stock. We have marked with an asterisk (*) those risk factors below that reflect changes from the risk factors included in our Annual Report on Form 10-K filed with the SEC on March 12 ,   201 5 .  

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

Although we reported net income of $ 9.0 million and $4.1 million for the three months ended March 31, 2015 and 201 4, respectively, we have experienced significant operating losses in the past, and as of March 31, 2015 , we had an accumulated deficit of approximately $129   million. If our operating expenses were to increase or if we were not able to increase or sustain revenue, we may not maintain profitability over the next 12 months.

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 litigation;

·

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, particularly the Chinese government’s increasing regulation of the pharmaceutical industry through anti-corruption activities and actions intended to reduce pharmaceutical prices such as the reduction in the governmentally permitted

26


 

maximum listed price for our products and increased oversight of the health care market and pharmaceutical industry;

·

actual or anticipated fluctuations in our quarterly operating results, some of which may result from undertaking new clinical development projects, or from licensing or acquisition-related expenses including up-front fees, milestone payments, and other items;

·

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

·

timing and achievement of our corporate objectives;

·

charges related to expired inventory or bad debt;

·

terminations of, or 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 control 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 the governmental investigations, our dispute with MEDA, and arising out of matters relating to any additional or uncorrected control deficiency or related matters;

·

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

·

c urrency fluctuations between the Chinese Yuan Renminbi (“RMB”) and US Dollar;

·

broad financial market fluctuations in the US, Europe or Asia; and

·

More aggressive taxation policy by the government in China.

Any acquisitions we may undertake involve a number of risks, and we may not realize all the anticipated benefits of an acquisition. We may acquire other companies or products that present risks similar to those stated above .  

We experienced a number of challenges in the process of our integration of NovaMed and its operations and personnel which have had, and could have further adverse effects on our business.

We may enter into other company or product acquisition transactions in the f uture which could present risks similar to those stated above 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 would be subject to impairment testing and potential periodic impairment charges;

·

incur amortization expenses related to certain intangible assets; and

·

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

Our revenue will continue to be substantially dependent on our sales of ZADAXIN in China. The Chinese government has previously imposed price restrictions on ZADAXIN, Aggrastat and several of our oncology

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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 sales of ZADAXIN in China. We anticipate that sales of ZADAXIN will continue to be a majority of our revenue for at least the next two years. For the three months ended March 31, 2015 and 2014, approximately 96% 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 and future decisions of the National Development and Reform Commission (“NDRC”) and provincial agencies’ 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 will 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.

Sales of ZADAXIN may 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 inventory levels may fluctuate significantly as a result, or as a result of changes in the distribution channel, potentially affecting quarterly periodic results.

During the third quarter of 2012, we estimated that there was a substantial increase in ZADAXIN channel inventory levels and we believe that our sales to our customers exceeded the pace at which our customers were able to sell the ZADAXIN through to other parties, primarily hospital pharmacies. As a result, ZADAXIN revenues were lower in the first half of 2013, as compared to the same period of 2014. We believe channel inventory has returned to normal levels, and we continue to believe that we will grow demand for ZADAXIN through increased penetration in the market; however, we may not be successful or we may experience future fluctuations in channel inventory either of which could adversely affect our future ZADAXIN revenue.

We could experience fluctuations in channel inventory due to actual or expected epidemics. For example, 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 subsequent 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 flows and business condition.

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 price limits have been significantly lower than prices at which 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.

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Recent governmental policy changes in China have eliminated national regula tion of the maximum retail drug prices for most drugs, effective June 1, 2015, including on the National Reimbursement Drug List (“NRDL”) . Decisions by provincial authorities appear to be emerging as the primary governmental mechanism for price controls.  As an example , the Zhejiang provincial authority announced a price limitation for sales of Z ADAXIN   in the province in April 2015. For f iscal 2015, we expect the impact of this and other potential decisions in other provinces to be offset by volume increases and change s in our arrangement with our China distributor as we are working with the distributor to negotiate the impact of the reduction on our s ales price to the distributor. 

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 when national regulation of retail pharmaceutical prices was in effect, thymalfasin, the generic chemical name for our pharmaceutical product ZADAXIN, was included as a Category B product in the NRDL and pricing for ZADAXIN on the NRDL was reviewed by the authorities. As a result of the Chinese government’s review of pharmaceutical prices once a product has been included i n the NRDL , the national reimbursement retail list price of ZADAXIN in China (i.e., the price at the hospital pharmacy level) was reduced by approximately 18% effective October 8, 2012. Sinopharm, our primary importer of ZADAXIN into China agreed to take a larger share of the impact of this price reduction in exchange for certain exclusive importation rights into China and as a result, the impact on our sales price per unit has been insignificant. As Sinopharm is now our exclusive importer of ZADAXIN into China, we have not made any subsequent sales of ZADAXIN to other importers. 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 by amounts ranging from 10 to 20%.

The pricing regulations in China, whether operating at a national, provincial or institutional level, as well as regulation of the importation of pharmaceutical products, have reduced retail prices of, and our own revenue from, ZADAXIN and our other products, and we expect that pricing pressure will continue. While the regulatory mechanisms are changing and the ultimate outcome is uncertain, and while we have been able to mitigate the impact of prior price reductions on our overall business, prices could be reduced 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.

Future healthcare reforms in China and changes to Chinese governmental regulations or policies or the implementation thereof, including those relating to pricing, reimbursement and the tender process, may impact our business, and our future results could be adversely affected by any such changes in such regulations or policies.

Our business strategy is dependent in part on our agreements with third parties for the rights to develop and commercialize products, or promote products, particularly in China. We have experienced challenges in maintaining some of our agreements and if we fail to enter into additional agreements, our business will suffer. *

Our sales and marketing strategy in China depends significantly on agreements with third parties, and potentially on entering into additional agreements with third parties, or renegotiating agreements with third parties. Except for ZADAXIN, our rights to develop, market and sell our products in China, including licensed products and products currently promoted or sold by our subsidiaries, NovaMed and NovaMed Shanghai, are held by us under license, promotion, distribution or marketing agreements with third parties. These agreements for products include DC Bead, a product expected to launch commercially in the first half of 2015, and products in the regulatory review process, including products in clinical trials that are held under license, distribution or marketing agreements. In addition, our success in the future may be dependent on 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 affected. In addition, if any of such agreements acquired in our NovaMed acquisition are not renewed, we could incur a decline in sales revenues.

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

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entering into additional acquisition, in-licensing, promotion or distribution agreements, particularly in China. The competition for attractive products is intense, and we cannot be certain that we will be able to negotiate in-license, promotion or distribution agreements for additional products in the future.

While in June 2013 we renewed our promotion agreement with Baxter for a 5-year term through December 2017 and in July 2014 we renewed our product distribution agreement with Pfizer for a 5-year term through June 2019, our promotion agreements with Sanofi were not renewed and expired on December 31, 2013. 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.   Terminations or failures to renew these or any other agreement as to some or all of the products covered by the agreement could result in a decline in revenue and in other costs including restructuring charges if a resulting revenue decline required us to reduce costs.   On the other hand, if we are successful in negotiating better terms there may be a positive impact on our revenues and profitability.

If our products do not meet standards established by the Chinese Pharmacopoeia, we could lose our license to import products to China for commercial sale, which could negatively affect our revenues and operating results .

Our products are subject to standards established by the Chinese Pharmacopoeia, or ChP. The ChP is an official compendium of drugs in China and sets the standards of purity, description, test, dosage, precaution, storage and the strength for each drug in China. The ChP is revised from time to time, with the most recent revisions set forth in a 2015 edition. If our products fail to meet ChP specifications during routine customs testing as such specifications may be revised from time to time, our import drug licenses (IDLs), which allow the importation for commercial sale, may be revoked, which would result in a significant loss of revenue and materially adversely affect our business.

For example, as part of the Chinese government’s regular review of the ChP specifications, pharmacopeial monographs of thymalfasin active pharmaceutical ingredient (“API”) and ZADAXIN were selected along with many other drug monographs for updating in the 2015 edition of the ChP. As part of this update, the CFDA’s testing division developed a new and better resolving method to evaluate the level of related substances/impurities in thymalfasin and ZADAXIN. Although the specifications regarding impurities were not modified from previous editions of the ChP, because the new method resolves previously poorly resolved related substance/impurities more accurately, the levels of some impurities may, as a result, appear higher. If the percentages of single or total impurities in the API, as measured by the Chinese government using the new method during routine customs release testing for each lot intended for importation into China are above the ChP specification, the respective lot will be rejected and/or confiscated. If two lots are found to be rejected, the IDL for ZADAXIN may be revoked, which would materially affect our business.

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

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 2017. Although renewals in the past were obtained successfully, there is no assurance that SciClone 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 CFDA. Some manufacturing changes may require: 1) approval by AIFA in Italy and/or 2) be accepted by the CFDA, the Chinese equivalent of the FDA. In addition, we must obtain an IDL from the CFDA 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 CFDA permitting the importation of ZADAXIN into China. Our ability to continue to renew our IDL from the CFDA permitting the importation of ZADAXIN into China could be adversely affected, if we were to fail to maintain ZADAXIN registration in Italy. The CFDA, 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

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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.

Our ZADAXIN sales and operations in China and in other parts of 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 and DOJ investigations regarding FCPA compliance and other matters, including potential penalties, substantial expense, 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 substantially concluded its investigation of those matters and on May 4 and 5, 2011 reported its findings and recommendations to the Board of Directors. The Special Committee 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.

In the Company’s Form 10-Q for the period ending September 30, 2012, filed with the SEC on November 9, 2012, the Company disclosed, among other things, a non-cash impairment loss to fully write down the value of intangible assets recorded as part of the NovaMed acquisition; a remeasurement of the valuation of the contingent consideration expense recorded as part of the NovaMed acquisition; a significant increase in ZADAXIN channel inventory levels; and internal control issues primarily within the NovaMed organization that were concluded to represent a material weakness in internal control over financial reporting. Following our disclosure of these items, the Company received a subpoena from the SEC requesting documents related to these and various other matters regarding the NovaMed acquisition and the Company’s operations in China. After review of the subpoena, and in order to respond to inquiries from the DOJ and SEC and to determine if any wrong-doing occurred, the Audit Committee determined to undertake an additional independent investigation as to additional matters, including, but not limited to, matters related to our acquisition of NovaMed and FCPA matters, and certain sales and marketing expenses.

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We are unable to predict what consequences any investigation by any regulatory agency or by our Audit or Special Committees may have on us. Our cooperation with these investigations has resulted in substantial legal and accounting expenses, has diverted management’s attention from other business concerns and could harm our business. The ongoing investigations and any other regulatory investigations that might be initiated in the future will result in similar substantial expenses, management diversion and harm to 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, including Chinese regulatory agencies, 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 as a result of such investigations may adversely affect our business in China, including adversely affecting our ability to obtain license renewals or other administrative approvals we require to conduct 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 on us. In the quarter ended December 31, 2013, we determined that a payment of at least $2.0 million to the government in penalties, fines and/or other remedies is probable. Accordingly, we recorded $2.0 million of operating expense in our fourth quarter 2013 results of operations to reflect our estimate of a probable loss incurred related to potential penalties, fines and/or other remedies in the ongoing investigations with the SEC and DOJ. Since the fourth quarter of 2013, we have monitored the results of the ongoing investigations; developments in such investigations have not indicated any further estimated loss that is both probable and reasonably estimable. We will incur additional expenses related to remedial measures we are undertaking, and could incur fines that are more than the estimated or other penalties. The period of time necessary to resolve the investigations by the DOJ and the SEC is uncertain, and these matters are requiring significant management and financial resources, which could otherwise be devoted to the operation of our business.

If we fail to achieve or 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 establish effective controls and provide 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 in internal control over financial reporting related to the design and operation 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. Furthermore, during the fourth quarter of 2012, our management determined that we had an additional indicator of the same material weakness related to the timing of revenue recognition for our Pfizer products and the override of related controls at our NovaMed subsidiary, and the corporate monitoring thereof. During fiscal 2014, we designed and implemented procedures to address the material weakness disclosed in our Annual Report s on Form 10-K for the years ended December 31, 2013 and 2012 related to the design and operating effectiveness of certain corporate monitoring controls. Management designed and implemented corporate monitoring controls and other controls that provided increased oversight over our China operations, and has remediated the material weakness as of December 31, 2014. We continuously 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, or otherwise cause us to inaccurately report our financial statements. For example, the restatement of our financial statements for each of our first, second, and third quarters of 2012, and our financial statements for each of the second and third quarters of 2011 and the year ended December 31, 2011, were in part caused by the material weakness related to the design and operation of our controls disclosed as of December 31, 2012 discussed above. 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.

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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 may not be able to effectively manage our employees and distribution network, and our reputation, business, prospects and brand may be materially and adversely affected by actions taken by our distributors and third-party marketing firms.

Our company policies prohibit our employees from making improper payments to hospitals or otherwise engaging in improper activities to influence the procurement decisions of hospitals, and we take remedial actions, including termination, when employees do not adhere to our policies. However, we may not be able to effectively ensure that every employee complies at all times with our policies. The compensation of our sales and marketing personnel is partially linked to their sales performance. Although we have made numerous changes to ensure compliance with our policies and to attempt to avoid any violation of law, we cannot assure you that employees will not violate the anticorruption laws of China, the US and other countries. Such violations, or allegations of such violations, could have a material adverse effect on our reputation, business, prospects and brand.

Furthermore, our employees in China have access to our facilities and internal systems and we have identified from time to time certain minor instances of improperly submitted expense reporting by our employees. Although these instances have involved insignificant sums, our employees may seek to create additional opportunities to engage in misappropriation or other employee malfeasance. If our controls and procedures to prevent such activities fail or are circumvented, our business would be negatively affected by, among other things, the related financial losses, diminished reputation and threat of litigation and regulatory inquiry and investigation.

We do not control, and therefore have limited ability to manage, the activities of third-parties who assist us in marketing and distributing our products. Our distributors or other third parties with whom we do business could take actions which violate the anti-corruption laws of China, the US or other countries. Failure to adequately manage our employees, and third parties and, or their non-compliance with employment, distribution or marketing agreements, could harm our corporate image among hospitals and end users of our products and disrupt our sales, resulting in a failure to meet our sales goals. Furthermore, we could be liable for actions taken by our employees, distributors or third-party marketing or third-party firms, including any violations of applicable law in connection with the marketing or sale of our products, including China’s anticorruption laws a nd the FCPA of the US . In particular, if our employees, distributors or third-party marketing firms make any payments that are forbidden under China’s anticorruption laws or the FCPA, we could be subject to civil and criminal penalties imposed by the Chinese or US government.

Recently, the Chinese government has increased its anti-corruption measures. In the pharmaceutical industry, corrupt practices include, among others, acceptance of kickbacks, bribes or other illegal gains or benefits by the hospitals and medical practitioners from pharmaceutical manufacturers and distributors in connection with the prescription of certain pharmaceuticals. Our employees, affiliates, distributors or third-party marketing firms may violate these laws or otherwise engage in illegal practices with respect to their sales or marketing of our products or other activities involving our products. If our employees, affiliates, distributors or third-party marketing firms violate these laws, or are alleged to have violated these laws, we could be required to pay damages or fines, be subject to administrative actions or suffer additional consequences which could materially and adversely affect our ability to conduct business in China and our financial condition. In addition, Chinese laws regarding what types of payments to promote or sell our products are impermissible are not always clear, and local regulatory authorities enforcing these laws are not always consistent. As a result, we, our employees, affiliates, our distributors or third-party marketing firms could make certain payments in connection with the promotion or sale of our products or other activities involving our products which at the time are considered by us or them to be legal but are later deemed impermissible by the Chinese government, or we may be asked to make payments by local government authorities that may not be permissible under China’s anticorruption laws or the FCPA. Furthermore, our

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brand and reputation, our sales activities or the price of our common stock could be adversely affected if we become the target of any negative publicity as a result of actions taken by our employees, affiliates, distributors or third-party marketing firms.

Our independent registered public accounting firm serving as our external auditor is an audit firm which is not inspected by the Public Company Accounting Oversight Board (“PCAOB”), and, although they may be subject to other inspections, you do not have the benefits of PCAOB inspections.

Our incumbent independent auditors’ system of quality control and their individual audits are subject to review, inspection, or other outside assurance from time to time by members firms in the network of firms to which they belong, by peer accounting firms, or by regulatory or industry bodies in China (such as China’s securities regulator or the Chinese body representing certified public accountants). However, these various bodies or parties are distinct from the PCAOB, and their efforts may not be concentrated on audits of SEC registrants. Their reviews or inspections may be substantially different, or not comparable to, an inspection by the PCAOB. Auditors of companies that are registered with the SEC and traded publicly in the US, including our independent registered public accounting firm, must be registered with the PCAOB, and are r equired by the laws of the US to undergo regular inspections by the PCAOB to assess their compliance with the laws of the US and professional standards. Because our auditors are located in the People’s Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating audits and quality control procedures of any auditors operating in China, including our auditors. As a result, investors in our equity securities may be deprived of the benefits of PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditors’ audit procedures or quality control procedures as compared to other public company auditors outside of China that are subject to PCAOB inspections. As a result, investors in our stock may lose confidence in our reported financial information and procedures and the quality of our financial statements.

Proceedings instituted by the SEC against certain PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Securities Exchange Act of 1934, as amended.  *

In December 2012, the SEC brought administrative proceedings against five accounting firms, including our independent registered public accounting firm, in China, alleging that they had refused to produce audit work papers and other documents related to certain other China-based related companies under investigation by the SEC. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of these firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective unless and until reviewed and approved by the SEC. On February 12, 2014, four of these PRC-based accounting firms, including our registered public accounting firm, appealed to the SEC against this sanction decision. In February 2015, the four PRC-based accounting firms agreed to a censure and to pay $500,000 each to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and audit U.S.- listed companies. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the China Securities Regulatory Commission. If the firms don’t follow the procedures, the SEC could impose penalties such as suspensions, or it could restart the current enforcement case administrative proceedings.

In the event that the SEC restarts the enforcement administrative proceedings procedures, depending upon the final outcome, listed companies in the US with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, US -listed companies and the market price of our stock may be adversely affected.

If our independent registered public accounting firm were denied the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act of 1934. Such a determination could ultimately lead to the delisting of our shares from the Nasdaq Global Select Market or

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deregistration by the SEC, or both, which would substantially reduce or effectively terminate the trading of our stock in the US .

Our compliance with the Foreign Corrupt Practices Act may put us at a competitive disadvantage, while our failure to comply with the Foreign Corrupt Practices Act may result in substantial penalties.

As a US reporting company, we are required to comply with the FCPA. If our employees or other agents are found to have engaged in practices in violation of the FCPA, we could suffer severe penalties. Non-US companies, including some of our competitors, are not subject to the provisions of the FCPA. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time to time in mainland China. If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in their business dealings, which would put us at a disadvantage.

Retaliation from terminated employees may damage our reputation or lead to claims that could subject us to further regulatory action.

From time to time we have terminated the employment of certain employees for performance-related reasons, including, in particular, our policies intended to prevent corruption. Employees who are terminated may seek more favorable terms of separation by threatening to damage our reputation in the marketplace. Further, they may seek to retaliate against us by making so-called “whistleblower” claims under the provisions enacted by the Dodd-Frank Act that may entitle persons who report alleged wrong-doing to the SEC to cash rewards. We anticipate that these provisions will result in a significant increase in whistleblower claims across our industry, and dealing with such claims could generate significant expenses and take up significant management time, even for frivolous and non-meritorious claims. Any investigations of whistleblower claims may impose additional expense on us, may require the attention of senior management and members of the Board of Directors and may result in fines, adverse administrative sanctions or rulings and/or reputational damage whether or not we are deemed to have violated any regulations. Furthermore, terminated employees may also seek to retaliate against us by making claims against us to other regulatory agencies, including local regulatory authorities. Inquiries by local regulatory agencies about such claims, even if frivolous and non-meritorious, could also generate significant expenses and take up significant management and Board of Directors’ time.

We may incur unexpected charges relating to our operations. *

Although we have generally experienced minimal product returns and our customers have historically paid all invoiced amounts, we could incur future charges relating to inventory that expires or as a result of customer failures to pay invoiced amounts timely or in full. For example, we recorded $0.5 million of bad debt expense in general and administrative expense for the quarter ended March 31, 2015 related to one customer whose accounts receivable are uncertain of collection. In addition , we recorded $2.4 million to bad debt expense for the year ended December 31, 2013 related to one customer whose accounts receivable were significantly past due and for which collectability was uncertain at that time, although we subsequently collected $1.5 million of these receivables in fiscal 2014. We also recorded charges of $0 for the three months ended March 31, 2015, and $1.6 million during the year ended December 31, 2014, for potential inventory obsolescence related to Aggrastat .   We could also experience additional charges for potential inventory obsolescence related to other products if we are unable to sell unit s that are nearing their expiration dates, or for bad debt if other distributors do not pay outstanding receivables in full. Those or similar future events would have an adverse impact upon our operating results. 

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. After our announcement regarding SEC and DOJ investigations in 2010, we and certain of our officers and directors were named as parties in purported stockholder class actions and derivative lawsuits. Those class action lawsuits were dismissed and we have settled those derivative lawsuits. Our stock price declined following the announcement of a restatement of our financial statements for fiscal 2011 and the first three quarters of fiscal 2012, and that our predecessor independent auditing firm had elected not to stand for reappointment for the 2013 fiscal year. Soon after that announcement, we and certain of our officers and directors were named as parties in a purported derivative lawsuit relating to the restatement, which was subsequently dismissed in its entirety. We may experience stock price

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volatility in the future, either related to announcements regarding the SEC and DOJ investigations, 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. We may be named in additional litigation, which could 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. Such litigation could result in additional substantial costs and a diversion of management's and the Board of Directors’ attention and resources, which could harm our business.

We may not be able to successfully develop or commercialize our products.

We have numerous products under development in China, some of which were acquired in the NovaMed acquisition and others which were in-licensed by us. In recent years, we have in-licensed several additional product candidates for each of which our future development expenses and milestone payments could be material.

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 oral mucositis. 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, CFDA 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 on our activities. We have experienced delays in the regulatory process, and there exists risk that we may not receive approval of in-licensed products currently in the regulatory process. 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.

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