SciClone Pharmaceuticals, Inc.
SCICLONE PHARMACEUTICALS INC (Form: 10-Q, Received: 05/10/2016 13:32:12)

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 , 2016



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 ,   2016 ,   49,909,084 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, 2016 and December 31, 2015  

  

 

  



 

 



 

Condens ed Consolidated Statements of Income for the three- month periods ended March 31, 2016 and  2015  

  

 

  



 

 



 

Condensed Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2016 and 2015

  

 

  



 

 



 

Condensed Consolidated Statements of Cash Flows for the three -month periods ended March 31, 2016 and 2015  

  

 

  



 

 



 

Notes to Unaudited Condensed Consolidated Financial Statements

  

 

  



 

 

Item 2.

 

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

  

 

18 

  



 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

 

30 

  



 

 

Item 4.

 

Controls and Procedures

  

 

30 

  



 

 

PART II.

 

OTHER INFORMATION

  

 

 

 



 

 

Item 1.

 

Legal Proceedings

  

 

30 

  



 

 

Item 1A.

 

Risk Factors

  

 

31 

  



 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

 

54 

  



 

 

Item 3.

 

Defaults Upon Senior Securities

  

 

54 

  



 

 

Item 4.

 

Mine Safety Disclosures

  

 

54 

  



 

 

Item 5.

 

Other Information

  

 

54 

  



 

 

Item 6.

 

Exhibits

  

 

54 

  



 

 

 Signature

 

 

  

 

55 

  



 

 

 

 

 

 





 

2

 


 

Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)



SCICLONE PHARMACEUTICALS , INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)







 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2016

 

2015

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

114,689 

 

$

101,403 

Restricted cash in escrow for SEC settlement (Note 9)

 

 

 —

 

 

12,826 

Accounts receivable, net of allowances of $94 and $594 as of March 31, 2016 and December 31, 2015, respectively

 

 

32,434 

 

 

39,363 

Inventories

 

 

12,158 

 

 

10,976 

Prepaid expenses and other current assets

 

 

2,715 

 

 

3,654 

Deferred tax assets

 

 

231 

 

 

299 

Total current assets

 

 

162,227 

 

 

168,521 

Property and equipment, net

 

 

2,389 

 

 

2,651 

Goodwill

 

 

33,215 

 

 

32,979 

Other assets

 

 

12,519 

 

 

12,468 

Total assets

 

$

210,350 

 

$

216,619 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

3,267 

 

$

4,495 

Accrued and other current liabilities

 

 

17,380 

 

 

32,151 

Deferred revenue

 

 

119 

 

 

174 

Total current liabilities

 

 

20,766 

 

 

36,820 

Other long-term liabilities

 

 

83 

 

 

87 

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; 49,646,617 and 49,533,835 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively

 

 

50 

 

 

50 

Additional paid-in capital

 

 

297,814 

 

 

296,086 

Accumulated other comprehensive income

 

 

2,267 

 

 

2,070 

Accumulated deficit

 

 

(110,630)

 

 

(118,494)

Total stockholders’ equity

 

 

189,501 

 

 

179,712 

Total liabilities and stockholders’ equity

 

$

210,350 

 

$

216,619 



 

 

 

 

 

 



See accompanying notes to unaudited condensed consolidated financial statements.

3


 

Table of Contents

 



SCICLONE PHARMACEUTICALS , INC.

CONDE NSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)





 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2016

 

2015

Revenues:

 

 

 

 

 

 

Product sales, net

 

$

35,320 

 

$

33,168 

Promotion services

 

 

1,179 

 

 

400 

Total net revenues

 

 

36,499 

 

 

33,568 

Operating expenses:

 

 

 

 

 

 

Cost of product sales

 

 

5,813 

 

 

4,597 

Sales and marketing

 

 

12,352 

 

 

11,356 

Research and development

 

 

1,467 

 

 

1,088 

General and administrative

 

 

7,443 

 

 

7,044 

Total operating expenses

 

 

27,075 

 

 

24,085 

Income from operations

 

 

9,424 

 

 

9,483 

Non-operating income (expense):

 

 

 

 

 

 

Interest and investment income

 

 

259 

 

 

112 

Other income (expense), net

 

 

128 

 

 

(63)

Income before provision for income tax

 

 

9,811 

 

 

9,532 

Provision for income tax

 

 

1,947 

 

 

570 

Net income

 

$

7,864 

 

$

8,962 



 

 

 

 

 

 

Basic net income per share

 

$

0.16 

 

$

0.18 

Diluted net income per share

 

$

0.15 

 

$

0.17 



 

 

 

 

 

 

Weighted average shares used in computing:

 

 

 

 

 

 

Basic net income per share

 

 

49,589 

 

 

49,964 

Diluted net income per share

 

 

51,955 

 

 

52,278 



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,



 

2016

 

2015

Net income

 

$

7,864 

 

$

8,962 

Other comprehensive income, net of income tax

 

 

 

 

 

 

Foreign currency translation

 

 

197 

 

 

56 

Total other comprehensive income

 

 

197 

 

 

56 

Total comprehensive income

 

$

8,061 

 

$

9,018 



 

 

 

 

 

 



See accompanying notes to unaudited condensed consolidated financial statements.

5


 

Table of Contents

 

SCICLONE PHARMACEUTICALS , INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)  





 

 

 

 

 

 



 

Three Months Ended



 

March 31,

 

 

2016

 

2015

Operating activities:

 

 

 

 

 

 

Net income

 

$

7,864 

 

$

8,962 

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

 

 

 

 

 

 

Non-cash expense related to stock-based compensation

 

 

1,293 

 

 

806 

Provision for doubtful accounts

 

 

 —

 

 

541 

Depreciation and amortization

 

 

249 

 

 

231 

Loss on disposal of fixed assets

 

 

 —

 

 

Deferred income taxes

 

 

69 

 

 

73 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

6,944 

 

 

7,296 

Inventories

 

 

534 

 

 

1,794 

Prepaid expenses and other assets

 

 

1,029 

 

 

417 

Accounts payable

 

 

(2,916)

 

 

(3,081)

Accrued and other current liabilities

 

 

(2,050)

 

 

(4,233)

Deferred revenue

 

 

(54)

 

 

(486)

Other long-term liabilities

 

 

(4)

 

 

(26)

Net cash provided by operating activities

 

 

12,958 

 

 

12,295 

Investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(20)

 

 

(808)

Net cash used in investing activities

 

 

(20)

 

 

(808)

Financing activities:

 

 

 

 

 

 

Repurchase of common stock including commissions

 

 

 —

 

 

(2,737)

Proceeds from issuances of common stock, net

 

 

386 

 

 

1,007 

Net cash provided by (used in) financing activities

 

 

386 

 

 

(1,730)

Effect of exchange rate changes on cash and cash equivalents

 

 

(38)

 

 

51 

Net increase in cash and cash equivalents

 

 

13,286 

 

 

9,808 

Cash and cash equivalents, beginning of period 

 

 

101,403 

 

 

86,228 

Cash and cash equivalents, end of period

 

$

114,689 

 

$

96,036 



 

 

 

 

 

 

Supplemental disclosure of non-cash operating activities:

 

 

 

 

 

 

Release of restricted cash in escrow for SEC settlement

 

$

12,826 

 

$

 —



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, 2015 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, 2015 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 Lingyun Biopharmaceutical (Shanghai) Co. Limited (“Sinopharm”). Sinopharm acts 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 replacement of product in the events of damaged product or quality control issues. As the Company bears risk of loss until delivery has occurred, revenue is not recognized until the shipment reaches its destination. 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 (“Tier 2”) 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 (“Tier 3”) 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 92% and 91% of the Company’s total net revenue for the three-month periods ended March 31, 2016 and 2015, 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.

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Product sales of $33.6 million or 92% and $31.3 million or 93%, for the three months ended March 31, 2016 and 2015, respectively, related to consolidated sales of ZADAXIN. As of March 31, 2016, approximately $29.7 million, or 91%, of the Company's accounts receivable was attributable to one customer, Sinopharm, in China. The Company generally does not require collateral from its customers. The Company maintains reserves for potential credit losses and such actual losses may vary significantly from its estimates.

Per the Company’s previous contractual arrangement with Sinopharm through December 31, 2015, and a renewed contractual arrangement with Sinopharm (the Company’s sole distributor for ZADAXIN in China) which took effect January 1, 2016, the Company’s sales of ZADAXIN to Sinopharm have been and continue to be denominated in US dollars. However, the established importer price may be adjusted quarterly based upon exchange rate fluctuations between the US dollar and Chinese Yuan Renminbi (“RMB”) .   A significant portion of the Company’s other revenues and expenses are denominated in RMB and a significant portion of the Company’s assets and liabilities are denominated in RMB and are exposed to foreign exchange risk. In recent months, the RMB has experienced devaluation. Such devaluation may negatively affect the US dollar value of revenues, albeit on a lagging basis, pursuant to the periodic adjustments described above. RMB is not freely convertible into foreign currencies. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions at the exchange rates quoted by People’s Bank of China. Remittances in currencies other than RMB by the Company in China require certain supporting documentation in order to affect the remittance.

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 December 31, 2015, the Company had a receivable reserve of $0.5 million from one customer that was 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 $0.5 million remaining receivable balance to be paid by December 31, 2015. In March 2016, SPIL China collected the remaining $0.5 million from this customer and this gain on recovery was recorded as a reduction to general and administrative expense during the first quarter of 2016. The Company recognized $0.5 million of bad debt expense in general and administrative expense during the first quarter of 2015 related to past due receivables from another customer, due to uncertainty regarding the collectability of the customer’s outstanding receivable balance. The Company wrote-off the $0.5 million of past due accounts receivable from this customer during the fourth quarter of 2015 as uncollectible. As of March 31, 2016, the Company had a receivable reserve of $0.1 million.

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 upon arrival of a shipment to its destination, which marks the point when title and risk of loss to product are transferred.   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.

Effective January 1, 2016, the Company’s new contractual arrangement with its China importer and distributor for ZADAXIN, Sinopharm, is resulting in the later recognition (relative to practices prevailing under the old contractual

8


 

arrangement through December 31, 2015) of a portion of the Company’s revenue invoiced to Sinopharm related to situations where the provincial tender price is greater relative to a reference (baseline) tender price. The tender price is the ultimate retail end price approved by provincial authorities. There is a price mechanism in the new contractual arrangement whereby the customer is invoiced at a lower base price relative to that prevailing in the previous agreement. The lower base price (as well as estimated price compensation payable due to the distributor for situations where the provincial tender price is lower than the reference (baseline) tender price) is recorded as revenue at the time the sale is completed (arrived at destination). To date, there are no situations where a provincial tender price is less than the reference (baseline) tender price. The distributor is invoiced for the portion of the price that results from situations where the provincial tender price is greater than the reference (baseline) tender price at a later time, and such amount is recognized as revenue after the amount has been agreed and invoiced to the distributor. As the first quarter of 2016 is the first under the new arrangement, it is expected that the price compensation due to the Company under the price adjustment mechanism for provinces with tender prices above the reference (baseline) tender price will be recognized in the second quarter on a delayed basis, and that similar delays of the price compensation receivable will occur in later quarters. 

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 generally maintains a revenue reserve for product returns based on estimates of the amount of product to be returned by its customers which are 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, 2016 and December 31, 2015, the Company’s revenue reserves were $0. 1 million.

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, 2016 and 2015, the Company did not record any write-downs related to inventory.  

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.

9


 

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, 2016 and December 31, 2015, 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, stock awards 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,



 

2016

 

2015

Numerator:

 

 

 

 

 

 

Net income

 

$

7,864 

 

$

8,962 

Denominator:

 

 

 

 

 

 

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

 

 

49,589 

 

 

49,964 

Effect of dilutive securities

 

 

2,366 

 

 

2,314 

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

 

 

51,955 

 

 

52,278 

Basic net income per share

 

$

0.16 

 

$

0.18 

Diluted net income per share

 

$

0.15 

 

$

0.17 



For the three months ended March 31, 2016 and 2015, outstanding stock options and awards for 1,699,670 and 478,098 shares, respectively, were excluded from the calculation of diluted net income per share because the effect from the assumed exercise or issuance of these options and awards calculated under the treasury stock method would have been anti-dilutive. In addition, for the three months ended March 31, 2016 and 2015, outstanding stock options and awards for 312,500 and 50,000 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.

Error Corrections

The Company revised its condensed consolidated statement of income for the three months ended March 31, 2015 by reducing general and administrative expense and increasing sales and marketing expense by $0.3 million for costs incurred related to marketing events.

The Company provided $1.2 million of additional income tax expense, and recorded a corresponding accrual in accrued and other current liabilities, during the three months ended March 31, 2016 to correct an error. The error corrected reflected the recognition of a previously unrecognized liability for an uncertain tax position related to the potential nondeductibility, under PRC tax regulations, of certain marketing costs related to the Company’s China operations. The adjustment related to tax years 2013 to 2015 and reflected the estimated tax exposure for each year as well as accrued interest thereon; such tax and interest amounts were $0.3 million, $0.5 million, and $0.4 million for the full years 2013, 2014, and 2015, respectively. The Company’s management evaluated the effects of the error on each prior annual and interim period, as well as the total error accumulated at the end of each respective prior period, and concluded under both approaches that the effects of the error were not material to previously issued annual or interim financial statements. The Company’s management also evaluated the total amount of the error correction in relation to projected results for full year 2016 and concluded the impact is not expected to be

10


 

material to the projected annual results. Accordingly, the total adjustment was recorded out-of-period in the first quarter of 2016. Management also concluded that the relevant amounts were not material to current liabilities or stockholders’ equity in any prior period or the current period.    

New Accounting Standards Updates

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. ASU 2014-09 is effective for the Company’s fiscal year beginning January 1, 2018, which reflects a one year deferral approved by the FASB in July 2015, with early application permitted provided that the effective date is not earlier than the original effective date. 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.

In November 2015, the FASB issued ASU 2015-17, " Balance Sheet Classification of Deferred Taxes”. This ASU amends existing guidance to require that deferred income tax liabilities and assets be classified as noncurrent in a classified balance sheet, and eliminates the prior guidance which required an entity to separate deferred tax liabilities and assets into a current amount and a noncurrent amount in a classified balance sheet. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual period. Additionally, the new guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company has not yet selected an adoption method. The impact of adopting this guidance is not expected to be material to the consolidated financial statements given the Company’s deferred tax amounts.

In February 2016, the FASB issued ASU 2016-02, “ Leases ”. Under the new guidance, lessees will be required to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for the Company from calendar 2019 and from the first interim period of calendar 2019, with earlier application permitted. The Company is evaluating the impact of the adoption of this update on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which outlines new provisions intended to simplify various aspects related to accounting for share-based payments and their presentation in the financial statements. The standard is effective for the Company from calendar 2017 and from the first interim period of calendar 2017. Early adoption is permitted. The Company is evaluating the impact of the adoption of this update on its consolidated financial statements and related disclosures.



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.

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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) measured at fair value on a recurring basis ( in thousands ):





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Fair Value Measurements as of March 31, 2016 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, 2016

Money market funds

 

$

19,680 

 

$

 —

 

$

 —

 

$

19,680 

Total

 

$

19,680 

 

$

 —

 

$

 —

 

$

19,680 



 

 

 

 

 

 

 

 

 

 

 

 





 

 

 

 

 

 

 

 

 

 

 

 



 

Fair Value Measurements as of December 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)

 

December 31, 2015

Money market funds

 

$

19,678 

 

$

 —

 

$

 —

 

$

19,678 

Total

 

$

19,678 

 

$

 —

 

$

 —

 

$

19,678 



 

 

 

 

 

 

 

 

 

 

 

 









Note 3 —   Inventories

Inventories   consisted of the following (in thousands) :



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2016

 

2015

Raw materials

 

$

4,085 

 

$

3,871 

Work in progress

 

 

351 

 

 

535 

Finished goods

 

 

7,722 

 

 

6,570 



 

$

12,158 

 

$

10,976 



Included in the Company’s inventory a s of March 31, 2016 and December 31, 2015   was  $ 3.3 million   in inventory held at distributors related t o   non-ZADAXIN products .

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 Republ ic of China, Hong Kong and Macao ) is more fully described in the Company’s quarterly report on Form 10-Q for the second quarter of 2013.

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Pursuant to its agreement to loan funds, the Company loaned $12 million to Zensun. 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 SciClone China, Zensun can make 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$ 24 0,000 as of March 31, 2016 ) 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.

With respect to lender SPIL China, Zensun could request US-dollar denominated borrowings up to $11.75 million. As of March 31, 2016, borrowings totaling $11.7 5 million had been requested by Zensun and paid by SPIL China with $4.5 million lent in the second half of 2014 and $ 7 .25 million lent in the second quarter of 2015 . 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 overall loan 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.

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 evidence of the market value of the pledged security indicating such market value exceeded the outstanding loan principal, and (iii) consideration of Zensun’s compliance with the terms of the loans and timely payments of interest, concluded there were no indications of loan impairment at March 31, 2016 or December 31, 2015; 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, 2016 and December 31, 2015 . Interest income on the loans amounted to $0.2 million and $0.1 million for the three months ended March 31, 2016   and 2015, respectively, and is included in interest and investment income in the unaudited condensed consolidated statement s of income .

Note 5 —   Goodwill

The following table represents the changes in goodwill for the three months ended March 31, 2016  ( in thousands ):



 

 

Balance as of December 31, 2015

$

32,979 

Translation adjustments

 

236 

Balance as of March 31, 2016

$

33,215 



 

 







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Note 6 Accrued and Other Current Liabilities

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



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2016

 

2015

Accrued SEC settlement loss (Note 9)

 

$

 —

 

$

12,826 

Accrued sales and marketing expenses

 

 

5,175 

 

 

8,511 

Accrued taxes, tax reserves and interest

 

 

6,839 

 

 

4,323 

Accrued compensation and benefits

 

 

1,922 

 

 

4,341 

Accrued professional fees

 

 

1,922 

 

 

1,130 

Accrued manufacturing costs

 

 

1,118 

 

 

444 

Other

 

 

404 

 

 

576 



 

$

17,380 

 

$

32,151 









Note 7 — Accumulated Other Comprehensive Income

Changes in the composition of accumulated other comprehensive income f or the three months ended March 31, 2016 and 2015 are as follows ( in thousands ):







 

 

 

Balances as of January 1, 2016

 

$

2,070 

Other comprehensive income related to foreign currency translation

 

 

197 

Balances as of March 31, 2016

 

$

2,267 







 

 

 

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 



 

 

 









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,



 

2016

 

2015

Sales and marketing

 

$

209 

 

$

241 

Research and development

 

 

52 

 

 

32 

General and administrative

 

 

1,032 

 

 

533 



 

$

1,293 

 

$

806 

Stock Options

During the three months ended March 31, 2016 , the Company granted options to purchase a total of 1,204,0 00 shares of common stock and options to purchase 107,220 shares of common stock were exercised. As of March 31, 2016 , there was approximately $ 8.0 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. 9 1 years.

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Restricted Stock Units (RSUs)

During the three months ended March 31, 2016 ,   102 ,000 RSUs were granted at a grant date fair value per share of $ 9 . 12 and zer o RSUs vested. As of March 31, 2016 , there was approximately $ 2 . 8 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 2.1 1 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, 201 5 under its share repurchase program that expired December 31, 2015.  



Note 9  —   Commitments and Contingencies  

Legal Matters  

The Company is a party to various legal proceedings and was 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.

As previously disclosed, since 2010 the SEC and the US Department of Justice (“DOJ”) had each been conducting formal investigations of the Company regarding a range of matters, including the possibility of violations of the Foreign Corrupt Practices Act (“FCPA”), primarily related to certain historical sales and marketing activities with respect to the Company’s China operations. In response to these matters, the Company’s Board appointed a Special Committee of independent directors (the “Special Committee”) to oversee its 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 in order to evaluate whether any violation of the FCPA or other laws occurred.

The Company previously recorded a charge to operating expenses in the fourth quarter of 2013 in the amount of $ 2.0 million for the accrual of an estimated loss associated with the SEC and DOJ investigations based on the available information at the time. In the second quarter of 2015, the Company recorded an additional charge to operating expenses of $10.8 million based on an agreement in principle reached with the SEC which had not yet been finalized at that time , bringing the accrued liability to $12.8 million.

On October 7, 2015, the Company deposited $12.8 million in an interest-bearing escrow account that it established related to the agreement in principle regarding a proposed settlement of FCPA-related matters with the staff of the SEC, creating a cash restriction at the time of deposit. On February 4, 2016, the Company announced that it entered into a settlement agreement with the SEC fully resolving the SEC’s investigation into possible violations of the FCPA. Under the terms of the settlement agreement, in February 2016 the Company paid to the SEC a total of $12.8 million which was released from its escrow account, including disgorgement, pre-judgment interest and a penalty as final settlement. This payment was in line with the charges the Company previously recorded and disclosed as summarized above. As part of the agreement the Company neither admitted nor denied engagement in any wrongdoing and the Company agreed to give status reports to the SEC for the next three years on its continued remediation and implementation of anti-corruption compliance measures. The DOJ has also completed its related investigation and has declined to pursue any action.

NovaMed Pharmaceuticals (Shanghai) Co. Ltd. (“NovaMed Shanghai”) was a party to a Distribution and Supply Agreement with MEDA Pharma GmbH & Co. KG (“MEDA”). Following the Company’s acquisition of NovaMed Shanghai , MEDA claimed it had a right to terminate the agreement under a change of control provision. NovaMed Shanghai does not

15


 

believe that MEDA had a right of termination under the agreement. NovaMed Shanghai filed an application for binding arbitration with the China International Economic and Trade Arbitration Commission (“CIETAC”) on July 26, 2012. On April 2, 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 Shanghai before any product 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 Shanghai to MEDA. The amount of such payment for services was not determined by the Arbitral Tribunal, but was left to be determined by NovaMed Shanghai . On April 30, 2014, NovaMed Shanghai 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 Shanghai 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 Shanghai 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, 2016 , 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 $ 1.9 million and $0. 6 million for the three-month periods ended March 31, 2016 and 2015 , respectively. For the three-month period ended March 31, 2016, the Company’s tax provision included $1.2 million of additional tax expense representing the correction of an error related to a previously unrecognized liability for an uncertain tax position in China (refer also to Note 1, “ Error Corrections ) . The remaining in crease of $ 0 . 1 million in the provision for income tax for the three-month period ended March 31, 2016 , compared to the same period of the prior year ,   related to forecasted growth in our China business for 2016 which impacts the estimated annual effective tax rate for 2016 . The Company’s statutory tax rate in China was 25% in 201 6 and 2015 .  

While the Company has concluded that its offshore undistributed accumulated earnings as of December 31, 2015 were indefinitely reinvested, and has therefore provided no taxes thereon, the Company concluded that a portion of its earnings expected to be generated by foreign subsidiaries in 2016 will be repatriated to the parent company in order to address the parent company’s liquidity needs. This anticipated repatriation, however, is not expected to result in any additional US f ederal or state tax liability for 2016 as ongoing tax-deductible corporate expenses expected to be incurred by the parent company more than offset the amount of the expected dividend distribution for the repatriation of a portion of projected earnings for the year. These expectations and related amounts have been reflected in the Company’s estimated annual effective tax rate for 2016.

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

16


 

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, 2016 and 2015 is as follows ( in thousands ):



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2016

 

2015

Revenue:

 

 

 

 

 

 

China

 

$

34,871 

 

$

32,427 

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

 

 

1,628 

 

 

1,141 

Total net revenues

 

$

36,499 

 

$

33,568 

Income (loss) from operations:

 

 

 

 

 

 

China

 

$

13,318 

 

$

12,344 

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

 

 

(3,894)

 

 

(2,861)

Total income from operations

 

$

9,424 

 

$

9,483 

Non-operating income, net:

 

 

 

 

 

 

China

 

$

377 

 

$

47 

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

 

 

10 

 

 

Total non-operating income, net

 

$

387 

 

$

49 

Income (loss) before provision for income tax:

 

 

 

 

 

 

China

 

$

13,695 

 

$

12,391 

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

 

 

(3,884)

 

 

(2,859)

Total income before provision for income tax

 

$

9,811 

 

$

9,532 



Long-lived assets as of March 31, 2016 and December 31, 2015 by operating segment are as follows ( in thousands ):



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2016

 

2015



 

 

 

 

 

 

China

 

$

46,477 

 

$

46,315 

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

 

 

1,646 

 

 

1,783 



 

$

48,123 

 

$

48,098 













17


 

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 "may," "will," "would," "could," "should," "might," "believes," "estimates," "projects," "potential," "expects," "plans," "anticipates," "intends," "continues," "forecast," "designed," "goal," “approximately” or the negative of those words or similar expressions are intended to identify forward-looking statements, including those statements we make regarding our future financial results. These statements are subject to risks and uncertainties that are difficult to predict and actual outcomes may differ materially.

These include risks and uncertainties relating to:

·

our substantial dependence on sales of ZADAXIN ® in China;

·

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;

·

Chinese government regulatory actions intended to reduce pharmaceutical prices such as the reduction in the governmentally permitted maximum listed price for our products and increased oversight of the health care market and pharmaceutical industry;

·

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;

·

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;

·

t he dependence of our current and future revenue and prospects on third-party license, promotion or distribution agreements, including the need to renew such agreements, enter into similar agreements, or end arrangements that SciClone does not believe are beneficial;

·

the effects of the resolution of the SEC and DOJ investigations and our ability to continue to comply with applicable laws and regulations, and carry out the continued reporting responsibilities agreed to with the SEC ;

·

our ability to implement and maintain controls over our financial reporting;

·

operating an international business, particularly in China including pricing regulations, slow payment cycles and currency exchange fluctuations;

·

uncertainty in the prospects for unapproved products, including uncertainties as to pricing and competition and risks relating to the clinical trial process and related regulatory approval process and the process of initiating trials at, and enrolling patients at, clinical sites;

·

research and development and other expense levels;

·

the ability of our suppliers to continue financially viable production of our products;

·

the allocation of financial resources to certain trials and programs, and the outcome and expenses related to litigation; and

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·

other factors discussed in this Report under Part I, Item 2 “Management Discussion and Analysis of Financial Condi tion and Results of Operations” and Part II, Item 1A “Risk Factors” .

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” or “PRC”) 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 business model with large pharmaceutical partners to promote and sell products 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. According to Globe Newswire, the Chinese pharmaceutical market currently ranks second among the global pharmaceutical markets, and had an estimated worth of $105 billion in 2014. It is forecasted to increase significantly to $200 billion 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; DC Bead ® ,   a product for the embolization of malignant hypervascularized tumors, for which we initiated sales and recorded product revenue beginning in the third quarter of 2015, and products from Pfizer International Trading (Shanghai) Ltd. (“Pfizer”). Through June 30, 2015, our product sales revenues also included Aggrastat ® , an intervention cardiology product launched in China in 2009, in-licensed from Cardiome Pharma Corp (“Cardiome”). In August 2015, we and Cardiome mutually agreed to end our collaboration for Aggrastat, thereby terminating our exclusive distribution rights in China, and returning all rights to the product to Cardiome. We recorded Aggrastat revenues of $1.5 million for the three months ended March 31, 2015, and we do not expect to generate any further Aggrastat revenues. We do not anticipate that the termination of this agreement will adversely affect our profitability.

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 for Baxter International, Inc. (“Baxter”). We recognize promotion services revenues as a percentage of our collaborator’s 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 margins for us.

ZADAXIN is approved in over 30 countries and may be used for the treatment of HBV, HCV, and certain cancers, and as an immune system enhancer 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

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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 piloting e-commerce approaches to reach customers. We are also seeking to expand the indications for which ZADAXIN could be used, including sepsis.

We initiated sales and recorded our first product revenue from DC Bead in the third quarter of fiscal 2015. The China Food and Drug Administration had approved the registration of DC Bead for the embolization of malignant hypervascularized tumors in August 2014. 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 continue commercial sales of DC Bead. BioCompatibles UK Ltd. (“BTG”) and SciClone previously entered into an agreement granting SciClone exclusive licensing and distribution rights to DC Bead in China. Under the agreement, we are purchasing DC Bead product from BTG.

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.

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 December 2015, we announced plans to pursue development and registration of SGX942 in the greater China market (including Hong Kong and Macao), for the treatment of oral mucositis. SGX942 is being developed by Soligenix, Inc. which recently reported positive preliminary results from its Phase 2 clinical trial for the treatment of oral mucositis in head and neck cancer. The Phase 2 preliminary results reported by Soligenix, Inc. showed a significant reduction in the duration of severe oral mucositis in patients receiving chemoradiation therapy for treatment of their head and neck cancer.

In May 2015, Theravance Biopharma, Inc. (“Theravance Biopharma”) granted SciClone exclusive development and commercialization rights to VIBATIV ®   (telavancin) in China, as well as the Hong Kong SAR, the Macao SAR, Taiwan and Vietnam, in exchange for upfront and regulatory milestone payments totaling $6 million. SciClone will be responsible for all aspects of development and commercialization in the partnered regions, including pre- and post-launch activities and product registration. SciClone will initially develop VIBATIV for hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia, and additional indications may include complicated skin and skin structure infections and potentially bacteremia. Theravance Biopharma will sell to SciClone all clinical and commercial product required to develop and commercialize VIBATIV in China and our other licensed territories.

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. We received CTA approval from the China Food and Drug Administration (“CFDA”) in early 2016 and are

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preparing a clinical study. 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.  

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. In November 2014, TLC was notified by the CFDA that ProFlow did not receive clinical trial approval and TLC is in the process of appealing the decision.

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 CFDA in 2012. In December 2013, the CFDA 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. As part of our agreement with Zensun, we agreed to loan up to $12 million to Zensun, of which $12 million had been loaned as of March 31, 2016 (refer to Note 4 to the unaudited condensed consolidated financial statements appearing under Part I, Item 1 for further information regarding the Zensun loans).

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. 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 ZADAXIN in the province in April 2015 that became effective in May 2015. We were able to mitigate the impact of this price limitation by shifting an equitable portion of the burden of the price reduction to our distributor in our sales channel; accordingly, the impact of the price reduction for the year ended December 31, 2015 was $2.8 million. The impact of the 2015 tender price reduction in Zhejiang province does not require providing for estimated price compensation payable under our new contractual arrangement with Sinopharm, which took effect January 1, 2016, as the lower tender price is reflected in a lower base invoice price to our customer under the new contractual arrangement. We anticipate that provincial pricing decisions will continue to be a significant factor in the China pharmaceutical market for the foreseeable future. The impact of such decisions on our future results is unpredictable, but we expect that pricing pressures on revenue in 2016 will be offset at least in significant part through sharing of the burden with our China distributor and potentially through volume increases. However, in the future, prices could be reduced to levels significantly below those that would prevail in an unregulated market, which may limit the growth of our revenues or cause them to decline.  

In addition, our new contractual arrangement with Sinopharm Holding Lingyun Biopharmaceutical (Shanghai) Co. Ltd (Sinopharm), our China distributor for ZADAXIN, which commenced January 1, 2016 is resulting in the later recognition (relative to practices prevailing through December 31, 2015 under the expired prior contractual arrangement) of a portion of our revenue invoiced to Sinopharm in situations where the provincial tender price (ultimate retail end price approved by provincial authorities) is greater relative to a reference (baseline) tender price. This is due to a price adjustment mechanism in the new contractual arrangement whereby the customer is invoiced at a lower base price relative to that prevailing in the previous agreement. The lower base price (as well as estimated price compensation payable due to the distributor for situations where the provincial tender price is lower than the referenced (baseline) tender price) is recorded as revenue at the time the sale is completed (arrived at destination). Currently, there are no provinces with lower-than-reference tender prices leading to price

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compensation payable.  The distributor is then invoiced for the portion of the price that may result from situations where the provincial tender price is greater than the reference (baseline) tender price at a later time, and such amount will be recognized as revenue after the amount has been agreed and invoiced to the distributor. Although we do not expect this new arrangement to have a significant impact on annual revenue or the amount recognized on an annual basis, it has and may continue to impact our current and future quarterly revenue amounts and timing. For example, we do not expect that the price compensation receivable due to us from the distributor for higher tender price provinces will be recognized until the second quarter of 2016 for amounts sold in the first quarter, and we expect to experience similar delays in recognition going forward.

As previously disclosed, since 2010 the US Securities and Exchange Commission (“SEC”) and the US Department of Justice (“DOJ”) had each been conducting formal investigations of us regarding a range of matters, including the possibility of violations of the Foreign Corrupt Practices Act (“FCPA”). On February 4, 2016, we announced that we entered into a settlement agreement with the SEC fully resolving the SEC’s investigation into possible violations of the FCPA. Under the terms of the settlement agreement, in February 2016 we paid a total of $12.8 million, including disgorgement, pre-judgment interest and a penalty as final settlement which was released from our restricted escrow account which we funded in the fourth quarter of 2015. This payment is in line with the charges we previously recorded and disclosed in our Form 10-Q filed with the SEC on August 10, 2015. As part of the agreement we neither admitted nor denied engagement in any wrongdoing and we agreed to give status reports to the SEC for the next three years on our continued remediation and implementation of anti-corruption compliance measures. The DOJ has also completed its related investigation and has declined to p ursue any action (refer to Note 9   to the unaudited condensed consolidated financial s tatements appearing under Part I, Item 1 and “Legal Proceedings” in Part I I, Item 1 for further information regarding the SEC and DOJ investigations).

We believe our cash and cash equivalents as of March 31, 2016 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,

 

 

 



  

2016

  

2015

  

Change

 

Product sales, net

 

$

35,320 

  

$

33,168 

  

6% 

 

Promotion services

 

 

1,179 

 

 

400 

 

195% 

 

Total net revenues

 

$

36,499 

 

$

33,568 

 

9% 

 



Product sales were $ 35.3 million for the three-month period ended March 31, 2016 compared to $ 33.2 million for the corresponding period in 201 5 , an increase of $ 2.2 million, or 6 %. ZADAXIN sales were $ 33.6 million for the three-month period ended March 31, 2016, compared to $31.3 million for the corresponding period of 2015, an increase of $2.3 million or 7%, which mainly related to a 23% increase in volume sold, offset partially by a 16% decrease in selling price related to a decrease in the list price of ZADAXIN in Zhejiang province since May 2015 and related to a lower base invoice price in our new arrangement with Sinopharm that became effective January 1, 2016 discussed below.

Our new contractual arrangement with Sinopharm which commenced January 1, 2016 is resulting in the later recognition (relative to practices prevailing through December 31, 2015) of a portion of our revenue invoiced to Sinopharm in situations where the provincial tender price is greater relative to a reference (baseline) tender price. This is due to a price adjustment mechanism in the new contractual arrangement whereby the customer is invoiced at a lower base price relative to that prevailing in the previous agreement. The lower base price (as well as estimated price compensation payable due to the distributor for situations where the provincial tender price is lower than the reference (baseline) tender price) is recorded as

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revenue at the time the sale is completed (arrived at destination). There are presently no provinces with tender prices below the reference (baseline) tender price, and therefore no price compensation payable situations. The distributor is then invoiced for the portion of the price that may result from situations where the provincial tender price is greater than the reference (baseline) tender price at a later time, and such amount will be recognized as revenue after the amount has been agreed and invoiced to the distributor. Although we do not expect this new arrangement to have a significant impact on annual revenue or the amount recognized on an annual basis, it has and may continue to impact our current and future quarterly revenue amounts and timing. For example, we do not expect that the price compensation receivable due to us from the distributor for higher tender price provinces will be recognized until the second quarter of 2016 for amounts sold in the first quarter, and we expect to experience similar delays in recognition going forward.

Per our previous contractual arrangement with Sinopharm through December 31, 2015, and the aforementioned renewed contractual arrangement with Sinopharm (our sole importer and distributor for ZADAXIN in China) which took effect January 1, 2016, our sales of ZADAXIN to Sinopharm have been and continue to be denominated in US dollars. However, the established importer price may be adjusted quarterly based upon exchange rate fluctuations between the US dollar and RMB. Our China ZADAXIN sales revenues are subject to exchange rate risk, and in recent months the RMB has experienced devaluation.

We anticipate that ZADAXIN revenues in 2016 will be higher than 2015, although our revenues are subject to exchange rate fluctuations and provincial adjustments to tender (retail level, government approved) prices which we cannot predict. The majority of our sales have been in US dollars, although a portion of our sales are denominated in RMB.  

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. 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 ZADAXIN in the province in April 2015 that became effective in May 2015. Changes in provincial drug prices for ZADAXIN in the provinces could impact our future sales revenues.

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 . Sinopharm acts 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 replacement of product in the event of damaged product or quality control issues. Passage of title and risk of loss are transferred to Sinopharm at the time of arrival of a shipment at its destination. 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 (“Tier 2”) 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 (“Tier 3”) local or regional distributors who, in turn, sell products to hospitals and pharmacies.

Promotion services revenue was $ 1.2 million and $0.4 million   for the quarters ended March 31, 2016 and 2015, respectively, and related to products promoted under agreements with Baxter. Promotion services revenue increased $0.8 million or 195% for the quarter ended March 31 , 2016, compared to 2015, related to an increase in Endoxan TM and Holoxan TM product sales.  

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. In August 2015, we and Cardiome, from whom we licensed Aggrastat ® , mutually agreed to end our collaboration for Aggrastat, and return all rights to the product to Cardiome. We recorded Aggrastat revenues of $1.5 million for the three months ended March 31, 2015. We do not expect to generate any further Aggrastat revenues. We do not anticipate that the termination of this agreement will adversely affect our profitability.

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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.

All of our promotion services revenue and a majority of our product revenues related to our China segment. Total China revenues were $34.9 million and $32.4 million, or 96% and 97% of sales for the three months ended March 31, 2016 and 2015, respectively. Rest of the World segment revenues were $1.6 million and $1.1 million, or 4% and 3% for the three months ended March 31, 2016 and 2015, respectively, and related to sales of ZADAXIN product.

For the three months ended March 31, 2016 and 2015, sales to Sinopharm in China accounted for approximately 92% and 91% of our revenues, respectively. Our experience with our largest customer 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,

 

 

 



  

2016

  

2015

  

Change

 

Cost of product sales

  

$

5,813 

  

$

4,597 

  

26% 

 

Cost of product sales was $5.8 million for the three-month period ended March 31, 2016, compared to $4.6 million for the corresponding period in 201 5 , an increase of $ 1.2 million, or 26%. ZADAXIN cost of sales increased $ 0.7 million for the three-month period ended March 31, 2016, compared to the same period of last year due to increased volume sold. Cost of product sales related to oncology products increased $0.8 million for the three-month period ended March 31, 2016, compared to the same period of last year, primarily due to increases in the volumes of our oncology products sold.   Cost of product sales related to Aggrastat products decreased $0.3 million due to the termination of our agreement with Cardiome .

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 2016 to be lower than 2015, based on lower selling prices as set by one province, with indications of others to follow, as well as the unfavorable impact of currency exchange fluctuations.

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,

 

 

 



  

2016

  

2015

  

Change

 

Sales and marketing

  

$

12,352 

  

$

11,356 

  

9% 

 

Sales and marketing expenses for the three months ended March 31, 2016   in creased by $ 1.0 million, or 9 %, compared to the corresponding period in 201 5 , related to growth in our sales and marketing efforts for ZADAXIN.

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We anticipate total S&M expenses for the year ending December 31, 2016 to be higher than those incurred for the year ended December 31, 2015 related to growth in our S&M efforts for ZADAXIN.

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,

 

 

 



  

2016

  

2015

  

Change

 

Research and development

 

$

1,467 

  

$

1,088 

  

35% 

 



R&D expenses for the three   months ended March 31, 2016, in creased $0.4 million, or 35 %, compared to the corresponding period in 2015 related to R&D expenditures related to in-licensing agreements with certain business partners and R&D activities in China.

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 R&D expenses to increase in 2016 compared to 2015 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,

 

 

 



  

2016

  

2015

  

Change

 

General and administrative

 

$

7,443 

  

$

7,044 

  

6% 

 



G&A expenses for the three-month period ended March 31, 2016 in creased by $ 0.4 million, or 6 %, compared to the corresponding period in 2015. For the quarter ended March 31, 2016, compared to the corresponding quarter of the prior year, legal costs increased related to the Company’s strategic review to maximize shareholder value, and stock-based compensation costs increased, offset partially by a $0.5 million credit to bad debt expense for recovery of previously written off accounts receivable, and a $0.5 million decrease in bad debt expense related to another customer that was reserved for in the first quarter of 2015.

We expect our G&A expenses in 2016 to increase compared to 2015 related to growth in our business. As previously disclosed in our Form 8-K issued in February 2016, our Board is evaluating a range of strategic transactions with a view to enhancing shareholder value. We may continue to incur certain G&A expenses in connection with this evaluation.  

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 $ 1.9 million and $0.6 million for the three-month periods ended March 31, 2016 and 2015, respectively. For the three-month period ended March 31, 2016, the Company’s tax provision included $1.2 million of additional tax expense representing the correction of an error to recognize a previously unrecognized liability for an uncertain tax position in China (see Note 1 - Basis of Presentation   Error Corrections ”   to unaudited condensed consolidated financial statements appearing in Part 1, Item 1 ).   The remaining increase of $ 0. 1 million in the provision for income tax for the three-month period ended March 31, 2016, compared to the same period of the prior year, related to forecasted growth in our China business for

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2016 which impacts the estimated annual effective tax rate   for 2016. Our statutory tax rate in China was 25% in 2016 and 2015. We expect the provision for income tax to increase for the year ending December 31, 2016, compared to the year ended December 31, 2015 ,   due to growth in our China operations and related to an uncertain tax position in China .

While we have concluded that our offshore undistributed accumulated earnings as of December 31, 2015 were indefinitely reinvested, and have therefore provided no taxes thereon, we concluded that a portion of our earnings expected to be generated by foreign subsidiaries in 2016 will be repatriated to the parent company in order to address the parent company’s liquidity needs. This anticipated repatriation, however, is not expected to result in any additional US f ederal or state tax liability for 2016 as ongoing tax-deductible corporate expenses expected to be incurred by the parent company more than offset the amount of the expected dividend distribution for the repatriation of a portion of projected earnings for the year. These expectations and related amounts have been reflected in our estimated annual effective tax rate for 2016.

Liquidity and Capital Resources

We closely manage our liquidity and capital resources. We rely on our operating cash flows and cash and cash equivalents 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 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, 2016

 

December 31, 2015

Cash, cash equivalents and investments

 

$

114,689 

 

$

101,403 



As of March 31, 2016, we had $114.7 million in cash and cash equivalents, of which $111.2 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.



We concluded that as of December 31, 2015, $176.2 million of accumulated undistributed earnings of foreign subsidiaries continue 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 and (ii) additional investments to support our expansion in the China market as well as planned product licensing transactions. Upon distribution of our foreign undistributed earnings, we may be subject to US federal and state income taxes.

Based on our current operating plan, we do not anticipate the need to repatriate undistributed earnings held by foreign subsidiaries accumulated as of December 31, 2015, but we plan to repatriate a portion of current year expected foreign earnings generation to fund our limited US operations. We are providing for US income taxes on a portion of current year expected foreign earnings generation that we anticipate repatriating from our foreign subsidiaries, and our estimated annual effective tax rate for the quarter reflects both the provisions as well as benefits associated with our operations. We do not anticipate having to record any US tax liability related to the anticipated repatriation, because US forecasted corporate expenses more than offset the anticipated dividend income. We plan to indefinitely reinvest outside of the US the remaining unrepatriated expected current year foreign earnings for 2016.

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Three Months Ended



 

March 31,



 

2016

 

2015

Cash provided by (used in):

 

  

 

 

 

 

Operating activities

 

$

12,958 

 

$

12,295 

Investing activities

 

$

(20)

 

$

(808)

Financing activities

 

$

386 

 

$

(1,730)



Net cash provided by operating activities was $ 13.0 million for the three -months ended March 31, 2016 and primarily reflected the net income for the period, adjusted for non-cash items such as stock-based compensation expense, depreciation and amortization expense, and changes in operating assets and liabilities. Accounts receivable decreased $ 6.9 million related to payments received from customers during the three months ended March 31, 2016 .   Accounts payable and ac crued liabilities decreased $5.0 million mainly related to a decrease in compensation and benefits and sales and marketing accruals for payments made during the three months ended March 31, 2016 .  

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-base d compensation expense ,   provision for doubtful accounts, depreciation and amortization expense and changes in operating assets and liabilities.

Net cash used in investing activities was approximately $20,000 and $ 0.8 million , respectively, for the three months ended March 31, 2016 and 20 15, and related to purchases of property and equipment .  

Net cash provided by ( used in ) financing activities was $0.4 million and ( $ 1.7) million for the three months ended March 31, 2016 and 2015, respectively. For the three months ended March 31, 2015 , we used $ 2.7 million to repurchase and retire 312,466 shares of our common stock under our stock repurchase program that expired December 31, 2015 . For the three months ended March 31, 2016 and 2015 , we also received $0.4 million and $ 1 .0 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 $7.25 million in the first half of 2015, and $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). The 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 SciClone Pharmaceuticals International China Holding Ltd (“SPIL China”).

The following summarizes our future obligations including uncertain tax positions as of March 31, 2016 ( in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Payments Due by Period



 

 

 

 

Less than

 

 

 

 

 

 

 

More Than



 

Total

 

1 Year

 

1-3 Years

 

3-5 Years

 

5 Years

Operating leases (1)

 

$

4,661 

 

$

2,387 

 

$

2,274 

 

$

 —

 

$

 —

Purchase obligations (2)

 

 

16,553 

 

 

16,553 

 

 

 —

 

 

 —

 

 

 —

Uncertain tax positions (3)

 

 

4,817 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total

 

$

26,031 

 

$

18,940 

 

$

2,274 

 

$

 —

 

$

 —



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

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(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 license agreements with third parties we have agreed to various upfront and milestone payments related to regulatory and commercial success and other achievements that may require substantial payments in the future, including a payment in the second quarter of fiscal 2016 that we expect to make of approximately $1.7 million.

We believe that our existing cash and cash equivalents 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.

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our 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 delivery. Sales of ZADAXIN to Sinopharm are recognized upon the arrival of a shipment to its destination when title and risk of loss to the product are transferred. 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”

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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.

Effective January 1, 2016, our new contractual arrangement with our China importer and distributor for ZADAXIN, Sinopharm, is resulting in the later recognition (relative to practices prevailing through December 31, 2015 under an expired older contractual arrangement) of a portion of the Company’s revenue invoiced to Sinopharm related to situations where the provincial tender price is greater relative to a reference (baseline) tender price. This is due to a price adjustment mechanism in the new contractual arrangement whereby the customer is invoiced at a lower base price relative to that prevailing in the previous agreement. The lower base price (as well as estimated price compensation payable due to the distributor for situations where the provincial tender price is lower than the reference (baseline) tender price) is recorded as revenue at the time the sale is completed (arrived at destination). There currently are no situations involving provinces with tender prices below the refe rence (baseline) tender price. The distributor is then invoiced for the portion of the price that may result from situations where the provincial tender price is greater than the reference (baseline) tender price at a later time, and such amount is recognized as revenue after the amount has been agreed and invoiced to the distributor. We expect that price compensation receivable will be recognized in the quarter following the original sale pursuant to the price adjustment mechanism. For example, we expect that price compensation receivable related to the first quarter of 2016 will be recognized in the second quarter of 2016.

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 maintain a revenue reserve for product returns based on estimates of the amount of product to be returned by our customers which 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, 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, 2016 and December 31, 2015, our revenue reserves were approximately $ 0.1 million; the reserves were recorded as accrued liabilities on our unaudited condensed consolidated balances sheets.  

We evaluate our returns reserve quarterly and adjust it when events indicate that a change in estimate is appropriate. Changes in estimates could materially affect our results of operations or financial position. It is possible that we may need to adjust our estimates in future periods.

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, 2015 . There have been no material changes in our critical accounting policies, estimates and judgments for the three months ended March 31, 2016 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015, other than the changes in our revenue recognition practices for sales of ZADAXIN to Sinopharm effective from January 1, 2016 as discussed in the foregoing paragraphs under the subcaption “Product Revenue”. 

New Accounting Standards Update s

Please refer to Note 1 to our unaudited condensed consolidated financial statements appearing under Part I, Item 1 for a discussion of new accounting standards updates that may impact the Company.

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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, 2016 compare d   to the disclosure in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2015 .

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, 2016, 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 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

As previously disclosed, since 2010 the SEC and the DOJ had each been conducting formal investigations of us regarding a range of matters, including the possibility of violations of the Foreign Corrupt Practices Act (“FCPA”), primarily related to certain historical sales and marketing activities with respect to our China operations. In response to these matters, our Board appointed a Special Committee of independent directors (the “Special Committee”) to oversee our response to the government inquiry. Based on an initial review, the Special Committee decided to undertake an independent investigation as to matters reflected in and arising from the SEC and DOJ investigations in order to evaluate whether any violation of the FCPA or other laws occurred.

As previously disclosed, on February 4, 2016, we entered into a settlement agreement with the SEC that fully resolved the SEC’s investigation. Under the terms of the settlement agreement, we paid a total of $12.8 million in February 2016, including disgorgement, pre-judgment interest and a penalty. The payment was in line with the charges we previously recorded and disclosed in our Form 10-Q filed with the SEC on August 10, 2015. As part of the agreement, we neither admitted nor denied engagement in any wrongdoing and we agreed to give status reports to the SEC for the next three years on our continued remediation and implementation of anti-corruption compliance measures . The DOJ has also completed its related investigation and has declined to pursue any action.



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As previously disclosed, we have taken, and continue to take certain steps to enhance our existing anti-bribery compliance efforts, including (i) evaluating and expanding our training of employees regarding understanding and compliance with laws including the FCPA and other anti-bribery laws and regulations, (ii) evaluating existing compliance and anti-bribery policies and guidelines and preparing new, more detailed policies and guidelines for implementation after review by our Board of Directors and/or committees of the Board of Directors, (iii) implementing 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) establishing an automated system for recording and approving travel and entertainment expenditures, and (v) hiring a Vice President of Compliance and an Internal Audit Director 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 third-party consultant to observe and make recommendations regarding our FCPA compliance. We will continue to emphasize the importance of compliance and ethical business conduct.

NovaMed Pharmaceuticals (Shanghai) Co. Ltd. (“NovaMed Shanghai”) was a party to a Distribution and Supply Agreement with MEDA originally entered into in 2007. Following our acquisition of NovaMed Shanghai in 2011, MEDA claimed it had a right to terminate the agreement under a change of control provision. NovaMed Shanghai does not believe that MEDA had a right of termination under the agreement. NovaMed Shanghai filed an application for binding arbitration with the China International Economic and Trade Arbitration Commission (“CIETAC”) on July 26, 2012. On April 2, 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 Shanghai before any product 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 Shanghai to MEDA. The amount of such payment for services was not determined by the Arbitral Tribunal, but was left to be determined by NovaMed Shanghai. On April 30, 2014, NovaMed Shanghai 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 Shanghai 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 Shanghai remains uncertain, and as such the Company has not recognized it as a gain contingency.

Item 1A.  Risk Factors

Consider these risks and uncertainties before investing in our common stock. We have marked with an asterisk (*) those risk factors below that reflect changes from the risk factors included in our Annual Report on Form 10-K file d with the SEC on March 11, 2016 .  

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

Althoug h we reported net income of $7.9 million and $9.0 million for the three months ended March 31, 2016 and 2015 , respectively, and have reported full year annual net income since fiscal 2009, we have experienced occasional quarterly losses and as a result of accumulated annual operating losses prior to fiscal 2009, we have an accumulated deficit of approximately $1 11 million as of March 31, 2016. 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:

·

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;

·

government regulatory action intended to reduce pharmaceutical prices such as the reduction in the governmentally

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

·

compliance by our employees with regulations that are applicable to sales and marketing activities, including the Foreign Corrupt Practices Act;

·

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 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;

·

currency fluctuations between the RMB and US Dollar (“USD”) including recent RMB devaluation that has led to, and may continue to lead to, downward adjustments in our importer price if further devaluation continues;

·

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

·

m ore aggressive action by the government in China in changing taxation p olicy.

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 may enter into other company or product acquisition transactions in the future which could present integration or other 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.

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Our revenue will continue to be substantially dependent on our sales of ZADAXIN in China. *

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, 2016 and 2015, approximately 95% and 96% of our ZADAXIN sales, respectively, 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 provincial agencies’ pricing reform.

In China, ZADAXIN is approved for the treatment of hepatitis B virus (“HBV”) and as an immune system enhancer. 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 has previously imposed price restrictions on ZADAXIN and several of our oncology products. If we experience difficulties in our sales efforts as a result   of price restrictions or other policies intended to reduce health care costs , our operating results and financial condition will be harmed.   *

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

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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.

Recent governmental policy changes in China have eliminated national regulation of the maximum retail drug prices for most drugs, effective June 1, 2015. Decisions by provincial authorities are emerging as the primary governmental mechanism for price controls. As an example, the Zhejiang provincial authority announced a price limitation for sales of ZADAXIN in the province in April 2015 that became effective in May 2015; we were able to mitigate the impact of this price limitation by sharing the burden of the price reduction with our distributor.    We anticipate that provincial pricing decisions will continue to be a significant factor in the China pharmaceutical market for the foreseeable future. The impact of such decisions on our future results is unpredictable, but we expect that pricing pressures in 2016 will be offset at least in significant part through sharing of any potential further burden with our China distributor and potentially through volume increases. However, in the future, prices could be reduced to levels significantly below those that would prevail in an unregulated market, which may limit the growth of our revenues or cause them to decline.

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.

While over the long term, we believe that the price reductions may positively affect our sales volumes and result in broader penetration into Tier 3 and Tier 2 cities in target geographies, potentially increasing our total sales revenues from these products, the process and timing for any price restrictions is unpredictable and further price reduction could be imposed that could adversely affect our business. In addition, our new contractual arrangement with our China distributor, Sinopharm, which commenced January 1, 2016, is resulting in the later recognition (relative to practices prevailing through December 31, 2015 under the expired older contractual arrangement) of a portion of our revenue invoiced to Sinopharm in situations where the provincial tender price is greater relative to a reference (baseline) tender price. This is due to a price adjustment mechanism in the new contractual arrangement whereby the customer is invoiced at a lower base price relative to that prevailing in the previous agreement. The lower base price (as well as estimated price compensation payable due to the distributor for situations where the provincial tender price is lower than the reference (baseline) tender price) is recorded as revenue at the time the sale is completed (arrived at destination). Currently, there are no situations involving provinces with tender prices lower than the reference (baseline) tender price. The distributor is then invoiced for the portion of the price that may result from situations where the provincial tender price is greater than the reference (baseline) tender price at a later time, and such amount is recognized as revenue after the amount has been agreed and invoiced to the distributor. Although we do not expect this new arrangement to have a significant impact on annual revenue or the amount recognized on an annual basis , it has and may continue to impact our current and future quarterly revenue amounts and timing.

Other emerging measures intended to reduce health care costs may also adversely affect our sales. Chinese provincial or local government agencies, or hospitals, may limit or prohibit the use of pharmaceuticals they consider to be and designate as adjuvants as part of a policy to reduce spending on pharmaceuticals. None of our products has receiv ed such a designation to date. However, if any of our products are designated as an adjuvant by governments or local agencies in provinces where we have significant sales, or in hospitals where we have significant sales, sales of that product in such locations or hospitals would be significantly adversely affected.

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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 prom oted or sold by our subsidiary , 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 which we launched commercially in the third quarter 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.

All of our products were originally obtained by us under licenses, promotion, distribution or similar third-party agreements. We do not conduct product discovery and our ability to bring new products to market is dependent upon our entering into additional acquisition, in-licensing, promotion or distribution agreements, particularly in China. The competition for attractive products is intense, and we cannot 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. In addition, in August 2015, we and Cardiome mutually agreed to end our collaboration for Aggrastat, and return all rights to the product to Cardiome. 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.

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

We have received regulatory approvals to import and market ZADAXIN in China and to manufacture ZADAXIN and export the product from Italy. In order to continue our sales to China, we need to maintain these approvals. Our license to import ZADAXIN into China needs to be renewed every five years and the next renewal is required in December 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.

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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 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.

Our resolution with government agencies in connection with violations by us of the US Foreign Corrupt Practices Act could have a material adverse effect on our business, results of operations and financial condition.  *

As previously disclosed, since 2010 the SEC and the DOJ had each been conducting formal investigations of us regarding a range of matters, including possible violations of the FCPA, primarily related to certain historical sales and marketing activities with respect to our China operations. In response to these matters, our Board appointed 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 in order to evaluate whether any violation of the FCPA or other laws occurred.

On February 4, 2016, we announced that we entered into a settlement agreement with the SEC fully resolving the SEC's investigation into possible violations of the FCPA and that the DOJ had also completed its related investigation and has declined to pursue any action. Under the terms of the settlement agreement with the SEC, SciClone paid a total of $12.8 million, including disgorgement, pre-judgment interest and a penalty .   The payment was in line with the charges the Company previously recorded and disclosed in its Form 10-Q filed with the SEC on August 10, 2015. As part of the agreement, we neither admitted nor denied engagement in any wrongdoing a nd we agreed to give status reports to the SEC for the next three years on our continued remediation and implementation of anti-corruption compliance measures

While we have resolved the previously pendi ng matters with the SEC and DOJ whether by virtue of announcement of the settlement agreement and the SEC Order or otherwise, we may be subject to investigations by foreign governments or further claims by third parties arising from conduct subject to the investigation or our other international operations. In addition, the remedial actions we have taken or may take as a result of such investigations may adversely affect our business in China and other countries, including adversely affecting our ability to obtain license renewals or other administrative approvals we require to conduct business in China and other countries.

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Despite the resolution of the SEC and DOJ matters, we may be subject to additional investigations or regulatory actions in the future.

Despite the settlement of our SEC and DOJ matters, we may be subject to additional investigations in the future. We are unable to predict what ultimate consequences any investigation by any regulatory or law enforcement agency may have on us. Regulatory investigations that might be initiated in the future could result in substantial expenses, management diversion of attention, 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 or law enforcement agency, including in China, 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.

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 Pharmaceuticals, Inc. (“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 Reports 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 remediated the material weakness prior to 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.

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.

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There can be no assurance that the strategic alternative process will result in pursuing or completing a particular transaction.

In early February 2016, we announced that our Board of Directors had initiated a process to identify, examine and consider a range of strategic alternatives available to us with a view to enhancing stockholder value and had engaged Lazard Freres & Co. LLC as its financial advisor to assist the Board in evaluating strategic alternatives. There can be no assurance that the evaluation of potential strategic alternatives will result in either pursuing any different strategic operational approach or completing any particular transaction. We also may not accurately assess the risks and uncertainties associated with engaging in a strategic alternative, and the anticipated benefits from pursuing any such alternative may not materialize. In addition, undertaking a strategic process could divert management’s time and focus from operating our business, potentially having adverse effects on our existing business relationships and our key employees.

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, we have identified from time to time certain instances of improperly submitted expense reporting by our employees. 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 and 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,

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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 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 member 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 required 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 US- 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, 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

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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 N ASDAQ Global Select Market or 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.