SciClone Pharmaceuticals, Inc.
SCICLONE PHARMACEUTICALS INC (Form: 10-K, Received: 03/09/2017 16:02:14)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K



 

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

For the fiscal year ended December 31, 201 6



O r



 

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



 

For the transition period from              to              .  

Commission file number 0-19825



SciClone Pharmaceuticals, Inc.

(Exact name of Registrant as specified in its charter)

 



 

Delaware

94-3116852

(State or other jurisdiction of

Incorporation or organization)

(I.R.S. Employer

Identification No.)



 

950 Tower Lane, Suite 900

Foster City, California

94404

(Address of principal executive offices)

(Zip Code)

  (650) 358-3456

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



 

Common Stock, $0.001 par value

The NASDAQ Stock Market LLC .

(Title of Class)

(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes     No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes     No  

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or 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 (Check one): 



 

 

 

 

 

 

 

 

 

 

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  

The aggregate market value of the voting stock held by non-affiliates of SciClone Pharmaceuticals, Inc. was approximately $ 670 , 206 ,000 as of June 30, 2016 , based upon the closing price of SciClone Pharmaceuticals Inc.’s Common Stock on The NASDAQ Global Select Market on such date. Shares of Common Stock held by each executive officer and director have been excluded from the calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March  7 ,   2017 ,   51,505,795   shares of the Registrant’s Common Stock , $0.001 par value, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference from the definitive proxy statement for the Company’s 201 7 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal y ear covered by this Annual Rep or t on F orm 10-K.


 

  TABLE OF CONTENTS



 

 

 

 

 

 

 

 

 

 

PAGE NO.

 

PART I.

 

 

Item 1.

 

Business

 

 

4

 

Item 1A.

 

Risk Factors

 

 

16

 

Item 1B.

 

Unresolved Staff Comments

 

 

31

 

Item 2.

 

Properties

 

 

31

 

Item 3.

 

Legal Proceedings

 

 

31

 

Item 4.

 

Mine Safety Disclosures

 

 

32

 

PART II.

 

 

Item 5.

 

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

 

32

 

Item 6.

 

Selected Financial Data

 

 

34

 

Item 7.

 

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

 

 

35

 

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 

 

48

 

Item 8.

 

Financial Statements and Supplementary Data

 

 

50

 



 

Report of Independent Registered Public Accounting Fi rm  

 

 

51

 



 

Consolidated Balance Sheets

 

 

52

 



 

Consolidated Statements of Income

 

 

53

 



 

Consolidated Statements of Comprehensive Income

 

 

54

 



 

Consolidated Statements of Stockholders’ Equity

 

 

55

 



 

Consolidated Statements of Cash Flows

 

 

56

 



 

Notes to Consolidated Financial Statements

 

 

57

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

 

81

 

Item 9A.

 

Controls and Procedures

 

 

81

 

Item 9B.

 

Other Information

 

 

82

 

PART III.

 

 

Item 10.

 

Directors, Executive Officers, and Corporate Governance

 

 

82

 

Item 11.

 

Executive Compensation

 

 

82

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

 

82

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

 

83

 

Item 14.

 

Principal Accountant Fees and Services

 

 

83

 

PART IV.

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

 

 

83

 

 Signatures

 

 

 

 

88

 



 

 

As used in this Annual Report, the terms “we,” “us,” “our,” the “Company” and “SciClone” mean SciClone Pharmaceuticals, Inc. and its subsidiaries (unless the context indicates a different meaning). SciClone, SciClone Pharmaceuticals, the SciClone Pharmaceuticals design, the SciClone logo and ZADAXIN ®   (ZADAXIN) are registered trademarks of SciClone Pharmaceuticals, Inc. in the United States and numerous other countries. All other Company names and trademarks included in this Annual Report are trademarks, registered trademarks or trade names of their respective owners.

 

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 and renewal of our Import Drug License with respect to ZADAXIN ;

·

government regulatory action affecting our Company or our drug products or our competitors' drug products in China, the U . S . 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 some provinces of 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 reso lved   U.S. Securities and Exchange Commission (“ SEC ”) and U.S.   Department of Justice (“ 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;

·

announcement and completion of corporate acquisition, merger, licensing or marketing arrangements, or sales of assets;

·

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

·

other factors discussed in this Report under Part I, Item 1A “Risk Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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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 Annual Report on Form 10-K. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

PART I

Item 1.   Business  

Overview  

SciClone Pharmaceuticals, Inc. (NASDAQ: SCLN) is a United States (“U . S . ”)-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. We believe our sales and marketing strengths position us to benefit from the long-term expansion of the pharmaceutical market in China. The Chinese pharmaceutical market is estimated to rise at a compound annual growth rate of 8%, reaching approximately $200 billion in 2020, according to a new report from AskCI, a Chinese market research and management consulting firm .   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 U . S . 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, and oncology products from Pfizer International Trading (Shanghai) Ltd. (“Pfizer”). ZADAXIN has the highest margins in our portfolio as it is a premium product sold exclusively by SciClone. Our “promotion services revenues” result from fees we receive for exclusively promoting oncology and cancer supportive care 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. 

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 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, and on September 26, 2016, we announced the first patient has been treated in a clinical trial in sepsis using ZADAXIN in China.

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.

We are also pursuing the registration of Loramyc ® , a mucoadhesive tablet formulation of miconazole lauriad to treat oropharyngeal candidiasis.

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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 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, to increase our revenues and profitability.

Our I n- Licensed Drug Candidate s in Clinical Development Include the Following:

PT-112:   On September 26, 2016, we also announced the first patient has been treated in the Phase 1 proof-of-concept trial of PT-112, a multi-targeted platinum-pyrophosphate anticancer agent being developed for patients with advanced solid tumors, in Taiwan. PT-112 is a key early-stage asset supporting our strategy to expand our oncology portfolio and drive long-term growth. We obtained, in 2015, exclusive development and commercialization rights from Phosplatin Therapeutics to PT-112 for Greater China (mainland China, Hong Kong, and Macau) and Vietnam, along with the exclusive option to expand the territory to include South Korea and Taiwan.

SGX942:   On September 12, 2016, we and Soligenix, Inc. announced that we entered into an exclusive license agreement granting rights to SciCl one to develop, promote, market , distribute and sell SGX942 (dusquetide), a novel, first-in-class therapy being developed for the treatment of oral mucositis in patients with head and neck cancer. The licensing agreement includes China, Hong Kong and Macau, Taiwan, South Korea and Vietnam (the “Territory”). This exclusive agreement builds on an existing collaboration, in which we provided our complete oral mucositis clinical and regulatory data library to Soligenix in exchange for certain, previously undisclosed, commercialization rights to SGX942 in the Greater China market (the “2013 exchange”) . The Phase 2 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.

Under the terms of the agreement, we transferred cash consideration of $3 million to Soligenix for 3,529,412 shares of Soligenix common stock (constituting 9.43% of Soligenix stock issued and outstanding immediately following the issuance of new shares to SciClone) and expanded rights for SGX942 in Taiwan, South Korea, and Vietnam, as we had previously obtained rights for Greater China in the 2013 exchange. Soligenix declared a 1 for 10 reverse stock split in October 2016, resulting in our ownership of 352,94 2 shares .  W e will be responsible for all aspects of development, product registration and commercialization in the Territory, having access to data generated by Soligenix. In the future, we will pay to Soligenix royalties on net sales, and Soligenix will supply commercial drug product to us on a cost-plus basis, while maintaining worldwide manufacturing rights.

VIBATIV ®   (telavancin):   In May 2015, Theravance Biopharma, Inc. (“Theravance Biopharma”) granted SciClone exclusive development and commercialization rights to VIBATIV   (telavancin) in China, as well as Hong Kong, Macao, 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. We anticipate commencing a bridging trial for VIBATIV.

Angiomax ®   (bivalirudin) and Cleviprex ®   (clevidipine) :   In December 2014, we entered into a strategic partnership with The Medicines Company for two cardiovascular products in China. The partnership includes agreement s 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 . W e have received Clinical Trial A pplication (“ CTA ”)   approval and a Clinical Trial Waiver in December 2016 from the China Food and Drug Administration (“CFDA”)   and are in the process of preparing a New Drug Application (“NDA”), 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 CTA for China was filed in 2013. We received CTA approval from the CFDA in early 2016 and are preparing a clinical study. As Chiesi USA, Inc. and its parent company, Chiesi Farmaceutici S.p.A. (“Chiesi”) , acquired the rights to Cleviprex in June 2016 from T he Medicines Company, SciClone will now be working together with Chiesi and The Medicines Company to progress the Cleviprex clinical study going forward. Under the terms of the agreement, which apply to Chiesi for Cleviprex, we will be responsible for all aspects of commercialization, including pre-and post-launch activities, for both products (Cleviprex and Angiomax) in the China market (excluding Hong Kong and Macao). We have also agreed to participate in the China registration process for both products. Financial

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terms of the agreement s for the two products , in addition to net sales royalties payable to The Medicines Company and /or Chiesi , include the following additional payments to The Medicines Company and /or Chiesi: 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.  

Neucardin TM :   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 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 whic h an 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 December 31 , 2016 (refer to Note 6 to the consolidated financial statements appearing under Part I I , Item 8 for further information regarding the Zensun loans).

ABTL-0812: Our license agreement with Ability Pharmaceuticals SL grants us a license and the exclusive rights to develop, manufacture and commercialize ABTL-0812 in China, Macau, Hong Kong, Taiwan, and Vietnam . ABTL-0812 is a first-in-class P13K/Akt/mTOR signaling pathway inhibitor for solid tumors , important in regulating the cell cycle . We are currently preparing for a phase 1 proof-of-concept trial in Taiwan   and Mainland China.

Governmental Policy Changes in China

G overnmental 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. Under our new contractual arrangement with Sinopharm, effective January 1, 2016, the lower tender price is reflected in a lower base invoice price to Sinopharm . Sinopharm 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 upon with them.   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 201 7 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.  

BUILDING A LEADING INTERNATIONAL PHARMACEUTICAL BUSINESS

Our Established Business in China

In China, we have established product revenue and positive cash flow. We are committed to building on this base and introducing additional pharmaceutical products to meet the country’s evolving healthcare needs. China state leaders are continuing to implement a health care reform plan which, among other things, is seeking to expand patient access to pharmaceuticals. We believe the China pharmaceutical market may grow close to 10% annually over the next several years.

We launched ZADA XIN in China in 1996 and by 201 6 our annual worldwide sales of this product reached more than $ 150 million , 95 % of which were sales to China. Today, ZADAXIN is one of the largest imported pharmaceutical products in China, measured by revenue. We estimate our market share of thymalfasin by units is approximately 1 7 %.   Over the last decade, we have established a sales and marketing organization and strong importation relationships with distribution channels that have facilitated strong growth in sales, and profitability, and substantial cash flow. Through our extensive China sales organization of approximately   54 0 professionals including approximately 46 0 sales personnel, we believe we have developed a good reputation and relationships with physicians and administrators. We serve approximately 2,000 hospitals with approximately 300 of the largest hospitals in the major cities in China contributing approximately 80% of our business. We have built a strong commercial presence in liver disease, cancer and the intensive care setting. We are expanding geographically in China to position the Company for further growth. ZADAXIN has strong brand recognition and is positioned as a high-quality, imported product. ZADAXIN is approved in China for

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the treatment of HBV a nd for use as a n immune system enhancer . It is also included in the treatment guidelines issued by the MOH for liver cancer. In China, orders for ZADAXIN are filled largely by distributors and sub-distributors which purchase ZADAXIN from our selected, established, government-licensed importing agents.

China accounted for approximately 95 %, 96 %, and 97% of our net revenues for each of the years ended December 31, 201 6 ,   2015 ,   and 201 4 , respectively .   In 2016, 2015 and 2014 , Sinopharm Holding Lingyun Biopharmaceutical (Shanghai) Co., Ltd. (“Sinopharm”) accounted for 93 %, 97 %   and 94 %   of our net revenues , respectively. No other customers accounted for more than 10% of our net revenues in those periods. As of December 31, 201 6 , approximately $39.5 million or 95 % of our gross accounts receivable were attributable to Sinopharm.

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

International Sales and Marketing

ZADAXIN is approved in over 30 countries, primarily in China and countries in the Pacific Rim, Latin America, Eastern Europe, and the Middle East regions. ZADAXIN’s approvals are principally for the treatment of HBV and as a n immune system   enhancer , with additional approvals in certain countries for the treatment of HCV, or as a chemotherapy immune enhancer for cancer patients with weakened immune systems. We sell ZADAXIN in various international markets through our wholly owned subsidiary, SciClone Pharmaceuticals International Ltd. (“SPIL”).

SPIL is registered in the Cayman Islands and its principal office is in Hong Kong. SPIL orders ZADAXIN from our European manufacturer and contracts with a third party for the storage of our finished goods inventory at warehousing facilities in Hong Kong. SPIL then distributes our product worldwide from these warehousing facilities based on purchase orders from our customers. Under our established distribution arrangements, local importers and distributors are responsible for the importation, inventory, distribution and invoicing of ZADAXIN after importation.

Product sales of $ 150 .1 million ,   $14 6.1 million, and $126.1 million for the years ended December 31, 201 6 ,   201 5 ,   and 201 4 , respectively, were from sales of ZADAXIN.

SciClone’s Lead Product ZADAXIN (Thymalfasin)

ZADAXIN is SciClone’s synthetic preparation of thymalfasin, scientifically referred to as thymosin alpha 1, a thymic peptide which circulates in the blood naturally and is instrumental in the immune response to certain cancers and infections. ZADAXIN is administered as a subcutaneous injection. Published scientific and clinical studies have shown that thymalfasin helps to stimulate and direct the body’s immune response to eradicate infectious diseases, such as HBV, HCV, bacterial, and fungal infections; to fight certain cancers such as melanoma and liver cancer; and to enhance response to vaccines. Thymalfasin appears to be well tolerated, with few reports of significant side effects or toxicities associated with its use.

Thymalfasin elicits a variety of immune system responses. Acting on intracellular signaling pathways, thymalfasin increases the Th1 subset of T-helper cells that assist with fighting invading viruses and cancers and leads to a boost in production of antibodies in response to vaccines. Thymalfasin also results in decreased CD-4 cell differentiation into the Th2 subset of CD-4 helper cells that produce cytokines, such as IL-4, which are associated with persistence of viral infection, and stimulates several other components of the immune response that help the body attack and kill virally-infected or tumor cells.

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Thymalfasin for Treatment of Sepsis

Clinical trials have shown that thymalfasin improves survival in patients in intensive care units being treated for sepsis from severe bacterial infections. One publication describes the results from a large, multicenter, single-blind, randomized, and controlled trial in 361 subjects in China. This study showed that the 28-day mortality from any cause was 26% in the ZADAXIN group, versus 35% in the control group, an effect that is clinically important ( p = 0.062 non-stratified analysis, p = 0.049 log-rank). Greater improvement in the biomarker HLA-DR was also seen in subjects treated with ZADAXIN ( p = 0.037). No serious drug-related adverse events were recorded. These data support the usefulness of ZADAXIN in treating severe sepsis.

An investigator-initiated trial involving ZADAXIN for the treatment of sepsis is underway in China ; we are supplying ZADAXIN with respect to such trial . Patient enrollment is under way and expected to be completed in 201 9 with top-line data expected in 20 20 .

Thymalfasin for Enhancement of Response to Vaccine

Clinical trials have demonstrated that thymalfasin increases response to influenza and hepatitis B vaccines in the elderly and in hemodialysis patients. In elderly subjects, thymalfasin was also shown to decrease the incidence of influenza from 19% in subjects given an influenza vaccine alone, to 6% in subjects receiving thymalfasin treatment in addition to the influenza vaccine. For these clinical trials, the treatment regimen involved 8 to 10 injections of 1.6 mg doses of thymalfasin. A clinical study conducted in 2009/2010 by Sigma-Tau Finanziaria, S.p.A. in Italy, however, showed that a higher dose of thymalfasin (3.2 or 6.4 mg) given only twice (seven days prior to vaccination and on the day of vaccination) was also effecti ve. ZADAXIN treatment led to a statistically significant increase in the percent of subjects who seroconverted to the H1N1 vaccine (MF59 adjuvanted monovalent vaccine, Focetria™ from Novartis), and an increase in total titers, when measured at 21 or 42 days after vaccination. While this effect was no longer seen at time points 84 and 168 days after vaccination, the enhancement effect of ZADAXIN provided a significant enhancing effect in the critical first six weeks following vaccination. These promising data further support the utility of thymalfasin for use in immune system enhancement.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

Patents

We seek regulatory approval for our products in disease areas with high unmet medical need, significant market potential and where we have a proprietary position through patents covering use, manufacturing process, or composition of matter for our products. For our lead product ZADAXIN, we are the licensee or owner of patents and patent applications relating to thymalfasin and its use for a number of diseases. In particular, we are the licensee or owner of patents and applications in the U . S . or China that are directed to thymalfasin therapy for the treatment of hepatitis B and/or hepatitis C as a monotherapy or in combination with other therapeutics, including drugs with or without regulatory approval for marketing. In China, patent number ZL99811382.4 has been granted for ZADAXIN for c hronic h epatitis B that expires in 2019. In addition, we are the licensee or owner of several patents and applications in the U . S . and internationally that are directed to thymalfasin therapy for immune system enhancement. The expiring patent terms for issued or to be issued patents are from 2025 to 203 1 . We are also the licensee or owner of patents in the U . S . and China that are directed to thymalfasin therapy for reducing side effects of chemotherapy. The expiring patent terms for these issued patents are from 2020-2021. We have also applied for patents in the U . S . and internationally that are directed to thymalfasin therapy for the treatment of severe sepsis and acute infection, as well as more specific patents for certain infections such as Aspergillus . The expiring patent term for the severe sepsis and acute infection patents, if issued, is 2033. The expiring patent terms for issued Aspergillus patents are from 2024 to 2027. In addition, we have issued patents in the U . S . and China directed to thymalfasin conjugates. The expiring patent terms for these issued patents are in 2022. Furthermore, we have applied for patents in the U . S . and internationally that relate to use of thymalfasin as an immune system enhancer for the treatment of cancer. The expiring patent term for these patents, if issued, is 2035.

With respect to our issued patents in the U . S . and Europe, we are also entitled to obtain a patent term extension to extend the patent expiration date. For example, in the U . S . , we can apply for a patent term extension of up to five years for one of the patents covering ZADAXIN if ZADAXIN is approved by the U . S . Food and Drug Administration (“FDA”) . The exact duration of the extension depends on the time we spend in clinical trials as well as getting a new drug application approval from the FDA.

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Proprietary Rights

In addition to patent protection, we intend to use other means to protect our proprietary rights. We may pursue marketing exclusivity periods that are available under regulatory provisions in certain countries, including the U . S . , Europe, Japan, and China. For example, if we are the first to obtain market approval of a product, e.g., thymalfasin in the U . S . , we would expect to receive at least five years of market exclusivity.

Furthermore, orphan drug exclusivity has been or may be sought where available. Such exclusivity has a term of seven years in the U . S . and 10 years in Europe. We have obtained orphan drug designation for thymalfasin for the treatment of malignant melanoma and chronic hepatitis B in the U . S . and for the treatment of hepatocellular carcinoma in the U . S . and in Europe. We own trademark registrations worldwide for ZADAXIN and other trademarks that appear on our commercial packaging and promotional literature. Copyrights for the commercial packaging may prevent counterfeit products or genuine but unauthorized products from entering a particular country by parallel importation. Brand and trademark protection are particularly important to us in China. We have implemented anti-counterfeiting measures on commercial packaging and we have registered the packaging with customs departments in countries where such procedures exist. We rely upon trade secrets, which we seek to protect in part by entering into confidentiality agreements with our employees, consultants, corporate partners, suppliers, and licensees.

MANUFACTURING

ZADAXIN is manufactured for us in Europe by third parties under exclusive contract manufacturing and supply agreements. We closely monitor production runs of ZADAXIN and conduct our own quality assurance audit programs. We believe the manufacturing facilities of our contract suppliers are in compliance with the FDA’s current Good Manufacturing Practices (“GMP”), and European equivalents of such standards. 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, the Chinese regulatory agency , and we must obtain an Import Drug License from the CFDA permitting the importation of ZADAXIN into China. The license must be renewed every five years, and our next renewal will be required in December 2017. If we change manufacturers, these changes must 1) be approved by AIFA in Italy and 2) be accepted by the CFDA, a nd we must obtain a new Import Drug License from the CFDA.

In the event of the termination of an agreement with any single supplier, we believe that we would be able to enter into arrangements with other suppliers with similar terms. We do not intend at this time to acquire or establish our own dedicated manufacturing facilities for any of our products. We believe that our current manufacturing partners for ZADAXIN have enough manufacturing capacity to meet potential market demand. We also believe that we will be able to meet our clinical trial needs and market demand for our other drug candidates when needed with our current manufacturing partners and through pursuing new relationships with additional manufacturing partners.

COMPETITION

Our competition for sales of ZADAXIN in China is primarily from generic drug manufacturers located in China that sell their product at lower prices. We compete with them based on our reputation as a provider of high quality products, including the fact that our products are produced at U . S . and western European GMP facilities.

Our competitors for existing and future products include pharmaceutical companies, biotechnology firms, universities and other research institutions, in the U . S . , China and other territories, that are actively engaged in research and development or marketing of products in the therapeutic areas we are pursuing. We believe that the principal competitive factors in this industry for a marketed drug include the efficacy, safety, price, therapeutic regimen, manufacturing, quality assurance and associated patents and the capabilities of its marketer.

Most of our competitors, particularly large pharmaceutical companies, have substantially greater financial, technical, regulatory, manufacturing, marketing and human resource capabilities than ours. Most of them also have extensive experience in undertaking the preclinical and clinical testing and in obtaining the regulatory approvals necessary to market drugs. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated with our competitors.

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For the treatment of HBV, current therapies being marketed by competitors include interferon alpha, in standard and pegylated forms, nucleoside analogues, such as lamivudine and entecavir, and nucleotide analogue adefovir. In addition to these products, in our largest market, China, ZADAXIN faces competition from other synthetic and generic biological extracts that are locally manufactured and significantly lower priced.

Future clinical trials may or may not show ZADAXIN or our other products in the market or in development to have advantages or value over such existing or future competitive products.

RESEARCH AND DEVELOPMENT

Research and development (“R&D”) expenses consist of independent R&D costs relating to the conduct of clinical trials and costs associated with in-licensing arrangements. R&D expenses were $15. 1 million, $ 12.3 million , and   $ 14.6 million , for the years ended December 31, 201 6 ,   201 5 ,   and 201 4 , respectively. During 201 6 ,   2015 and 201 4 , R&D expenses included $ 4 .5 million, $7.5 million and $11 .0 million, respectively, related to upfront and milestone payments made under our in-license arrangements.   During 2015, under our subsidiary SciClone Pharmaceuticals International (Cayman) Development Limited, we incorporated two further subsidiaries, SciClone Pharmaceuticals (Hong Kong) Development Company Ltd., and SciClone Pharmaceuticals (Shanghai) Development Company Ltd. Our development entities conduct various research and development activities including those relating to in-licensing arrangements and the conduct of clinical trials.

EMPLOYEES

As of December 31, 201 6 , we had approximately 570 employees: approximately 54 0 in China, approximately 20 in the U . S . , and approximately 10 in other countries. From time to time, we engage the services of consultants worldwide with pharmaceutical and business backgrounds to assist in our product development and commercialization activities.

GOVERNMENT REGULATION

Regulation by governmental authorities in the U . S . , China and other foreign countries is a significant factor in the manufacturing and marketing of our products, as well as in ongoing research and development activities and in pre-clinical and clinical trials and testing related to our products. Our products in clinical development in the U . S . , China and other foreign countries are subject to approval by the FDA, the CFDA and similar regulatory authorities .   Manufacturing establishments are subject to inspections by regulatory authorities at the federal, state and local level and must comply with current GMP as established in various jurisdictions. In complying with GMP standards, manufacturers must continue to expend time, money and effort in the area of production and quality assurance to ensure ongoing full technical compliance. We also conduct a separate review of products on an ongoing basis to test and maintain compliance with GMP standards.

China

In China, the pharmaceutical industry is subject to extensive government regulation and supervision. The regulatory framework addresses all aspects of operating in the pharmaceutical industry, including approval, pricing, re-imbursement, production, licensing and certification requirements and procedures, periodic renewal and reassessment processes, registration of new drugs and environmental protection.

The CFDA is the authority that monitors and supervises the administration of pharmaceutical products and medical appliances and equipment as well as food, health food and cosmetics in China. The primary responsibilities of the CFDA include:

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formulating administrative rules and policies concerning the supervision and administration of food, health food, cosmetics and the pharmaceutical industry;

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evaluating, registering and approving of new drugs, generic drugs, imported drugs and traditional Chinese medicine;

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approving and issuing permits for the manufacture and export/import of pharmaceutical products, medical appliances and equipment and approving the establishment of enterprises to be engaged in the manufacture and distribution of pharmaceutical products; and

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examining and evaluating the safety of food, health food and cosmetics and handling significant accidents involving these products.

The MOH is an authority at the ministerial level under the State Council and is primarily responsible for national public health and has administrative responsibility for the CFDA. The MOH performs a variety of tasks in relation to the health industry such as establishing social medical institutes, promulgating national regulations, and producing professional codes of ethics for public medical personnel. The MOH is also responsible for international issues, such as those pertinent to foreign companies and governments.

Drug Administration Laws and Regulations

The China Drug Administration Law and related regulations provide the legal framework for the establishment of pharmaceutical manufacturing enterprises, and pharmaceutical trading enterprises, and for the administration of pharmaceutical products, including the development and manufacturing of new drugs, the import of pharmaceuticals and the regulation of packaging, trademarking and advertising of pharmaceutical products in China.

Permits and Licenses for Importation, Manufacturing and Registration of Drugs

Import Drug License. Our strategy to date has been to seek approval for the import into China of drugs approved in other ma rkets. We must obtain an Import Drug License from the CFDA to import a pharmaceutical product into China.

T o qualify to receive an Import Drug License from the CFDA, each manufacturing establishment must be registered with the FDA or European (“EMA”) regulatory authorities where the product is registered for sale and listed on the Certificate of Pharmaceutical Product (“CPP” or Country of Origin Approval).

As a result, in order to obtain and maintain an Import Drug License in China, we or our partners must also meet the regulatory requirements for the country of origin of the pharmaceutical products we import, or are seeking to import, into China.

The process for applyi ng for and obtaining an Import Drug License can be protracted and uncertain. In addition to the submission of clinical data from trials outside China, the CFDA may require additional clinical data, including from studies in China, and it may conduct its own inspection and testing of manufacturing facilities and of finished product. An Import Drug License needs to be renewed every five years. Further, if the manufacturer of the pharmaceutical product changes, an additional approval is required from the CFDA, and approval will also have to be obtained in the country from which the product is imported.

For ZADAXIN, the CPP is in Italy, and was issued by the AIFA. The named manufacturer of ZADAXIN is Patheon Italia S.p.A. DC Bead is manufactured by Biocompatibles UK Ltd. (“Biocompatibles”) and its Country of Origin approval is the United Kingdom .   We and our partners need to maintain these approvals.

China require s that products with an Import Drug License be imported through approved importing agents. At each port of entry, prior to moving the product forward to the distributors, government-licensed importing agents must process and evaluate each shipment to determine whether such shipment satisfies China's quality control requirements.

GMP Certificates.  Our current products and our clinical candidates in China are all manufactured outside China and are subject to GMP standards in the country in which they are manufactured. Our manufacturers are subject to site inspections by the regulatory authorities in the jurisdictions in which they are located. The iss uance and renewal of an Import Drug License is dependent, among other things, upon maintaining manufacturing standards that comply with the GMP standards of a widely recognized regulatory authority, such as the FDA or EMEA.

If we were to manufacture product in China, or obtain product from Chinese contract manufacturers, such manufacturing would be subject to similar GMP standards established in China and administered by local authorities.

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Distribution of Pharmaceutical Products

According to the China Drug Administration Law and related regulations, a manufacturer of pharmaceutical products in China can only engage in the trading of the pharmaceutical products that the manufacturer has produced itself. In addition, such manufacturer can only sell its products to:

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wholesalers and retailers holding pharmaceutical trading permits;

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other holders of pharmaceutical manufacturing permits; or

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medical practitioners holding medical practice permits.

A pharmaceutical manufacturer in China is prohibited from selling its products to end-users, or individuals or entities other than holders of Pharmaceutical Trading Permits, the pharmaceutical manufacturing permits or the medical practice permits.

A pharmaceutical distributor (including wholesalers and retailers) must satisfy requirements as to: personnel with pharmaceutical expertise, appropriate warehousing and sanitary environments compatible with the distributed pharmaceutical products; quality management and compliance with regulations to ensure the quality of the distributed pharmaceutical products. Operations of pharmaceutical distributors must be conducted in accordance with the Pharmaceutical Operation Quality Management Rules and require a certificate from the CFDA. Pharmaceutical distributors must comply with record-keeping requirements regarding the products sold.

Price Control s

Prior to June 1, 2015, the price of pharmaceutical products in China was controlled and regula ted by the Chinese government. With the promulgation of the Circular on Issuing the Opinions on Promoting Drug Price Reform jointly by the National Development and Reform Commission and several other government agencies (t he “Circular”), starting from June 1, 2015, pharmaceutical products (other than anesthetics and Class I psychotropic drugs which are still subject to fixed ex-factory price and retail ceiling price controls ) are no longer subject to price cont rols by the Chinese Government at the national level, however , the Chinese government is expected to continue to influence the setting of the prices through the government bidding process and its management of the reimbursement system, as discussed below.

Reimbursement under the National Medical Insurance Program

The Ministry of Human Resources and Social Security (“MOHRSS”), together with other government authorities, determine which medicines are to be included in or removed from the   Catalogue for the National Medical Insurance Program, as well as the category under which a medicine should fall in the Catalogue (also referred to as the National R eimbursement Drug List (“NRDL”) . There are two categories under the Catalogue: Category A and Category B. Category B medicine s are generally more expensive than Category A medicine s. A National Medical Insurance Program participant can be reimbursed for the full cost of a Category A medicine but only a certain percentage of a   Category B medicine .  Whether a medicine should be included in the Catalogue depends on a number of factors, including whether the medicine is used in large quantities and commonly prescribed, and whether it is considered to be important in meeting the basic healthcare needs of the general public.

Although the National Medical Insurance Program is designated as a national program, the implementation of the National Medical Insurance Program is delegated to various provincial governments, each of which has established its own medicine catalog ue (also referred to as the Provincial Reimbursement Drug List (“PRDL”) .   A provincial government must include all Category A medicines listed in the Catalogue in its provincial medicine catalog ue and may not downgrade a nationally classified Category A medicine to Category B .  For Category B medicines listed in the Catalogue , provincial governments have the discretion to add or subtract by no more than 15% .  

The amount in a participant’s individual medical insurance account varies, depending upon the amount of contributions from the participant and his or her employer.   Generally, program participants who are from relatively wealthier eastern parts of China and relatively wealthier metropolitan centers have greater amounts in their individual accounts than those from less developed provinces.  

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Government Procurement

Most of the hospitals in China are State-owned. P harmaceutical products covered by the National Medical Insurance Program are generally procured by the government through a tender process. The tender process is typically conducted by the provincial health authorities every year or every few years. A government-appointed committee reviews bids submitted by pharmaceutical companies and selects one or more products for the treatment of a particular medical condition. The selection is based on a number of factors, including bid price, quality and a   manufacturer’s reputation and service. Once a product is selected by the committee, the state-owned hospitals in the province will purchase the product at the tender price submitted by the pharmaceutical company. However, starting from February 2015, the State Council had encouraged hospitals in some pilot cities to renegotiate the supply price s of the product s selected to further drive down the price.

Healthcare Insurance Reform

The Chinese government is undertaking a major reform of its medical insurance system. The MOHRSS is responsible for the reform of the medical insurance system. At present, the medical insurance system   consists of three basic medical insurances: (i) the Urban Employee Basic Medical Insurance Scheme,   which is a mandatory health insurance program for urban employees and retirees; (ii) the Urban   Resident Basic Medical Insurance Scheme, which is a voluntary program for other urban residents;   and (iii) the New Rural Cooperative Medical Scheme, or NRCMS, which is a voluntary program for all   rural residents.   The coverage of China’s urban/rural basic medical insurance extended from   approximately 10% in 2004 to approximately 94% and 100% in 2009 and 2013, respectively. As of December 31, 2014, the two urban insurance schemes covered 597 million urban residents and the NRCMS   covered approximately 736 million rural residents. In addition, the budget and actual amount of medical   and healthcare expenditure s of the Ministry of Finance have been increasing since 2009, with both   exceeding 900 billion   Chinese Yuan Renminbi (“RMB”) in 2014.

Coverage and Reimbursement   Challenges

Our ability to successfully commercialize our products in China as well as in other parts of the world depends in part on the extent to which coverage and reimbursement to patients will be available from government health care programs, private health insurers and other third-party payors or organizations, as well as on the level of reimbursement. Significant uncertainty exists as to the reimbursement status of therapeutic products, such as ZADAXIN or other drugs we may develop.   In most of the markets in which we are currently approved to sell ZADAXIN, reimbursement for ZADAXIN under government or private health insurance programs is not yet available. In many of these countries government resources and per capita income may be so low that our products would be prohibitively expensive and therefore will not be covered by government health insurance program.

In November 2009, thymalfasin, the generic chemical name for our pharmaceutical product ZADAXIN, was included as a Catego ry B product in the Catalogue. In February 2017, a new NRDL was published by Government agencies in China. Thymalfasin, and thus ZADAXIN, remain listed as a Category B product. However, since th e Catalogue is amended every few years, there is no assurance that thymalfasin   will remain on the Catalog ue with subsequent amendments. Furthermore, since the provinces have the discretion to exclude Category B products in the Catalogue from the provincial catalogue within certain limit s , t here is no assurance that ZADAXIN will be included in all the provincial catalogues. Even if ZADAXIN is included in the catalogue of a province, we may not be the successful bidder in the government bidding process.

U . S . , Europe and Other Countries

The regulatory regime for the approval for drug distribution and marketing in the U . S . and Europe is similar in many respects to the regulatory system in China. The steps required before a new drug may be distributed commercially generally include:

conducting appropriate pre-clinical laboratory evaluations, including animal studies, in compliance with the FDA's Good Laboratory Practice (“GLP”) requirements, to assess the potential safety and efficacy of the product;

submitting the results of these evaluations and tests to the FDA in an Investigational New Drug Application (“ IND ”) , and receiving approval from the FDA that the clinical studies proposed under the IND are allowed to proceed;

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conducting adequate and well-controlled clinical trials in compliance with the FDA's Good Clinical Practice (“GCP”) requirements that establish the safety and efficacy of the product candidate for the intended use, typically in the same Phase 1, Phase 2 and Phase 3 steps described above for China;

development of manufacturing processes that conform to FDA current Good Manufacturing Practices, or cGMPs, as confirmed by FDA inspection;

submitting to the FDA the results of pre-clinical studies, clinical studies, and adequate data on chemistry, manufacturing and control information to ensure reproducible product quality batch after batch, in a n   NDA or Biologics License Application (“BLA”); and

obtaining FDA approval of the NDA, including inspection and approval of the product manufacturing facility as compliant with cGMP requirements, prior to any commercial sale or shipment of the pharmaceutical agent.

After FDA approval has been obtained, the FDA requires post-marketing reporting to monitor the side effects of the drug. This may include phase 4 studies in which the drug is studied in an expanded patient population in a post-approval setting for continued monitoring of safety and sometimes continued efficacy.

We must comply with the regulations of each country in which we seek approval of and intend to market and sell any product.

AGREEMENTS WITH THIRD PARTIES  

We hold license, promotion, distribution or marketing agreements with a number of parties for products currently marketed or under development, including an agreement w ith Biocompatibles for the distribution of DC Bead in China. We had agreements during 2016   and 2015 with several companies for the distribution of certain products in China including the following significant agreements. We have additional license agreements with other parties.

Baxter Healthcare Trading (Shanghai) Co. Ltd. (“Baxter”)   Agreement.   In June 2013, our subsidiary, NovaMed Pharmaceuticals (Shanghai) Co. Ltd. (“ NovaMed Shanghai ”) , entered into an Amended and Restated Product Promotion Agreement with Baxter for the distribution of Holoxan TM , Mesna TM , and Endoxan TM in China effective January 1, 2013. Under the agreement, we market products from Baxter for sale in China, with a promotion fee specified in the agreement. To maintain our exclusive rights, we must meet certain unit volume requirements. The agreement will expire on December 31, 2017, unless renewed.

Pfizer International Trading (Shanghai) Ltd. (“Pfizer”)   Agreement. In July 2014, our subsidiary, NovaMed Shanghai, renewed its promotion and distribution relationship with Pfizer by entering into an Import and Service Agreement for the continued distribution of several pharmaceutical products (currently Methotrexate TM , Estracyt TM , and Farlutal TM ) in China. Under the agreement, we must purchase product from Pfizer for sale in China at prices specified in the agreement. The purchase prices are subject to adjustment in certain circumstances. To maintain our exclusive rights, we must meet certain unit volume requirements. In October 2016, NovaMed Shanghai entered into an agreement whereby it assigned its rights and obligations under the agreement to its affiliate, SciClone Pharmaceuticals ( Jiangsu ) Co., Ltd .   The agreement will expire June 30, 2019 , unless renewed .  

Zensun (Shanghai) Science & Technology Co., Ltd . (“Zensun”) Agreement . In May 2013, our subsidiary, SciClone Pharmaceuticals International China Holding Ltd. (“SciClone China”), entere d into an agreement with Zensun granting SciClone China a license and the exclusive rights in China, Hong Kong and Macao to promote, market, distribute and sell Neucardin™, a novel, first-in-class therapeutic drug for the treatment of patients with intermediate to advanced chronic heart failure (CHF). The agreement provides for the principal terms of the arrangement between SciClone China and Zensun, and the companies have agreed to negotiate a supplemental license and supply agreement.

The Medicines Company Agreement.  In December 2014, we entered into an agreement with The Medicines Company granting us a license and the exclusive rights in China to promote, market, distribute and sell two cardiovascular products:  Angiomax®, an anticoagulant indicated in certain patients undergoing percutaneous coronary intervention (PCI), and Cleviprex®, a third-generation dihydropyridine calcium channel blocker for the reduction of blood pressure.

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Theravance Biopharma, In c . Agreement . In May 2015, we entered into an agreement with Theravance Biopharma granting us exclusive development and commercialization rights to VIBATIV ® (telavancin) in China, as well as Hong Kong, Macau, Taiwan and Vietnam. Under the terms of the agreement Theravance Biopharma will sell to us all clinical and commercial product required to develop and commercialize VI BATIV in China and our other licensed territories.

Soligenix , Inc. Agreement.   In September 2016, we entered into an exclusive license agreement with Soligenix, Inc. granting us rig hts to develop, promote, market , distribute and sell SGX942 (dusquetide).

Under the terms of the agreement, we transferred cash consideration of $3 million to Soligenix for 3,529,412 shares of Soligenix common stock (constituting 9.43% of Soligenix stock issued and outstanding immediately following the issuance of new shares to SciClone) and expanded rights for SGX942 in Taiwan, South Korea, and Vietnam, as we had previously obtained rights for Greater China in the 2013 exchange. Under the terms of the agreement, we will be responsible for all aspects of development, product registration and commercialization in the Territory, having access to data generated by Soligenix, and we wi ll owe Soligenix royalties on net sales, and Soligenix will supply commercial drug product to us on a cost-plus basis, while maintaining worldwide manufacturing rights. Soligenix declared a 1 for 10 reverse stock split in October 2016, resulting in our ownership of 352,94 2 shares.

Our continued distribution of approved products depends upon the continuation of these agreements and the renewal of the agreements upon expiration.

Information about Segment and Geographic Revenue

Additional information about segment and geographic revenue is set forth in Note 1 7 of our Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

AVAILABLE INFORMATION

We file electronically with the SEC our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, on the day of filing with the SEC on our website on the World Wide Web at http://www.sciclone.com, by contacting the Investor Relations Department at our corporate offices by calling 800-724-2566 or by sending an e-mail message to investorrelations@sciclone.com .

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Item 1A.  Risk Factors  

You should carefully consider the risks described below, in addition to the other information in this report on Form 10-K, before making an investment decision. Each of these risk factors could adversely affect our business, financial condition, and operating results as well as adversely affect the value of an investment in our common stock.

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

Although we reported net income of $30.7 million, $29.5 million and $25.2 million, for the years ended December 31, 2016, 2015 and 2014, 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 $88 million as of December 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:

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our substantial dependence on our sales of  ZADAXIN in China;

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our revenues are dependent on our obtaining or maintaining regulatory licenses and compliance with other country-specific regulations, including renewing our China Import Drug License for ZADAXIN, which must be renewed every 5 years;

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

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government regulatory action affecting our Company or our drug products or our competitors' drug products in China, the U . S . 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;

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

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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;

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announcement and completion of corporate acquisition, merger, licensing or marketing arrangements, or sales of assets;

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changes in assessments of our internal control over financial reporting;

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progress and results of clinical trials and the regulatory approval process for our product candidates ;  

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timing and achievement of our corporate objectives;

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charges related to expired inventory or bad debt;

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terminations of, or changes in our agreements or relationships with collaborative partners;

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announcements of technological innovations or new products by us or our competitors;

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developments or disputes concerning patent or proprietary rights;

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changes in the composition of our management team or Board of Directors;

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changes in company assessments or financial estimates by securities analysts;

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

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unanticipated increases in our G&A expense due to legal and accounting expenses, including expenses relati ng to strategic initiatives, or arising out of matters relating to any additional or uncorrected control deficiency or related matters;

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economic and political conditions in the U . S . or abroad, particularly in China;

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currency fluctuations between the RMB and U . S . 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;

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broad financial market fluctuations in the U . S . , Europe or Asia;

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more aggressive action by the government in the U . S . , China or other foreign jurisdicti ons in changing taxation policy; and

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unanticipated changes in key personnel.

We have acquired products, product licenses and other companies in the past and expect to continue such acquisitions. We may not realize all the anticipated benefits of such acquisitions due to various risks, including risks similar to those stated above as well as to risks that could result if we: 

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

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

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record goodwill and intangible assets that would be subject to impairment testing and potential periodic impairment charges;

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incur amortization expenses related to certain intangible assets; and

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

Our revenue is substantially dependent on our sales of ZADAXIN in China and competition or other factors could adversely affect our sales.

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 years ended December 31, 2016, 2015 and 2014, approximately 95%, 96% 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. Any decrease in the sales of ZADAXIN in China may have a material adverse effect on our revenue and results of operations.

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.

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. 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 im port and distribution process. Additionally, in the past, there have been situations where our suppliers or customers hold a higher level of inventory than expected, which decreased demand f or ZADAXIN during that period. 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 affecti ng quarterly periodic results. Fluctuation in our sales of ZADAXIN may negatively impact our revenues and results of operations.

We are attempting to expand our business beyond ZADAXIN and outside of China. However , 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.

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Our revenues are dependent on our obtaining or maintaining regulatory licenses and compliance with other country-specific regulations, including renewing our drug import license for ZADAXIN, and compliance with the Chinese Pharmacopeia.

Our revenue is dependent on receipt and maintenance of regulatory licenses and compliance with other country-specific regulations. For example, 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, known as Import Drug L icenses which allow for the importation and commercial sale of a product manufactured outside of China . Our Import Drug License for   ZADAXIN needs to be renewed every five years and the next renewal is required before December 2017 in order for us to continue our ability to import and sell ZADAXIN into China. Although Import Drug License   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 import and sell ZADAXIN into China.

Our licenses to manufacture and export ZADAXIN from Italy are dependent upon our continuing compliance with regulations in Italy. Our business would be adversely affected if we are not able to maintain these approvals. In order to sell ZADAXIN to the licensed importers in China, our manufacturers must 1) be approved by the Italian Ministry of Health (“AIFA”) and 2) be accepted by the CFDA. Some manufacturing changes may require: 1) approval by AIFA in Italy and/or 2) acceptance by the CFDA. ZADAXIN registration in Italy has been essential to the renewal of our Import Drug License   from the CFDA permitting the importation of ZADAXIN into China.

Our ability to obtain a renewal of our Import Drug License from the CFDA could be adversely affected due to changes in policies and practices at CFDA in the review process, including with respect to potential requirements for additional technical information regarding ZADAXIN to CFDA.

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 cos ts as a result of such changes. Any change in our ability to obtain or renew regulatory licenses or approvals could have an adverse effect on our revenue and results of operations. 

Our products are subject to rigorous regulation in the jurisdictions where they are sold, including the standards established by the Chinese Pharmacopoeia, or ChP, in China. 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. If our products fail to meet relevant specifications, including ChP specifications, during routine customs testing as such specifications may be revised from time to time, our Import Drug Licenses , 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.

Chinese provincial government regulations mandating price controls have been imposed on ZADAXIN and several of our other 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.

Our products are subject to increasing pricing pre ssures, particularly in China. Government regulations mandating price controls and limitations on patient access to our products impact our business, and our future results could be adversely affected by changes in such regulations or policies.



The Chinese government is increasing its efforts to reduce overall health care costs, including pricing controls on pharmaceutical products. Individual provinces in China and, in some cases, individual hospitals can and have established pricing requirements for a product to be included on formulary lists or imposed price reductions as part of the provincial tender process . 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

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April 2015 that became effective in May 2015.  How ever, we were able to mitigate, in part, the impact of this price limitation by sharing the burden of the price reduction with our distributor. 

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.

Other emerging measures intended to reduce health care costs may also adversely affect our sales. Chinese provincial or local government agencies 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 received such a designation to date from Chinese provincial or local government agencies. A few hospitals have designated our product as an adjuvant, but our revenues have not been materially affected. 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.

There can be no assurance that our business development activities 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 . In July 2016, we announced that our Board was no longer continuing active discussions with potential acquirers which were undertaken as part of its strategic review process and that the Board will continue to evaluate additional strategic opportunities while continuing to focus on growing the Company's business. This announcement had adverse effects on our stock price, and may have adverse effects on our customer relationships and retention of key employees.

We expect to continue to review strategic opportunities, including through collaborations, alliances, licenses, joint ventures, equity- or debt-based investments, mergers and acquisitions. However, these activities are subject to the availability and cost of appropriate opportunities, competition from other companies that are seeking similar opportunities and our ability to successfully identify, structure and execute transactions in the anticipated timeframe or at all, and integrate acquisitions. Further, while we seek to mitigate risks and liabilities of such transactions, we may not accurately assess the risks and uncertainties associated with engaging or not engaging in a strategic opportunity, and the anticipated benefits from pursuing any such opportunity may not materialize. I n addition, undertaking substantial transactions or multiple transactions could divert management’s time and focus from operating our business, potentially having adverse effects on our existing business relat ionships and our key employees.   In addition, there can be no assurance that the evaluation of potential transactions will result in either pursuing any different strategic operational approach or completing any particular transaction.

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 U . S . -based corporation doing business internationally, these controls often need to satisfy the requirements of foreign law as well as the requirements of U . S . 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, in 2012, our management identi fied two separate instances of a material weakness in internal co ntrol over financial reporting which were fully remediated 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

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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.

We are subject to U.S. and foreign anti-bribery and anti-corruption and similar laws, and could face substantial penalties if we fail to fully comply with such regulations and laws.

We are subject to U.S., Chinese and other foreign anti-bribery and anti-corrup tion laws and regulations. As a U.S. reporting company, we are subject to Foreign Corrupt Practices Act (“FCPA”) which prohibits U.S. corporations and their representatives from offering, promising, authorizing or making payments to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business abroad. The scope of the FCPA has been interpreted to include interactions with certain healthcare professionals in many countries. Other countries have enacted similar anti-corruption laws and/or regulations and the Chinese government in particular has increased its anti-corruption measures, particularly in the pharmaceutical and health care markets.

In 2010 the SEC and DOJ commenced  investigations of the Company regarding a range of matters, including the possibility of violations of the FCPA, primarily related to certain historical sales and marketing activities with respect to our China operations. A Special Committee of our Board undertook an independent investigation as to matters reflected in and arising from the SEC and DOJ investigations in order to evaluate whether any violation of t he FCPA or other laws occurred.   In 2016, we announced a settlement agreement with the SEC fully resolving the SEC’s investigation into possible violations of the FCPA. The DOJ has also completed its investigation and has declined to pursue any action. Under the terms of the settlement with the SEC, we paid to the SEC a total of $12.8 million, including disgorgement, pre-judgment interest and a penalty as final settlement. We are also required to give status reports to the SEC through the first quarter of 2019 on our continued remediation and implementation of anti-corruption compliance measures.

We expended substantial resources on the investigations and our internal remediation and compliance efforts, and continue to expend substantial resou rces on compliance. However, given the high level of complexity of the anti-bribery laws, there is a risk that we may inadvertently breach these regulations, for example through fraudulent or negligent behavior of ind ividu al employees, our failure to comply with record keepi ng requirements, or otherwise. Our success depends, in part, on our ability to anticipate risks and manage compliance through policies, pro cedures and internal controls. We have a large, dispersed sales force and we use third-party agents as well as distributors in various aspects of our business, which presents risks to our effort to ensure that our practices comply with anti-bribery and similar regulations. 

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 U . S . , including our independent registered public accounting firm, must be registered with the PCAOB, and are required by the laws of the U . S . to undergo regular inspections by the PCAOB to assess their compliance with the laws of the U . S . 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.

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

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

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

If our independent registered public accounting firm were denied the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act of 1934. Such a determination could ultimately lead to the delisting of our shares from the NASDAQ Global Select Market or deregistration by the SEC, or both, which would substantially reduce or effectively terminate the trading of our stock in the U . S.

We may incur unexpected charges relating to our operations.

Although we have generally experienced minimal product returns and our customers have historically paid all invoiced amounts, we could incur future charges relating to inventory that expires or as a result of customer failures to pay invoiced amounts timely or in full. For example, from time to time we have recorded bad debt expense or write offs of unco llectible accounts receivable. While the amounts of the write offs have historically been immaterial, we may have more significant bad debt expense s or write offs in the future. We have had and could also experience additional charges for potential inventory obsolescence related to other products if we are unable to sell units that are nearing their expiration dates, or for bad debt if other distributors do not pay outstanding receivables in full. Those or similar future events would have an adverse impact upon our operating results. 

We are at risk of additional securities class action and derivative lawsuits.

Securities class action and derivative lawsuits are often filed against public companies following a decline in the market price of their securities. After our announcement regarding SEC and DOJ investigations in 2010, we and certain of our officers and directors were named as parties in purported stockholder class actions and derivative lawsuits. Those class action lawsuits were dismissed and we have settled those derivative lawsuits. Our stock price declined following the announcement of a restatement of our financial statements for fiscal 2011 and the first three quarters of fiscal 2012, and that our predecessor independent auditing firm had elected not to stand for reappointment for the 2013 fiscal year. Soon after that announcement, we and certain of our officers and directors were named as parties in a purported derivative lawsuit relating to the restatement, which was subsequently dismissed in its entirety. We may experience stock price volatility in the future related to other matters. This risk is especially relevant for us because biotechnology companies have experienced greater than average stock price volatility in recent years. We may be named in additional litigation, which could require significant management time and attention and result in significant legal expenses and may result in an unfavorable outcome, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Such litigation could result in additional substantial costs and a diversion of management's and the Board of Directors’ attention and resources, which could harm our business.

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

We have numerous product candidates under development, some of which we own and others which were in-licensed to us.

Clinical trials are inherently risky and may reveal that our product candidates are ineffective or have unanticipated side effects and/or drug interactions that may significantly decrease the likelihood of regulatory approval. The regulatory approval processes in the U . S . , Europe and China are demanding, lengthy and expensive. We have committed significant resources, including capital and time, to develop and seek approval for products under development, and if we do not obtain approvals we are seeking, we may be unable to achieve any revenue from these products. All new drugs, including our product candidates, are subject to extensive and rigorous regulation by the FDA, CFDA and similar regulatory agencies. These regulations govern, among other things, the development, testing, manufacturing, labeling, storage, pre-market approval, importation, advertising, promotion, sale and distribution of our products. These regulations may change from time to time and new regulations may be adopted.

Satisfaction of government regulations may take several years and the time needed to satisfy them varies substantially based on the type, complexity and novelty of the pharmaceutical product. As a result, government regulation may cause us to delay the introduction of, or prevent us from marketing, our existing or potential products for a considerable period of time and impose costly procedures on our activities. We have experienced delays in the regulatory process, and there exists risk that we may not receive approval of in-licensed products currently in the regulatory process.

To fully develop these products and other products we may acquire, substantial resources are required for extensive research, development, pre-clinical testing, clinical trials, and manufacturing scale-up and regulatory approval prior to the potential products being ready for sale. We cannot assure that our efforts will produce commercially viable products. We are obligated to make a milestone payment upon regulatory approval of certain products under development. If any of our products, even if developed and approved, cannot be successfully commercialized in a timely manner, our business will be harmed and the price of our stock may decline.

Market acceptance of any product that is successfully developed and approved will depend on many factors, including our ability to convince prospective customers to use our products as an alternative to other treatments and therapies. In addition, doctors must opt to use treatments involving our products. If doctors elect to use a different course of treatment, demand for our drug products would be reduced. In addition, for certain products we may need to convince partners to manuf acture or market our products. Our success will also depend upon pricing restrictions and reimbursement policies that will be imposed, and upon our ability to properly anticipate those. Failure to do any of the above will lead to an unfavorable outcome on the results of our operations.

Our sales are concentrated in China and we face risks relating to operating in China, including risks due to changes in the regulatory environment, slow payment cycles and exposure to fluctuations in the Chinese economy.

A significant portion of our revenue and profit is derived from operations in China. Consequently, our overall financial results are dependent on this market, and our business is exposed to risks there. A downturn in the Chinese economy could materially and adversely affect our revenues and results of operations. In addition to the risks relating to pricing previously discussed above, these risks also include changes in economic conditions (including wage and cost inflation, currency exchange rates, consumer spending and employment levels), tax rates, laws, changes in the regulatory environment, increased competition and potential noncompliance with local laws and regulations. Risks also include changing consumer product preferences and preferred sales channels, as well as our ability to accommodate such changing preferences. Certain risks and uncertainties of doing business in China are solely within the control of the Chinese government, and Chinese law regulates the scope of our foreign investments and business conducted within China. Any significant or prolonged deterioration in China’s relations with the United States and other countries could adversely affect our China business. There are also uncertainties regarding the interpretation and application of laws and regulations and the enforceability of intellectual property and contract rights in China. There can be no assurance as to the future effect of any such risks and uncertainties on our results of operations, financial condition or cash flows.

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

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Our future results could be adversely affected by changes in laws and regulations, including, among others, changes in accounting standards, taxation requirements (including tax rate changes, new tax laws and revised tax law and regulatory interpretations, including changes affecting the taxation by the U.S. of income earned outside the U.S. that may result from pending and possible future proposals), competition laws, privacy laws and environmental laws in the U.S. and other countries.

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, 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.

The Company could be subject to changes in its tax rates, the adoption of new U . S . or international tax legislation or exposure to additional tax liabilities which could have a negative impact on our financial position and results of operations.

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

Because of China's tiered method of importing and distributing finished pharmaceutical products, our quarterly results may vary substantially from one period to the next; we are dependent upon Sinopharm as the exclusive importer of ZADAXIN.

Imported products in China, including ZADAXIN and other imported products, are distributed through a tiered method to import and distribute finished pharmaceutical products. Promoted products are typically sold from our partner companies within China to the primary distributor with the following distribution being the same for imported as well as promoted products. At each port of entry, and prior to moving the product forward to the distributors, government-licensed importing agents must process and evaluate each imported product shipment to determine whether it satisfies China's quality assurance requirements. In order to efficiently manage this process, the importing agents typically place large, and therefore relatively few, orders within an annual period. Therefore, sales to an importing agent can vary substantially from quarter to quarter depending on the size and timing of the orders, which has in the past and may in the future cause our quarterly results to fluctuate. We rely on Sinopharm to supply our ZADAXIN sales in China . Our receivables from Sinopharm are material, and if we were unable to collect receivables from Sinopharm or any other importer, our business and cash-flow would be adversely affected.

Generally, our importers are not obligated to place purchase orders for our product, and if they determined for any reason not to place purchase orders, we would need to seek alternative licensed importers, which could cause fluctuations in our revenue. As a result of our agreement granting certain exclusive importation rights to Sinopharm for ZADAXIN, we are dependent upon Sinopharm’s performance of its obligations under that agreement. We have a long-standing and, we believe excellent, relationship with Sinopharm; however, if Sinopharm were unable to adequately perform its obligations under, or breached, the agreement our business would be adversely affected.

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

Certain medicine products distributed or sold in China’s pharmaceutical retail market, including th ose appearing to be ZADAXIN , may be counterfeit. Counterfeit products are products sold under the same or very similar brand names and/or have a similar appearance to genuine products. Counterfeit products, including counterfeit pharmaceutical products, are a significant problem in China and we have experienced counterfeiting of ZADAXIN . Such counterfeit products divert sales from genuine products, often are of lower cost, often are of lower quality (having different ingredients or formulations, for example), and have the potential to damage the reputation for quality and effectiveness of the genuine product. The counterfeit pharmaceutical product regulation control and enforcement system in China is not able to completely eliminate production and sale of counterfeit pharmaceutical products. To

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increase our ability to prevent counterfeiting, we have taken several actions, including enhancements of our ZADAXIN product labeling to implement industry-leading labeling technology and implementation of product tracking applications. However we cannot eliminate counterfeiting and, any sale of counterfeit products resulting in adverse side effects to consumers may subject us to negative publicity and expenses. It could have a material adverse effect on our business, financial condition, results of operations and prospects.

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

        Although our financial statements are denominated in U.S. dollars, a significant portion of our revenues and costs are realized in other currencies. Our profitability is affected by movement of the U.S. dollar against other currencies. Fluctuations in exchange rates between the U.S. dollar and other currencies may also affect the reported value of our assets and liabilities, as well as our cash flows. Some foreign currencies are subject to government exchange controls.

The majority of our sales through June 30, 2016 were in U . S . dollars, although a portion of our sales were denominated in RMB. Per our previous contractual arrangement with Sinopharm through December 31, 2015, and a 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 were denominated in U . S . dollars. However, the established importer price could be adjusted quarterly based upon exchange rate fluctuations between the U . S . dollar and RMB. Effective July 1, 2016, sales to Sinopharm are and will be denominated in RMB, linking our sales directly to the foreign currency (as opposed to a less-correlated basis via lagging adjustments). In recent months the RMB has experienced devaluation exposing us to increased foreign exchange risk and our revenues were adversely impacted by those fluctuations in the year ended December 31, 2016.

Our purchases with contract manufacturers are denominated in U . S . dollars and euros and costs of our marketing efforts in China are paid in local currency. In addition, we have certain cash balances and other assets and liabilities denominated in euros, RMB   and Hong Kong dollars. A stronger U . S . dollar vis-à-vis the local currency would tend to have an adverse effect on sales and potentially on collection of accounts receivable and a positive effect on expenses . China currently maintains the value of the RMB in a narrow currency trading band that may or may not fluctuate based on government policy. For example, in August 2015, the Chinese government devalued the RMB and may further devalue the RMB at any time. This devaluation has resulted in the strengthening of the U . S . dollar and may reflect a weakening of the Chinese economy. Depending on market conditions and the state of the Chinese economy, China has intervened in the foreign exchange market in the past to prevent significant short-term fluctuations in the RMB exchange rate, and it could make future adjustments, including moving to a managed float system, with opportunistic interventions. This reserve diversification may negatively impact the U . S . dollar and U . S . interest rates. C hanges in exchange rates could unpredictably and adversely affect our operating results and could result in exchange losses. To date, we have not hedged against the risks associated with fluctuations in exchange rates and, therefore, exchange rate fluctuations could have a material adverse impact on our future operating results and stock price.

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

While ZADAXIN has an excellent safety profile, we cannot predict whether ZADAXIN or any product we market may have unexpected safety issues in a particular patient population or when used in new indications. In addition, we cannot predict how ZADAXIN or other drugs we may develop or market will work with other drugs, including causing possible adverse side effects not directly attributable to the other drugs that could compromise the safety profile of ZADAXIN or other drugs we may develop or market when used in certain combination therapies. We are exploring new indications for ZADAXIN and there is a risk that new safety issues could appear in these new patient populations.

As we introduce new products, there may be adverse safety events related to those products. Adverse safety events may have a negative impact on our business. Discovery of safety issues with our products could create product liability and could cause additional regulatory scrutiny and requirements for additional labeling, withdrawal of products from the market, and the imposition of fines or criminal penalties. Adverse safety events may also damage physician and patient confidence in our products and our reputation. Any of these could result in liabilities, loss of revenue, material write-offs of inventory, material impairments of goodwill and fixed assets, material restructuring charges and other adverse impacts on our results of operations.

Regulatory authorities are making greater amounts of stand-alone safety information directly available to the public through periodic safety update reports, patient registries and other reporting requirements. The reporting of adverse safety events involving our

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products or products similar to ours and public rumors about such events may increase claims against us and may also cause our product sales or stock price to decline or experience periods of volatility.

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

Significant uncertainty exists as to the reimbursement status of therapeutic products, such as ZADAXIN or other drugs we may develop. We cannot assure you that third-party insurance coverage and reimbursement will be available for therapeutic products we might develop. Although ZADAXIN receives some limited reimbursement in China, we cannot assure you that we will be able to maintain existing reimbursements or increase third-party payments for ZADAXIN or obtain third-party payments for other products that we sell or develop in China. The failure to maintain third-party reimbursement for our products would harm our business. In many emerging markets where we have marketing rights to ZADAXIN, but where government resources and per capita income may be so low that our products will be prohibitively expensive, we may not be able to market our products on economically favorable terms, if at all.

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

We rely on third parties who are our sole source suppliers for our clinical trial and commercial products and their inability to deliver products that meet our quality-control standards could delay or harm one or more important areas of our business including our sales, clinical trials or the regulatory approval process.

We rely on third parties, who are subject to regulatory oversight, to supply our commercial products. Any deficiencies or shortages in supply of our commercial products would adversely affect our ability to realize our sales plans. For example, the manufacturing of the raw material and the processing to finished product of ZADAXIN is done in few batches in any given three-month period and any manufacturing errors have the potential to require a product recall. We currently have only one approved finished vial manufacturer and two approved active pharmaceutical ingredient (“API”) suppliers. Similarly, ONXEO (formerly BioAlliance) is the sole supplier of Loramyc and   each of the products that are marketed through our NovaMed Shanghai and our SciClone Pharmaceuticals (Jiangsu) Co. Ltd. subsidiaries are manufactured by, or obtained from, a single source.

If we experience a problem with a sole source manufacturer or our suppliers, our sales may suffer. We have experienced difficulties with obtaining product from manufacturers in the past. In addition, manufacturing interruptions or failure to comply with regulatory requirements by suppliers of our product candidates in clinical trial, or other could delay the trials or detract from the integrity of the trial data and its potential use in future regulatory filings.  

During 2012, we experienced limitations on supply of several products we were promoting (each of which we no longer market) and the growth in the sales of those products was affected. During 2011, we experienced manufacturing delays related to repairs for general, non-production-related facilities equipment at one of our API suppliers. During 2010, we experienced difficulties validating upgrades to equipment with one of our API manufacturers. Although we are taking steps to ensure that such problems do not continue, there is no assurance that we will either be successful in doing so with our current supplier or be able to timely and cost-effectively qualify new suppliers for this component. 

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

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

25

 


 

deliver finished product to China could be adversely affected, which in turn could materially adversely affect our sales and operating results.

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

We rely on third parties, such as collaboration partners, contract research organizations, medical institutions, clinical investigators, and contract laboratories, in the research and development of our product candidates and in the conduct of clinical trial s for our product candidates. We are also dependent upon third parties for the commercialization or distribution of pr oducts or product candidates. If these parties, whom we do not control, do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, or if our collabor ation partners do not have the ability or the resources to successfully complete their objectives,   or choose not to continue their relationship with us, our development efforts could be delayed, suspended or terminated, or our commercialization efforts may be delaye d, impaired or terminated. If the quality or accuracy of the data they obtain by third parties is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical or clinical activities could be delayed and we may not be able to obtain regulatory approval for our product candidates. 

        Our rights to develop, market and sell our products and future product candidates are held under license and other agreements, and the third parties to those agreements might elect not to renew them.

Except for ZADAXIN, our rights to develop, market and sell our products including licensed products and products currently promoted or sold, are held by us under license, promotion, distribution or marketing agreements with third parties. These agreements for products include 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, and in some cases have not renewed the agreements, which has affected our revenues. If any of these agreements are terminated, or if they are not renewed, our ability to develop or distribute the products or product candidates could be terminated and our business could be affected.

If we are unable to retain our key personnel, or are unable to attract and retain additional, highly skilled and experienced personnel, including the ability to expand our sales staff, our business will suffer.

We are highly dependent upon our ability to attract and retain qualified personnel because of the specialized, scientific and worldwide nature of our business. We are also dependent on our ability to appropriately staff these personnel in appropriate positions as our business fluctuates. Further, our efforts to in-license or acquire, develop and commercialize product candidates in current or new jurisdictions may require the addition of clinical and regulatory personnel and the expansion of, or changes in our sales and marketing operation. In addition, we assign numerous key responsibilities to a limited number of individuals, and we would experience difficulty in finding immediate replacements for any of them were any one of them to choose to leave employment with us. There is intense competition for qualified management, scientific, clinical, regulatory, and sales and marketing personnel in the pharmaceutical industry.

There is significant turnover in the industry, in China in particular, and we have also experienced turnover in our sales personnel and key employees. We may not be able to attract and retain the qualified personnel we need to grow and develop our business globally. 

We have terminated personnel for violations of our policies and procedures as well as for lack of performance. Our future success will depend in part on our retaining key personnel and on recruiting additional senior sales and other personnel in China. We are continuously recruiting executives and other level personnel to address departures and to expand and strengthen our China operations.

Conversely, if we need to reduce the size of a particular aspect of our business, including if we have contracts that are not renewed or renegotiated for products we market or promote, we are also dependent on our ability to make such adjustments while retaining suitably skilled personnel. If we were unable to attract and retain qualified personnel as needed or promptly replace those employees who are critical to our sales, development and other operations, and in particular senior executives, our financial results and operations would be adversely affected. At this time, we do not maintain “key person” life insurance for any of our personnel.

26

 


 

We may need to obtain additional funding to support our long-term product development, including funding of in-licensed products, and commercialization programs.

We believe 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 may use cash to acquire additional product rights or for future acquisitions.  Our ability to achieve and sustain operating profitability is dependent on numerous factors including our ability to achieve increasing sales of ZADAXIN in China, and for our other products and the execution and successful completion of clinical trials in China. Further, we may use cash to fund products we in-license. We cannot assure you that such funds from operating activities will be sufficient, or that we will attain profitable operations in future periods. In addition, we intend to develop other products and we may need additional funds in the future to support such development and to support future growth and achieve profitability. If we need to raise additional funds in the future and such funds are not available on reasonable terms, if at all, our commercialization efforts may be impeded, our revenues may be limited and our operating results may suffer.  

We are subject to the risk of increased income taxes which could reduce our future income.  

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

·

tax incentives have been extended to encourage foreign investment; or

·

income tax rates are low.

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

Our taxes could also increase if our ability to defer U.S. federal taxes under current tax laws were to change as a result of changes in tax law that prevent us from asserting indefinite reinvestment of offshore undistributed earnings or as a result of a change in our intention regarding distribution of these offshore undistributed earnings.

If we fail to protect our products, technologies and trade secrets, we may not be able to successfully use, manufacture, market or sell our products, or we may fail to advance or maintain our competitive position, and we have limited intellectual property protection in China.

Our success depends significantly on our ability to obtain and maintain meaningful patent protection for our products and technologies and to preserve our trade secrets. Our pending patent applications may not result in the issuance of patents in the future. Our patents or patent applications may not have priority over others' applications. Our existing patents and additional patents that may be issued, if any, may not provide a competitive advantage to us or may be invalidated or circumvented by our competitors. Others may independently develop similar products or design around patents issued or licensed to us. Patents issued to, or patent applications filed by, other companies could harm our ability to use, manufacture, market or sell our products or maintain our competitive position with respect to our products. Although many of our patents relating to thymalfasin have expired, including composition of matter patents, we have rights to other patents and patent applications relating to thymalfasin and thymalfasin analogues, including method of use patents with respect to the use of thymalfasin for certain indications. Additionally, thymalfasin has received Orphan Drug designation in the U.S. for the treatment of stage 2b through stage 4 melanoma, for the treatment of chronic active hepatitis B, for the treatment of DiGeorge anomaly with immune defects, and for the treatment of hepatocellular carcinoma. If other parties develop generic forms of thymalfasin for other indications, including conducting clinical trials for such indications, our patents and other rights might not be sufficient to prohibit them from marketing and selling such generic forms of thymalfasin or their brands of thymalfasin. If other parties develop analogues or derivatives of thymalfasin, our patents and other rights might not be sufficient to prohibit them from marketing these analogues or derivatives.

27

 


 

Pharmaceutical products are either not patentable or have only recently become patentable in some of the countries in which we market or may market thymalfasin. We do not have composition patent claims directed to the thymalfasin that is currently marketed in China, our largest market, although we do have other type of patent claims, pending or issued, directed to other aspects of thymalfasin therapy. Other companies market generic thymalfasin in China, potentially in violation of our patent, trademark or other rights which, to date, we have defended by informing physicians and hospitals of the practice. Past enforcement of intellectual property rights in many of these countries, including China in particular, has been limited or non-existent. Future enforcement of patents and proprietary rights in many other countries will likely be problematic or unpredictable. Moreover, the issuance of a patent in one country does not assure the issuance of a similar patent in another country. Claim interpretation and infringement laws vary by nation, so the extent of any patent protection is uncertain and may vary in different jurisdictions.

If we are involved in intellectual property claims and litigation, the proceedings may divert our resources and subject us to significant liability for damages, substantial litigation expense and the loss of our proprietary rights.

Our commercial success depends in part on our not infringing valid, enforceable patents or proprietary rights of third parties, and not breaching any licenses that may relate to our technologies and products. In addition, we may not be aware of all patents or patent applications that may impact our ability to make, use or sell any of our potential products. For example, U . S . patent applications may be kept confidential for 12 or more months while pending in the Patent and Trademark Office, and patent applications filed in foreign countries are often first published nine months or more after filing. It is possible that we may unintentionally infringe these patents or other patents or proprietary rights of third parties. We may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third-party patents. Any legal action against us or our collaborative partners claiming damages and seeking to enjoin commercial activities relating to our products and processes affected by third-party rights may require us or our collaborative partners to obtain licenses in order to continue to manufacture or market the affected products and processes. Our efforts to defend against any of these claims, regardless of merit, would require us to devote resources and attention that could have been directed to our operations and growth plans. In addition, these actions may subject us to potential liability for damages. We or our collaborative partners may not prevail in a patent action and any license required under a patent may not be made available on commercially acceptable terms, or at all. Any conflicts resulting from the patent rights of others could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection.

If other companies obtain patents with conflicting claims, we may be required to obtain licenses to those patents or develop or obtain alternate technology to manufacture or market the affected products and processes. We may not be able to obtain any such licenses on acceptable terms or at all. Any failure to obtain such licenses could delay or prevent us from pursuing the development or commercialization of our potential products. Our efforts to defend against any of these claims would require us to devote resources and attention that could have been directed to our operations and growth plans.

We may need to initiate litigation, which could be time-consuming and expensive, to enforce our proprietary rights or to determine the scope and validity of others' rights. If litigation results, a court may find our patents or those of our licensors invalid or may find that we have infringed on a competitor's rights. If any of our competitors have filed patent applications in the U.S. that claim technology we also have invented, the Patent and Trademark Office may require us to participate in expensive interference proceedings to determine who has the right to a patent for the technology. These actions may subject us to potential liability for damages. We or our collaborative partners may not prevail in a patent action and any license required under a patent may not be made available on commercially acceptable terms, or at all.

Substantial sales of our stock or securities convertible into shares of our stock or the exercise or conversion of options may impact the market price of our common stock.

We may conduct future offerings of our common stock, preferred stock or other securities convertible into our common stock to fund acquisitions, finance oper ations and for other purposes. Future issuances of substantial amounts of our common stock could adversely affect the market price of our common stock. Similarly, if we raise additional funds through the issuance of common stock or securities convertible into or exercisable for common stock or sell equity in a subsidiary, the percentage ownership of our present stockholders of the respective entities will be reduced and the price of our common stock may fall.

28

 


 

Our cash, cash equivalents and investment   in common stock are subject to certain risks which could materially adversely affect our overall financial position.  

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

Any adjustment to decrease the ratings of our investments by a statistical rating organization (such as Moody’s or Standard and Poor’s) may have a negative impact on the value of our investments.

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

If our common stock investment in Soligenix were to permanently lose value on an other than temporary basis , our financial position could be negatively impacted with a charge to operations.

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

We expect that we may need to transfer capital to certain of our China subsidiaries from time to time to fund their operations. We need to obtain regulatory approval from China’s State Administration of Foreign Exchange (“SAFE”) in order to make such transfers and there can be no assurance that we will be able to obtain such approval in a timely manner. We were able to fund the operations of NovaMed Shanghai to date through commercial credit facilities or through intercompany loans, but we could face difficulties in the future if our efforts to improve profitability and cash flow in NovaMed Shanghai or our other China subsidiaries are not successful, or if we are unable to obtain SAFE approval or obtain further funding for them.

Furthermore, a majority of our cash is held by our foreign subsidiaries. Such cash is used to fund the operating activities of our foreign subsidiaries and for further investment in foreign operations. Based on our current operating plan, we do not anticipate the need to repatriate undistributed earnings of our foreign subsidiaries accum ulated through December 31, 2016 . We plan to repatriate   a portion of expected foreign earnings to be generated in future years   to fund our U.S. operations. We have provided for U.S. income taxes on a portion of recent year s’ foreign earnings that we have repatriated from our foreign subsidiaries, and our annual effective tax rate for the respective periods reflects both the provisions as well as benefits associated with our operations. We plan to indefinitel y reinvest outside of the U.S. remaining unrepatriated future foreign earnings expected to be generated in 2017 and beyond .

Our loans receivable are subject to certain risks which could materially adversely affect our financial position.  

As part of our May 2013 license and supply agreement with Zensun, we agreed to loan up to $12 million to Zensun, of which $12 million had been loaned as of December 31, 2016. The proceeds of the loans are to be used   for working capital and general corporate purposes by Zensun. As security for the loan agreements, Zensun pledged its entire equity interest in its subsidiary Shanghai Dongxin Biochemical Technology Co. Ltd. (whose assets include real property) to us. If the real property which comprises the majority of the value of all of the assets pledged as security were to suffer a decrease in its value due to macroeconomic conditions or local market-specific factors impacting commercial real estate market values, such a fact may represent an indication of loan impairment. If these loans were to become impaired and the loans could not be collected, our financial position could be negatively impacted with a charge to operations for the amount of any unpaid principal and interest.

Our ability to utilize our tax attributes may be limited by an “ownership change”.  

Our ability to use our tax attributes, such as our U.S. federal income tax net operating loss carryforwards and our tax credit carryforwards, may be substantially restricted if we have had in the past, or have in the future, an “ownership change” as defined in

29

 


 

Section 382 of the U.S. Internal Revenue Code. An ownership change occurs if increases in the percentage of our stock held by “5-percent shareholders” (within the meaning of Section 382, which provides that certain public groups can be treated as 5-percent shareholders) collectively exceed more than fifty percent, comparing the lowest percentage of stock owned by each 5-percent shareholder at any time during the testing period (which is generally a three-year rolling period) to the percentage of stock owned by the 5-percent shareholder immediately after the close of any owner shift testing date. Our repurchases of our common s tock, issuances of any additio nal significant amounts of our common s tock for future acquisitions or other transactions and trading in our stock by stockholders, may have increased the possibility that in the future we could experience an ownership change. Trading by our stockholders, stock repurchases or other transactions could, in the future, cause an ownership change, resulting in an annual limitation on utilization of our tax attributes. If our tax attribute usage is subject to limitation and if we are profitable, our future cash flows could be adversely affected due to an increased tax liability.

Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition of us, which may be beneficial to our stockholders, more difficult.

Certain anti-takeover provisions of Delaware law and our charter documents as currently in effect may make a change in control of our company more difficult, even if a change in control would be beneficial to our stockholders. Our charter documents contain certain anti-takeover provisions, including provisions in our certificate of incorporation providing that stockholders may not cumulate votes, stockholders' meetings may be called by stockholders only if they hold 25% or more of our common stock and provisions in our bylaws providing that the stockholders may not take action by written consent. Additionally, our Board of Directors has the authority to issue 10 million shares of preferred stock and to determine the terms of those shares of stock without any further action by the stockholders. The rights of holders of our common stock are subject to the rights of the holders of any preferred stock that may be issued. The issuance of preferred stock could make it more difficult for a third-party to acquire a majority of our outstanding voting stock. Delaware law also prohibits corporations from engaging in a business combination with any holders of 15% or more of their capital stock until the holder has held the stock for three years unless, among other possibilities, the Board of Directors approves the transaction. Our Board of Directors may use these provisions to prevent changes in the management and control of our company. Although our Rights Agreement dated December 19, 2006 expired on its scheduled expiration date of December 19, 2016, our Board of Directors could adopt another rights plan with anti- takeover effects in the future. Also, under applicable Delaware law, our Board of Directors may adopt additional anti-takeover measures in the future.

Our business could be negatively affected as a result of actions of stockholders.

The actions of stockholders   could adversely affect our business. Specifically, certain actions of certain types of stockholders, including without limitation public proposals, requests to pursue a strategic combination or other transaction or special demands or requests, could disrupt our operations, be costly and time-consuming or divert the attention of our management , directors and employees. In addition, perceived uncertainties as to our future direction in relation to the actions of our stockholders may result in the loss of potential business opportunities or the perception that we are unstable and need to make changes, which may be exploited by our competitors and make it more difficult to attract and retain personnel as well as customers, service providers and partners. Actions by our stockholders may also cause fluctuations in our stock price based on speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.

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

Clinical trials of any of our current and potential products or the actual commercial sales of our product may expose us to liability claims from the use of these products. We currently carry product liability insurance. However, we cannot be certain that we will be able to maintain insurance on acceptable terms, if at all, for clinical and commercial activities, that any insurance we have will cover any particular claim that is asserted, or that the insurance would be sufficient to cover any potential product liability claim or recall. If we fail to have sufficient coverage, our business, results of operations and cash flows could be adversely affected.

If we are unable to comply with environmental and other laws and regulations, our business may be harmed.

We are subject to various federal, state and local laws, regulations and recommendations relating to the use, manufacture, storage, handling and disposal of hazardous materials and waste products (including radioactive compounds and infectious disease agents), as well as safe working conditions, laboratory and manufacturing practices and the experimental use of animals. The extent of government regulation that might result from future legislation or administrative action in these areas cannot be accurately predicted.

30

 


 

We do not currently maintain hazardous materials at our facilities. While we outsource our research and development programs involving the controlled use of biohazardous materials, if in the future we conduct these programs ourselves, we might be required to incur significant cost to comply with environmental laws and regulations. Further, in the event of an accident, we would be liable for any damages that result, and the liability could exceed our resources.

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

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

We may be affected by climate change and market or regulatory responses to climate change.  

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

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we store sensitive data, including intellectual property, our proprietary business information, certain information regarding our business partners, and personally identifiable information of our employees, in our computer networks. The secure maintenance and transmission of this information is critical to our operations and reputation. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Although we have not been adversely affected in any significant manner, we have experienced problems with information security in the past which we believe is primarily due to breaches of security by current or former employees gaining access to restricted information. Any such breach could compromise our computer networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Although we have purchased cyber liability insurance, any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, and damage our reputation, any of which could adversely affect our business and competitive position.

Item 1B. Unresolved Staff Comments  

None.

Item 2. Properties

We currently lease approximately 11,900 square feet of office space for our corporate headquarters in Foster City, California, approximately 34,600 square feet of office space in China, primarily in Beijing and Shanghai, and lease approximately 6,1 00 square feet of combined office space in Hong Kong and Vietnam. We believe that our existing facilities will be adequate for our current needs and that additional space will be available as needed.

Item 3. Legal Proceedings  

None.

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Item 4. Mine Safety Disclosures  

Not applicable.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  

Our common stock trades on The NASDAQ Global Select Market of the NASDAQ Stock Market under the symbol “SCLN.”

The following table sets forth the high and low sales prices per share for the quarterly periods indicated, as reported by The NASDAQ Stock Market. The quotations shown represent inter-dealer prices without adjustment for retail markups, markdowns, or commissions, and may not necessarily reflect actual transactions.





 

 

 

 

 



 

 

 

 

 



Price Range



Common Stock



 

High

 

 

Low

2016

 

 

 

 

 

4th quarter

$

10.85 

 

$

8.55 

3rd quarter

 

13.73 

 

 

9.84 

2nd quarter

 

15.03 

 

 

10.74 

1st quarter

 

11.15 

 

 

7.37 



 

 

 

 

 

2015

 

 

 

 

 

4th quarter

$

10.94 

 

$

6.70 

3rd quarter

 

11.71 

 

 

6.47 

2nd quarter

 

9.87 

 

 

8.07 

1st quarter

 

9.65 

 

 

7.01 



 

 

 

 

 

S tockholders

As of March 7 , 201 7 , there were approximately 190 holders of record of our common stock and 51,505,795  shares of common stock issued and outstanding. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders we are unable to estimate the total number of stockholders represented by these record holders.

Dividends

We have not paid any dividends on our common stock during the fiscal years ended December 31, 2016, 2015 ,   and 2014, and do not currently have plans to pay any cash dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

The information required by Item 201(d) of Regulation S-K is incorporated by reference from the section entitled “Equity Co mpensation Plan Information ” in Part III, Item 12 of this Form 10-K.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None .  

32

 


 

Performance Graph

This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act.

The following line graph compares the annual percentage change in (i) the cumulative total stockholder return on the Company’s Comm on Stock since December 31, 201 1 , with (ii) the cumulative total return on (a) The NASDAQ Composite Index and (b) the NASDAQ Biotechnology Index. The comparison assumes (i) an investm ent of $100 on December 31, 2011 in each of the foregoing indices and (ii) reinvestment of dividends, if any. The stock price performance shown on the graph below is not necessarily indicative of future stock price performance.

PICTURE 1







33

 


 

Item 6. Selected Financial Data  

This section presents selected historical financial data for each of the last five fiscal years and is qualified by reference to and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The selected balance sh eet data as of December 31, 201 6 and 201 5 and the selected statement of operations data for each year ended December 31, 201 6 ,   201 5 ,   and 201 4   have been derived from our audited financial statements that are included elsewhere in this report. The selected balance sheet data as of December 31, 2014 ,   201 3 ,   and 201 2   and the selected statement of operations data for e ach year ended December 31, 201 3 and 2012 have been derived from our audited financial statements not included in this report. H istorical results are not necessarily indicative of the results to be expected in the future.







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Year Ended December 31,



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

(in thousands, except per share data)

 

2016

 

2015 (1)

 

2014

 

2013 (1)

 

2012 (2)

Statement of Operations data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net revenues

$

160,096 

 

$

157,257 

 

$

134,790 

 

$

127,058 

 

$

156,269 

Net income

$

30,729 

 

$

29,463 

 

$

25,208 

 

$

10,964 

 

$

9,620 

Basic net income per share

$

0.61 

 

$

0.59 

 

$

0.49 

 

$

0.20 

 

$

0.17 

Diluted net income per share

$

0.58 

 

$

0.56 

 

$

0.48 

 

$

0.20 

 

$

0.16 

Shares used in computing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

50,235 

 

 

49,797 

 

 

51,277 

 

 

53,587 

 

 

56,637 

Diluted net income per share

 

52,566 

 

 

52,173 

 

 

52,684 

 

 

54,936 

 

 

58,483 









 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of December 31,



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

(in thousands)



2016

 

2015 (1)

 

2014

 

2013 (1)

 

2012 (2)

Balance Sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

134,395 

 

$

101,403 

 

$

86,228 

 

$

85,803 

 

$

84,228 

Restricted cash in escrow for SEC settlement

 

 —

 

 

12,826 

 

 

 —

 

 

 —

 

 

 —

Accounts receivable, net of allowance

 

41,510 

 

 

39,363 

 

 

40,268 

 

 

39,771 

 

 

38,109 

Inventories

 

16,587 

 

 

10,976 

 

 

10,703 

 

 

15,238 

 

 

10,424 

Deferred tax assets

 

 —

 

 

299 

 

 

326 

 

 

 

 

369 

Total current assets

 

195,733 

 

 

168,521 

 

 

140,197 

 

 

143,417 

 

 

137,329 

Goodwill

 

30,838 

 

 

32,979 

 

 

34,521 

 

 

35,357 

 

 

34,313 

Total assets

 

241,898 

 

 

216,619 

 

 

181,831 

 

 

179,859 

 

 

174,071 

Borrowings

 

 —

 

 

 —

 

 

 —

 

 

1,651 

 

 

1,445 

Deferred revenue

 

 —

 

 

174 

 

 

596 

 

 

2,915 

 

 

 —

Deferred tax liabilities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

153 

Other long-term liabilities

 

92 

 

 

87 

 

 

114 

 

 

44 

 

 

237 

Total stockholders’ equity

 

215,365 

 

 

179,712 

 

 

155,274 

 

 

146,595 

 

 

143,022 



(1)

We recorded a charge of $2.0 million for 2013 related to the possibility of a settlement, and recorded an additional charge of $10.8 million associated with the SEC settlement for 2015. Refer to Part II, Item 8, Note 15 “ Contingencies ” for further information on this matter .  

(2)

During fiscal 2012, we identified an impairment indicator with respect to our intangible assets related to our promotion and distribution contract rights and recorded losses of approximately $42.7 million to recognize the full impairment. We recorded a benefit for income tax of approximately $6.8 million for the year ended December 31, 2012 due to the impairment of intangible assets, which resulted in a reversal of deferred tax liabilities. This was partially offset by the impact of recognizing a full valuation allowance on any remaining NovaMed Shanghai deferred tax assets. In addition, we recorded a non-cash gain of $15.4 million related to the contingent consideration because revenue and EBITDA targets of NovaMed Shanghai were not achieved.



34

 


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations  

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the “Selected Financial Data” and our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report on Form 10-K contain forward-looking statements which involve risks and uncertainties. See “Note Regarding Forward-Looking Statements” and “Risk Factors” contained in this Annual Report on Form 10-K.

SciClone Pharmaceuticals, Inc. (NASDAQ: SCLN) is a United States (“ U.S. ”)-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. 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 U.S. 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, and products from Pfizer International Trading (Shanghai) Ltd. (“Pfizer”). ZADAXIN has the highest margins in our portfolio as it is a premium product sold exclusively by SciClone .   Our “promotion services revenues” result from fees we receive for exclusively promoting oncology and cancer supportive care 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. 

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 the Liver) and invasive fungal infections of critically ill patients (issued by the Chinese Medical Association). We are also seeking to expand the indications for which ZADAXIN could be used, including sepsis, and on September 26, 2016, we announced the first patient has been treated in clinical trial in sepsis using ZADAXIN in China.

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 .  

We are also pursuing the registration of Loramyc ® , a mucoadhesive tablet formulation of miconazole lauriad to treat oropharyngeal candidiasis.

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 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 , to increase our revenues and profitability .  W e have in license agreements for the following products.

Our I n- Licensed Drug Candidates in Clinical Development Include the Following :

PT-112 :   On September 26, 2016, we also announced the first patient has been treated in the Phase 1 proof-of-concept trial of PT-112, a multi-targeted platinum-pyrophosphate anticancer agent being developed for patients with advanced solid tumors, in Taiwan. PT-112 is a key early-stage asset supporting our strategy to expand our oncology portfolio and drive long-term growth. We

35

 


 

obtained, in 2015, exclusive development and commercialization rights from Pho splatin Therapeutics to PT-112 for Greater China (mainland China, Hong Kong, and Macau) and Vietnam, along with the exclusive option to expand the territory to include South Korea and Taiwan.

SGX942 :   On September 12, 2016, we and Soligenix, Inc. announced that we entered into an exclusive license agreement granting rights to SciClone to develop, promote, market , distribute and sell SGX942 (dusquetide), a novel, first-in-class therapy being developed for the treatment of oral mucositis in patients with head and neck cancer. The licensing agreement includes the People’s Republic of China, Hong Kong ,   Macau, Taiwan, South Korea and Vietnam (the “Territory”). This exclusive agreement builds on an existing collaboration, in which we provided our complete oral mucositis clinical and regulatory data library to Soligenix in exchange for certain, previously undisclosed, commercialization rights to SGX942 in the Greater China market (the “2013 exchange ) . The Phase 2 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.

Under the terms of the agreement, we transferred cash consideration of $3 million to Soligenix for 3,529,412 shares of Soligenix common stock and expanded rights for SGX942 in Taiwan, South Korea, and Vietnam, as we had previously obtained rights for Greater China in the 2013 exchange. In October 2016, Soligenix announced a 1 for 10 reverse stock split resulting in the Company’s ownership of 352,94 2 shares. In addition, we will be responsible for all aspects of development, product registration and commercialization in the Territory, having access to data generated by Soligenix. In the future, we will pay to Soligenix royalties on net sales, and Soligenix will supply commercial drug product to us on a cost-plus basis, while maintaining worldwide manufacturing rights.

VIBATIV ®   (telavancin):   In May 2015, Theravance Biopharma, Inc. (“Theravance Biopharma”) granted SciClone exclusive development and commercialization rights to VIBATIV   (telavancin) in China, Hong Kong, Macao, 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. We anticipate commencing a bridging trial for VIBATIV.

Angiomax ®   (bivalirudin) and Cleviprex ®   (clevidipine ):   In December 2014, we entered into a strategic partnership with The Medicines Company. The partnership includes an agreement granting us a license and the exclusive rights in China to promote two cardiovascular 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 . W e have received Clinical Trial A pplication (“ CTA ”) approval and a Clinical Trial Waiver from the China Food and Drug Administration   (“CFDA”)   in December 2016, and are in the process of preparing a New Drug Application (“NDA”) , 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 CTA for China was filed in 2013. We received CTA approval from the CFDA in early 2016 and are preparing a clinical study. As Chiesi USA, Inc. and its parent company, Chiesi Farmaceutici S.p.A. (“Chiesi”) , acquired the rights to Cleviprex in June 2016 from the Medicines Company, SciClone will now be working together with Chiesi and The Medicines Company to progress the Cleviprex clinical study going forward. Under the terms of the agreement, which apply to Chiesi for Cleviprex, we will be responsible for all aspects of commercialization, including pre-and post-launch activities, for both products (Cleviprex and Angiomax) 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 s for the two products , in addition to net sales royalties payable to The Medicines Company and/or Chiesi , include the following additional payments to The Medicines Company and /or Chiesi: 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.  

Neucardin TM :   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 in China, Hong Kong and Macao. Neucardin is a novel, first-in-class therapeutic for the treatment of patients with intermediate to advanced hear t failure, for which an 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

36

 


 

agreement with Zensun, we agreed to loan up to $12 million to Zensun, of which $12 million had been loaned as of December 31 , 2016 (refer to Note 6 to the consolidated financial statements appearing under Part I I, Item 8 for further information regarding the Zensun loans).

ABTL-0812: Our license agreement with Ability Pharmaceuticals SL grants us a license and the exclusive rights to develop, manufacture and commercialize ABTL-0812 in China, Macau, Hong Kong, Taiwan, and Vietnam. ABTL-0812 is a first-in-class P13K/Akt/mTOR signaling pathway inhibitor for solid tumors , important in regulating the cell cycle . We are currently preparing for a phase 1 proof-of-concept trial in Taiwan and Mainland China .  

Governmental Policy Changes in China

G overnmental 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. Under our new contractual arrangement with Sinopharm, effective January 1, 2016, the lower tender price is reflected in a lower base invoice price to Sinopharm ,   as further described in the following section under “Results of Operations, Revenues . 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 pric ing pressures on revenue in 2017 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.  

We believe our cash and cash equivalents as of December 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 summarizes the year over year changes in our product sales and promotion services revenues (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



  

Years Ended December 31,



 

 

 

 

 

 

 

 

 

 

 

 

 



  

2016

 

Change

  

2015

 

Change

 

2014

Product Sales, net

  

$

155,937 

 

1% 

  

$

154,329 

 

17% 

 

$

131,973 

Promotion Services

 

 

4,159 

 

42% 

 

 

2,928 

 

4% 

 

 

2,817 

Total Net Revenues

 

$

160,096 

 

2% 

 

$

157,257 

 

17% 

 

$

134,790 



 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales were $155.9 million, $ 154.3 million ,   and $132.0 million   for the years ended December 31, 201 6 ,   201 5 ,   and 2014 ,   respectively. The increase of $ 1.6 million, or 1 %, for the year ended December 31, 2016 compared to 2015, was primarily attributable to an increase in ZADAXIN unit sales and stronger demand for certain oncology products. ZADAXIN sales were $150.1 million for the year ended December 31 , 2016, compared to $146.1 mill ion for 2015, an increase of $4.0 million or 3 %, which mainly related to a 13 % increase in volum e sold, offset partially by a 10 % decrease in revenue realized primarily as a result of an u nfavorable exchange rate impact. Oncology p roduct sales increased $0.3 million for the year ended December 31, 2016, compared to the corresponding period of 2015 , related to greater market penetration . Aggrastat ® product sales were zero and $1.8 million for the year s ended December 31, 2016 and 2015, respectively, due to the termination of our agreement wi th Cardiome as discussed below.   Product sales for the year ended December 31, 2015 also included initial immaterial DC Bead revenue.

The increase in product sales of $ 22.4 million, or 17 %, for the year ended December 31, 2015 compared to 2014, was primarily attributable to an increase in ZADAXIN unit sales and stronger demand for certain oncology products. ZADAXIN sales were $ 146.1 million for the year ended December 31, 2015, compared to $126.1 million for the prior year, an increase of $ 20.0 million ,   or 16 %, which mainly relat ed to a 21 % increase in volume sold, offset partially by a 5 % decrease in selling price mainly related to a decrease

37

 


 

in the list price of ZADAXIN in the Zhejiang province since May 2015 .   Product sales for the year ended December 31, 2015, also increased compared to 2014, related to Pfizer product sales, initia l immaterial DC Bead revenue , and Aggrastat product sales .  

Through June 30, 2015, our product sales revenues 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 $1.8 million and $1.1 million for the years ended December 31, 2015 and 2014, respectively, none thereafter, and we do not expect to generate any further Aggrastat revenues.

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 Sinopharm is invoiced at a lower base price relative to that prevailing in the previous agreement. The lower base price ( reduced by estimated price compensat ion payable 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 are presently no provinces with tender prices below the reference (baseline) tender price, and therefore no price compensation payable situations. Sinopharm 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 upon with them . 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, the price compensation receivable due to us from Sinopharm for above-reference tender price provinces for products originally sold in the first quarter of 2016 was recognized in the third quarter of 2016 , and the amount of price compensation receivable for products originally sold in the second and third quarter s of 2016 w as recognized in the fourth quarter of 2016 . We expect that the price compensation receivable due to us from Sinopharm for above-reference tender price provinces for a qua rter will be recognized on a one-to-two quarter delayed basis relative to the originating sales quarter 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 were denominated in U . S . dollars through June 30, 2016. However, the established importer price was adjusted quarterly based upon exchange rate fluctuations between the U.S. dollar and RMB. Effective July 1, 2016, our sales of ZADAXIN to Sinopharm are and will be denominated in RMB going forward. Our China ZADAXIN sales revenues have been (under the prior adjustment mechanism which operated on a lag basis) and will be in the future (as invoiced directly in RMB) subject to exchange rate risk. In recent months the RMB has experienced devaluation.

We anticipate that ZADAXIN revenues in 2017 will be higher than 2016 , although our revenues are subject to exchange rate fluctuations and provincial adjustments to tender (retail level, government approved) prices which we cannot predict.

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 U.S. 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.

38

 


 

Promotion services revenue was $4.2 million, $ 2.9 million ,   and $2.8 million, for the years ended December 31, 201 6 ,   201 5 ,   and 201 4 , respectively, and related to products promot ed under agreements with Baxter. Promotion services revenue increased $1.3 million or 42 % for the year ended December 31, 2016, compared to 2015, mainly related to an increase in Endoxan TM and Holoxan TM   sales. Promotion services revenue increased $ 0.1 million or 4 % for the year ended December 31, 2015, compared to 2014, related to an increase in Endoxan sales .  

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 relate to our China segment. Total China revenues were $152.6 million, $ 151.6 million ,   and $130.3 million , or 95 %, 96%, and 97%   of sales for t he years ended December 31, 2016 , 201 5 , and 201 4 , respectively . Rest of the World segment revenues were $7.5 million, $ 5.7 million ,   and $4.5 million , or 5 %, 4%, and 3%, for each of the years ended December 3 1, 201 6 , 201 5 and 201 4 ,   respectively, and related to sales of ZADAXIN product.

For the year s ended December 31, 2016,   2015 and 2014, sales to   Sinopharm in China accounted for approximately 93 %, 97 % and 94% 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 summarizes the year over year changes in our cost of product sales (in thousands) :





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



  

Years Ended December 31,



 

 

 

 

 

 

 

 

 

 

 

 

 



  

2016

 

Change

  

2015

 

Change

 

2014

Cost of Product Sales

  

$

22,898 

 

2% 

  

$

22,348 

 

-3%

 

$

23,002 



 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales was $22.9 million for the year ended December 31, 2016, compared to $22.3 million for the year ended Dece mb er 31, 2015, an increase of $0.6 million. The i ncrease in cost of sales of $0.6 million, or 2 %, for the year ended December 31, 2016 , compared to 2015 , was primarily attributable to an increase in volume sales of ZADAXIN.

Cost of product sales was $22.3 million for the year ended December 31, 2015, compared to $23.0 million for the year ended December 31, 2014 , a decrease of $0.7 million. The decrease in cost of sales of $0.7 million, or 3%, for the year ended December 31, 2015 , compared to 2014 , was primarily attributable to a $2.9 million decrease in cost of product sales of Aggrastat as we had recorded a provision of $2.1 million for excess Aggrastat inventory during the year ended December 31, 2014 that didn’t recur for the year ended December 31, 2015 . It was also attributable to our receipt in the fourth quarter of 2015 of $1.1 million for reimbursement for Aggrastat inventory returned that we had previously fully written off in 2014 , which was recorded as a red uction in cost of product sales. These decreases in cost of product sales were partially offset by increases in cost of product sales related to ZADAXIN and certain oncology product sales due to increased volume sold .   C ost of product sales also increased related to initial DC Bead sales in the second half of 2015.

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 pe rcentages in 2017 to be lower than 201 6 ,   based on lower selling prices in certain province s , with indications of others to follow, as well as the unfavorable impact of currency exchange fluctuations.

39

 


 

Sales and Marketing (“S&M”) :

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





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



  

Years Ended December 31,



 

 

 

 

 

 

 

 

 

 

 

 

 



  

2016

 

Change

  

2015

 

Change

 

2014

Sales and Marketing

  

$

54,704 

 

1% 

  

$

53,961 

 

11% 

 

$

48,477 



 

 

 

 

 

 

 

 

 

 

 

 

 

S&M expenses were $54.7 million ,   $54.0 million, and $48.5 million , for the years ended December 31, 201 6 , 201 5 and 201 4 , respectively .   S&M expenses increased $0.7 million, or 1 %, for the year ended December 31, 2016, compared to 2015, related to growth in our S&M efforts for ZADAXIN   in cluding our sales force efforts on increasing sales to China’s largest hospitals as well as mid-sized hospitals, and related to post-marketing clinical trial expenses .   S&M expenses increased by $ 5.5 million, or 1 1 %, for the year ended December 31, 2015, compared to 2014, related to growth in our S&M efforts for ZADAXIN and launch costs related to DC Bead.

We anticipate total S&M expenses for t he year ending December 31, 2017 to be higher than those incurred for the year ended December 31, 2016 related to growth in our S&M efforts for ZADAXI N   and other products including higher post-marketing clinical trial expenses and higher expenses related to our e-commerce strategies to widen our market .

Research and Development (“R&D”):

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





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



  

Years Ended December 31,



 

 

 

 

 

 

 

 

 

 

 

 

 



  

2016

 

Change

  

2015

 

Change

 

2014

Research and Development

 

$

15,078 

 

22% 

  

$

12,314 

 

-16%

 

$

14,581 



 

 

 

 

 

 

 

 

 

 

 

 

 

R&D expenses were $15. 1 million, $12.3 million, and $14.6 million, for the years ended December 31, 201 6 ,   201 5 , and 201 4 , respectively. For the years ended December 31, 201 6 ,   201 5 and 201 4 , we recorded $4.5 million, $ 7. 5 million, and   $11.0 million, respectively, in R&D expenses related to upfront and milestone costs under our in-license arrangements .   The remaining $5.8 million increase in R&D expense for the year ended December 31, 2016 , compared to 2015, related to increased clinical and preclinical activities with certain licensors. The remaining $1.2 million increase in R&D expense for the year ended December 31, 2015 compared to 2014, related to hiring additional R&D personnel and an increase in clinical and preclinical activities with certain licensors.

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 201 7 compared to 201 6 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 summarizes the year over year changes in our G&A expenses ( in thousands ):





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Years Ended December 31,



 

 

 

 

 

 

 

 

 

 

 

 

 



  

2016

 

Change

  

2015

 

Change

 

2014

General and Administrative

 

$

34,181 

 

23% 

  

$

27,897 

 

23% 

 

$

22,746 



 

 

 

 

 

 

 

 

 

 

 

 

 

40

 


 

G&A expenses were $3 4 . 2 million, $ 2 7 . 9 million, and $22.7 million , for the years ended December 31, 201 6 ,   201 5 ,   and 201 4 , respectively. G&A expenses for the year ended De cember 31, 2016 increased by $ 6.3 million, or 23 %, compared to the year ended December 31, 2015 related to increased costs for the Company’s strategic review to maximize stockholder value , higher transaction losses related to sales of ZADAXIN to Sinopharm being denominated in RMB since July 1, 2016, and higher stock–based compensation expense.

G&A expenses for the year ended December 31, 2015 increased by $ 5. 2 million, or 23 %, compared to the year ended December 31, 2014 mainly related to a   China legal-entity restructuring plan , higher professional consulting fees for b usiness development strategy, higher stock-based compensation expense, and lower credits to bad debt expense for recovery of previously written off accounts receivable, offset by lower legal expenses related to our investigations with the SEC and DOJ and lower accounting fees.

We expect our G&A expenses in 2017 to increase compared to 2016 related to growth in our business .

SEC Settlement Expense:

We recorded a charge of $2.0 million in the fourth quarter of 2013 related to the possibility of a settlement with the SEC and DOJ regarding their investigation into possible violations of the FCPA by us, and we recorded additional charges totaling $10.8 million associated with the SEC settlement in 2015. In February 2016, 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 $12.8 million, including disgorgement, pre-judgement interest and a penalty as final settlement. 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 . The DOJ has also completed its related investigation and has declined to pursue any actions. Refer to Part II, Item 8, Note 1 5  “ Contingencies ”   for further information on this matter.

Provision for Income Tax:

The provision for income tax relates to our foreign operations in China. The provision for income tax was $ 3.4 million, $0.8 million ,   and $1.2 million for the years ended December 31, 201 6 , 201 5 and 201 4 , respectively .   Tax expense increased $ 2.6 million for the year ended December 31, 2016, compared to 2015. For the year ended December 31, 2016, our tax provision included $1.3 million of additional tax expense representing the correction of an error related to a previously unrecognized liability for uncertain tax positions in China (refer also to Note 1, “ Error Correction appearing in Part II, Item 8, within the footnotes to the consolidated financial statements contained elsewhere in this report ). In addition, the tax provision for the year ended December 31, 2016 was higher relative to the prior year as a result of higher sales and marketing activities in our China business.

Tax expense   decreased $0.4   million for the year ended December 31, 2015, compared to 2014 , mainly related to a reduction in our liabilities for uncertain tax positions (and associated accrued interest) in China due to certain tax years becoming closed to assessment due to the statute of limitations.

The statutory t ax rate in China was 25% in 201 6 , 201 5 and 201 4 .   We expect th e provision for income tax to de crease for t he year ending December 31, 201 7 , compared to the year ended December 31, 201 6 , as a result of tax expense for uncertain tax positions recorded in 2016 that we do not expect to recur in 2017.

As of December 31, 201 6 , we had net operating loss carryforwards for U.S.   federal income tax purposes of approximately $ 11 2 . 9 million that expire in the years 2020 through 2035 , and had approximately RMB 40.8 million in net operating loss carryforwards related to our NovaMed Shanghai subsidiary that expire in the years 2019 through 2021 . As of December 31, 2016 , we had   U.S. federal research and development, orphan drug and investment tax credit carryforwards of approximately $12. 3 million that expire in the years 2018 through 203 6 .  

Because of the “change in ownership” provisions of the Internal Revenue Code, a portion of our net operating loss carryforwards and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods. As a result of the annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce future income tax liabilities.

41

 


 

Liquidity and Capital Resources

We continue to 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 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, includi ng investments in our business, and to fund our business development activities.

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







 

 

 

 

 



As of December 31,



2016

 

2015

Cash and cash equivalents

$

134,395 

 

$

101,403 



As of December 31, 201 6 , we had $ 134.4 million in cash and cash equivalents , of which $ 124.8 million was located in subsidiaries of the Company outside the U.S. Cash and cash equivalents held by subsidiaries outside the U . S . are held primarily in U.S. 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. In 2016 and 2015, we repatriated $10 million and $ 12.8 million , respectively, in funds via special dividend distribution s from our foreign subsidiary as a result of the need to fund our U.S. operations and to fund an escrow facility for our SEC settlement (as previously described) , respectively. The dividend distribution s were made from respective current year earnings in those years and pro fits of o ur foreign subsidiary, which were not part of the cumulative pool s of undistributed earnings of foreign subs idiaries as of December 31, 2016 or 2015 .  



We have determi ned that as of December 31, 2016 , $ 21 1   million of accumulated undistributed earnings of foreign subsidiaries, after the payment of a 2016 dividend in the amount of $10 million and a 2015 dividend in the a mount of $12.8 million which w ere satisfied entirely out of the respective year s’ current earnings and profits, continues to be indefinitely reinvested outside of the U . S. 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 U.S. federal and state income taxes. Based on our current operating plan, we do not anticipate the need to repatriate undistributed earnings acc umulated as of December 31, 2016 , but we do anticipate a need to repatriate a portion of future foreign earnings to fund our U.S. operations .   Our current expectation is that any amounts repatriated to supplement our parent company’s liquidity will be offset by tax-deductible expenses or available tax benefits such as accumulated net operating losses. We will accrue for U.S. income taxes on future foreign earnings that we anticipate repatriating from our foreign subsidiaries.





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



  Years Ended December 31,



 

 

 

 

 

 

 

 

 



2016

 

2015

 

2014

 

Cash provided by (used in):

  

 

 

 

 

 

 

 

 

Operating activities

$

34,527 

 

$

32,507 

 

$

27,609 

 

Investing activities

$

(3,366)

 

$

(9,010)

 

$

(6,203)

 

Financing activities

$

1,858 

 

$

(8,419)

 

$

(20,806)

 



 

 

 

 

 

 

 

 

 

Net cash provided by operating activities wa s $34 . 5 million for the year ended December 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, deferred income taxes, unrealized loss on measurement of monetary asset ,   and changes in operating assets and liab ilities. Accounts receivable and inventory levels both increased for the year ended December 31, 2016, related to higher sales volume and h igher finished goods inventory.

Net cash provided by operating activities was $ 32.5 million for the year ended December 31, 2015 and primarily reflected the net income for the period, adjusted for non-cash items such as stock-based compensation expense, provisions for doubtful accounts , depreciation and amortization expense, and changes in operating assets and liabilities. We reserved an amount of $0.5 million in the first quarter of 2015 as a bad debt charge recorded in general and administrative expense related to a customer whose receivable balance was past due which we subsequently wrote off when we determined it to be uncollectible during the fourth quarter of 2015 .  

42

 


 

Accounts payable and ac crued liabilities increased $9. 7 million for the year ended December 31, 2015 as compared to the prior year’s period, mainly related to the additional $ 10.8 million   SEC settlement expense recorded to operating expense related to the settlement with the SEC. Restricted cash in escrow for the SEC settlement increased $12.8 million related to the $ 12.8 million   SEC settlement amount deposited in escrow during the fourth quarter of 2015.

Net cash provided by operating activities was $27.6 million for the year ended December 31, 2014 and primarily reflected the net income for the period, adjusted for non-cash items such as stock-based compensation expense, provisions for expiring inventory, depreciation and amortization expense, and changes in operating assets and liabilities. As of December 31, 2014, we had accounts receivable totaling approximately $0.9 million from a single customer, which were substantially delinquent and which we were actively trying to collect, and for which we had recorded a reserve of $0.9 million. We entered into a settlement agreement with the customer in October 2014 to collect the remaining balance (refer to Note 1 to the consolidated financial statements appearing under Part II, Item 8). Accounts receivable increased $3.3 million mainly related to an increase in ZADAXIN sales. Inventory decreased $5.9 million mainly related to ZADAXIN inventory sales during the first half of 2014 exceeding our purchase levels, excluding approximately $2.9 million in Pfizer and Aggrastat inventory not yet paid for as of December 31, 2014. Accounts payable and accrued liabilities decreased $5.9 million mainly related to sales and marketing and manufacturing expense payments made during the year ended December 31, 2014.

Net cash used in investing activities was $3.4 million, $9.0 million ,   and $6.2 million, for t he years ended December 31, 201 6, 2015 , and 201 4 , respectively. As further discussed in Note 5 to the notes to the consolidated financial statements appearing in Part II, Item 8, on September 9, 2016, we and Soligenix entered into an exclusive license agreement (the “License Agreement”), pursuant to which Soligenix granted rights to the Company to develop, promote, market, distribute and sell SGX9412 in the People’s Republic of China, Hong Kong, Macau, Taiwan, South Korea and Vietnam. In connection with the execution of the License Agreement, we entered into a common stock purchase agreement with Soligenix pursuant to which we bought 3,529,412 shares of Soligenix common stock for  $ 2.7 million .   In October 2016, Soligenix declared a 1 for 10 reverse stock split, converting our Soligenix ownership from 3,529,412 shares to 3 52,942 shares.

For the years ended December 31, 201 6 ,   201 5 , and 201 4 , purchases of property and equipment were $0.6 million, $1.8 million ,   and $1.5 million, respectively. In addition, for the year s ended December 31, 2015 and , we received proceeds of $0.1 million from the sale or maturity of our short-term investments or available-for-sale securities .   In addition, 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 6 to the consolidated financial statements appearing under Part II, Item 8), which is reflected in the $ 9.0 million and $6.2 million of net cash used in investing activities for 2015 and 2014 , respectively . 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 ”) .

Net cash provided by ( used in ) financing activities was $1.9 million, ( $8.4 ) million ,   and ( $20.8 ) million, for the years ended December 31, 201 6 ,   2015 , and 2014 ,   respectively. For the years ended December 31, 2016, 2015, and 2014, we received $1.9 million, $4.4 million, and $5.2 million, of proceeds, respectively, from the issuances of common stock made under our stock award plans. During the years ended December 31, 2016 ,   201 5   and 201 4 , we used   $ 12.8 million   and $24.4 million, respectively, to repurchase and retire approximately 1.5 million and 3.8 million shares of our common stock under our stock repurchase program.

In December 2013, our subsidiary, NovaMed Shanghai, entered into a 10.0 million RMB revolving line of credit facility (approximately $1.6 million USD) and a maximum 15.0 million RMB loan facility (approximately $2.4 million USD) secured by its accounts receivable with Shanghai Pudong Development Bank Co. Ltd. (the “Credit Facility”). In June 2014, NovaMed Shanghai repaid the 10.0 million RMB (approximately $1.6 million USD) under the Credit Facility. The Credit Facility expired on November 30, 2014 and all amounts borrowed were repaid by the expiration date.

43

 


 

The following summarizes our other future contractual obligations as of December 31, 20 1 6  ( in thousands ):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Payments Due by Period



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

Less than

 

 

 

 

 

 

 

 

More Than

Contractual Obligations

 

 

Total

 

 

1 Year

 

 

1-3 Years

 

 

3-5 Years

 

 

5 Years

Operating leases (1)

 

$

3,640 

 

$

2,311 

 

$

1,329 

 

$

            —

 

$

            —

Purchase obligations (2)

 

 

20,711 

 

 

20,711 

 

 

            —

 

 

            —

 

 

            —

Uncertain tax positions (3)

 

 

3,900 

 

 

            —

 

 

            —

 

 

            —

 

 

            —

Total

 

$

28,251 

 

$

23,022 

 

$

1,329 

 

$

            —

 

$

            —



(1)

These are future minimum rental commitments for office space and copiers leased under non-cancelable operating lease arrangements.

(2)

These consist of purchase obligations with manufacturers and distributors.

(3)

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

Under our license agreements with third parties we have agreed to various milestone payments related to regulatory and commercial success and other achievements that may require substantial payments in the future.

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 from the issuance of the financial statements . 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 status of the pending regulatory investigations and pending litigations, the level and price of our products, the timing and amount of manufacturing costs related to our products, the availability of complementary products, technologies and businesses, the initiation and continuation of preclinical and clinical trials and testing, the timing of regulatory approvals, developments in relationships with existing or future collaborative parties, the status of competitive products, and various alternatives for financing. We have not determined the timing or structure of any transaction.

Off-Balance Sheet Arrangements

We do not have any off - balance sheet arrangements.

Critical Accounting Policies and Significant Judgments and Estimates

General

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect our reported and expected

44

 


 

financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the “Notes to our Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, we evaluate the relevance of our estimates and judgments. We base our estimates on historical experience and on various other market-specific assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.

Revenue Recognition

We recogn ize 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 arrival of a shipment to its destination, which marks the point when title and risk of loss to 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” 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 arr angement with our China importer and distributor for ZADAXIN, Sinopharm, is resulting in the later recognition (relative to practices prevailing under the old contractual arrangement through December 31, 2015) of a portion of our revenue due from 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 Sinopharm is invoiced at a lower base price relative to that prevailing in the previous agreement. The lower base price ( reduced by estimate d price compensation payable   to Sinopharm 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 upon arrival at destination. To date, there are no situations where a provincial tender price is less than the reference (baseline) tender price. Sinopharm 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 with them . It is expected that the price compensation due to us related to sales in a quarter under the price adjustment mechanism for provinces with tender prices above the reference (baseline) tender price wil l be recognized on a rolling one-to-two quarter delayed basis relative to the originating sales quarter. 

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 Dec ember 31, 201 6 and 201 5 , our revenue reserves were approximately $0.3 million and $ 0 .1 million , respectively ; the reserves were recorded as accrued liabilities i n our consolidated balances sheet.

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.

45

 


 

Accounts Receivable Reserve

We record a receivable reserve based on a specific review of our overdue invoices. Our estimate for a reserve is determined after considering our existing contractual payment terms, payment patterns of our customers and individual customer circumstances, the age of any outstanding receivables and our current customer relationships. Accounts receivable are charged off at the point when they are considered uncollectible.

As of December 31, 2016, we determined that no receivable reserve was needed. As of December 31, 2015 , we had a receivable reserve of $0. 6 million. In October 2014, our subsidiary, SPIL China, executed an agreement with a particular customer providing for settlement of a $3.0 million receivable balance. The terms of the settlement agreement resulted in the write-off of $1.1 million in previously fully reserved accounts receivable with an equivalent charge-off of the allowance for bad debt, which had no impact on net income in 2014, as the subsequent agreement provided direct evidence that the $1.1 million previously reserved will not be collected in the future. Of the remaining $1.9 million receivable balance, $0.5 million, $0.4 million and $1.0 million were collected in 2016, 2015 and 2014, respectively, per the terms of the settlement agreement, and these gains on recovery were recorded as reductions to general and administrative expense for the years ended December 31, 2016, 2015 a n d 2014, respectively. We 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. We wrote-off the $0.5 million of past due accounts receivable from this customer during the fourth quarter of 2015 as uncollectible.

Inventories

Our 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. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements and compare that with the current inventory levels. If our current assumptions about future production or inventory levels and demand were to change or if actual market conditions are less favorable than those projected by management, inventory write-downs may be required, which could negatively impact our gross margins and results of operations. If obsolete or excess items are observed and there are no alternate uses for the inventory, we will record a write-down to net realizable value in the period that the impairment is first recognized. During t he years ended December 31, 2016, 2015 and 2014 , we recorded inventory write-downs of $34,000 ,   $0, and $2.1 million, respectively, principally related to carrying value reductions for excess Aggrastat product in the year 2014 . As we have discontinued this product, remaining Aggrastat invent ory is zero as of December 31, 2016 .

Goodwill

We account for goodwill in accordance with ASC Topic 805, and ASC Topic 350, Intangibles — Goodwill and Other . ASC Topic 805 requires that the acquisition method of accounting be used for all business combinations and specifies the criteria that must be met in order for intangible assets acquired in a business combination to be recognized and reported apart from goodwill. Goodwill is tested for impairment at least annually or whenever events or circumstances occur that indicate impairment might have occurred or circumstances suggest that the carrying value of these assets may not be recoverable and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets in accordance with ASC Topic 350. Judgment regarding the existence of impairment indicators will be based on operating results, changes in the manner of our use of the acquired assets or our overall business strategy, and market and economic trends.

Goodwill relates to our China segment which focuses on our primary pharmaceutical distribution market, consisting of the NovaMed Pharmaceuticals, Inc. (“NovaMed”) business and the legacy China business of the Company, which represent a single reporting unit. For t he years ended December 31, 2016, 2015 and 201 4 , we tested for goodwill impairment by quantitatively comparing the fair value of the reporting unit to its carrying amounts - step one of the two-step impairment test. We estimated the fair value of the China reporting unit using a discounted cash flow model. This valuation approach considers a number of factors that include, but are not limited to, expected future cash flows, growth rates, discount rates, and requires us to make certain assumptions and estimates regarding industry economic factors and future profitability of our business. Although we believe our assumptions are reasonable, actual results may vary significantly and may expose us to impairment charges in the future. Our methodology for determining fair value remained consistent for the periods presented. If we determine that the carrying value of our reporting unit exceeds its fair value, we would then calculate the implied fair value of the reporting unit goodwill as compared to its carrying value to determine the appropriate impairment charge. After completing our annual impairment review for the reporting unit as of December 31, 2016 , 201 5 and 201 4 , we concluded that g oodwill was not impaired in 2016 , 201 5 , or 201 4 .

46

 


 

Investments

We record unrealized gains or losses on available-for-sale equity investments in other comprehensive income (loss). Realized gains and losses and declines in value judged to be other-than temporary on available-for-sale equity investments are included in earnings. Available-for-sale equity investments are evaluated for impairment each reporting period. An investment is considered impaired if the fair value of the investment is less than its cost. If after consideration of all available evidence to evaluate the realizable value of our investment, impairment is determined to be other-than-temporary, then an impairment loss is recognized in the consol idated statement of operations. We determine an impairment to be other-than temporary if there is an inability to recover the carrying value of the investment.

Loans Receivable

Loans receivable consist of two loans to one third party (see Note 6   to our consolidated financial statements appearing under Part II, Item 8 ). Loans are initially recorded, and continue to be carried, at unpaid principal balances under “other assets” on the consolidated balance sheet as of December 31, 2016 and 2015 . 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.

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.

Management assessed the credit worthiness of the counterparty by reviewing available borrower financial information and substantiation of the value of the pledged security interest in the course of preparing our consolidated financial statements. Management also considered in its analysis that the borrower was compliant with the terms of the loans, that interest payments have been time ly made , and that available reliable evidence indicated that the market value of the pledged security was greater than the loan receivable balance . As of December 31, 2016 and 2015 , management concluded the loans receivable were not impaired, and there was no allowance for loan losses.

Contingent Liabilities

We record as liabilities estimated amounts for litigation, claims or other legal actions that are probable and can be reasonably estimated. The likelihood of a material change in these estimated reserves is dependent on the possible outcome of settlement negotiations, regulatory or judicial review and the development of facts and circumstances in extended litigation, which could change claims or assessments when both the amount and range of loss on some outstanding litigation is uncertain. We disclose in the footnotes of the financial statements when we are unable to make a reasonable estimate of a material liability that could result from unfavorable outcomes. As events occur, we will assess the potential liability related to any pending litigation, claims or other legal actions and adjust our estimates accordingly.

Stock-Based Compensation  

We record stock-based compensation costs relating to share-based payment transactions, including stock options, restricted stock units (“RSUs”) , performance restricted stock units (“PSUs”) and employee stock purchase plans (“ESPP”) . Stock-based compensation expense for stock options and the employee stock purchase plan is estimated at the date of grant based on the fair value of the award using the Black-Scholes option-pricing model. Stock-based compensation expense for RSUs and PSUs is estimated at the date of grant based on the number of shares granted and the quoted price of the Company’s common stock on the grant date. Stock-based compensation expense values for stock options, RSUs and the ESPP plan are recognized as expense on a straight-line basis over the requisite service period, net of estimated forfeitures. We recognize expense related to the performance stock options and PSUs over the implicit service period if it is probable that the performance goals will be achieved. If it is subsequently determined that the performance goals are not probable of achievement, the expense related to the performance stock options or PSUs is reversed. The share-based payment awards that are ultimately expected to vest are recognized as expense ratably (as the awards vest) over the requisite service period, which is generally one or four years for stock options and RSUs and three months for ESPP .   We estimate pre-

47

 


 

vesting forfeitures at the time of grant by analy zing historical data and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The total expense recognized over the vesting period will only be for those awards that ultimately vest.

The option-pricing models require the use of certain subjective assumptions, including the expected volatility of the market price of the underlying stock and the expected term of the award. Expected volatility is based on the historical volatility of our stock. Expected term is derived from historical data on employee exercises and terminations. We review our valuation assumptions at each grant date, and, as a result, valuation assumptions used to value stock-based compensation of awards granted in future periods may change.

Income Taxes

Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. We provide a valuation allowance against deferred tax assets if, based upon the available evidence, it is more-likely-than-not that the deferred tax assets will not be realized. Realization of our deferred tax assets is dependent upon the generation of future taxable income, the timing and amount of which are uncertain. The tax years 1995-2016 remain open to examination by the major U.S. taxing jurisdictions to which we are subject. The Internal Revenue Service completed their examinations of our 2008, 2009 and 2011 U.S. Federal tax returns with no additional tax assessments or proposed adjustments relating to taxable income for any years. Our China income tax returns are generally subject to examination for a period of five years and those years remain open to examination.

We record liabilities related to uncertain tax positions in accordance with the guidance that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We do not believe any such uncertain tax positions currently pending will have a material adverse effect on our consolidated financial statements, although an adverse resolution of one or more of these uncertain tax positions in any period could have a material impact on the results of operations for that period.

New Accounting Standards Updates  

Please refer to Note 1 to our consolidated financial statements appearing under Part II, Item 8 for a discussion of new accounting standards updates that may impact the Company.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk  

Foreign Currency Exchange Rate Risk

We do not hold any derivative financial instruments for speculation or trading purposes. The majority of our sales since July 1, 2016 are denominated in RMB. Our purchases with contract manufacturers are denominated in U.S. dollars and euros and costs of our marketing efforts in China are paid in local currency. In the recent year and months the RMB has experienced devaluation . Such devaluation negatively affects the U.S. dollar value of revenues while it positively affects the U.S. dollar value of China operating expenses . 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 the Peoples Bank of China. Remittances in currencies other than RMB by the Company in China require certain supporting documentation in order to process the remittance.  

In addition, we have certain cash balances and other long-term assets and liabilities denominated in euros, RMB and Hong Kong dollars. As a result, we are exposed to foreign currency rate fluctuations, and we do not hedge against the risk associated with such fluctuations. Consequently, changes in exchange rates could result in material exchange losses and could unpredictably, materially and adversely affect our operating results and stock price. A hypothetical 1% increase or decrease in foreign exchange rates would result in an approximate $ 0.1 million increase or decrease in our financial assets and liabilities denominated in euros, RMB and Hong Kong dollars, as of December 31, 201 6 and 201 5 . These potential changes are based on sensitivity analyses performed on our financial position as of December 31, 201 6 and 201 5 . Actual results may differ materially.

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Interest Rate Risk

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in money market funds, term deposits, commercial paper, corporate bonds, U.S. treasury, or government agency notes; our investments are most frequently classified as cash equivalents. We are also invested in a loan to a business partner; however, the purpose for such loan is to facilitate the business relationship and it is not principally for investment purposes. Our investment securities may be subject to interest rate risk and could decrease in value if market interest rates rise. To minimize this risk, we primarily hold securities that are short-term in duration and maintain an average maturity of less than one year. We believe that our exposure to interest rate risk is not significant and a 1% movement in market interest rates would not have a significant impact to the total value of our investment po rtfolio as of December 31, 2016 or 2015 .

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Item 8. Financial Statements and Supplementary Data  

SCICLONE PHARMACEUTICALS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



 

 

 

 

 

 

 

  

PAGE NO.

 



 

 

Report of Independent Registered Public Accounting Firm

  

 

51

 



Consolidated Balance Sheets

 

 

52

 



Consolidated Statements of Income

 

 

53

 



Consolidated Statements of Comprehensive Income

 

 

54

 



Consolidated Statements of Stockholders’ Equity

 

 

55

 



Consolidated Statements of Cash Flows

 

 

56

 



Notes to Consolidated Financial Statements

 

 

57

 



 

 

 

 

 





 



 

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Report of Independent Registered Public Accounting Fir m

To the Board of Directors and Shareholders of SciClone Pharmaceuticals, Inc.

In our opinion, the consolidated   financial statements listed in the   index appearing under Item 15(a)(1) present fairly,   in all material respects, the financial position of SciClone Pharmaceuticals, Inc. and its subsidiaries at   December 31, 2016 and December 31, 2015 ,   and the results of   their o perations and their cash flows for   each of the three years in the period ended   December 31, 2016   in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) ,   present s fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated   financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of Decem ber 31, 2016 , based on criteria established in Internal Control - Integrated Framework   (2013)   issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting , included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9(a). Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion s .

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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.

/s/ PricewaterhouseCoopers Zhong Tian LLP

Shanghai, the People’s Republic of China

March 9 , 2017



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SCICLONE PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)



 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31,

 

December 31,