-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VGoIhnMFTaG/yzH5lHI23w+CldWzICaHn4WKPSnOC8IRhr6vHcUlefCm/6iw2dA4 yKbdklAOy+h2tAJCLyyFtg== 0000891618-96-002195.txt : 19961001 0000891618-96-002195.hdr.sgml : 19961001 ACCESSION NUMBER: 0000891618-96-002195 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHARMACYCLICS INC CENTRAL INDEX KEY: 0000949699 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 913148201 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26658 FILM NUMBER: 96636728 BUSINESS ADDRESS: STREET 1: 995 EAST ARQUES AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087743345 MAIL ADDRESS: STREET 1: 995 EAST ARQUES AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-K 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 000-27066 PHARMACYCLICS, INC (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-3148201 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 955 E. ARQUES AVENUE, SUNNYVALE, CALIFORNIA 94086-4521 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 774-0330 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - -------------------------------------------------------------------------------------------- None None
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.0001 PAR VALUE 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 report(s), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ No / /. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 amendments to this Form 10-K. The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of August 31, 1996, was approximately $42,949,500 based on the Nasdaq National Market on such date. The number of outstanding shares of the Registrant's Common Stock as of August 31, 1996 was 8,553,300. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into Part III of this Form 10-K: the Proxy Statement for the Registrant's 1996 Annual Meeting of Stockholders scheduled to be held on December 6, 1996. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1996 TABLE OF CONTENTS PART I Item 1. Business.................................................................... 3 Item 2. Properties.................................................................. 27 Item 3. Legal Proceedings........................................................... 27 Item 4. Submission of Matters to a Vote of Security-Holders......................... 27 PART II Item 5. Market for Registrants Common Equity and Related Stockholder Matters........ 28 Item 6. Selected Financial Data..................................................... 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................. 29 Item 8. Financial Statements and Supplementary Data................................. 32 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................................................. 47 PART III Item 10. Directors and Executive Officers of the Registrant.......................... 48 Item 11. Executive Compensation...................................................... 48 Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 48 Item 13. Certain Relationships and Related Transactions.............................. 48 PART IV Item 14. Financial Statements, Financial Statement Schedule, Exhibits and Reports on Form 8-K.................................................................... 48
2 3 PART I ITEM 1. BUSINESS Pharmacyclics is developing patented pharmaceutical products designed to improve radiation and chemotherapy of cancer, enable or improve the photodynamic therapy of certain cancers and atherosclerotic cardiovascular disease, and enhance certain diagnostic imaging techniques. These products address significant market opportunities and are intended to enhance existing medical procedures and improve the ability of physicians to treat or manage life threatening and serious conditions. Such products are derived primarily from Pharmacyclics' core technology in designing and synthesizing small molecules called expanded porphyrins, which bind metals in a way that allows the resulting molecule to capture and focus energy to perform specific therapeutic and diagnostic functions. The Company's proprietary expanded porphyrins, called "texaphyrins," are small, ring-shaped molecules that localize in cancer cells and atherosclerotic plaque where they can be exposed to forms of energy that activate the molecules to eliminate diseased tissue. The physical and chemical characteristics of the texaphyrin molecules are determined by the type of metal inserted into the ring and the form of energy applied to activate the molecule. For example, texaphyrins can be synthesized to focus and transform X-ray, chemical or light energy into other forms of energy capable of producing localized destruction of diseased tissue. This forms the basis for the use of texaphyrins as radiation sensitizers, chemosensitizers and photosensitizers. One such molecule, Lutetium Texaphyrin ("Lu-Tex"), is being developed as a photosensitizing agent for use in photodynamic therapy, and a second, Gadolinium Texaphyrin ("Gd-Tex") is being developed for use as a radiation sensitizer and chemosensitizer. Lu-Tex is in multicenter Phase I clinical testing to evaluate its safety and efficacy in the treatment of certain invasive cancers which are accessible to illumination by externally applied light. Gd-Tex has completed Phase I testing and is now in a multicenter Phase I/II clinical trial as a radiation sensitizer to improve the efficacy and safety of radiation therapy of certain cancers. Gd-Tex also is being developed to potentiate the activity of certain cancer chemotherapy drugs. Based on the Company's unique metal binding expertise, it has developed GADOLITE(R) Oral Suspension ("GADOLITE") for use as an oral contrast agent in patients undergoing Magnetic Resonance Imaging ("MRI") of the abdomen or pelvis. In September 1995, the Company submitted a New Drug Application ("NDA") with the Food and Drug Administration ("FDA") for GADOLITE. In June 1996 the Company filed an Marketing Authorization Application ("MAA") for GADOLITE with the Medicines Control Agency ("MCA") in the United Kingdom. The Company's strategy is to apply its core biometallic chemistry and expanded porphyrin technology to develop a diverse product portfolio. Pharmacyclics is leveraging its core technology and products by establishing relationships with third parties intended to augment its research and development activities and to provide manufacturing capacity and sales and marketing capabilities. To date, the Company has retained worldwide marketing rights for its therapeutic products. The Company also dedicates significant resources to build and protect its intellectual property rights in the U.S. and abroad. ACHIEVEMENTS SINCE LAST FISCAL YEAR - Completed IPO raising $28M. - Completed Phase I clinical trial with Gd-Tex radiosensitizer. - Initiated Multicenter Phase I/II clinical trial with Gd-Tex radiosensitizer for brain metastases. - Initiated Phase I clinical trial for Lu-Tex photosensitizer for cancer treatment using photodynamic therapy. - Filed MAA for GADOLITE MRI contrast agent in the United Kingdom. - Finalized worldwide commercial supply agreement with Hoechst Celanese Corporation ("HCC") for Gd-Tex and Lu-Tex. 3 4 MARKET OVERVIEW CANCER Cancers result from the uncontrolled proliferation of cells that invade adjacent normal tissues and organs and interfere with their function. In some cases, cancer cells become dislodged from their primary site and spread, or metastasize, to other anatomic sites. Cancers can arise in almost any location in the body. In the U.S., there are approximately 1.3 million new cases of cancer per year and the incidence of cancer is increasing. Over seven million people in the U.S. today have been diagnosed with cancer, resulting in estimated annual direct and indirect medical costs of over $50 billion associated with the management of cancer. Selection of appropriate therapy depends on careful assessment of the size, location and existence of metastases of the tumor using diagnostic imaging procedures such as computerized tomography ("CT") and MRI, which may be further enhanced by the use of contrast agents. Once the extent of disease has been determined, cancer therapy typically includes some combination of surgery, radiation therapy or chemotherapy. Unfortunately, many tumors are not controlled with surgery because of their size, location or presence of metastases. In these cases, radiation therapy or chemotherapy are frequently used. Radiation therapy is applied by physicians specializing in radiation oncology. There are approximately 3,000 such physicians based in 1,300 radiation treatment centers in the U.S. Chemotherapy is usually prescribed by physicians who specialize in medical oncology and there are about 6,000 such specialists in the U.S. Chemotherapy and radiation therapy destroy both healthy and diseased cells and cause serious side effects because their cytotoxic effects are not adequately selective. Substantial research in cancer treatment has been directed toward improving the efficacy of existing therapy while reducing toxicity, in addition to searching for new treatment approaches. Radiation Therapy for Cancer. Radiation therapy is administered to the anatomic site where the tumor is located, known as the treatment field, while adjacent normal tissues are shielded to minimize radiation toxicity, and is usually given several times per week over a period of two to six weeks. Irradiation of tissues generates free radicals and electrons (highly reactive and short-lived molecules and particles) that attack intracellular molecules such as DNA and lead to cell death. Treatment planning and definition of the treatment field is highly dependent on imaging procedures which are required to determine the location and size of the tumor and its relationship to adjacent normal tissues. Of the over one million newly-diagnosed cancer patients each year in the U.S., an estimated 50% will be treated with radiation therapy as part of their initial disease management. This includes patients with cancers of the lung, breast, prostate, head and neck region and other anatomic sites. In addition, approximately 150,000 patients with persistent or recurrent disease also will receive radiation therapy. In total, approximately 700,000 patients receive radiation therapy for cancer each year in the U.S. Depending on the complexity and duration of treatment, a course of radiation therapy for cancer can cost between $10,000 and $25,000. While there currently are no approved radiation sensitizers, certain chemotherapy agents are frequently used off-label to increase the effectiveness of radiation therapy. However, the use of chemotherapy agents as radiation sensitizers is typically limited by lack of tumor localization and by systemic toxicity. Optimally, a radiation sensitizer should be safe, simple to administer to the patient and potentiate the effect of radiation at the tumor site and not the adjacent normal tissue. Chemotherapy of Cancer. In the U.S., over 350,000 patients per year receive cytotoxic chemotherapy for treatment of many types of cancer. The effectiveness of chemotherapy agents usually is limited by their serious or life threatening side effects. These side effects often include nausea and vomiting, suppression of white blood cell and platelet counts, renal toxicity, pulmonary toxicity, neurotoxicity and cardiac toxicity. Chemotherapy drugs distribute throughout the body in normal tissues as well as in the tumor. The cytotoxic effects to normal tissues is dose-limiting for most of these drugs, resulting in a very narrow therapeutic margin. Many recent advances in medical oncology have resulted from the discovery of drugs that ameliorate the side effects of chemotherapy agents, such as anti-emetics and blood cell growth factors which allow for use of higher doses of chemotherapy. Chemosensitizers are drugs which potentiate the anti-tumor activity of cancer 4 5 chemotherapy agents. Although certain chemosensitizers have been tested experimentally, no such agents are yet approved. Ideally, a chemosensitizer should be safe, simple to administer to the patient and potentiate the activity of the cytotoxic chemotherapy agent in the tumor but not in any normal tissues or organs, thereby increasing the therapeutic margin. Photodynamic Therapy for Cancer. Photodynamic therapy, also known as photochemotherapy, is an emerging cancer treatment based on the combined effects of visible light and a photosensitizing drug. Photosensitizers are activated by exposure to light of a specific wavelength. In this procedure, a photosensitizing agent which accumulates in tumors is injected into the patient. The tumor site is then illuminated with visible light of a particular energy and wavelength that is absorbed by the photosensitizer, creating excited state oxygen molecules in those tissues in which the drug has localized. These molecules are highly reactive with cellular components and cause tumor cell death. Recently, the first photosensitizing agent was approved by the FDA for treatment of obstructing cancers of the esophagus. To date, photodynamic therapy has been restricted to treatment of superficial or small lesions because existing photosensitizers have been unable to absorb light of a wavelength capable of penetrating deeply into tissues. Other limitations of photosensitizers have included unfavorable biolocalization, prolonged retention in the body, skin phototoxicity and insolubility in water, complicating intravenous administration. In addition, some tumors, including malignant melanoma, contain pigments which have not allowed adequate penetration of light for photodynamic therapy. Optimally, a photosensitizer should accumulate selectively in tumors and be capable of activation with a wavelength of light that is able to penetrate through tissue, blood and darkly pigmented skin, in order to treat larger or more deeply situated tumors. Ideally the treatment should be accomplished in a single outpatient visit. Other important features include safety, lack of skin phototoxicity and simple administration of the agent to the patient. ATHEROSCLEROSIS Atherosclerosis is a progressive and degenerative vascular disease in which cholesterol and other fatty materials are deposited in the walls of blood vessels, forming a build-up known as plaque. The accumulation of plaque narrows the interior of the blood vessels, thereby reducing blood flow. Atherosclerosis in the coronary arteries can lead to heart attack and death. In peripheral vessels, atherosclerosis can lead to decreased mobility, loss of function and other complications such as strokes. Current treatments for atherosclerosis include surgery and other techniques aimed at removing or relieving the plaque. Procedures utilizing intravascular devices to mechanically remove or compress the obstructing lesion include atherectomy and angioplasty, often with stent placement, and are currently performed on over 400,000 patients per year in the U.S. These procedures require the use of anticoagulant drugs and, although the use of stents has reduced the incidence of restenosis, generally have been limited to localized sections of the diseased vessel. The optimal interventional treatment for atherosclerosis should effectively eliminate atherosclerotic plaque without the need for anticoagulant drugs or stent placement. Since atherosclerosis is a diffuse disease, therapies which can be used over long segments of the affected vessel offer significant advantages over treatments limited to short segments of the vessel. Photodynamic Therapy of Atherosclerosis. Photodynamic therapy to eliminate atherosclerotic plaque involves administration of a photosensitizing agent which accumulates in the plaque. The diseased site is then exposed to light delivered by a catheter containing an optical fiber. This approach may eliminate cholesterol plaque without damage to the blood vessel lining thereby potentially eliminating the need for anticoagulants and reducing the frequency of restenosis. The Company believes that the use of photodynamic therapy for atherosclerosis previously has been limited by the inability of photosensitizers to absorb light that is capable of penetrating through blood. The ideal photosensitizer should localize in atherosclerotic plaque and be readily activated by light capable of penetrating through blood to reach the drug. 5 6 DIAGNOSTIC IMAGING AGENTS The worldwide market for imaging agents exceeded $3 billion in 1993, approximately $250 million of which was associated with MRI. Improved contrast agents may provide an opportunity to expand the medical indications for MRI. In 1993, approximately 3,300 MRI scanners were used in health care centers in the U.S., and approximately seven million procedures were performed. Since the most common cancers originate and spread within the chest, abdomen or pelvis, the greatest need for additional MRI contrast agents is for imaging of these areas. These sites are generally difficult to image because of the close juxtaposition of many overlapping organs. The tortuous pathway and unpredictable position of the stomach, small intestine and large intestine, in addition to their being fluid-filled, often makes it difficult to distinguish such organs from cancers, abscesses or other inflammatory processes in an MRI scan. Thus, the development of oral MRI contrast agents capable of definitively marking the gastrointestinal tract could improve the diagnostic quality of scans of the abdomen and pelvis. Just as oral X-ray contrast agents currently are used in nearly all CT scans of the abdomen and pelvis, the Company believes that, as they become available, oral MRI contrast agents will be increasingly used in MRI scans of the abdomen and pelvis. Improvements in diagnostic certainty resulting from image enhancement may reduce the need for repeat scanning of patients or other diagnostic tests, and, by permitting faster scanning and increased patient throughput, reduce the cost of an MRI scan. OTHER MARKETS The Company is also evaluating Lu-Tex for photodynamic therapy of age related macular degeneration, an eye disease affecting the retina that is a leading cause of blindness in the U.S. The Company has also prepared and tested topical formulations of Lu-Tex for various applications in dermatology. Both of these applications are currently being studied in animal models. PHARMACYCLICS' BUSINESS STRATEGY Pharmacyclics' products are designed to address significant market opportunities in the treatment of certain cancers and atherosclerosis, and in diagnostic imaging. The key elements of the Company's business strategy include: DEVELOPING THERAPEUTIC PRODUCTS THAT ADDRESS LARGE MARKETS FOR THE TREATMENT OF CANCER AND ATHEROSCLEROSIS. The Company's therapeutic products under development are designed to improve radiation therapy, chemotherapy and photodynamic therapy for the treatment of certain cancers and atherosclerosis. The Company's initial therapeutic product focus has been on treatments for life threatening cancers, where the Company believes its products may offer measurable improvements in patient outcomes. This strategy is intended to reduce the time required to achieve regulatory approval, and achieve both substantial market penetration and favorable pricing of these products. APPLYING CORE BIOMETALLIC CHEMISTRY AND EXPANDED PORPHYRIN TECHNOLOGY TO DEVELOP A DIVERSE PRODUCT PORTFOLIO. Each of the Company's products under development incorporates one of a series of metals within a proprietary expanded porphyrin or a zeolite structure. The resulting synthetic small molecules selectively localize in the body and are capable of harnessing forms of energy used in a variety of medical applications. The Company has leveraged its expertise and proprietary position in biometallic chemistry and expanded porphyrin technology to develop a diverse product portfolio. Using a series of different metals which may be incorporated into texaphyrins to enable the molecule to capture and focus different types of energy, the Company has created several product opportunities based on similar chemical synthesis, manufacturing and product development activities. 6 7 DESIGNING PRODUCTS THAT ENHANCE EXISTING MEDICAL PROCEDURES AND ARE SIMPLE AND PRACTICAL TO USE. The Company's products under development are designed to improve the ability of physicians to treat or manage life threatening or serious conditions. These products are designed to enhance existing procedures and should result in accelerated product adoption. For example, the Lu-Tex photosensitizer for cancer therapy is designed to be given by rapid intravenous infusion, and tumors can be exposed to light within a few hours, permitting treatment in a single outpatient visit; the Gd-Tex radiation sensitizer and chemosensitizer each are designed to be used in conjunction with standard radiation therapy and chemotherapy procedures; and GADOLITE is intended to improve the diagnostic capabilities of existing abdominal and pelvic MRI procedures. LEVERAGING ITS CORE TECHNOLOGY THROUGH COLLABORATIVE RELATIONSHIPS. The Company is leveraging its proprietary core technology through collaborative relationships that strengthen its basic research capabilities and provide manufacturing and marketing capacity, enabling the Company to focus on the development of new products addressing substantial markets in the areas of therapeutics for cancer and atherosclerosis. Consistent with this strategy, the Company is building a series of relationships with third parties to augment its research and development activities and to provide manufacturing, sales and marketing capabilities. The Company has utilized a Sponsored Research Agreement with The University of Texas at Austin for continued research and development of its expanded porphyrin technology. For its GADOLITE product, the Company has entered into a North American manufacturing and supply agreement with Glaxo Wellcome ("Glaxo") and a sales and distribution agreement with E-Z-EM, a leading distributor worldwide of oral contrast agents. For production of its Lu-Tex and Gd-Tex products, the Company has entered into a definitive process development and supply agreement with HCC, a manufacturer of chemicals and pharmaceutical intermediates. The Company to date has retained worldwide marketing rights for its therapeutic products. EXPANDING AND PROTECTING PROPRIETARY TECHNOLOGY AND PRODUCTS. Since its inception, the Company has dedicated significant resources to protect its intellectual property. In the U.S., the Company owns or has exclusive rights to 26 issued patents, 18 allowed patent applications and 41 pending patent applications covering various aspects of its core technology and products under development. Outside the U.S., the Company is the owner or exclusive licensee of five corresponding patents, and 40 pending counterpart patent applications. The Company intends to continue to protect its intellectual property through additional patent filings. PHARMACYCLICS' TECHNOLOGY The Company's products under development are derived from its expertise in biometallic chemistry and expanded porphyrins, such as the proprietary texaphyrin molecules developed by the Company and its academic collaborators. In nature, porphyrins, such as heme or chlorophyll, bind metals, transport ions and transform energy. In living organisms, porphyrins primarily localize to tissues or organs responsible for energy production, metabolism or transport functions. Based on their ability to capture and focus medically useful forms of energy, Pharmacyclics and its collaborators have designed and synthesized porphyrins, small, ring-shaped molecules, to perform specific functions in a number of medical applications. The expanded porphyrins being developed by the Company consist primarily of its proprietary texaphyrin molecules. For example, texaphyrins can be synthesized to focus and transform X-ray, chemical or light energy into other forms of energy capable of producing localized destruction of diseased tissue. This forms the basis for the use of texaphyrins as radiation sensitizers, chemosensitizers and photosensitizers. Texaphyrins can also be used with radiofrequency energy to produce an enhanced MRI signal. In contrast to naturally occurring porphyrins, synthetic texaphyrins have a larger central binding ring which makes possible the stable binding of a variety of lanthanide metals such as gadolinium, lutetium, europium and dysprosium. The physical and chemical characteristics and product application of the 7 8 texaphyrin molecules are determined by the type of metal inserted into the ring and the form of energy applied to activate the molecule. Metal ions act as natural catalysts for a number of biochemical processes. The binding of metal ions by texaphyrins is unique in that the metal is held near or within the plane of the molecule. This type of binding allows the metal to interact freely with adjacent molecules while still being retained within the texaphyrin structure. As a result of this metal binding configuration, texaphyrins can be engineered to capture and focus a variety of energy forms including capture of high energy chemical species, such as free radicals. As is the case for naturally occurring porphyrins, texaphyrins accumulate in those areas of the body where substantial energy usage or metabolism occurs, such as in cancer cells and the cholesterol of atherosclerotic plaque. This selectivity for particular cell types provides the basis for the Company's treatment approaches for certain cancers and atherosclerosis. Once localized, these small molecules can be excited with the appropriate energy form to activate their therapeutic effects. PRODUCTS UNDER DEVELOPMENT Pharmacyclics is pursuing the development of products based on its core technology in biometallic chemistry and the ability of its proprietary texaphyrin molecules to capture and focus medically useful forms of energy. By taking advantage of the Company's unique metal binding technology and the texaphyrin molecule, Pharmacyclics has developed the following product candidates:
PRODUCT INDICATION STATUS(1) COLLABORATORS(2) - ---------------------- ---------------------- ---------------------- ---------------------- CANCER THERAPY Lu-Tex.............. Photosensitizer for Multicenter Phase I Marketing rights photodynamic therapy retained of a variety of cancers Gd-Tex.............. Radiation sensitizer Phase I/II for brain Marketing rights for radiation therapy metastases retained of a variety of cancers Gd-Tex.............. Chemosensitizer for Preclinical Marketing rights chemotherapy of a retained variety of cancers ATHEROSCLEROSIS THERAPY Lu-Tex.............. Photosensitizer for Preclinical Marketing rights photodynamic therapy retained of atherosclerosis DIAGNOSTIC IMAGING GADOLITE............ Oral MRI contrast NDA submitted E-Z-EM, Inc. holds agent for abdomen and September 1995; MAA North American pelvis submitted June 1996 marketing rights; Glaxo holds manufacturing rights
- --------------- (1) "Phase I" means initial human studies designed to establish the safety, dose tolerance and sometimes pharmacokinetics of a compound. "Phase I/II" means initial human studies designed to establish the safety, dose tolerance and, sometimes, pharmacokinetics of a compound and are, in contrast to Phase I studies, performed with patients with the targeted disease. "Phase II" means human studies designed to establish safety, optimal dosage and preliminary activity of a compound. "Phase III" means human studies designed to lead to accumulation of data sufficient to support an NDA, including data as to efficacy. (2) The Company has entered into a process development and supply agreement with Hoechst Celanese for the clinical and commercial supply of its Lu-Tex and Gd-Tex products. There can be no assurance that the Company will not in the future enter into licensing agreements with third parties for the marketing of its products under development. 8 9 CANCER THERAPY Lu-Tex for Photodynamic Therapy of Cancer Photodynamic therapy is a minimally invasive treatment modality in which a photosensitizing drug that localizes to diseased tissue is injected into the body and then activated with light. To date, photodynamic therapy has been restricted to the treatment of superficial or small lesions because existing photosensitizers have been unable to absorb light that is capable of penetrating deeply into tissues. Lu-Tex is activated by light of 720-760 nanometers, wavelengths that are optimal for penetrating through tissue, blood and skin pigmentation such as melanin. After absorbing light of this wavelength, Lu-Tex becomes activated to a higher energy state capable of generating cytotoxic singlet oxygen molecules. Preclinical studies conducted by the Company indicate that Lu-Tex localizes to a variety of cancers. Lu-Tex is a synthetic, well characterized molecule that is water soluble and, in animal studies conducted by the Company, was relatively rapidly cleared from the body, reducing potential toxicity. Because of its relatively rapid clearance from normal tissue, it is possible to illuminate the tumors within a few hours of drug administration. This has the potential to simplify clinical use of the drug by permitting its administration in a single outpatient visit, a substantial improvement over current photodynamic therapies. The Company intends to seek initial approval for the use of Lu-Tex in photodynamic therapy for patients with invasive surface tumors (involving the skin or subcutaneous tissue) which are accessible to externally applied light. Such patients include those with chest wall recurrence of breast cancer, Kaposi's sarcoma, melanoma and other metastatic tumors to the skin or subcutaneous tissues, which diseases may affect over 50,000 patients per year in the U.S. Additional indications for the use of Lu-Tex include internal cancers such as cancer of the lung, breast, esophagus, colon, rectum, prostate, head and neck region and genitourinary tract, etc. Clinical Status. Lu-Tex has been administered to 25 patients in the Company's ongoing Phase I trial in cancer patients with tumors which are accessible to externally applied light. In these studies, currently being conducted at the University of Louisville James Brown Cancer Center, the University of Tennessee Thompson Cancer Center and Stanford University Medical Center, it has been possible to treat patients with a single rapid infusion of Lu-Tex followed within a few hours by illumination of the tumor with light in a single outpatient visit. To date, the Company has seen neither serious systemic toxicity nor any significant skin phototoxicity in this study that is evaluating increasing doses of Lu-Tex in order to find a maximally tolerated dose ("MTD"). During treatment a number of patients in these studies experienced pain localized at the diseased site. In some patients, transient discomfort in the hands and face was experienced at high drug doses. Tumor responses have been observed in a variety of tumor types including breast cancer, renal cell cancer, basal cell cancer, Kaposi's sarcoma and importantly, malignant melanoma. Because Lu-Tex is activated by tissue-penetrating light, responses have been observed in large tumors and in lymph nodes involved with cancer located in the soft tissues beneath the skin. Responses have been seen in patients who were refractory to other treatment modalities. The responses observed in melanoma patients are of interest because other photosensitizers have failed to be effective in this tumor. Melanoma cells contain the pigment melanin, which, except for light of 720-760 nanometers, prevents light from penetrating into tissue where it can activate the photosensitizer. Furthermore, Lu-Tex's ability to be activated by light of these wavelengths also indicates that it would be possible to treat people with darkly pigmented skin. Gd-Tex for Radiation Sensitization of Cancer Radiation therapy is based upon the sensitivity of cancer cells exposed to relatively high dosages of externally applied radiation. Generally, however, such radiation has toxic effects on healthy tissues surrounding the tumor because the energy is not adequately targeted. Radiation sensitizers are agents that increase the cytotoxic effects of radiation. The Company's preclinical studies indicate that texaphyrins can increase the effect of radiation therapy by absorbing free electrons which are generated during irradiation of tissues. Free electron absorption by Gd-Tex results in formation of relatively long-lived texaphyrin and other free radicals capable of destroying intracellular DNA molecules. In addition to these physicochemical properties of Gd-Tex, its propensity to localize selectively in cancer cells confers additional advantages as a radiation sensitizer since this effect is localized to the tumor. Gd-Tex uptake in tumors occurs within minutes and 9 10 persists for hours. Preclinical studies also indicate that Gd-Tex enhances radiation-induced killing of various human and animal cancer cells. Animals receiving Gd-Tex in conjunction with radiation therapy had enhanced tumor response and survival rates as compared to the control group receiving equivalent dosages of radiation therapy alone. Preclinical studies further indicate that Gd-Tex increases the effect of radiation therapy at the tumor site but does not increase radiation damage to normal tissues. Another possible advantage of the Gd-Tex molecule is that its unique properties allow it to be visualized with MRI. Because radiation therapy requires the use of imaging procedures to accurately define the treatment field, use of Gd-Tex may allow more precise imaging of the tumor and improve radiation treatment planning. The Company initially intends to seek approval of Gd-Tex for brain metastases. Brain metastases occur in nearly 14% of all cancer patients and are typically treated with radiation therapy. Radiation therapy for treatment of brain metastases is performed on approximately 150,000 patients per year in the U.S. The Company believes that Gd-Tex could be used in many other tumor types and clinical situations requiring radiation therapy. Clinical Status. The Company has completed Phase I testing of Gd-Tex in patients with advanced cancer receiving radiation therapy in a study designed to determine the MTD. Forty-one patients were treated on this protocol and reversible renal toxicity was observed at 25 umol/kg, a dose significantly exceeding that which is expected to produce a radiation sensitization effect. Biolocalization of Gd-Tex in lung cancer, breast cancer, and sarcomas has been confirmed. The Company is conducting a multicenter Phase I/II clinical trial to evaluate the safety and efficacy of Gd-Tex in cancer patients receiving radiation therapy for treatment of brain metastases at the Joint Center for Radiation Therapy in Boston, MD Anderson Cancer Center in Houston, the University of Texas Southwestern Medical Center in Dallas, Northwest Kinetics, L.L.C. in Tacoma, Washington, and the Institute Gustave Roussy in Paris, and is in the process of expanding the study to other sites. In this study, an intravenous dose of Gd-Tex is administered prior to each radiation treatment. Gd-Tex for Chemosensitization of Cancer The Company is conducting preclinical studies regarding the use of Gd-Tex as a chemosensitizer for use in conjunction with certain cytotoxic chemotherapy agents. Cytotoxic chemotherapy destroys cancer cells by interfering with their metabolism, protein synthesis or cell division. Generally, however, the damaging effects of cancer chemotherapy agents are not restricted to the tumor. Because these agents are not tissue selective, cancer chemotherapy agents produce serious or life-threatening side effects which compromise quality of life and increase the cost of management of patients with cancer. Preclinical studies conducted by the Company and its collaborators indicate that Gd-Tex increases the activity of certain chemotherapy agents in tumors. This effect is believed to be related to Gd-Tex's ability to capture cytotoxic free radicals produced by certain chemotherapy agents, such as doxorubicin and bleomycin. Gd-Tex's selective uptake in tumors potentiates the activity of cancer chemotherapy agents in tumor cells but not in normal tissues, thereby increasing the therapeutic margin. In preclinical studies, animals receiving Gd-Tex and chemotherapy with either bleomycin or doxorubicin had enhanced tumor responses and survival rates as compared to control groups receiving equivalent doses of chemotherapy alone. In these studies, no enhancement of chemotherapy-related toxicity was noted. ATHEROSCLEROSIS THERAPY Lu-Tex for Photodynamic Therapy of Atherosclerosis. Animal studies conducted by the Company and its collaborators have demonstrated that both Lu-Tex and Gd-Tex localize to atherosclerotic plaque. In the Company's Phase I clinical study with Gd-Tex, localization in atherosclerosis in human aortas has been confirmed using MRI. Based on these studies, the Company believes that Lu-Tex also should localize in human atherosclerotic plaque. Studies conducted by the Company also have indicated that following intravenous administration of Lu-Tex to animals, intravascular exposure of atherosclerotic plaque to 732 nanometer light delivered through a catheter resulted in elimination of the lesions without damage to the endothelium. The Company believes that these results suggest that photodynamic therapy of atherosclerosis with Lu-Tex has the potential to eliminate plaque without complications such as thrombosis and restenosis, which are associated with techniques such as angioplasty and atherectomy. These animal studies also have 10 11 shown that photodynamic therapy of atherosclerosis with Lu-Tex could be used to treat diffuse atherosclerosis over long segments of blood vessels, which is not possible with other techniques. These results further confirm that Lu-Tex is activated by light that is capable of penetrating through blood, a shortcoming that has prevented the successful use of photosensitizers for cardiovascular applications. DIAGNOSTIC IMAGING AGENT GADOLITE. The Company's oral MRI contrast agent, GADOLITE, is based on a patented compound and is used for imaging the gastrointestinal tract in patients undergoing MRI procedures of the abdomen or the pelvis. GADOLITE contains gadolinium sodium aluminosilicate suspended in an aqueous, orange-flavored oral formulation designed to fill the bowel uniformly. The Company's preclinical studies in animals indicated that orally administered GADOLITE is nontoxic even when used at large multiples of the intended human dose and is not systemically absorbed. Clinical Status. The Company's Phase I and II human clinical trials indicated that GADOLITE is well tolerated, safe and not absorbed from the human gastrointestinal tract. The Company has conducted two pivotal multicenter controlled Phase III studies in patients receiving MRI scans for known or suspected diseases of the abdomen or pelvis. A total of 284 patients received GADOLITE in these studies, which were completed in March 1995. The Company's analysis of data from these studies confirmed the safety, tolerability and lack of absorption of GADOLITE, and indicated that it significantly reduced diagnostic uncertainty when comparing MRI scans performed with GADOLITE to those without GADOLITE. The Company believes that these trials establish that GADOLITE improves the ability to distinguish the gastrointestinal tract from adjacent anatomic or pathologic structures and thereby assists in the detection or diagnosis of abnormalities in the abdomen or pelvis. The Company believes that by reducing diagnostic uncertainty, GADOLITE will lessen the need for repeated exams and other more invasive diagnostic tests, thereby reducing costs. The Company submitted an NDA in September 1995 to market this product in the U.S. In June 1996 the Company filed an MAA with the Medicines Control Agency in the United Kingdom for authorization to market GADOLITE. If approved in the U.K., the Company plans to apply for similar authorization in other member states of the European Union under mutual recognition procedures. LU-TEX IN OTHER PHOTODYNAMIC THERAPY APPLICATIONS The Company is evaluating Lu-Tex for photodynamic therapy of age related macular degeneration, a retinal eye disease that is a leading cause of blindness in the U.S. The Company has also prepared topical formulations of Lu-Tex for various applications in dermatology. Both of these applications are currently being studied in animal models. COLLABORATIVE RELATIONSHIPS The Company has maintained a focus on its core technology in biometallic chemistry and expanded porphyrin molecules and has utilized relationships with third parties for research, process development, manufacturing, sales and marketing. In the photodynamic therapy field, the Company has used outside collaborations for development of light production and delivery devices for use in preclinical and clinical trials while focusing on development of its proprietary photosensitizing drug. The Company has established and intends to establish additional alliances with companies for late stage product development, manufacturing, sales, marketing and distribution of certain of its products. To date, the Company has retained worldwide marketing rights to its therapeutic products. THE UNIVERSITY OF TEXAS AGREEMENTS. The Company collaborates with and sponsors research and development programs at a number of academic institutions, including The University of Texas ("UT") at Austin, in a group under the direction of Jonathan Sessler, Ph.D., Professor of Chemistry, to extend its research capabilities in the field of expanded porphyrin chemistry. The Company has entered into two license agreements with UT that grant the Company the worldwide, exclusive right to patents or patent applications that relate to or result from (i) research conducted by UT Austin on the use, development and syntheses of expanded porphyrin molecules, and (ii) research conducted by UT Dallas on the incorporation of paramag- 11 12 netic metals into zeolites for use as MRI contrast agents. These agreements require the Company to pay royalties as a percentage of net sales to UT for products incorporating the licensed technology including each of the Company's current product candidates. In addition, the Company and UT have entered into sponsored research agreements which expand the products, inventions and discoveries developed by UT to which the Company's license rights apply. In connection with the UT license agreements, the Company also entered into a license agreement with Dr. Stuart W. Young, a co-inventor of GADOLITE, and now the Vice President, Medical Research of the Company, pursuant to which the Company has been granted an exclusive royalty-bearing license to manufacture, use and sell certain products that fall within the scope of the UT Dallas License Agreement. HOECHST CELANESE AGREEMENT. In October 1995, the Company entered into a memorandum of understanding and in September 1996 finalized a definitive agreement with HCC, a manufacturer of chemicals and pharmaceutical intermediates, for the process optimization, scale-up and clinical and worldwide commercial supply of Gd-Tex and Lu-Tex. Under the terms of this agreement, HCC is obligated to supply drug substance for clinical and commercial use. There can be no assurance that Hoechst Celanese will deliver bulk-drug substance for Gd-Tex or Lu-Tex on a timely or commercially attractive basis to the Company. PHOTODYNAMIC THERAPY LIGHT PRODUCTION AND DELIVERY DEVICES. The Company has collaborated with Coherent, Inc. ("Coherent") for the development of a laser that produces 732 nanometer light for use in photodynamic therapy studies. These lasers and light delivery devices have been purchased from Coherent and are now in use in the ongoing Phase I clinical studies. Coherent has participated with the Company in the filing of regulatory documents required for conducting the Company's Phase I clinical trials with this device. The Company has purchased from Quantum Devices, Inc. ("Quantum") LED devices that are capable of producing the required wavelength of light for use in photodynamic therapy with Lu-Tex. The Company has used LED devices in preclinical animal studies and will purchase such devices for use in its future clinical trials. GLAXO WELLCOME SUPPLY AGREEMENT. The Company entered into a supply agreement with Glaxo under which Glaxo has agreed to manufacture clinical and commercial quantities of GADOLITE for the U.S. and Canada. Pursuant to the agreement, Glaxo has agreed to manufacture and the Company has agreed to purchase certain minimum annual quantities of GADOLITE. In addition, the Company is obligated to make certain payments upon Glaxo's achievement of certain process development, quality assurance and supply validation milestones. The agreement has a five year term and is subject to earlier termination in the event of breach or if the NDA for GADOLITE is not approved by the FDA on or prior to January 1, 1998 or if GADOLITE is otherwise not commercialized. See Note 6 of Notes to Financial Statements. E-Z-EM MARKETING SALES AND DISTRIBUTION ARRANGEMENT. In August 1995, the Company entered into an agreement with E-Z-EM, Inc. ("E-Z-EM"), a leading manufacturer and distributor worldwide of oral contrast agents and other products for use in gastrointestinal radiology, for the exclusive marketing and sale of GADOLITE in the U.S., Canada and Mexico. The Company and E-Z-EM will share equally in the operating profits from the sale of GADOLITE, and the Company also may receive premium payments based upon product sales if certain unit sales levels are achieved. During the term of the agreement, E-Z-EM is prohibited from distributing products that are directly competitive with GADOLITE, except for products which have been or currently are being developed by E-Z-EM that contain certain specified chemical compounds. The agreement also states that the Company and E-Z-EM will enter into good faith negotiations for the expansion of the agreement beyond North America. The agreement may be terminated by E-Z-EM at any time with six months' notice. The Company is in negotiations with E-Z-EM for marketing and distribution rights in some European countries. COOK, INCORPORATED AGREEMENT. The Company has non-exclusively licensed to Cook, Incorporated, a leading provider of catheter products, its technology to produce MRI detectable materials for catheters. Under the terms of this agreement, the Company will receive royalties based on a percentage of net sales of products utilizing its proprietary technology. The Company intends to license this technology to other catheter and medical device companies. 12 13 PATENTS AND PROPRIETARY TECHNOLOGY The Company seeks to protect its proprietary position by, among other methods, continuing to file U.S. and foreign patent applications with respect to its technology that are important to the development of its business. The Company plans to aggressively prosecute and defend its patent applications, issued patents and proprietary information. The Company owns or has exclusive rights to 26 issued U.S. patents, many of which include composition of matter claims relating to a number of Pharmacyclics' compounds, 18 allowed patent applications and 41 pending patent applications. The Company is also the owner or the exclusive licensee of two counterpart patents issued in Australia, two counterpart patents issued in Europe, 1 counterpart patent issued in New Zealand and 40 pending counterpart patent applications in Europe, Japan and certain other countries. Many of these applications were filed through the Patent Cooperation Treaty and the European Patent Office and preserve for the Company the right to file applications in various countries. The existing issued U.S. patents expire between 2009 and 2014. All of the patents and patent applications not owned by the Company have been licensed to it pursuant to its agreements with UT or the Agreement with Dr. Stuart W. Young. With respect to the individual areas of research and product development being carried out by the Company, the Company has three issued U.S. patents related to the GADOLITE product, and two issued and five pending foreign patents. There are five composition-of-matter issued patents and six allowed and twelve pending applications in the U.S. related to the texaphyrin compounds, with two issued patents, and one allowed and five pending applications directed to synthesis of texaphyrins. Five U.S. patents have issued and two applications have been allowed relating to photodynamic therapy using texaphyrins. The Company also has three issued U.S. patents and two allowed and two pending applications relating to the use of texaphyrins as contrast agents in MRI, as well as one allowed and two pending applications related to the use of texaphyrins in radiation sensitization and eight applications (three of which have been allowed) related to the use of texaphyrins in other areas. Foreign applications corresponding to the texaphyrins and their uses also have been filed. Patent applications in the U.S. are maintained in secrecy until patents issue, and patent applications in foreign countries are maintained in secrecy for a period after filing. Publication of discoveries in the scientific or patent literature tend to lag behind actual discoveries and related patent applications, and the large number of patents and applications and the fluid state of the Company's development activities make comprehensive patent searches and analysis impractical or not cost-effective. As a result, the Company has not made patent or publication searches in the U.S. or in foreign countries to determine whether materials, processes or designs used by it or its potential products infringe or will infringe existing patents or foreign patent applications available to the public. However, because of the number of patents issued and patent applications filed relating to biometallic and expanded porphyrin chemistries, Pharmacyclics believes there is a significant risk that current and potential competitors and other third parties have filed or in the future will file applications for, or have received or in the future will receive, patents and will obtain additional proprietary rights relating to materials or processes used or proposed to be used by the Company. In the event that any relevant claims of third party patents are upheld as valid and enforceable, the Company could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses from the patent owners of each of such patents or to redesign its products or processes to avoid infringement. There can be no assurance that such licenses would be available or, if available, would be on terms acceptable to the Company or that the Company would be successful in any attempt to redesign its products or processes to avoid infringement. Litigation may be necessary to defend against claims of infringement, to enforce patents issued to the Company or to protect trade secrets and could result in substantial cost to, and diversion of effort by, the Company. The Company is aware of several U.S. patents owned by or licensed to Schering AG that relate to MRI contrast agents. Schering AG has sent communications to the Company suggesting that GADOLITE may infringe certain of such Schering AG patents. The Company has obtained advice of special patent counsel that the technologies employed by the Company for its imaging products under development do not infringe the claims of such patents. A determination of the infringement of any such patents could have a material adverse effect on the Company's business. There can be no assurance that Schering AG will not seek to assert such 13 14 patent rights against the Company, which would result in significant legal costs and require substantial management resources. The Company is aware that Schering AG has asserted such rights against at least one other company in the contrast agent imaging market and that a number of companies have entered into licensing arrangements with Schering AG with respect to one or more such patents. There can be no assurance that the Company would be able to obtain a license from Schering AG, if required, on commercially reasonable terms, if at all. The Company also relies upon trade secrets, technical know-how and continuing technological innovation to develop and maintain its competitive position. It is the Company's policy to require its employees, consultants and advisors to execute appropriate confidentiality and assignment-of-inventions agreements in connection with their employment, consulting or advisory relationships with the Company. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with the Company is to be kept confidential and not disclosed to third parties except in specific circumstances, and in the case of employees, provide that all inventions conceived by the individual during such employment shall be the exclusive property of the Company. There can be no assurance, however, that these agreements will not be breached or that the Company will have adequate remedies for any breach. Furthermore, no assurance can be given that competitors will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's proprietary technology, or that the Company can meaningfully protect its rights in unpatented proprietary technology. MANUFACTURING Pharmacyclics currently uses selected third-party manufacturers for producing various components of the products being developed by the Company. Except for the components covered in the agreements with HCC and Glaxo described above, manufacturers supplying the Company do not currently have the ability to provide commercial quantities for the Company's intended products. Prior to any regulatory approval of the Company's other products, the Company intends to negotiate supply agreements with additional manufacturers who will have the ability to manufacture, fill, label and package such additional necessary materials prior to commercial introduction of its products. There can be no assurance that the Company will be able to enter into supply agreements other than the HCC and Glaxo agreements on commercially acceptable terms or with manufacturers who will be able to deliver supplies in appropriate quantity and quality to meet commercial demand. Any interruption of supply could have a material adverse effect on the Company's ability to manufacture its products and thus on the ability to commercialize products. The Company is currently purchasing light delivery devices from Coherent and Quantum. In addition, the Company may seek other suppliers of light delivery devices, although there can be no assurance that any agreements will be reached with such suppliers on terms commercially reasonable to the Company, if at all. There also can be no assurance that these devices will be available for commercial use or that regulatory approval for such devices will be obtained. COMPETITION The development of therapeutic and diagnostic agents for human diseases is intensely competitive. Many different approaches are being developed or have already been adopted into routine use for the management of diseases targeted by the Company. While there are currently no FDA approved radiation sensitizers or chemosensitizers, the Company expects significant competition in these fields, as the Company believes that one or more companies may be developing and testing products which compete directly with the products being developed by the Company. There can be no assurance that these companies will not succeed in developing technologies and products that are more effective than Gd-Tex or that would render the Company's products or technologies obsolete. Certain chemotherapy agents also are used as radiation sensitizers. Photofrin(R), a photosensitizer developed by QLT Phototherapeutics Inc. ("QLT"), has been approved by the FDA for treatment of obstructing cancer of the esophagus. Photofrin also has received marketing approval in Japan, Canada and certain European countries for various disease indications. The Company believes that 14 15 the major competitive features for photosensitizers will include their safety, efficacy, cost and convenience. The Company is aware of several other photosensitizers in various stages of development for a number of indications. In addition to QLT, other companies developing products in this area include Dusa Pharmaceuticals, Inc., Nippon Petrochemical, and PDT, Inc. Some companies developing photodynamic therapy products are developing specialized light delivery devices for such products, which when integrated with their product offering may afford them a competitive advantage relative to the Company's strategy of sourcing such devices from third parties. The Company expects competition in the development of improved oral MRI contrast agents to increase substantially. Current FDA approved and commercially available intravenous MRI contrast agents include Magnevist(R), Omniscan(R)and Prohance(R) which are marketed by Schering AG, Nycomed and Bracco-Squibb Diagnostics, Inc. ("Bracco"), respectively. Gastromark(TM), an oral contrast agent based on iron particles developed by Advanced Magnetics and licensed to Mallinckrodt, has received initial indications of its approvability for commercial sale from the FDA. In addition, there are several oral MRI contrast agents in various phases of human testing in the U.S., including OMP from Nycomed, in Phase III testing in the U.S. and on the market in Europe, and Lumenhance(TM), a manganese-based agent under development by Bracco. In addition, Schering AG has introduced Enterovist(TM), an oral formulation of its Magnevist MRI contrast agent, in certain European markets. The Company believes that GADOLITE may prove superior to these products because it is well tolerated and capable of producing a strong positive signal at all levels of the gastrointestinal tract. Although the Company believes that GADOLITE may offer advantages over competing oral MRI contrast agents, there can be no assurance that there will be greater acceptance of GADOLITE over other agents. In addition, to the extent that other diagnostic modalities such as CT and X-ray may be perceived as providing greater value than MRI, any corresponding decrease in the use of MRI would have an adverse effect on the demand for GADOLITE. Competition in the industry from pharmaceutical companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase. Many of these entities have significantly greater research and development capabilities than the Company, as well as substantial marketing, manufacturing, financial and managerial resources, and represent significant competition for the Company. Acquisitions of, or investments in, competing pharmaceutical companies by large collaborating partners could increase such competitors' financial, marketing, manufacturing and other resources. There can be no assurance that developments by others will not render the Company's products or technologies noncompetitive or obsolete, or that the Company will be able to keep pace with technological developments or other market factors. Competitors may be developing products that have an entirely different approach or means of accomplishing similar diagnostic, imaging and/or therapeutic effects than products being developed by the Company. These competing products may be safer, more effective and less costly than the products developed by the Company and, therefore, may represent a serious competitive threat to the Company's product offerings. GOVERNMENT REGULATION FDA REGULATION AND PRODUCT APPROVAL The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the manufacturing and marketing of pharmaceutical products. These national agencies and other federal, state and local entities regulate, among other things, research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. The process required by the FDA before the Company's products may be marketed in the U.S. generally involves the following: (i) preclinical laboratory and animal tests; (ii) submission of an IND application which must become effective before clinical trials may begin; (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed pharmaceutical in its intended indication; and (iv) FDA approval of an NDA. If the pharmaceutical or compound utilized in the product has been previously approved for use in another dosage form, then the approval process is similar, except that certain 15 16 preclinical toxicity tests normally required for the IND may be avoidable. The testing and approval process requires substantial time, effort, and financial resources and there can be no assurance that any approval will be granted on a timely basis, if at all. Preclinical tests include laboratory evaluation of the product, its chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of the product. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND, which must become effective before human clinical trials may be commenced. The IND will automatically become effective 30 days after receipt by the FDA, unless the FDA before that time raises concerns or questions about the conduct of the trials as outlined in the IND. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed. There can be no assurance that submission of an IND will result in FDA authorization to commence clinical trials. Further, each clinical study must be reviewed and approved by an independent Institutional Review Board. Human clinical trials are typically conducted in three sequential phases which may overlap. Phase I involves the initial introduction of the pharmaceutical into healthy human subjects or patients where the product is tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. Phase II involves studies in a limited patient population to (i) identify possible adverse effects and safety risks, (ii) determine the efficacy of the product for specific, targeted indications, and (iii) determine dosage tolerance and optimal dosage. When Phase II evaluations demonstrate that the product is effective and has an acceptable safety profile, Phase III trials are undertaken to further evaluate dosage, clinical efficacy and to further test for safety in an expanded patient population at geographically dispersed clinical study sites. The regulatory authority or the sponsor may suspend clinical trials at any point in this process if either entity concludes that clinical subjects are being exposed to an unacceptable health risk or for other reasons. In the case of products for severe or life-threatening diseases, such as cancer, the initial human testing is sometimes done in patients rather than in healthy volunteers. Since these patients are already afflicted with the target disease, it is possible that such studies may provide evidence of efficacy traditionally obtained in Phase II trials. These trials are frequently referred to as "Phase I/II" trials. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specific time period, if at all, with respect to any of the Company's product candidates. Furthermore, the FDA may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. The results of product development, preclinical studies and clinical studies are submitted to the FDA as part of an NDA for approval of the marketing and commercial shipment of the product. The FDA may deny an NDA if applicable regulatory criteria are not satisfied, or may require additional clinical data. Even if such data is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Once issued, a product approval may be withdrawn if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products which have been commercialized, and it has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. Additionally, in March 1996, the FDA announced a new policy intended to accelerate the approval process for cancer therapies. Previously, cancer therapies have been approved primarily on the basis of data regarding patient survival rates and/or improved quality of life. Evidence of partial tumor shrinkage, while often part of the data relied on for approval, was considered insufficient by itself to warrant approval of a cancer therapy, except in limited situations. Under the FDA's new policy, which became effective immediately, the FDA has broadened the circumstances in which evidence of partial tumor shrinkage is considered sufficient for approval. This policy is intended to make it easier to study cancer therapies and shorten the total time for marketing approvals; however, it is too early to tell what effect this policy may actually have on product approvals. In addition to the drug approval requirements applicable to the Company's Lu-Tex product for photosensitization of certain cancers, the Company will also need to obtain the approval of the FDA for the 16 17 laser and associated light delivery devices used in such treatments. Such device approval requires additional submissions both by the Company and by the manufacturers of such devices and must include clinical data obtained from the use of such devices with Lu-Tex for photodynamic therapy, and may result in additional delays or difficulties in obtaining approval for the use of the Lu-Tex as a photosensitizer. Such light delivery device manufacturers currently are under no obligation to the Company to file or pursue such applications. Satisfaction of these FDA requirements, or similar requirements by foreign regulatory agencies, typically takes several years and the time needed to satisfy them may vary substantially, based upon the type, complexity and novelty of the pharmaceutical product. The effect of government regulation may be to delay or to prevent marketing of potential products for a considerable period of time and to impose costly procedures upon the Company's activities. There can be no assurance that the FDA or any other regulatory agency will grant approval for any products being developed by the Company on a timely basis, if at all. Success in preclinical or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. If regulatory approval of a product is granted, such approval may impose limitations on the indicated uses for which a product may be marketed. Further, even if regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product, including withdrawal of the product from the market. Delay in obtaining or failure to obtain regulatory approvals would have a material adverse effect on the Company's business. Marketing the Company's products abroad will require similar regulatory approvals and is subject to similar risks. In addition, the Company is unable to predict the extent of adverse government regulations that might arise from future U.S. or foreign governmental action. Any products manufactured or distributed by the Company pursuant to FDA clearances or approvals are subject to pervasive and continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic inspections by the FDA and certain state agencies for compliance with GMP, which regulations impose certain procedural and documentation requirements upon the Company and its third party manufacturers. Drug labeling and promotion activities are subject to scrutiny by the FDA and, in certain instances, the Federal Trade Commission. The FDA actively enforces regulations prohibiting marketing of products for unapproved uses. The Company and its products are also subject to a variety of state laws and regulations in those states or localities where its products are or will be marketed. Any applicable state or local regulations may hinder the Company's ability to market its products in those states or localities. The Company is also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. There can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations now or in the future. The FDA's policies may change and additional government regulations may be promulgated which could prevent or delay regulatory approval of the Company's potential products. Moreover, increased attention to the containment of health care costs in the U.S. and in foreign markets could result in new government regulations which could have a material adverse effect on the Company's business. The Company is unable to predict the likelihood of adverse governmental regulation which might arise from future legislative or administrative action, either in the U.S. or abroad. INTERNATIONAL REGULATION In order for the Company to market its products abroad, the Company must obtain required regulatory approvals and clearances and otherwise comply with extensive regulations regarding safety and manufacturing processes and quality. These regulations, including the requirements for approvals or clearance to market and the time required for regulatory review, vary from country to country. There can be no assurance that the Company will obtain regulatory approvals in such countries or that it will not be required to incur significant costs in obtaining or maintaining its foreign regulatory approvals. Delays in receipt of approvals to market the 17 18 Company's products, failure to receive these approvals or future loss of previously received approvals could have a material adverse effect on the Company's business, financial condition, and results of operations. The time required to obtain approval for sale in foreign countries may be longer or shorter than that required for FDA approval, and the requirements may differ. In June 1996 the Company filed an MAA with the Medicines Control Agency in the United Kingdom for authorization to market GADOLITE. The European Community has promulgated rules that require that medical device products receive by mid-1998 the right to affix the CE mark, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. In order to market a laser or other light delivery device for the Company's Lu-Tex product in Europe, such CE mark will be required to be obtained, and there can be no assurance that the Company or its light device suppliers will be successful in meeting such certification requirements. THIRD PARTY REIMBURSEMENT AND HEALTH CARE REFORM The commercial success of the Company's products under development will be substantially dependent upon the availability of government or private third-party reimbursement for the use of such products. There can be no assurance that Medicare, Medicaid, HMOs and other third-party payors will authorize or otherwise budget such reimbursement. Such governmental and third party payors are increasingly challenging the prices charged for medical products and services. If the Company succeeds in bringing one or more products to market, there can be no assurance that such products will be viewed as cost-effective or that reimbursement will be available to consumers or will be sufficient to allow the Company's products to be marketed on a competitive basis. Furthermore, federal and state regulations govern or influence the reimbursement to health care providers of fees and capital equipment costs in connection with medical treatment of certain patients. In response to concerns about the rising costs of advanced medical technologies, the current administration of the federal government has publicly stated its desire to reform health care, including the possibility of price controls and revised reimbursement policies. There can be no assurance that actions taken by the administration, if any, with regard to health care reform will not have a material adverse effect on the Company. If any actions are taken by the administration, such actions could adversely affect the prospects for future sales of the Company's products. Further, to the extent that these or other proposals or reforms have a material adverse effect on the Company's ability to secure funding for its development or on the business, financial condition and profitability of other companies that are prospective collaborators for certain of the Company's product candidates, the Company's ability to develop or commercialize its product candidates may be adversely affected. Given recent government initiatives directed at lowering the total cost of health care throughout the U.S., it is likely that the U.S. Congress and state legislatures will continue to focus on health care reform and the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems. Pharmacyclics cannot predict the likelihood of passage of federal and state legislation related to health care reform or lowering pharmaceutical costs. In certain foreign markets pricing of prescription pharmaceuticals is already subject to government control. Continued significant changes in the nation's health care system could have a material adverse effect on the Company's business. ENVIRONMENTAL REGULATION In connection with its research and development activities and its manufacturing materials and products, the Company is subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens, and wastes. Although the Company believes that it has complied with these laws, regulations and policies in all material respects and has not been required to take any significant action to correct any noncompliance, there can be no assurance that the Company will not be required to incur significant costs to comply with environmental and health and safety regulations in the future. The Company's research and development involves the controlled use of hazardous materials, including but not limited to certain hazardous chemicals and radioactive materials. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and 18 19 federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. EMPLOYEES As of August 31, 1996, the Company had 44 employees, three of whom are part-time. Thirty-eight of its employees are dedicated to research, development, manufacturing, quality assurance and quality control, regulatory affairs, or preclinical and clinical testing. Fifteen of the Company's employees have an M.D. or Ph.D. degree. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS This Form 10-K contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed in this section as well as those discussed elsewhere in this Form 10-K. NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT To achieve profitable operations on a continuing basis, the Company must successfully research, develop, test, obtain regulatory approval for, manufacture, introduce, market and distribute its products. The time frame necessary to achieve these goals for any individual product is long and uncertain. Most of the products currently under development by the Company will require significant additional research and development, preclinical and clinical testing and regulatory approval prior to commercialization. Additionally, any product the Company succeeds in developing and for which it gains regulatory approval must then compete for market acceptance and market share. There can be no assurance that the Company's products will prove to be effective or that physicians, patients, or clinical or hospital laboratories will accept the Company's products as readily as other forms of diagnosis and treatment or as readily as other newly developed therapeutic products and diagnostic imaging techniques. There can be no assurance that the Company's research and development efforts will be successful or that any given product will be safe or effective, capable of being manufactured economically in commercial quantities, developed in a timely fashion or successfully marketed. UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS Pharmacyclics has conducted and plans to continue to undertake extensive and costly clinical testing to assess the safety and efficacy of its potential products. The rate of completion of the Company's clinical trials is dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including the nature of the Company's clinical trial protocols, existence of competing protocols, size of the patient population, proximity of patients to clinical sites and eligibility criteria for the study. Delays in patient enrollment will result in increased costs and delays, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the FDA may suspend clinical trials at any time if it concludes that the subjects or patients participating in such trials are being exposed to unacceptable health risks. Success in preclinical or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. Further, there can be no assurance that clinical testing will show any current or future product candidate to be safe and effective for use in humans. NO ASSURANCE OF PRODUCT APPROVAL To date, none of the Company's products has been approved for sale in the U.S. or any international market. Satisfaction of regulatory requirements of the FDA, or similar requirements by foreign regulatory agencies, typically takes several years, and the time needed to satisfy them may vary substantially based upon the type, complexity and novelty of the pharmaceutical product. There can be no assurance that the FDA or any other regulatory agency will grant approval for any products being developed by the Company on a timely 19 20 basis, if at all. The Company submitted an NDA for GADOLITE in September 1995. There can be no assurance that the FDA will decide that the NDA satisfies the criteria for approval. In addition, in June 1996 the Company filed a Market Authorization Application ("MAA") with the Medicines Control Agency in the United Kingdom for authorization to market GADOLITE. Although the process for regulatory approval in Western Europe is similar to that in the United States, there are numerous and sometimes unique risks associated with the approval of an MAA. There can be no assurance that such authorization will be granted or, even if granted in the United Kingdom, that authorization to market GADOLITE in other member states would be granted under the European Union's mutual recognition procedure. Delay in obtaining or failure to obtain regulatory approvals would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the policies of the FDA and foreign regulatory bodies may change, and additional regulations may be promulgated which could prevent or delay regulatory approval of the Company's potential products. Even if regulatory approval of a product is granted, such approval may impose limitations on the indicated uses for which a product may be marketed. Further, later discovery of previously unknown problems with a product may result in restrictions on the product, including withdrawal of the product from the market. In addition to the drug approval requirements applicable to the Company's Lu-Tex product for photosensitization of certain cancers and atherosclerosis, the Company will also need to obtain the approval of the FDA and other foreign regulatory authorities for the laser, light emitting diode ("LED") or associated light delivery devices used in such treatments. Such device approval requires additional regulatory submissions both by the Company and by the manufacturers of such devices that must include clinical data obtained from the use of such light delivery devices with Lu-Tex for photodynamic therapy, and may result in additional delays or difficulties in obtaining approval for the use of Lu-Tex as a photosensitizer. Such light delivery device manufacturers currently are under no obligation to the Company to file or pursue such applications. HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY The Company has incurred operating losses since its inception in 1991 and, as of June 30, 1996, had an accumulated deficit of approximately $28.0 million. The Company anticipates that such operating losses will continue over the next several years, as it continues to incur increasing costs of research and development, clinical and manufacturing activities. To date, the Company has not generated revenue from the commercial sale of its products and does not expect to receive any such revenue until calendar year 1997 at the earliest. All revenues to date have resulted from license and milestone payments and funding from a government research grant. LIMITED MANUFACTURING AND MARKETING EXPERIENCE The Company must manufacture its products in commercial quantities either directly or through third parties, in compliance with regulatory requirements and at an acceptable cost. Except for Gd-Tex and Lu-Tex bulk drug substance, which are the subject of a manufacturing and supply agreement with HCC, and GADOLITE, which is the subject of a manufacturing and supply agreement with Glaxo, the Company does not have access to the manufacturing capacity necessary to provide clinical and commercial quantities of the Company's products. Access to such manufacturing capacity is necessary for the Company to conduct clinical trials, obtain regulatory approval and commercialize its products. The Company is engaged in preliminary discussions with a number of manufacturers of parenteral products regarding process development and validation, filling, labeling and packaging of the finished dosage form of Gd-Tex and Lu-Tex. A failure to successfully complete such agreement would, if the Company could not locate alternate manufacturing capabilities, have a material adverse impact on the Company's business, financial condition and results of operations. Prior to any regulatory approval of the Company's other products under development, the Company intends to negotiate supply agreements with manufacturers who will have the ability to manufacture, fill, label and package such materials prior to commercial introduction of such products. There are, however, a limited number of contract manufacturers that operate under current federal and state Good Manufacturing Practices ("GMP") regulations and are capable of manufacturing the Company's products. Accordingly, there can be no assurance that the Company will be able to enter into supply agreements on 20 21 commercially acceptable terms or with manufacturers who will be able to deliver supplies in appropriate quantity and quality to develop and commercialize its products. Any interruption of supply of its products could have a material adverse effect on the Company's business, financial condition and results of operations. The Company also has entered into a sales and distribution agreement with E-Z-EM for North American sales, marketing and distribution of GADOLITE. The Company plans to enter into similar agreements to market GADOLITE in Europe and Asia. To date, however, no such arrangements have been established, and there can be no assurance that any such agreements will be entered into. To the extent that the Company determines not to, or is unable to, enter into co-promotion agreements or to arrange for third party distribution of its other products or to the extent that the agreement with E-Z-EM is terminated without a replacement agreement, significant additional resources will be required to develop a sales force. There can be no assurance that the Company will be able to establish such a sales force or enter into such co-promotion or distribution agreements. In addition, the Company currently has no arrangement for the sale and distribution of any of its other products under development. The Company has no expertise in the development of light sources and associated light delivery devices required for the Company's Lu-Tex photosensitizer program. Successful development, manufacturing, approval and distribution of the Company's photosensitization products will require third party arrangements for the required light sources, associated light delivery devices and other equipment. The Company currently obtains lasers from Coherent and LEDs from Quantum on a purchase order basis, and such entities are under no obligation to continue to deliver light devices on an ongoing basis. Failure to maintain such relationships may require the Company to develop additional sources which may require additional regulatory approvals and could delay commercialization of the Company's Lu-Tex products under development. There can be no assurance that the Company will be able to establish or maintain relationships with other sources on a commercially reasonable basis, if at all, or that such devices will receive regulatory approval for use in photodynamic therapy. RELIANCE ON THIRD PARTY RELATIONSHIPS The Company has no manufacturing facilities for commercial production of its products under development, nor does the Company have experience in sales, marketing or distribution. The Company's strategy for commercialization of its products requires entering into various arrangements with corporate and other collaborators to conduct clinical trials and to manufacture, distribute and market its products. The Company will be dependent upon the success of these outside parties performing their responsibilities. There can be no assurance that such parties will perform their obligations as expected or that the Company's reliance on others for the clinical development, manufacturing, distribution and marketing of its products will not result in unforeseen problems. The Company does not have the ability to conduct these development activities in house. If one or more of these relationships were terminated or the organizations did not perform up to expectations, the clinical development of the Company's product candidates would likely be delayed and could be substantially impaired depending on the availability and quality of substitute development capabilities. RAPID TECHNOLOGICAL CHANGE AND SUBSTANTIAL COMPETITION The pharmaceutical industry is subject to rapid and substantial technological change. Technological competition in the industry from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase. Many of these entities have significantly greater research and development capabilities than the Company, as well as substantially more marketing, manufacturing, financial and managerial resources, and represent significant competition for the Company. Acquisitions of, or investments in, competing pharmaceutical companies by large collaborating partners could increase such competitors' financial, marketing, manufacturing and other resources. There can be no assurance that developments by others will not render the Company's products or technologies noncompetitive or obsolete, or that the Company will be able to keep pace with technological developments or other market factors. Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products. Some of these products may have an entirely different approach or means of accomplishing similar diagnostic, imaging and/or therapeutic effects than products 21 22 being developed by the Company. The Company is aware that one of its competitors in the market for photodynamic therapy drugs has received marketing approval for certain indications in the U.S., Canada, The Netherlands, France and Japan for Photofrin. There can be no assurance that the Company's competitors will not develop products that are safer, more effective and less costly than the products developed by the Company and, therefore, present a serious competitive threat to the Company's product offerings. Further, the medical indications for which the Company is developing its therapeutic products also can be treated, in the case of cancer, by surgery, radiation and chemotherapy, and in the case of atherosclerosis, by surgery (e.g., bypass), angioplasty, atherectomy, the use of stents and drug therapy. These treatments are widely accepted in the medical community and have a long history of use. In addition, technological advances with other therapies for cancer and atherosclerosis could make such other therapies more efficacious or cost-effective than Lu-Tex and could render the Company's technology noncompetitive or obsolete. Also, there can be no assurance that physicians will use either Gd-Tex as a radiation sensitizer or chemosensitizer in the case of cancer or Lu-Tex as a photosensitizer in the case of cancer or atherosclerosis to replace or supplement established treatments for such diseases or that the therapeutic products the Company is developing will become competitive with current or future treatments. Further, some companies developing photodynamic therapy products are developing specialized light delivery devices for such products, which when integrated with their product offering may afford them a competitive advantage relative to the Company's strategy of sourcing such devices from third parties. REQUIREMENTS FOR ADDITIONAL FINANCING AND ACCESS TO CAPITAL MARKETS The Company has expended and will continue to expend substantial funds to complete the research, development and clinical testing of its products. The Company will require additional funds for these purposes, to establish additional clinical and commercial-scale manufacturing arrangements and to provide for the marketing and distribution of its products. The Company believes that its cash, cash equivalents and short-term investments and amounts available under a capital lease agreement will be adequate to satisfy its capital needs through calendar 1997. However, the actual amount of the Company's capital requirements will depend on many factors, including the status of the development of products, the time and costs involved in conducting clinical trials, obtaining regulatory approvals, and filing, prosecuting and enforcing patent claims; competing technological and market developments; and the ability of the Company to market and distribute its products and establish new collaborative and licensing arrangements. The Company will attempt to raise any necessary additional funds through equity or debt financings, collaborative arrangements with corporate partners or from other sources. No assurance can be given that such additional funds will be available on acceptable terms, if at all. If adequate funds are not available from operations or additional sources of financing, the Company's business, financial condition and results of operations, will be materially and adversely affected. DEPENDENCE UPON QUALIFIED AND KEY PERSONNEL The Company's ability to maintain its competitive position depends on its ability to attract and retain qualified management and scientific personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to continue to attract or retain such persons. The loss of key personnel or the failure to recruit additional personnel or to develop needed expertise could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company relies on consultants and advisors to assist in formulating its research and development strategy. All of the Company's consultants and advisors are employed by entities other than the Company and may have commitments to or consulting or advisory contracts with other entities that may affect their ability to contribute to the Company. UNCERTAINTIES REGARDING PATENTS AND PROPRIETARY RIGHTS The Company's success depends in part on its ability to obtain patent protection for its products and preserve its trade secrets. In the U.S., the Company owns or has exclusive rights to 26 issued patents, 18 allowed, and 41 pending patent applications. Outside the U.S., the Company is the owner or exclusive licensee 22 23 of five counterpart patents, and 40 pending counterpart patent applications. There can be no assurance that the Company's patent applications will result in additional patents being issued or that issued patents will afford protection against competitors with similar technology, nor can there be any assurance that any patents issued to the Company will not be infringed by or designed around by others. Even issued patents may later be modified or revoked by the U.S. Patent and Trademark Office in proceedings instituted by third parties or otherwise found to be invalid or unenforceable. Moreover, the Company believes that obtaining foreign patents may be more difficult than obtaining domestic patents because of differences in patent laws, and believes the protection provided by foreign patents, if obtained, may be weaker than that provided by domestic patents. The Company has not conducted an extensive search of patents issued to other companies, research or academic institutions or others, and no assurance can be given that such patents do not exist, have not been filed or could not be filed or issued which contain claims relating to the Company's technology, products or processes. Because of the number of patents issued and patent applications filed relating to biometallic and expanded porphyrin chemistries, Pharmacyclics believes there is a significant risk that current and potential competitors and other third parties have filed or in the future will file applications for, or have received or in the future will receive, patents and will obtain additional proprietary rights relating to materials or processes used or proposed to be used by the Company. If such patents have been or become issued, the holders of such patents may bring claims against the Company for infringement which may have a material adverse effect on the Company's business, financial condition and results of operations. As a result, the Company may be required to obtain licenses from others to develop, manufacture or market its products. There can be no assurance that the Company will be able to obtain any such licenses on commercially reasonable terms, if at all. The Company is aware of several U.S. patents owned by or licensed to Schering AG that relate to MRI contrast agents. Schering AG has sent communications to the Company suggesting that GADOLITE may infringe certain of such Schering AG patents. The Company has obtained advice of special patent counsel that the technologies employed by the Company for its imaging products under development do not infringe the claims of such patents. A determination of the infringement of any such patents could have a material adverse effect on the Company's business. There can be no assurance that Schering AG will not seek to assert such patent rights against the Company, which would result in significant legal costs and require substantial management resources. The Company is aware that Schering AG has asserted such rights against at least one other company in the contrast agent imaging market and that a number of companies have entered into licensing arrangements with Schering AG with respect to one or more such patents. There can be no assurance that the Company would be able to obtain a license from Schering AG, if required, on commercially reasonable terms, if at all. The Company also relies on trade secrets and proprietary know-how that it seeks to protect, in part, by confidentiality agreements with its employees, consultants, suppliers and licensees. No assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques, that others will not otherwise gain access to the Company's proprietary technology, or disclose such technology, or that the Company can meaningfully protect its rights in such unpatented proprietary technology. UNCERTAINTIES REGARDING HEALTH CARE REIMBURSEMENT AND REFORM The future revenues and profitability of pharmaceutical and related companies as well as the availability of capital to such companies may be affected by the continuing efforts of government and third party payors to contain or reduce costs of health care through various means. For example, in certain foreign markets pricing or profitability of prescription pharmaceuticals is subject to government control. In the U.S., given recent federal and state government initiatives directed at lowering the total cost of health care, it is likely that the U.S. Congress and state legislatures will continue to focus on health care reform and the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems. While the Company cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of such proposals could have a material adverse effect on the Company's business, financial condition and results of operations. 23 24 The Company's ability to commercialize its products successfully will depend in part on the extent to which appropriate reimbursement levels for the cost of such products and related treatment are obtained by governmental authorities, private health insurers and other organizations, such as health maintenance organizations ("HMOs"). Third party payors are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the U.S. and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for the Company's products. The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could materially adversely affect the Company's ability to operate profitably. PRODUCT LIABILITY EXPOSURE The testing, manufacturing, marketing and sale of the products under development by the Company entail an inherent risk that product liability claims will be asserted against the Company. Although the Company is insured against such risks up to a $3 million annual aggregate limit in connection with human clinical trials and commercial sales of its products under development, there can be no assurance that the Company's present product liability insurance is adequate. A successful product liability claim in excess of the Company's insurance coverage could have a material adverse effect on the Company's business, financial condition and results of operations and may prevent the Company from obtaining adequate product liability insurance in the future on commercially reasonable terms. In addition, there can be no assurance that product liability coverage will continue to be available in sufficient amounts or at an acceptable cost. An inability to obtain sufficient insurance coverage at an acceptable cost or otherwise protect against potential product liability claims could prevent or inhibit the commercialization of pharmaceutical products developed by the Company. A product liability claim or recall would have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION The manufacturing and marketing of the Company's products and its research and development activities are subject to extensive regulation for safety, efficacy and quality by numerous government authorities in the U.S. and other countries. Clinical trials, manufacturing and marketing of products are subject to the rigorous testing and approval process of the FDA and equivalent foreign regulatory authorities. As a result, clinical trials and regulatory approval can take a number of years to accomplish and require the expenditure of substantial resources. To date, the Company has not received regulatory approval in the U.S. or any foreign jurisdiction for the commercial sale of any of its products. There can be no assurance that requisite FDA approvals or those of foreign regulatory authorities will be obtained on a timely basis, if at all, or that any approvals granted will cover the clinical indications for which the Company may seek approval. The manufacture and marketing of drugs are subject to continuing FDA and foreign regulatory review and later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions, including withdrawal of the product from the market. Failure to obtain or maintain requisite governmental approvals, failure to obtain approvals of the clinically intended uses or the identification of adverse side effects of the Company's products under development could delay or preclude the Company from further developing a particular product or from marketing its products, or could limit the commercial use of its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. ENVIRONMENTAL REGULATION In connection with its research and development activities and its manufacturing materials and products, the Company is subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens and wastes. Although the Company believes that it has complied with these laws, regulations and policies in all material respects and has not been required to take any significant action to correct any material noncompliance, there can be no assurance that the Company will not be required to incur 24 25 significant costs to comply with environmental and health and safety regulations in the future. The Company's research and development involves the controlled use of hazardous materials, including but not limited to certain hazardous chemicals and radioactive materials. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. CONTROL BY EXISTING STOCKHOLDERS The Company's officers, directors and principal stockholders, and certain of their affiliates beneficially own approximately 57% of the Company's outstanding Common Stock. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. Additionally, these stockholders will have significant influence over major corporate transactions as well as the election of directors of the Company and control over board decisions. VOLATILITY OF STOCK PRICE; NO DIVIDENDS The market prices for securities of pharmaceutical and biotechnology companies (including the Company) have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Future announcements concerning the Company, its competitors or other pharmaceutical and biotechnology companies including the results of testing and clinical trials, technological innovations or new therapeutic products, governmental regulation, developments in patent or other proprietary rights, litigation or public concern as to the safety of products developed by the Company or others and general market conditions may have a significant effect on the market price of the Common Stock. The Company has not paid any cash dividends on its Common Stock and does not anticipate paying any dividends in the foreseeable future. 25 26 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are as follows:
NAME AGE POSITION - --------------------------------- --- -------------------------------------------- Richard A. Miller, M.D........... 45 President, Chief Executive Officer and Director William C. Dow, Ph.D............. 41 Vice President, Chemical Research and Development Cheryl B. Jaszewski.............. 50 Vice President, Finance and Administration Marc L. Steuer................... 49 Vice President, Business Development and Chief Financial Officer Stuart W. Young, M.D............. 53 Vice President, Medical Research Thomas D. Kiley.................. 53 Director Joseph S. Lacob(1)............... 40 Director Patrick F. Latterell(1)(2)....... 38 Director Joseph C. Scodari................ 43 Director Craig C. Taylor(1)(2)............ 46 Director
- --------------- (1) Member of Compensation Committee (2) Member of Audit Committee DR. MILLER has served as President, Chief Executive Officer and a Director since the Company was founded in April 1991. In 1989, Dr. Miller co-founded CellPro, Inc. ("CellPro"), a public biotechnology company, and served as a Director of CellPro from 1989 to 1991, and Chairman of CellPro's Scientific Advisory Board until 1993. He continues to serve on CellPro's Scientific Advisory Board. In 1984, Dr. Miller co-founded IDEC Pharmaceuticals Corporation where he served as Vice President and a Director until February 1992. Dr. Miller also is a Clinical Associate Professor of Medicine (Oncology) at Stanford University Medical Center. Dr. Miller received his M.D., summa cum laude, from the State University of New York Medical School and is board certified in both Internal Medicine and Medical Oncology. DR. DOW has served as Vice President, Chemical Research and Development since February 1993 and previously as Senior Director, Chemical Research and Development from July 1992 to February 1993. From 1987 to 1992, he was at Salutar, Inc., a pharmaceutical company involved in research and development of MRI contrast agents, where he held positions of increasing responsibility in discovery and chemical development of contrast agents, last serving as Director, Chemical Development and Manufacturing. Dr. Dow holds a B.S. and M.S. from Stanford University in Chemistry and a Ph.D. in Chemistry from the California Institute of Technology. MS. JASZEWSKI has served as Vice President, Finance and Administration since October 1992. From 1986 to 1991, she served as the Director, Planning and Financial Analysis, which included strategic planning and mergers and acquisitions, at Nellcor, Inc., a medical device company. From 1991 to 1992, Ms. Jaszewski was a financial and administrative consultant to various private companies. Ms. Jaszewski holds a B.A. in Economics and a M.B.A. from Stanford University. MR. STEUER has served as Chief Financial Officer and Vice President, Business Development since November 1994. From April 1992 to November 1994 he was Executive Vice President, Business Development and Commercial Affairs for SciClone Pharmaceuticals, Inc. and also served as Chief Financial Officer. From 1985 to 1992, Mr. Steuer served in a variety of roles in the Pilkington Visioncare Group ("PVG"), which developed, manufactured and distributed medical devices, pharmaceuticals and equipment for the ophthalmic field. His positions at PVG included General Manager, Ventures and Licensing and Chief Financial Officer. Mr. Steuer was a member of the Board of Directors of SciClone Pharmaceuticals, Inc. from 26 27 January 1993 through November 1994, and currently serves as a member of the Board of Directors of a private company. Mr. Steuer received his M.S. and B.S. degrees in Electrical Engineering from Columbia University and a M.B.A. from New York University. DR. YOUNG has served as Vice President, Medical Research since September 1993. Dr. Young is a board certified radiologist. From 1977 to 1994 Dr. Young served as Director of the Contrast Media Laboratory in the Department of Radiology at Stanford University School of Medicine and he was a tenured Associate Professor until he joined the Company. Dr. Young received his M.D. from the Indiana University School of Medicine and his Masters of Business Management from Stanford University, where he was an A.P. Sloan Fellow. MR. KILEY was appointed as a Director of the Company in June 1991. He has been self-employed since 1988 as an attorney, consultant and investor. From 1980 to 1988, he was an officer of Genentech, Inc., serving variously as Vice President and General Counsel, Vice President for Legal Affairs and Vice President for Corporate Development. Mr. Kiley is also a Director of Cardiogenesis Corporation, a medical device company, Geron, Inc., and Connective Therapeutics, Inc., pharmaceutical companies, and certain private biotechnology and other companies. Mr. Kiley received a B.S. in Chemical Engineering from Pennsylvania State University and a J.D. from George Washington University. MR. LACOB was appointed as a Director of the Company in June 1991. He is a General Partner of Kleiner Perkins Caufield & Byers, a venture capital investment firm, which he joined in 1987. Mr. Lacob is currently Chairman of the Board of CellPro, Inc. and Microcide Pharmaceuticals and a director of Heartport, Inc., as well as several private life science companies. Mr. Lacob holds a B.S. in BioChemistry from the University of California, Irvine, a M.S. in Public Health from the University of California, Los Angeles and a M.B.A. from Stanford University. MR. LATTERELL was appointed as a Director of the Company in June 1991. He is a General Partner of Venrock Associates and Venrock Associates II, L.P., venture capital investment groups, which he joined in April 1989. Mr. Latterell is currently a Director of Biocircuits Corporation, Geron Corporation, Vical, Inc. and several private biomedical companies. Mr. Latterell holds S.B. degrees in Biological Sciences and Economics from the Massachusetts Institute of Technology and a M.B.A. from Stanford University. MR. SCODARI was appointed as a Director of the Company in December 1994. He is Corporate Executive Vice President, and President Pharmaceutical Division for Centocor, Inc. Prior to joining Centocor, he was Senior Vice President and General Manager, North American Ethicals for Rhone-Poulenc Rorer Pharmaceuticals, Inc. where he held various positions since 1989. From 1987 to 1989, Mr. Scodari was Executive Vice President of Sterling Drugs U.S. Diagnostic Imaging Division where he held responsibilities for all marketing and sales and business development activities for Sterling's imaging agent business. Mr. Scodari received a B.S. in Political Science from Youngstown State University. MR. TAYLOR was appointed as a Director of the Company in June 1991. He is a General Partner of AMC Partners 89, L.P., the general partner of Asset Management Associates 1989, L.P., a private venture capital partnership. Mr. Taylor has been with Asset Management Company, a venture management group, since 1977. Mr. Taylor is a Director of Occupational Health & Rehabilitation (formerly Telor Ophthalmic Pharmaceuticals, Inc.), Metra BioSystems, Inc. and Lynx Therapeutics, Inc., and several private companies. Mr. Taylor holds B.S. and M.S. degrees in Physics from Brown University and a M.B.A. from Stanford University. ITEM 2. PROPERTIES In 1993 the Company entered into an eight year lease agreement beginning in February 1994 for 32,500 square foot facility in Sunnyvale, California. This facility includes administrative space and research and development space. The lease is a non-cancelable operating lease which expires in 2002. Rental payments are based upon a gradual scale. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS None. 27 28 PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common shares of Pharmacyclics, Inc. are listed on the National Association of Securities Dealers Automated Quotation National Market System under the symbol PCYC. The following table presents quarterly information on the high and low sales prices of the Company's common stock for the fiscal year 1996.
FISCAL YEAR HIGH LOW --------------------------------------------------------------- ---- --- 1996 2nd Quarter.................................................... $16 3/4 $12 3rd Quarter.................................................... 15 12 3/4 4th Quarter.................................................... 20 1/4 13 3/4
As of August 31, 1996, the Company's common stock was held by 94 stockholders of record. The Company has never declared or paid dividends on its capital stock and does not anticipate paying any dividends in the forseeable future. ITEM 6. SELECTED FINANCIAL DATA The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes included elsewhere herein.
PERIOD FROM INCEPTION YEAR ENDED JUNE 30, (APRIL 1991) ------------------------------------------------------ THROUGH 1992 1993 1994 1995 1996 JUNE 30, 1996 ----- ------- ------- -------- ------- -------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS Revenues: License and grant revenues............... $ -- $ -- $ 3,000 $ 79 $ 301 $ 3,380 ----- ------- ------- -------- ------- -------------- Operating expenses: research and development............ 487 3,161 6,909 9,330 7,641 27,528 General and administrative......... 58 559 1,042 996 1,515 4,170 ----- ------- ------- -------- ------- -------------- Total operating expenses........ 545 3,720 7,951 10,326 9,156 31,698 ----- ------- ------- -------- ------- -------------- Loss from operations........ (545) (3,720) (4,951) (10,247) (8,855) (28,318) Interest income............. 22 148 164 187 940 1,461 Interest expense............ -- (8) (253) (419) (320) (1,000) ----- ------- ------- -------- ------- -------------- Loss before income taxes.... (523) (3,580) (5,040) (10,479) (8,235) (27,857) Provision for income taxes..................... -- -- (101) -- -- (101) ----- ------- ------- -------- ------- -------------- Net loss.................... $(523) $(3,580) $(5,141) $(10,479) $(8,235) $(27,958) ===== ======= ======= ======== ======= ========== Net loss per share.......... $ (1.65) $ (1.05) ======== ======= Weighted average common and common equivalent shares.................... 6,353 7,815 ======== =======
28 29
JUNE 30, ---------------------------------------------------------- 1992 1993 1994 1995 1996 ------- ------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA Cash and cash equivalents............. $ 2,116 $ 6,196 $ 8,690 $ 376 $ 13,950 Short-term investments................ -- -- -- -- 8,053 Total Assets.......................... 2,157 6,880 12,050 3,539 25,015 Long term obligations, excluding current installments................ -- 228 1,880 1,429 941 Deficit accumulated during development stage............................... (523) (4,103) (9,244) (19,723) (27,958) Total Stockholders' equity (deficit)........................... 2,152 6,249 8,769 (1,652) 21,991
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains certain statements of a forward-looking nature relating to future events or the future performance of the Company. Such statements are only predictions and the actual events or results may differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed in "Factors That May Affect Results" elsewhere in this report. OVERVIEW During the period from its inception in April 1991 through the fiscal year ended June 30, 1992, the Company was engaged in organizational activities, including negotiating agreements with The University of Texas with respect to licensing of certain aspects of its core technology in biometallic chemistry and recruiting scientific and management personnel. Since June 1992 the Company has devoted substantially all of its resources to the research and development of proprietary pharmaceutical products to facilitate and improve treatments for cancer and atherosclerosis and to improve certain diagnostic imaging procedures. As these products are still under development, no revenues have been derived from the sale of products and the Company does not expect to receive revenues from the sale of any of its products until calendar year 1997 at the earliest. The Company has financed its operations primarily through the sale of equity securities and, in October 1995, completed its initial public offering, issuing 2,383,450 shares of its Common Stock, resulting in net proceeds of approximately $26.0 million. In addition, cash has been received in connection with entering into certain product licenses and license option agreements. No revenues have been derived from the sale of products under development. The Company is pursuing additional collaborative agreements for the financing of its research and development efforts and for the commercialization of its products. However, no assurance can be given that these efforts will result in any such agreements or that the Company will obtain significant revenues therefrom. The Company has been unprofitable since inception and had an accumulated deficit of $28 million at June 30, 1996. Successful future operations depend upon the Company's ability to develop, to obtain regulatory approval for and to commercialize its products, of which there can be no assurance. The Company will require additional funds to complete the development of its products and to fund operating losses that are expected to be incurred in the next several years. RESULTS OF OPERATIONS Revenue To date, Pharmacyclics has received only limited revenues and no revenues from operations. During the fiscal year ending June 30, 1996, $301,000 was recognized compared to $79,000 in fiscal 1995. The fiscal 1996 revenue includes two milestone payments received pursuant to an August 1995 product distribution agreement with E-Z-EM. Under this agreement, the Company recorded $250,000 as revenue (net of licensing related expenses paid to The University of Texas). In addition, $51,000 was received under a 29 30 Small Business Innovation Research ("SBIR") grant from the National Cancer Institute during the same period. All of the revenue recorded in fiscal 1995 was from the same grant. In fiscal 1994, the Company recognized $2,000,000 under an option whereby the Company agreed, for six months, to refrain from entering into any discussions or agreements relating to licensing certain technology. No license agreement was consummated pursuant to this option. The Company also recognized $1,000,000 under an agreement for the development and commercialization of certain diagnostic imaging products in certain Asian countries. This agreement was terminated during fiscal 1995. Research and Development Research and development expenses totaled $7,641,000 during fiscal 1996 compared to $9,330,000 during fiscal 1995, a decrease of 18%. The decrease was due to fluctuations in the level of clinical activity relating to the Company's products. During fiscal 1995, the Company was conducting multi-center Phase III studies of GADOLITE(R) Oral Suspension and completing the preclinical studies required for an Investigational New Drug Application (IND) filing for gadolinium-texaphyrin (Gd-Tex). By comparison, fiscal 1996 included a Phase I trial for lutetium-texphyrin (Lu-Tex) and Phase I and Phase Ib/II trials for Gd-Tex, each of which required a smaller number of patients. There will continue to be significant period-to-period variations in research and development expenses related to the timing of clinical and preclinical trials and other research activities. The Company currently expects its research and development expenses to increase in future periods due to planned expansion in clinical trials and research activities. For the year ended June 30, 1995 research and development spending totaled $6,909,000. This increase during fiscal 1995 of 35% was the result of growth in the research organization and the costs associated with the Phase III GADOLITE(R) multi-center trials. General and Administrative General and administrative expenses totaled $1,515,000 during fiscal 1996 compared to $996,000 during fiscal 1995, an increase of 52%. The increase was primarily the result of insurance, professional services and other expenses related to conducting business as a public company. The Company expects that costs related to being a public company will result in higher levels of general and administrative expenditures in future years. General and administrative expenses decreased slightly from $1,042,000 in fiscal 1994 to $996,000 in fiscal 1995. Interest and Other Income Interest income, net of interest expense totaled $620,000 for fiscal 1996, compared to net interest expense of $232,000 for the same period in the prior fiscal year. The increase in interest income is the result of interest earned on the proceeds from the Company's initial public offering completed in October 1995. The expenses in the prior year were related to borrowings associated with capital lease financing and notes payable which offset interest on income from cash and cash equivalents. Interest expense, net of interest income, during fiscal 1994 was $89,000. This increase in net interest expense reflects interest on lease lines resulting from growth in equipment and facilities. Income Taxes At June 30, 1996, the Company had net operating loss carryforwards of approximately $23.0 million and tax credits carryforwards of approximately $1.3 million for federal and state income tax reporting purposes, respectively. These amounts expire at various times through 2010. A change of ownership, as defined under Section 382 of the Internal Revenue Code, occurred as a result of the Company's initial public offering. Accordingly, utilization of approximately $17.0 million of the Company's net operating loss carryforwards will be subject to an annual limitation of approximately $4.0 million. See Note 5 of Notes to Financial Statements. 30 31 LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations since inception through June 30, 1996 primarily through the sale of equity securities, payments under third party agreements and proceeds from its initial public offering. From inception through June 30, 1996, the Company has used approximately $25.3 million of cash for operating activities and approximately $2.8 million of cash for the purchase of laboratory and office equipment and payments under capital lease agreements. Net cash used in operating activities of $7.4 million for fiscal year ended June 30, 1996, resulted primarily from the net loss incurred during that period and increases in accounts payable, accrued liabilities, and depreciation expense. On June 30, 1996, the Company had approximately $22.0 million in cash, cash equivalents and short-term investments. The Company expects to incur ongoing levels of expenditures which may not only fluctuate from quarter to quarter but which are expected to increase as the levels of clinical activity for the Company's products under development increases. Additional expenditures may occur in commercializing the Company's first product, GADOLITE. As a result of both these factors, as well as the costs associated with being a public company, the Company expects to report increased expenses for research and development and general and administrative activities for at least the next several years. The Company's future liquidity and capital requirements will depend upon numerous factors, including the progress of the Company's product development efforts, the progress of the Company's clinical trials, actions relating to regulatory matters, the costs and timing of expansion of product development, manufacturing, marketing and sales activities, future third-party collaborations, the extent to which the Company's products gain market acceptance, and competitive developments. Although the Company believes that the Company's current cash, cash equivalents and short-term investments will be sufficient to meet the Company's operating and capital requirements through calendar 1997, there can be no assurance that the Company will not require additional financing within this time frame. The Company's forecast of the period of time through which its financial resources will be adequate to support its operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. The factors described above will impact the Company's future capital requirements and the adequacy of its available funds. The Company may be required to raise additional funds through public or private financing, collaborative relationships or other arrangements. There can be no assurance that such additional funding, if needed, will be available on terms attractive to the Company, or at all. Furthermore, any additional equity financing may be dilutive to existing stockholders, and debt financing, if available, may involve restrictive covenants. Collaborative arrangements, if necessary to raise additional funds, may require the Company to relinquish its rights to certain of its technologies, products or marketing territories. The failure of the Company to raise capital when needed could have a material adverse effect on the Company's business, financial condition and results of operations. See " Factors That May Affect Results." FUTURE POSSIBLE COMPENSATION EXPENSE In May 1996, the Company granted to certain employees options to purchase approximately 211,000 shares of Common Stock at $17.75 per share (the then fair market value of such shares). Approximately 160,000 of such options were in excess of the number of options authorized to be granted under the Company's 1995 Stock Option Plan. The Company expects to grant additional options to purchase approximately 200,000 shares of Common Stock prior to the 1996 Annual Meeting of Stockholders currently scheduled for December 1996 (the "Annual Meeting"), with an exercise price equal to the fair market value of the Company's Common Stock on the date of grant. All such option grants are subject to stockholder approval at the Annual Meeting. As a result, in the event the fair market value of the Company's Common Stock on the date of the Annual Meeting exceeds the exercise price of the respective stock options, the Company will be required to record compensation expense in an amount equal to such difference multiplied by the number of shares subject to such option and recognized on a straight-line basis over the vesting period of the option, generally five years. 31 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants..................................................... 33 Balance Sheet -- June 30, 1996, and 1995.............................................. 34 Statement of Operations -- Years ended June 30, 1996, 1995 and 1994 and Period from Inception (April 1991) to June 30, 1996............................................. 35 Statement of Cash Flows -- Years ended June 30, 1996, 1995 and 1994 and Period from Inception (April 1991) to June 30, 1996............................................. 36 Statement of Stockholders' Equity -- Period from Inception (April 1991) to June 30, 1996................................................................................ 37 Notes to Financial Statements......................................................... 38
32 33 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Pharmacyclics, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of cash flows and of stockholders' equity (deficit) present fairly, in all material respects, the financial position of Pharmacyclics, Inc. (a development stage company) at June 30, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1996, and for the period from inception (April 1991) through June 30, 1996 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California August 20, 1996 33 34 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET (IN THOUSANDS)
JUNE 30, --------------------- 1996 1995 -------- -------- ASSETS Current assets: Cash and cash equivalents............................................ $ 13,950 $ 376 Short-term investments............................................... 8,053 -- Prepaid expenses..................................................... 241 164 -------- -------- Total current assets......................................... 22,244 540 Property and equipment, net............................................ 2,622 2,850 Deposits............................................................... 54 54 Notes receivable from employee......................................... 95 95 -------- -------- $ 25,015 $ 3,539 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable..................................................... $ 753 $ 689 Accrued liabilities.................................................. 300 257 Current portion of capital lease obligations......................... 917 749 Notes payable........................................................ -- 2,000 -------- -------- Total current liabilities.................................... 1,970 3,695 Capital lease obligations.............................................. 941 1,429 Deferred rent.......................................................... 113 67 -------- -------- Total liabilities............................................ 3,024 5,191 -------- -------- Commitments (Note 6) Stockholders' equity (deficit): Preferred stock, $0.0001 par value; authorized -- 1,000,000 shares at June 30, 1996; no shares issued and outstanding................... -- -- Convertible preferred stock, $0.0001 par value; authorized -- 6,666,667 shares at June 30, 1995; shares issued and outstanding -- 4,507,839 at June 30, 1995......................... -- -- Common stock, $0.0001 par value; authorized -- 10,000,000 shares at June 30, 1995, 12,000,000 at June 30, 1996; shares issued and outstanding -- 908,702 at June 30, 1995 and 8,549,424 at June 30, 1996 respectively................................................. 1 -- Additional paid-in capital........................................... 49,948 18,071 Deficit accumulated during development stage......................... (27,958) (19,723) -------- -------- Total stockholders' equity (deficit)......................... 21,991 (1,652) -------- -------- $ 25,015 $ 3,539 ======== ========
The accompanying notes are an integral part of these financial statements. 34 35 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PERIOD FROM INCEPTION (APRIL 1991) YEAR ENDED JUNE 30, THROUGH JUNE -------------------------------- 30, 1996 1995 1994 1996 ------- -------- ------- -------------- Revenues: License and grant revenues................... $ 301 $ 79 $ 3,000 $ 3,380 ------- -------- ------- -------- Operating expenses: Research and development..................... 7,641 9,330 6,909 27,528 General and administrative................... 1,515 996 1,042 4,170 ------- -------- ------- -------- Total operating expenses............. 9,156 10,326 7,951 31,698 ------- -------- ------- -------- Loss from operations........................... (8,855) (10,247) (4,951) (28,318) Interest income................................ 940 187 164 1,461 Interest expense............................... (320) (419) (253) (1,000) ------- -------- ------- -------- Loss before income taxes....................... (8,235) (10,479) (5,040) (27,857) Provision for income taxes..................... -- -- (101) (101) ------- -------- ------- -------- Net loss....................................... $(8,235) $(10,479 $(5,141) $(27,958) ======= ======== ======= ======== Net loss per share (Note 1).................... $ (1.05) $ (1.65) ======= ======== Weighted average common and common equivalent shares (Note 1).............................. 7,815 6,353 ======= ========
The accompanying notes are an integral part of these financial statements. 35 36 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM INCEPTION (APRIL 1991) THROUGH YEAR ENDED JUNE 30, JUNE 30, ----------------------------- ------------ 1996 1995 1994 1996 -------- -------- ------- ------------ Cash flows from operating activities: Net loss........................................... $ (8,235) $(10,479) $(5,141) $(27,958) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................... 732 643 321 1,776 Write-down of fixed assets...................... -- 118 -- 118 Other........................................... -- 39 -- 39 Gain on sale of short-term investments.......... -- (22) -- (22) Changes in assets and liabilities: Prepaid expenses................................... (77) (89) 9 (231) Deposits........................................... -- (1) 19 (54) Notes receivable from employee..................... -- (95) -- (95) Accounts payable................................... 64 47 411 753 Accrued liabilities................................ 43 109 74 300 Deferred rent...................................... 46 46 21 113 -------- -------- ------- ------------ Net cash used in operating activities.............. (7,427) (9,684) (4,286) (25,261) -------- -------- ------- ------------ Cash flows from investing activities: Purchase of property and equipment................. (16) (52) (770) (1,085) Proceeds from sale of property and equipment....... -- -- 112 112 Purchase of short-term investments................. (8,053) (5,478) -- (14,380) Proceeds from the sale of short-term investments... -- 5,500 849 6,349 -------- -------- ------- ------------ Net cash (used in) provided by investing activities......................................... (8,069) (30) 191 (9,004) -------- -------- ------- ------------ Cash flows from financing activities: Issuance of common stock, net of issuance costs.... 26,278 9 38 26,336 Proceeds from notes payable........................ 1,000 2,000 -- 3,000 Issuance of convertible preferred stock, net of issuance costs.................................. 2,550 -- 7,623 20,514 Payments under capital lease obligations........... (758) (609) (225) (1,635) -------- -------- ------- ------------ Net cash provided by financing activities.......... 29,070 1,400 7,438 48,215 -------- -------- ------- ------------ Increase (decrease) in cash and cash equivalents..... 13,574 (8,314) 3,343 13,950 Cash and cash equivalents at beginning of period..... 376 8,690 5,347 -- -------- -------- ------- ------------ Cash and cash equivalents at end of period........... $ 13,950 $ 376 $ 8,690 $ 13,950 ======== ======== ======= ========= Supplemental disclosures of cash flows information: Income taxes paid during the period................ $ -- $ -- $ 101 $ 101 ======== ======== ======= ========= Interest paid during the period.................... $ 320 $ 352 $ 238 $ 918 ======== ======== ======= ========= Supplemental disclosure of noncash investing and financing activities: Property and equipment acquired under capital lease obligations..................................... $ 437 $ 317 $ 2,367 $ 3,492 ======== ======== ======= ========= Warrants issued.................................... $ -- $ 49 $ -- $ 49 ======== ======== ======= ========= Conversion of notes payable and accrued interest into convertible preferred stock................ $ 3,051 $ -- $ -- $ 3,051 ======== ======== ======= =========
The accompanying notes are an integral part of these financial statements. 36 37 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM INCEPTION (APRIL 1991) THROUGH JUNE 30, 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONVERTIBLE DEFICIT PREFERRED COMMON ADDITIONAL ACCUMULATED STOCK STOCK PAID-IN DURING -------------------- ------------------- ---------- DEVELOPMENT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL ----------- ------- ---------- ------- ---------- ----------- -------- Issuance of common stock for cash at $0.02 -- $ -- 400,000 $ -- $ 6 $ -- $ 6 per share................................ ----------- ------- ---------- ------- ---------- ----------- -------- Balance at June 30, 1991................... -- -- 400,000 -- 6 -- 6 Issuance of common stock for cash at an -- -- 97,111 -- 2 -- 2 average price of $0.02 per share......... Issuance of convertible preferred stock for 2,040,784 -- -- -- 2,667 -- 2,667 cash, net of issuance costs, at an average price of $1.32 per share......... Net loss................................... -- -- -- -- -- (523) (523) ----------- ------- ---------- ------- ---------- ----------- -------- Balance at June 30, 1992................... 2,040,784 -- 497,111 -- 2,675 (523) 2,152 Issuance of common stock for cash at an -- -- 49,000 -- 3 -- 3 average price of $0.06 per share......... Issuance of convertible preferred stock for 1,580,095 -- -- -- -- 7,674 cash, net of issuance costs, at $4.88 per share.................................... Net loss................................... -- -- -- -- (3,580) (3,580) ----------- ------- ---------- ------- ---------- ----------- -------- Balance at June 30, 1993................... 3,620,879 -- 546,111 -- 10,352 (4,103) 6,249 Issuance of common stock upon exercise of -- -- 324,188 -- 38 -- 38 stock options at an average price of $0.12 per share.......................... Issuance of convertible preferred stock for 886,960 -- -- -- -- 7,623 -- cash, net of issuance costs, at an average price of $8.63 per share......... Net loss................................... -- -- -- -- -- (5,141) (5,141) ----------- ------- ---------- ------- ---------- ----------- -------- Balance at June 30, 1994................... 4,507,839 -- 870,299 -- 18,013 (9,244) 8,769 Issuance of common stock upon exercise of -- -- 38,403 -- 9 -- 9 stock options at an average price of $0.24 per share.......................... Issuance of warrants....................... -- -- -- -- 49 -- 49 Net loss................................... -- -- -- -- -- (10,479) (10,479) ----------- ------- ---------- ------- ---------- ----------- -------- Balance at June 30, 1995................... 4,507,839 -- 908,702 -- 18,071 (19,723) (1,652) Issuance of convertible preferred stock for 353,483 -- -- -- 3,051 -- 3,051 notes payable and accrued interest at an average of $8.63 per share............... Issuance of convertible preferred stock for 295,649 -- -- -- 2,550 -- 2,550 cash, net of issuance costs, at an average price of $8.63 per share......... Issuance of common stock upon initial -- -- 2,383,45 1 26,042 -- 26,043 public offering, net of issuance costs, for cash at $12 per share................ Conversion of convertible preferred stock (5,156,971) -- 5,156,971 -- -- -- -- into common stock........................ Issuance of common stock upon exercise of -- -- 91,922 -- 122 -- 122 stock options at an average exercise price of $1.33 per share................. Issuance of common stock upon exercise of -- -- 8,379 -- 86 -- 86 purchase rights at an exercise price of $10.20 per share......................... Stock compensation expense................. -- -- -- -- 26 -- 26 Net loss................................... -- -- -- -- -- (8,235) (8,235) ----------- ------- ---------- ------- ---------- ----------- -------- Balance at June 30, 1996................... -- $ -- 8,549,424 $ 1 $ 49,948 $ (27,958) $ 21,991 ========== ======== ========= ======== ========= =========== =========
The accompanying notes are an integral part of these financial statements. 37 38 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES: Description of the Company Pharmacyclics, Inc. (the "Company") was incorporated in Delaware in April 1991 and commenced operations during 1992 to develop and market pharmaceutical products derived from biometallic chemistry for the treatment of certain cancers, atherosclerosis diseases and contrast agents for magnetic resonance imaging. Since its inception the Company has been in the development stage, principally involved in research and development and other business planning activities, with no revenues from product sales. Successful future operations depend upon the Company's ability to develop, to obtain regulatory approval for and to commercialize its products. The Company expects that additional funds will be required to complete the development of its products and to fund operating losses that are expected to be incurred in the next several years. Initial public offering In October 1995 the Company effected a 2 for 3 reverse stock split. All share and per share amounts have been adjusted to retroactively reflect this stock split. The Company completed its initial public offering on October 23, 1995, issuing 2,150,000 shares of its common stock. Upon the closing of the offering, all outstanding shares of Convertible Preferred Stock were automatically converted into 5,156,971 shares of common stock. On November 6, 1995, the underwriters of the initial public offering exercised their over-allotment option with respect to an additional 233,450 shares of common stock. The Company's initial public offering resulted in net proceeds of approximately $26.0 million. Management's use of estimates and assumptions The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Net loss per share The Company's historical capital structure was not indicative of its prospective structure due to the conversion of all shares of Convertible Preferred Stock into common stock concurrent with the closing of the Company's initial public offering in October 1995. Accordingly, net loss per share for the year ended June 30, 1994 is not considered meaningful and has not been presented herein. Net loss per share for the years ended June 30, 1995 and 1996 is computed using the weighted average number of outstanding shares of common stock. In addition, the computation includes the effect of the conversion of all shares of Series A, A1, B and C Convertible Preferred Stock into 5,156,971 shares of common stock concurrent with the closing of the Company's initial public offering as if they were converted into shares of common stock on July 1, 1994. Common stock equivalent shares arising from stock options and warrants are excluded from the computation because their effect is antidilutive, except that common stock equivalent shares arising from stock options and warrants (using the treasury stock method and the initial public offering price) issued during the twelve month period prior to the initial public offering are included in the computation of net loss per share as if they were outstanding for all periods presented prior to the initial public offering. 38 39 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Cash equivalents and short-term investments All highly liquid investments purchased with maturity at the date of purchase of three months or less are considered to be cash equivalents. Effective July 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The adoption of SFAS 115 did not have a material impact on the Company's financial condition or results of operations. The Company has classified its cash equivalents and short-term investments as "available-for-sale." For all periods presented, cost of investments approximated fair market value. The Company's cash, cash equivalents and short-term investments consisted of the following (in thousands):
JUNE 30, ------------------ INVESTMENT TYPE 1996 1995 ----------------------------------------------------------------- ------- ---- Cash in bank..................................................... $ 360 $ 2 Money market..................................................... 6,562 374 Debt (state or political subdivision)............................ 4,014 -- Debt (corporate)................................................. 3,014 -- ------- ---- Cash and cash equivalents.............................. $13,950 $376 ======= ==== Debt (state or political subdivision)............................ $ 1,013 $ -- Debt (corporate)................................................. 7,040 -- ------- ---- Short-term investments................................. $ 8,053 $ -- ======= ====
Concentration of credit risk The Company deposits its excess cash with financial institutions and invests such excess cash in debt instruments of financial institutions, corporations and government entities with strong credit ratings. Management of the Company believes they have established guidelines relative to diversification and maturities that maintain safety and liquidity. Property and equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the shorter of the estimated useful lives of the assets, generally four to eight years, or the lease term of the respective assets, if applicable. Amortization of leasehold improvements is computed using the straight-line method over the shorter of their estimated useful lives or lease terms. Research and development Research and development costs are charged to expense as incurred. Income taxes The Company provides for income taxes using the liability method. This method requires that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts. Reclassifications Certain 1994 amounts have been reclassified to conform with the current presentation. 39 40 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Fair value of financial instruments The carrying value of capital lease obligations approximate fair value due to the short maturity of those instruments. Adoption of recent accounting standards In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") which requires the Company to review for impairment its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets might not be recoverable. In certain situations, an impairment loss would be recognized. The Company will adopt SFAS 121 during fiscal 1997 and, based on its initial evaluation, does not expect its adoption to have a material impact on the Company's financial condition or results of operations. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") which established a fair value based method of accounting for stock-based compensation plans and requires additional disclosures for those companies who elect not to adopt the new method of accounting. The Company will adopt SFAS 123 during fiscal 1997. The Company intends to continue to account for employee stock options using the intrinsic value method prescribed by APB Opinion No. 25 and to adopt the "disclosure only" pro forma alternative described in SFAS 123. NOTE 2 -- BALANCE SHEET COMPONENTS: Property and equipment consists of the following (in thousands):
JUNE 30, -------------------- 1996 1995 ------- ------ Equipment....................................................... $ 2,250 $1,802 Furniture and fixtures.......................................... 324 318 Leasehold improvements.......................................... 1,689 1,689 ------- ------ 4,263 3,809 Less accumulated depreciation and amortization.................. (1,641) (959) ------- ------ $ 2,622 $2,850 ======= ======
Accrued liabilities consists of the following (in thousands):
JUNE 30, --------------- 1996 1995 ---- ---- Employee compensation............................................... $220 $184 Other............................................................... 80 73 ---- ---- $300 $257 ==== ====
NOTE 3 -- NOTES RECEIVABLE FROM EMPLOYEE: In September 1994, the Company loaned an employee approximately $65,000. This note receivable bears interest at 5.86%, with interest payable annually and principal due in full on August 31, 1997. In April 1995, the Company loaned the same employee approximately $30,000. This note receivable bears interest at 7.19%, with principal and interest due in full on February 28, 1998. 40 41 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- STOCKHOLDERS' EQUITY (DEFICIT): Common Stock The Company has issued certain shares of its common stock to employees and consultants. Under the terms of the agreements related to issuance, the Company has the right to repurchase, at the stockholder's original cost, a declining percentage of the shares issued for a stipulated period from the date of issuance. At June 30, 1996 20,833 shares were subject to such repurchase rights. Preferred Stock In September 1995, the Company amended its Certificate of Incorporation effective upon the conversion of the Convertible Preferred Stock to authorize 1,000,000 shares of Preferred Stock, par value $0.0001 per share. The Board of Directors is authorized to issue the Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. Warrants In connection with entering into certain capital leases, the Company issued to lessors warrants to purchase 73,042 shares of Convertible Preferred Stock at a weighted average exercise price of $4.49 per share. The warrants are exercisable at any time prior to their expiration in 2000. In July 1995, in connection with certain short-term note agreements entered into prior to the Company's initial public offering, the Company issued to the holders of such notes payable warrants to purchase 57,976 shares of Series C Convertible Preferred Stock at an exercise price of $8.63 per share. Also in July 1995, the Company issued warrants to purchase 66,522 shares of Series C Convertible Preferred Stock at an exercise price of $8.63 per share to certain holders of such stock, in exchange for an agreement by the holders to modify certain rights received in connection with the Series C financing which occurred in June 1994. Management ascribed a nominal value to these warrants and has reserved 197,540 shares of common stock for future issuance upon exercise of such warrants. In connection with the Company's initial public offering, the above warrants were converted into warrants to purchase shares of common stock. Stock Option Plans The 1992 Stock Option Plan (the "1992 Plan"), as amended, authorizes the Board of Directors to grant incentive stock options and non-statutory stock options to employees, directors and consultants to purchase up to 1,233,334 shares of common stock. Under the 1992 Plan, incentive stock options are granted at a price not less than 100% of the estimated fair value of the stock on the date of grant, as determined by the Board of Directors. Nonqualified stock options are granted at a price not less than 85% of the estimated fair value of the stock on the date of grant, as determined by the Board of Directors. To date, all options granted under the 1992 Plan have been granted at 100% of the estimated fair value of the common stock as determined by the Board of Directors. Generally, options granted under the 1992 Plan are exercisable on and after the date of grant, subject to the Company's right to repurchase from the optionee at the optionee's cost per share, any unvested shares which the optionee has purchased and holds in the event the optionee attempts to dispose of such shares or in the event of the optionee's termination of employment with or without cause. The Company's right to repurchase lapses as the shares become vested. Generally, shares subject to options granted under the 1992 41 42 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Plan vest at the rate of 1/4th of the shares on the first anniversary of the grant date of the option, and an additional 1/48th of the shares upon completion of each succeeding month of continuous employment thereafter. Options are exercisable for a period of ten years. The Company's 1995 Stock Option Plan (the "1995 Plan") was adopted by the Board of Directors on August 2, 1995 as the successor to the 1992 Plan. The 1995 Plan authorizes for issuance 834,881 shares of common stock, plus an additional number of shares on the first trading day of each calendar year, commencing January 1, 1996, equal to 1% of the number of shares of common stock outstanding on the last day of the preceding calendar year not to exceed 500,000 shares per year. Shares of common stock subject to outstanding options, including options granted under the 1992 Plan, that expire or terminate prior to exercise will be available for future issuance under the 1995 Plan. Under the 1995 Plan, employees (including officers), non-employee members of the Board of Directors (other than those serving as members of the Compensation Committee) and independent consultants may, at the discretion of the plan administrator, be granted options to purchase shares of common stock at an exercise price not less than 85% of the fair market value of such shares on the grant date. Non-employee members of the Board of Directors will also be eligible for automatic option grants under the Company's Non-Employee Directors Stock Option Plan. Generally, shares subject to options under the 1995 Plan vest over a five-year period, and are exercisable for a period of ten years. The exercise price for options granted under the 1995 Plan may be paid in cash or in outstanding shares of common stock. Options may also be exercised on a cashless basis through the same-day sale of the purchased shares. The Compensation Committee may permit the optionee to pay the exercise price through a promissory note payable in installments over a period of years. The amount financed may include any federal or state income and employment taxes incurred by reason of the option exercise. The Compensation Committee has the authority to effect, from time to time, the cancellation of outstanding options under the 1995 Plan, including options incorporated from the 1992 Plan, in exchange for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the common stock on the new grant date. In the event the Company is acquired by merger, consolidation or asset sale, the shares of common stock subject to each option outstanding at the time under the 1995 Plan will immediately vest in full, except to the extent the Company's repurchase rights with respect to those shares are to be assigned to the acquiring entity, and options will accelerate to the extent not assumed by the acquiring entity. Any assumed options will accelerate and assigned repurchase rights will terminate upon the optionee's involuntary termination within 18 months following the acquisition. The Compensation Committee also has discretion to provide for the acceleration of one or more outstanding options under the 1995 Plan (including options incorporated from the 1992 Plan) and the vesting of shares subject to outstanding options upon the occurrence of certain hostile tender offers. Such accelerated vesting may be conditioned upon the subsequent termination of the affected optionee's service. The 1995 Plan also authorizes stock appreciation rights, which provide the holders with the election to surrender their outstanding options for an appreciation distribution from the Company equal to the excess of (i) the fair market value of the vested shares of common stock subject to the surrendered option over (ii) the aggregate exercise price payable for such shares. Such appreciation distribution may be made in cash or in shares of common stock. To date no such rights have been issued. The Board may amend or modify the 1995 Plan at any time. The 1995 Plan will terminate on August 1, 2005, unless sooner terminated by the Board. 42 43 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes activity under the 1992 Plan and 1995 Plan (in thousands, except per share amounts):
OPTIONS OPTIONS OPTION PRICE PER AVAILABLE OUTSTANDING SHARE --------- ----------- ----------------- Balance at June 30, 1993....................... 520 480 $0.08 - $ 0.49 Options exercised.............................. -- (324) $0.08 - $ 0.49 Options granted................................ (167) 167 $0.49 - $ 5.25 Options cancelled.............................. 8 (8) $0.08 - $ 0.49 ---- ---- Balance at June 30, 1994....................... 361 315 $0.08 - $ 5.25 Options exercised.............................. -- (39) $0.08 - $ 0.49 Options granted................................ (193) 193 $3.75 Options cancelled.............................. 38 (38) $0.49 - $ 3.75 ---- ---- Balance at June 30, 1995....................... 206 431 $0.08 - $ 5.25 Options authorized............................. 318 -- Options exercised.............................. -- (92) $0.08 - $18.625 Options granted................................ (472) 472 $7.50 - $17.75 Options cancelled.............................. 11 (11) $0.49 - $17.75 ---- ---- Balance at June 30, 1996....................... 63 800 $0.08 - $17.75 ==== ====
At June 30, 1996 options to purchase 205,221 shares were vested. In May 1996, the Company granted options to purchase approximately 211,000 shares of common stock at $17.75 (the then fair market value of such shares) per share to certain employees. The Company expects to grant additional options to purchase approximately 200,000 shares of common stock prior to the 1996 Annual Meeting of Stockholders currently scheduled for December 1996 (the "Annual Meeting"), with an exercise price equal to the fair market value of the Company's common stock on the date of grant. All such option grants are subject to stockholder approval at the Annual Meeting. As a result, the Company will be required to record compensation expense in the event the fair market value of the Company's common stock on the date of the Annual Meeting exceeds the exercise price of the respective stock options, in an amount equal to such difference multiplied by the number of shares subject to such option and recognized on a straight-line basis over the vesting period of the option, generally five years. 1995 Non-Employee Directors Stock Option Plan. The Company's 1995 Non-Employee Directors Stock Option Plan (the "Directors Plan") was adopted by the Board of Directors on August 2, 1995. Automatic option grants are made at periodic intervals to eligible non-employee Board members under the Directors Plan. The Directors Plan became effective as of the effective date of the Company's initial public offering. A total of 166,667 shares of common stock have been reserved for issuance under the Directors Plan. Each individual serving as a non-employee Board member on the effective date of the Company's initial public offering was automatically granted a non-statutory option to purchase 5,000 shares of common stock, vesting in equal monthly installments for one year after the grant date. Each individual first elected or appointed as a non-employee Board member after the effective date of the Company's initial public offering will automatically be granted, on the date of such election or appointment, a non-statutory option to purchase 10,000 shares of common stock vesting over five years. In addition, on the date of each Annual Stockholders Meeting, beginning with the 1996 Annual Meeting, each individual who is to continue to serve as a non-employee Board member after that Annual Meeting and has been a member of the Board for at least six months will automatically be granted a non-statutory option to purchase 5,000 shares of common stock vesting in equal monthly installments for one year after the grant date. There will be no limit on the number of such 43 44 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) annual 5,000-share option grants any one non-employee Board member may receive over his or her period of continued Board service. The exercise price per share of each automatic option grant will be equal to the fair market value of the common stock on the automatic grant date. Each automatic option will be immediately exercisable; however, any shares purchased upon exercise of the option will be subject to repurchase should the optionee's service as a non-employee Board member cease prior to vesting in the shares. Each 10,000- share grant will vest in five equal and successive annual installments over the optionee's period of Board service. Each 5,000-share grant will vest in twelve equal and successive monthly installments over the optionee's period of Board service. In the event of the optionee's death or permanent disability or in the event the Company is acquired by a merger or asset sale and in the event of certain hostile tender offers, each outstanding automatic grant will vest in full so that each such option will become exercisable for fully vested shares. Upon the acquisition of 50% or more of the Company's outstanding voting stock pursuant to a hostile tender offer, each automatic option grant outstanding for at least six months may be surrendered automatically or be cancelled in exchange for a cash distribution to the director based upon the tender offer price. THE DIRECTORS PLAN WILL TERMINATE IN ALL EVENTS ON AUGUST 1, 2005. Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan (the "Purchase Plan"), was adopted by the Board of Directors on August 2, 1995. A total of 50,000 shares of common stock are reserved for issuance under the Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code, provides for 24-month offering periods with purchases occurring at six month intervals. The initial offering period commenced on October 23, 1995. The Purchase Plan is administered by the Compensation Committee of the Board. Employees become eligible to participate in the initial offering period if they are employed by the Company for at least 20 hours per week and five months per calendar year. For subsequent offering periods, employees will become eligible to participate if they are employed by the Company for at least 20 hours per week and five months per calendar year and have completed 90 days of service with the Company or any affiliate. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 10% of an employee's cash compensation. The price of stock purchased under the Purchase Plan will generally be 85% of the lower of the fair market value of the common stock at the beginning of the 24-month offering period or on the applicable semi-annual purchase date. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically following termination of employment with the Company. Each outstanding purchase right will be exercised immediately prior to a merger or consolidation. The Board may amend or terminate the Purchase Plan immediately after the close of any offering period. However, the Board may not materially increase the number of shares of common stock available for issuance or materially modify the eligibility requirements for participation or the benefits available to participants without stockholder approval. The Purchase Plan will in all events terminate in October 2005. NOTE 5 -- INCOME TAXES: The provision for income taxes for the year ended June 30, 1994 consists primarily of foreign withholding taxes on payments received by the Company under a license agreement (Note 7). 44 45 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Deferred tax assets (liabilities) are summarized as follows (in thousands):
JUNE 30, -------------------- 1996 1995 -------- ------- Deferred tax assets: Net operating loss carryforwards............................ $ 9,193 $ 5,926 Tax credit carryforwards.................................... 1,300 1,100 Capitalized start-up costs.................................. 927 935 Other....................................................... 240 110 -------- ------- Gross deferred tax assets................................... 11,660 8,071 Less valuation allowance.................................... (11,660) (7,997) Net deferred tax assets..................................... -- 74 Deferred tax liabilities: Other....................................................... -- (74) -------- ------- $ -- $ -- ======== =======
A valuation allowance has been established for the Company's deferred tax assets since realization of such assets through the generation of future taxable income is uncertain. The provision for income taxes differs from the amount determined by applying the U.S. statutory income tax rate to loss before income taxes as summarized below (in thousands):
YEAR ENDED JUNE 30, ------------------------------- 1996 1995 1994 ------- ------- ------- Tax benefit at statutory rate....................... $ 2,882 $ 3,563 $ 1,714 State income taxes, net of federal benefit.......... -- -- (1) Foreign taxes....................................... -- -- (100) Net operating loss carryforward for which no benefit was available..................................... (2,882) (3,563) (1,714) ------- ------- ------- $ -- $ -- $ (101) ======= ======= =======
At June 30, 1996, the Company had net operating loss carryforwards of approximately $23.0 million and tax credits carryforwards of approximately $1.3 million for federal and state income tax reporting purposes, respectively. These amounts expire at various times through 2010. Under the Tax Reform Act of 1986, the amounts of and the benefit from net operating losses and tax credit carryovers that can be carried forward may be impaired or limited in certain circumstances. These circumstances include, but are not limited to, a cumulative stock ownership change of greater than 50%, as defined, over a three year period. Such an ownership change occurred as a result of the Company's initial public offering. As a result, utilization of approximately $17,000,000 of the Company's federal and state net operating loss and tax credit carryforwards will be subject to an annual limitation of approximately $4,000,000. 45 46 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- COMMITMENTS: The Company leases its facilities under a non-cancelable operating lease which expires in 2001. The Company also leases certain assets under long-term lease agreement that are classified as capital leases. The total amount of assets acquired under capital lease arrangements which is included in property and equipment (Note 2), is as follows (in thousands):
JUNE 30, ------------------- 1996 1995 ------- ------- Equipment...................................................... $ 2,154 $ 1,619 Furniture and fixtures......................................... 278 375 Leasehold improvements......................................... 1,050 1,050 ------- ------- 3,482 3,044 Less accumulated depreciation and amortization................. (1,381) (811) ------- ------- $ 2,101 $ 2,233 ======= =======
The capital lease agreements require the Company, among other things, to pay insurance and maintenance costs. Under the terms of a capital lease agreement, the Company may acquire additional equipment of up to $385,000 at June 30, 1996. Future minimum lease payments at June 30, 1996 under all non-cancelable operating and capital leases are as follows (in thousands):
CAPITAL OPERATING YEAR ENDING JUNE 30, LEASES LEASES ----------------------------------------------------------------- ------ --------- 1997............................................................. $1,085 $ 400 1998............................................................. 723 407 1999............................................................. 171 392 2000............................................................. 113 371 Thereafter....................................................... -- 572 ------ --------- $2,092 $ 2,142 ======= ------ Less amount representing interest................................ (234) ------ 1,858 Less current portion............................................. (917) ------ Long-term portion of capital lease obligations................... $ 941 ======
Rent expense for the years ended June 30, 1993, 1994, 1995 and 1996 was $104,000, $236,000, $366,000, and $366,000 respectively, and $1,075,000 for the period from inception through June 30,1996. The terms of the facility lease provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid at June 30, 1996. The Company has a manufacturing and supply agreement with a third party under which clinical and commercial quantities of certain products will be manufactured for the Company for a period of five years. Certain minimum quantities of manufactured product will be required to be purchased by the Company from this party. Upon FDA approval and commercialization of the product, minimum quantities approximate $8,500,000 over the contractual period. In addition, the Company will be obligated to make certain payments to this party for validation, quality assurance and technical services associated with product manufacturing. 46 47 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- LICENSE AND MARKETING AGREEMENTS: The Company has entered into two exclusive patent license agreements with The University of Texas which permit the Company to exclusively manufacture, use and sell products covered by patents that result from certain research conducted by the University. Each agreement requires the Company to pay royalties to the University. Royalties totaling $250,000 were paid under the agreements through June 30, 1996 in connection with the E-Z-EM, Inc. ("E-Z-EM") agreement described below. During fiscal 1994, the Company received $2,000,000 from a corporation under an option agreement whereby the Company agreed, for a six month period of time, to refrain from entering into any discussions or agreements relating to the licensing or sale of certain of the Company's future products in Europe and Japan. The Company recorded the $2,000,000 as license income when management ascertained that the Company had complied with all requirements under the option agreement. In April 1994, the Company entered into a license agreement with a corporation for the production, use and/or sale of certain of the Company's diagnostic products used in magnetic resonance imaging. The license is exclusive with respect to the use and sale of the products in certain countries in the Far East. The Company received and recognized license revenue of $1,000,000 under the agreement during fiscal 1994. Under terms of the agreement, the Company was to receive additional milestone payments and ongoing royalty payments based on a stipulated percentage of amounts received from the sale of the products. However, the license agreement was terminated in January 1995 at the option of the license holder, prior to the achievement of any additional milestones or product sales. Accordingly, no revenue was recognized relating to the agreement during the year ended June 30, 1995, and the year ended June 30, 1996. In August 1995, the Company entered into an agreement with E-Z-EM, a leading manufacturer and worldwide distributor of oral contrast agents and other products for use in gastrointestinal radiology, for the exclusive marketing and sale of the Company's GADOLITE product in the U.S., Canada and Mexico. The Company and E-Z-EM will share equally in profits from the sale of GADOLITE, and the Company may also receive premium payments if certain sales levels are achieved. During the year ended June 30, 1996 the Company recorded revenue of $250,000 (net of royalties paid to UT) as a result of meeting certain milestones with respect to the GADOLITE product, including the filing of a New Drug Application with the Food and Drug Administration. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 47 48 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 (with respect to Directors) is hereby incorporated by reference from the information under the caption "Election of Directors" contained in the Company's definitive proxy statement, to be filed with the Securities and Exchange Commission no later than 120 days from the end of the Company's last fiscal year in connection with the solicitation of proxies for its Annual Meetings of Shareholders to be held on December 6, 1996 (the "Proxy Statement"). The required information concerning MANAGEMENT -- Directors and Executive Officers is contained in Item 1, Part 1 of this Form 10-K under the caption "Executive Officers of the Company" on pages 26 and 27. The information required by Section 16(a) is hereby incorporated by reference from the information under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is incorporated by reference from the information under the caption "Election of Directors, Summary of Cash and Certain Other Compensation, Stock Options, Exercises and Holdings" of the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is incorporated by reference from the information under the caption "Stock Ownership of Management and Certain Beneficial Owners" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is incorporated by reference from the information under the caption "Certain Relationships and Related Transactions" in the Proxy Statement. PART IV ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE, EXHIBITS AND REPORTS ON FORM 8-K (A)1. FINANCIAL STATEMENTS See Index to Financial Statements under Item 8. (A)2. FINANCIAL STATEMENT SCHEDULES All schedules are omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statement or notes thereto. (B) REPORTS ON FORM 8-K Not Applicable (C) EXHIBITS
EXHIBIT NO. ------- 3.1 Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1, Commission File No. 333-05985). 3.2 Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048).
48 49
EXHIBIT NO. ------- 4.1 Amended and Restated Investors' Rights Agreement between the Company and the investors specified therein dated July 31, 1995 (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 4.2 Specimen Certificate of the Company's Common Stock (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.1 Form of Indemnification Agreement between the Company and its directors and executive officers (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.2 Series C Stock Purchase Agreement dated as of June 13, 1994 between the Company and the investors specified therein (Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.3 Investment Agreement dated as of July 31, 1995 between the Company and the investors specified therein (Incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.4 Form of Series C Preferred Stock Purchase Warrant dated as of July 31, 1995 issued by the Company to the investors listed on Schedule A thereto (Incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.5 Master Lease and Warrant Agreements entered into between the Company and Comdisco, Inc. dated as of July 22, 1992, July 30, 1992, March 31, 1993, June 24, 1993 and October 3, 1994, respectively (Incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.6* Patent License Agreement entered into between the Company and The University of Texas, Austin dated entered into on or about July 1, 1991 (Incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.7* Patent License Agreement entered into between the Company and The University of Texas, Dallas dated as of July 1, 1992, as amended by the Patent License Agreement dated May 27, 1993 (Incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.8* Patent License Agreement entered into between the Company and Stuart W. Young dated as of October 15, 1992 (Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.9 Lease Agreement entered into between the Company and New England Mutual Life Insurance Company dated as of June 17, 1993, as amended on July 22, 1993, and as further amended on March 1, 1994 (Incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.10* Supply Agreement entered into between the Company and Glaxo Wellcome Co. (f/k/a Burroughs Wellcome Co.) dated as of March 1, 1995 (Incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.11* License Agreement entered into between the Company and Cook, Incorporated dated as of April 4, 1995 (Incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.12* License and Supply Agreement entered into between the Company and E-Z-EM, Inc. dated as of August 7, 1995 (Incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048).
49 50
EXHIBIT NO. ------- 10.13 The Company's 1995 Stock Option Plan (Incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.14 The Company's 1995 Non-Employee Directors' Stock Option Plan (Incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.15 The Company's Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.16 Employment Agreement entered into between the Company and Richard A. Miller, M.D. dated as of June 10, 1992 (Incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.17 Employment Agreement entered into between the Company and Marc L. Steuer dated as of October 31, 1994 (Incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.18 Employment Agreement entered into between the Company and William C. Dow, Ph.D. dated as of May 20, 1992, as amended by a letter agreement dated July 8, 1992 (Incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.19 Employment Agreement entered into between the Company and Stuart W. Young, M.D. dated as of April 19, 1993 (Incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.20 Promissory Notes issued by the Company to Stuart W. Young, M.D. dated as of September 1994 and April 1995, in the amounts of $65,000 and $30,000, respectively (Incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1, Commission File No. 33-96048). 10.21** Master Process Development and Supply Agreement dated September 6, 1996 entered into between the Company and Hoechst Celanese Corporation. 11.1 Computation of Net Loss and ProForma Net Loss per Share. 23.1 Consent of Price Waterhouse LLP, Independent Accountants. 24.1 Power of Attorney (see pages 53 and 54). 27 Financial Data Schedule.
- --------------- * Confidential treatment has been granted as to certain portions of this agreement. ** Confidential treatment has been requested as to certain portions of this agreement. Such omitted confidential information has been designated by an asterisk and has been filed separately with the Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended, pursuant to an application for confidential treatment. 50 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: September 27, 1996 PHARMACYCLICS, INC. By: /s/ RICHARD A. MILLER, M.D. ------------------------------------ Richard A. Miller, M.D. President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person who signature appears below constitutes and appoints jointly and severally, Richard A. Miller and Marc L. Steuer, or either of them as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated. Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------ ------------------------------ ------------------- President and Chief Executive September 27, 1996 /s/ RICHARD A. MILLER Officer and Director - ------------------------------------------ (Principal Executive Officer) Richard A. Miller Vice President, Business September 27, 1996 /s/ MARC L. STEUER Development and Chief - ------------------------------------------ Financial Officer (Principal Marc L. Steur Financial and Accounting Officer Vice President, Finance and September 27, 1996 /s/ CHERYL B. JASZEWSKI Administration (Principal - ------------------------------------------ Accounting Officer) Cheryl B. Jaszewski /s/ THOMAS D. KILEY Director September 27, 1996 - ------------------------------------------ Thomas D. Kiley /s/ JOSEPH S. LACOB Director September 27, 1996 - ------------------------------------------ Joseph S. Lacob
51 52
SIGNATURE TITLE DATE - ------------------------------------------ ------------------------------ ------------------- /s/ PATRICK F. LATTERELL Director September 27, 1996 - ------------------------------------------ Patrick F. Latterell /s/ JOSEPH SCODARI Director September 27, 1996 - ------------------------------------------ Joseph Scodari /s/ CRAIG C. TAYLOR Director September 27, 1996 - ------------------------------------------ Craig C. Taylor
52 EX-10.21 2 MASTER PROCESS DEVELOPMENT AND SUPPLY AGREEMENT 1 MASTER PROCESS DEVELOPMENT AND SUPPLY AGREEMENT This MASTER PROCESS DEVELOPMENT AND SUPPLY AGREEMENT (the "Agreement") is made this 6th day of September, 1996 (the "Effective Date"), between HOECHST CELANESE CORPORATION, a Delaware corporation with its principal office at 1041 Route 202-206, Box 2500, Somerville, New Jersey, 08876 ("HCC") and PHARMACYCLICS, INC., a Delaware corporation with its principal office at 995 E. Arques Avenue, Sunnyvale, California 94086-4521 ("Pharmacyclics"). HCC and Pharmacyclics are sometimes referred to herein individually as a "Party" and collectively as the "Parties", and references to "HCC" and "Pharmacyclics" shall include their respective Affiliates. WITNESSETH WHEREAS, HCC, among other things, manufactures, or is capable of manufacturing, various bulk pharmaceutical substances in accordance with current Good Manufacturing Practices (as such term is defined below); and WHEREAS, Pharmacyclics desires to have one or more compounds of the general class known as "texaphyrins" manufactured in bulk form by HCC; and WHEREAS, HCC and Pharmacyclics each wish to commit resources for manufacturing process development and the manufacture of such texaphyrin compounds as may be selected by the Parties from time to time pursuant to the procedures set forth in this Agreement; and WHEREAS, HCC and Pharmacyclics intend that the terms and conditions of this Agreement shall govern the general manufacturing process development and the manufacture of such texaphyrin compounds and that specific terms relating to each texaphyrin compound to be manufactured hereunder, such as price and specifications with respect to such texaphyrin compound, shall be set forth in appendices to this Agreement, to be added to this Agreement from time to time upon mutual agreement of the Parties. NOW, THEREFORE, HCC and Pharmacyclics agree as follows: ARTICLE 1. DEFINITIONS As used in this Agreement, the following terms shall have the meanings set forth below: 1.1 "AFFILIATES" shall mean any entity or person which controls, is controlled by or is under common control with either Party. For purposes of this Section 1.1, "control" shall mean (a) in the case of corporate entities, the direct or indirect ownership of at least one-half 1. 2 of the stock or participating shares entitled to vote for the election of directors, and (b) in the case of a partnership, the power to direct the management and policies of such partnership. 1.2 "APPLICABLE FOREIGN JURISDICTION" shall mean, for each Drug Substance, each country or other jurisdiction set forth on the applicable Drug Substance Appendix. 1.3 "CURRENT GOOD MANUFACTURING PRACTICES" or "cGMP" shall mean: (i) the good manufacturing practices required by the FDA and set forth in the FD&C Act or FDA regulations, policies, or guidelines in effect at a particular time, for the manufacture and testing of pharmaceutical materials as applied to bulk pharmaceuticals, and (ii) the corresponding requirements of each Applicable Foreign Jurisdiction. 1.4 "DRUG SUBSTANCE" shall mean a bulk form of a pharmaceutical compound from the family of compounds generally known as "texaphyrins" that is identified as a "Drug Substance" on a Drug Substance Appendix attached to and made part of this Agreement and that is manufactured by HCC under this Agreement. 1.5 "DRUG SUBSTANCE APPENDIX" shall have the meaning set forth in Section 2.1. 1.6 "DRUG SUBSTANCE BATCH" shall mean a production batch of a given Drug Substance manufactured in bulk form hereunder. The applicable batch size(s), in kilograms, for each Drug Substance shall be agreed to by the Parties and set forth on the corresponding Drug Substance Appendix. 1.7 "FDA" shall mean the United States Food and Drug Administration. 1.8 "FD&C ACT" shall mean the United States Federal Food, Drug and Cosmetic Act, as amended. 1.9 "GD-TEX" shall mean the Texaphyrin compound incorporating gadolinium and having the structure and the International Union of Pure and Applied Chemistry ("IUPAC") name shown in Exhibit 1.9. 1.10 "GOVERNMENTAL ENTITY" shall mean the FDA and any other applicable national, supranational (e.g. the European Commission or the Council of the European Union), state or local regulatory agency, department, bureau, commission, council or other governmental entity in the United States or any other Applicable Foreign Jurisdiction. 1.11 [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 2. 3 [ * ] 1.12 "HCC MANUFACTURE SITE" shall have the meaning set forth in Section 2.7. 1.13 "HCC INVENTORY SITE" shall have the meaning set forth in Article 8. 1.14 "HCC TECHNOLOGY" shall mean any patents covering the manufacture of any Drug Substance and any trade secrets or know-how related thereto for which HCC has or acquires, during the term of this Agreement, ownership, co-ownership or the right to grant a license or sublicense, excluding any licenses granted by Pharmacyclics. 1.15 [ * ] 1.16 "INDA" shall mean an Investigational New Drug Application, as defined in FDA regulations, as amended from time to time. 1.17 "INTERMEDIATE" shall mean, for each Drug Substance, any texaphyrin precursor or precursors used in the manufacture of such Drug Substance as identified on the applicable Drug Substance Appendix. 1.18 "LICENSED TECHNOLOGY" shall mean any patents covering the manufacture of any Drug Substance and any trade secrets and know-how related thereto for which Pharmacyclics has or acquires, during the term of this Agreement, ownership, co-ownership or the right to grant a license or sublicense. "Licensed Technology" shall include any rights relating to the * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 3. 4 manufacture of any Drug Substance for which Pharmacyclics has or acquires, during the term of this Agreement, the right to grant a sublicense under certain University of Texas patents and technology, including, but not limited to, those specifically listed on Exhibit 1.18, or any other third party patents and technology. 1.19 "LU-TEX" shall mean the Texaphyrin compound incorporating lutetium and having the structure and the IUPAC name shown in Exhibit 1.19. 1.20 "MOU" shall mean the Memorandum of Understanding, dated as of October 5, 1995, between the Parties. 1.21 "NDA" shall mean a New Drug Application, as defined in the FD&C Act and applicable regulations promulgated thereunder, as amended from time to time. 1.22 "NET PRODUCT SALES" shall mean the gross receipts actually received by Pharmacyclics from sales of the Product to third party customers for commercial use, less the following deductions to the extent actually incurred or paid by Pharmacyclics with respect to such Product: (a) amounts repaid or credited by reason of rejections, recalls or returns; (b) taxes (other than franchise or income taxes on the income of Pharmacyclics) and custom duties directly related to such sale; (c) transportation and delivery charges; and (d) rebates, samples, reserves, discounts and allowances. Amounts received by Pharmacyclics or its Affiliates for the sale of the Product among Pharmacyclics or its Affiliates whether for their internal use or for resale or other disposition shall not be included in the computation of Net Product Sales hereunder; provided, however, that all actual sales to third parties, whether made directly by Pharmacyclics or indirectly through an Affiliate, shall be included in the computation of Net Product Sales hereunder. 1.23 "PHASE III" shall mean that phase of clinical development of pharmaceutical products defined as "Phase III" in FDA regulations, as amended from time to time. 1.24 "PRODUCT" shall mean a pharmaceutical product containing a Drug Substance in final dosage form for use in clinical trials or for commercial sale, which has been processed, compounded, formulated, finished, filled, labeled and/or packaged by Pharmacyclics and/or a third party. 1.25 "PRODUCT UNIT" shall mean each unit of Product sold by Pharmacyclics. 4. 5 1.26 "PRODUCT UNIT SALES PRICE" shall be determined for each Product Unit and shall equal the Net Product Sales for all like Product sold during the quarter in which such Product Unit is sold divided by the number of like Product Units sold during such quarter. 1.27 [ * ] 1.28 "SHIPMENT LOT" shall mean each lot of a particular Drug Substance shipped by HCC to Pharmacyclics or a third party at the request of Pharmacyclics. 1.29 "SPECIFICATIONS" shall have the meaning set forth in Section 2.1. 1.30 "TEXAPHYRIN" shall mean a molecule which has as its core structure the structure set forth on Exhibit 1.30. ARTICLE 2. GENERAL DEVELOPMENT AND MANUFACTURE OBLIGATIONS 2.1 DRUG SUBSTANCE SELECTION; DRUG SUBSTANCE APPENDICES. Each texaphyrin compound which will be subject to the process development and supply obligations hereunder will be selected by mutual agreement of the Parties from time to time for inclusion in this Agreement. Each such texaphyrin compound will be added to the terms of this Agreement pursuant to an appendix signed by both Parties (each, a "Drug Substance Appendix") and each texaphyrin compound added to this Agreement in the foregoing manner and manufactured by HCC hereunder will be deemed to be a Drug Substance. Each Drug Substance Appendix will contain written specifications for the Drug Substance covered by such appendix, as well as packaging and labeling specifications and storage requirements (collectively, the "Specifications"), the process development and manufacturing activities to be performed by HCC, including the testing programs and a development schedule for such Drug Substance, and each Applicable Foreign Jurisdiction for such Drug Substance. Each Drug Substance Appendix can be modified by mutual agreement of the Parties. In the event Pharmacyclics proposes that a country be added as a new Applicable Foreign Jurisdiction on a Drug Substance Appendix, HCC will agree to such proposal, provided that HCC may invoke Section 2.9 with respect to such country in the event that Section 2.9 is applicable to such situation. To facilitate any modification of a Drug Substance Appendix, as described above, each Party shall designate one of its employees to be the contact person in the event the other party desires to propose such a modification. As of the Effective Date, the contact person at Pharmacyclics is William C. Dow, Ph.D. and the contact person at HCC is Molly J. Clark. In the event either Party decides to change its contact person, it shall provide written notice to the other Party giving the name of the new contact person for such Party. In the event of a conflict between any terms of this Agreement and a Drug Substance Appendix, the terms of the Drug Substance Appendix shall prevail. 2.2 HCC DEVELOPMENT OBLIGATIONS. With respect to each Drug Substance, HCC will perform for Pharmacyclics all process development and manufacturing services set forth on the * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 5. 6 corresponding Drug Substance Appendix. In particular, and without limiting the foregoing, HCC will, with respect to each Drug Substance: (a) on its own, or jointly with Pharmacyclics, develop the technical know-how necessary to produce such Drug Substance. (b) put in place all necessary equipment, personnel, facilities, supply and/or tolling agreements (subject to Section 2.8) necessary to produce sufficient quantities of each Drug Substance so as to fulfill: (i) all of Pharmacyclics' Phase III clinical trial requirements for such Drug Substance, as set forth on the applicable Drug Substance Appendix, and (ii) all of Pharmacyclics' commercial supply requirements for such Drug Substance, subject to the terms of this Agreement. (c) upon the request of Pharmacyclics, produce quantities of each Drug Substance in connection with the process development, in amounts set forth on the applicable Drug Substance Appendix, and deliver to Pharmacyclics such amount thereof. 2.3 COMPLIANCE WITH LAW; HANDLING OF DRUG SUBSTANCE. While the Drug Substance is in its possession or under its control, HCC shall be responsible for complying with all applicable statutory and regulatory requirements of the United States and of each Governmental Entity regarding the development, manufacture, handling, storage, labeling, packaging, transportation and distribution of each Drug Substance. In carrying out its obligations under this Agreement, HCC shall comply with all applicable environmental and health and safety laws in each Applicable Foreign Jurisdiction, and, except as otherwise set forth in this Agreement, HCC shall be solely responsible for determining how to carry out these obligations. In addition to the foregoing, at all times when HCC has title to and risk of loss for any of the Drug Substances, it will take all reasonable actions necessary to avoid spills and other safety concerns to persons, and damage to property or the environment resulting from the Drug Substance or any intermediates or raw materials thereof. 2.4 TESTING AND DOCUMENTATION. HCC shall certify in writing to Pharmacyclics' reasonable satisfaction, that each Shipment Lot of Drug Substance was produced and tested in compliance with (i) the applicable Drug Substance Appendix, including, but not limited to, the applicable Specifications and testing programs, (ii) cGMP requirements, (iii) the INDA, any amendments or modifications to the INDA mutually agreed to by the Parties or the NDA (whichever is applicable) relevant to such Drug Substance, (iv) corresponding applications, licenses, registrations, authorizations, or approvals relevant to such Drug Substance in each Applicable Foreign Jurisdiction, and (v) all other applicable regulatory documents, in accordance with procedures agreed between Pharmacyclics and HCC. 2.5 EXISTING MEMORANDUM OF UNDERSTANDING. All process development and other activities performed, and related costs incurred, by HCC or Pharmacyclics under the MOU prior to the Effective Date of this Agreement shall be governed by the terms of the MOU. All process development and other activities performed, and related costs incurred, by HCC or Pharmacyclics on or after the Effective Date of this Agreement shall be governed by the terms 6. 7 of this Agreement. Notwithstanding the first sentence of this Section, all intellectual property and confidential information developed under the MOU shall be governed by the terms of this Agreement as if such intellectual property and confidential information were developed during the term of this Agreement. 2.6 FUTURE TEXAPHYRINS. As of the Effective Date, "Drug Substance" includes the Texaphyrins Lu-Tex and Gd-Tex. In the event that Pharmacyclics decides to commercialize any additional Texaphyrins, it shall provide written notice to HCC of such decision. Within [ * ] days of receipt of such notice, HCC shall provide written notice to Pharmacyclics indicating whether HCC is interested in adding such additional Texaphyrin to this Agreement pursuant to a new Drug Substance Appendix. In the event that HCC notifies Pharmacyclics that HCC is interested in doing so (an "Interest Notice"), the Parties shall meet to negotiate, in good faith, the terms for adding such additional Texaphyrin to this Agreement pursuant to a new Drug Substance Appendix, under the procedures set forth in Section 2.1. In the event that (i) HCC notifies Pharmacyclics that it is not interested in adding such additional Texaphyrin to this Agreement or (ii) the Parties are unable to agree on the terms of a new Drug Substance Appendix for such additional Texaphyrin within [ * ] days of Pharmacyclics' receipt of the Interest Notice, Pharmacyclics shall be free to enter into negotiations and an agreement with one or more third parties to manufacture and supply such additional Texaphyrin (a "Declined Additional Texaphyrin"), subject to Section 11.12 hereof. 2.7 SITE OF MANUFACTURE. Each Drug Substance shall be manufactured at the site agreed to by the Parties and set forth in the corresponding Drug Substance Appendix (the "HCC Manufacture Site"). 2.8 SUBCONTRACTING. Except as set forth on a Drug Substance Appendix, under no circumstances will HCC contract out to a third party any part of the development, manufacturing or testing of (i) Drug Substance or (ii) any raw materials or Intermediates used in the manufacture of such Drug Substance, without prior written approval from Pharmacyclics, such approval not to be unreasonably withheld. 2.9 [ * ] (a) [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 7. 8 [ * ] (b) [ * ] ARTICLE 3. RESEARCH AND DEVELOPMENT COSTS 3.1 [ * ] 3.2 [ * ] Within thirty (30) days after the end of each month, HCC will provide Pharmacyclics with a detailed accounting of the [ * ] incurred by HCC during such month, along with an invoice for such costs. Such invoices will be due and payable within thirty (30) days of receipt. 3.3 ALL OTHER COSTS. Except as set forth in Section 3.1, HCC shall bear all costs associated with the operation of the required manufacturing processes to produce each of the Drug Substances, subject to Pharmacyclics' payment obligations set forth in Article 10. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 8. 9 ARTICLE 4. AGREEMENT OF PURCHASE AND SALE 4.1 SUPPLY/PURCHASE OBLIGATIONS. During the term of this Agreement and any renewal thereof, HCC shall manufacture and provide Pharmacyclics with a guaranteed, uninterrupted supply of Pharmacyclics' entire worldwide requirements of the Drug Substances, for the purposes of Phase III clinical trials of Product and commercial sale of Product, and, subject to the applicable Drug Substance Appendix, Pharmacyclics shall purchase all of its Phase III clinical trial requirements and commercial requirements of the Drug Substances from HCC. Subject to the foregoing and except as otherwise set forth in Section 6.2, it is understood and agreed that Pharmacyclics has no specific or minimum commitment to purchase any amounts of a particular Drug Substance and that Pharmacyclics has sole discretion whether to continue to develop or commercialize each particular Drug Substance. 4.2 THIRD PARTY MANUFACTURE. Subject to Sections 4.1 and 6.2, in the event HCC makes a good faith determination that it is or will be unable to supply all of Pharmacyclics' requirements of any Drug Substance from the HCC Manufacture Site and/or the HCC Inventory Site, based on either (i) the quarterly forecasts under Section 6.1 or (ii) one of Pharmacyclics' firm purchase orders pursuant to Section 6.3, HCC shall, within [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 9. 10 [ * ] ARTICLE 5. TERM The term of this Agreement shall commence on the Effective Date and, unless sooner terminated as provided herein, shall continue up to and including December 31, 2006. No later than twelve (12) months prior to the expiration date of this Agreement, the Parties will meet to discuss whether to extend the term of this Agreement. ARTICLE 6. ORDERS AND SHIPMENTS 6.1 FORECAST SCHEDULES. (a) INITIAL LONG-TERM FORECAST SCHEDULE. Upon execution of each Drug Substance Appendix, Pharmacyclics shall deliver to HCC an initial long-term forecast of Pharmacyclics' expected requirements for the applicable Drug Substance. Such initial long-term forecast shall include quarterly forecasts through the end of the first full calendar year following the execution of the applicable Drug Substance Appendix and annual forecasts thereafter. Such initial long-term forecast shall be non-binding, except that the quarterly forecasts contained on the initial long-term forecast shall be binding within the percentage ranges set forth in Section 6.2. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 10. 11 (b) UPDATED LONG-TERM FORECAST SCHEDULES. No later than October 1 of each year, Pharmacyclics shall deliver to HCC an updated long-term forecast of Pharmacyclics' expected requirements for each Drug Substance. Such long-term forecast shall include quarterly forecasts for the first full calendar year following the date of such update and annual forecasts thereafter. Such updated long-term forecasts shall be non-binding, except that the quarterly forecasts contained on the updated long-term forecast shall be binding within the percentage ranges set forth in Section 6.2. 6.2 FORECAST VARIANCES. Except as otherwise provided in Section 6.1, all long-term forecasts under this Agreement and updates thereof shall be for the sole purpose of assisting HCC in its planning and will not constitute an obligation of Pharmacyclics to purchase the quantities of Drug Substance indicated; provided, however, (i) until the end of the second full calendar year in which a particular Drug Substance is sold for commercial use, the total quantity of such Drug Substance ordered by Pharmacyclics pursuant to purchase orders for delivery in any calendar quarter shall not exceed [ * ] of the quarterly forecast for such quarter or be less than [ * ] of such quarterly forecast without HCC's prior written consent, which consent shall not be unreasonably withheld and (ii) after the end of the second full calendar year in which a particular Drug Substance is sold for commercial use, the total quantity of such Drug Substance ordered by Pharmacyclics pursuant to purchase orders for delivery in any calendar quarter shall not exceed [ * ] of the quarterly forecast for such quarter or be less than [ * ] of such quarterly forecast without HCC's prior written consent, which consent shall not be unreasonably withheld. HCC shall use commercially reasonable efforts to supply to Pharmacyclics any requirements of any Drug Substance in excess of [ * ] (or [ * ], after the end of the second full calendar year) of any quarter's forecast. In the event Pharmacyclics orders more than [ * ] of the quarterly forecast in any given quarter, then Pharmacyclics agrees to waive the inventory requirement set forth in Article 8 to the extent necessary to allow HCC to supply the Pharmacyclics orders in excess of [ * ] of the quarterly forecast. At such time following such quarter as HCC can reasonably fulfill the inventory requirements set forth in Article 8, Pharmacyclics will no longer be required to waive such requirements. HCC shall use diligent efforts to meet such inventory requirement as soon as practicable. 6.3 FIRM PURCHASE ORDERS. Pharmacyclics will place firm purchase orders, subject to Section 6.2, for each of the Drug Substances at least ninety (90) days before each required delivery date. Both Parties agree to work together to reduce lead time for orders and deliveries. 6.4 AUTHORIZATION TO SHIP DRUG SUBSTANCE. Copies of all documentation and test results, including batch records, a certificate of analysis appropriately signed and an HCC quality assurance release appropriately signed, as are necessary to demonstrate HCC's compliance with Section 2.4 for each Shipment Lot, shall be provided to Pharmacyclics no later than ten (10) business days prior to the expected shipment date for such Shipment Lot from the HCC Manufacture Site or the HCC Inventory Site. No shipment of any Shipment Lot shall take place without the written approval of Pharmacyclics, such approval not to be unreasonably withheld. It is understood by the Parties that, as more fully described on the applicable Drug Substance Appendix, the testing associated with the documentation required by this Section 6.4 will occur at the time of manufacture and, if a given Shipment Lot has been maintained in * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 11. 12 inventory by HCC pursuant to Article 8, may also occur at a subsequent point in time for such Shipment Lot. 6.5 PRODUCTION AND INVENTORY REPORTS. No later than the end of each calendar quarter, HCC shall provide Pharmacyclics with a written report of (i) the production schedule for each Drug Substance; (ii) HCC's actual progress against such production schedule; and (iii) the amounts and locations of inventory of each Drug Substance. In addition, HCC agrees to notify Pharmacyclics as soon as is reasonably possible, but in any event no longer than five (5) days, after discovery of any event that could result in HCC's inability to meet Pharmacyclics' requested delivery dates. Such notice shall indicate the likely effect of such event on HCC's ability to meet Pharmacyclics' requested delivery dates. ARTICLE 7. SHIPPING AND CLAIMS 7.1 DELIVERY; SHIPMENT. Each of the Drug Substances supplied under this Agreement will be delivered FOB the HCC Manufacture Site for such Drug Substance or the HCC Inventory Site for such Drug Substance or such other facilities as may be mutually agreed to by the Parties. HCC shall make shipping arrangements with the appropriate carriers designated in writing by Pharmacyclics from the FOB point, under the agreements that Pharmacyclics has with those carriers. Title and risk of loss passes to Pharmacyclics when the Drug Substance is delivered to the carrier at the FOB point. 7.2 TESTING AND ACCEPTANCE. Each Drug Substance Appendix will set forth the identification testing procedures to be conducted by Pharmacyclics or its designee upon receipt of a Shipment Lot of the applicable Drug Substance (the "Identification Testing Procedures"). Pharmacyclics will conduct, or will cause a third party to conduct, the Identification Testing Procedures for each Shipment Lot of Drug Substance, within ten (10) business days after such Shipment Lot is received. Promptly thereafter, Pharmacyclics will provide written notice to HCC indicating whether it is accepting or rejecting such Shipment Lot and, if such Shipment Lot is rejected, the basis for such rejection. Except as set forth in Section 7.3, all claims against HCC with respect to any shipment of a Drug Substance, including claims for allegedly defective goods or shortage, will be deemed waived unless made in writing and received by HCC within [ * ] days after Pharmacyclics receipt of such Shipment Lot. Variations in invoice quantity of 1% or less will be disregarded. If these variations are consistently in one direction, HCC and Pharmacyclics will work to resolve them. 7.3 LATENT DEFECTS. If Pharmacyclics determines following acceptance of Drug Substance from HCC that, due to an act or fault of HCC or any agent of HCC, whether or not deliberate or willful, the Drug Substance has not been manufactured and tested by HCC in accordance with (a) the applicable Drug Substance Appendix, including, but not limited to, the Specifications and any procedures set forth therein, (b) relevant sections of the INDA, NDA, or corresponding licenses, registrations, authorizations or approvals in each Applicable Foreign Jurisdiction, or (c) cGMP requirements, then HCC will promptly: (i) cure such non-performance * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 12. 13 at its own expense and replace the affected Shipment Lots of Drug Substance; (ii) fully compensate Pharmacyclics for actual, direct damages sustained as a result of the affected Shipment Lots of Drug Substance; (iii) reimburse Pharmacyclics for any additional manufacture costs incurred by Pharmacyclics or its sublicensees in turning such defective Drug Substance into Product; (iv) pay Pharmacyclics' actual costs for notification, destruction or return of the defective Drug Substance and/or Product containing such defective Drug Substance; and (v) pay any costs directly associated with the manufacture or distribution of replacement Product. In the event that HCC disputes such determination, the Parties will select a mutually agreeable outside consulting firm which will be instructed to review the applicable information and data and to confirm or dissent from Pharmacyclics' determination. If the consulting firm confirms Pharmacyclics' determination, HCC will have the obligations set forth in the first sentence of this Section and HCC will pay the fees of such consulting firm. If the consulting firm dissents from Pharmacyclics' determination, HCC will not have the obligations set forth in the first sentence of this Section with respect to the disputed Drug Substance and Pharmacyclics will pay the fees of such consulting firm. ARTICLE 8. INVENTORY REQUIREMENT Unless Pharmacyclics has temporarily waived such requirement pursuant to Sections 4.2 and 6.2 and Article 15, at all times during the term of this Agreement and any extension thereof, HCC will maintain an inventory of each Drug Substance sufficient [ * ] HCC's obligations set forth in the first sentence of this paragraph will only be in effect for each Drug Substance commencing on January 1 of the second full calendar year following the commercial launch of such Drug Substance. ARTICLE 9. REGULATORY MATTERS 9.1 REGULATORY APPROVALS. Pharmacyclics agrees to use commercially reasonable efforts (i) to file an NDA for each of the Products as soon as practicable, based on the results of clinical trials conducted by Pharmacyclics, and (ii) to secure FDA approval for each of the Products. Pharmacyclics shall provide periodic updates to HCC of (i) the progress of clinical development of any Drug Substance or Product and (ii) the fact of any INDA or NDA submissions to the FDA relating to a Drug Substance. In addition, Pharmacyclics shall keep * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 13. 14 HCC informed about the current status of all communications with the FDA concerning any bulk manufacturing issues relating to any Drug Substance or Product. 9.2 PHARMACYCLICS LICENSES, REGISTRATIONS, LISTINGS, AUTHORIZATIONS AND APPROVALS. (a) PHARMACYCLICS RESPONSIBILITIES. Pharmacyclics or its designee shall be responsible for obtaining and maintaining such drug licenses, registrations, listings, authorizations and approvals as the FDA or any other applicable Governmental Entity may require to enable marketing of Product throughout the world. HCC shall take all actions necessary to assist Pharmacyclics in obtaining and maintaining all licenses, registrations, listings, authorizations and approvals of any Governmental Entities necessary for the marketing of Drug Substances or Product throughout the world. Pharmacyclics and/or its designee shall serve as the point of contact with the FDA and any other applicable Governmental Entity concerning licenses, registration, authorizations or approvals required to market the Drug Substance or Product, but may, as appropriate, request HCC's assistance with FDA and/or other applicable Governmental Entity communications. (b) HCC PRODUCT APPROVAL EFFORTS. HCC shall use its best efforts to prepare and provide to Pharmacyclics, at Pharmacyclics' request, the Drug Substance chemistry, manufacture, and control ("CMC") information in a mutually agreeable form for assembly of the CMC section of any Pharmacyclics INDA or NDA for a Product incorporating the Drug Substance, or corresponding portions of any submission for a license, registration, authorization, or approval required by other applicable Governmental Entities to market the Drug Substance or Product. In the United States, CMC information shall follow the format and content set forth in FDA INDA or NDA regulations (as appropriate) at 21 C.F.R. Parts 312 and 314, and applicable FDA guidelines and policies. 9.3 HCC LICENSES, REGISTRATIONS, AUTHORIZATIONS AND APPROVALS. Other than licenses, registrations, listings, authorizations and approvals required to market the Drug Substances or Product, HCC shall be responsible for obtaining and maintaining all other necessary licenses, registrations, authorizations, and approvals to develop, manufacture, handle, store, label, package, transport and distribute Drug Substance under cGMP conditions that may be required to enable manufacture of each Drug Substance for marketing in the Applicable Foreign Jurisdictions for such Drug Substance. HCC shall provide Pharmacyclics with copies of any correspondence sent from HCC to Governmental Entities relating to any Drug Substance at the time such correspondence is sent by HCC. HCC shall provide Pharmacyclics with copies of any comments, responses, notices or other correspondence received by HCC from any Governmental Entity relating to any Drug Substance within 48 hours of receipt of such correspondence by HCC. 9.4 STABILITY STUDIES. Pharmacyclics will be responsible for conducting Drug Substance stability studies, including stability studies on Intermediates. Reports and data generated from such studies shall be provided to HCC upon request. For the purpose of such studies, HCC shall provide Intermediates and Drug Substance samples to Pharmacyclics at such 14. 15 times and in such sample quantities as are reasonably requested by Pharmacyclics, provided HCC receives reasonable notice of the quantities to be requested. 9.5 GOVERNMENT INSPECTIONS, COMPLIANCE REVIEWS AND INQUIRIES. (a) Upon the request of any Governmental Entity or any third party entity authorized by a Governmental Entity, such entity shall have access to observe and inspect HCC's facilities and procedures used for the manufacture, testing or warehousing of any Drug Substance, including process development and manufacturing operations, and to audit such facilities for compliance with cGMP and/or other applicable regulatory standards. HCC shall give Pharmacyclics prompt notice of any upcoming inspections or audits by a Governmental Entity (or a third party authorized by a Governmental Entity) of the facility used for, or processes involved in, the manufacture, testing or warehousing of Drug Substance and shall provide Pharmacyclics an opportunity to observe such inspection or audit. (b) HCC also agrees to notify Pharmacyclics within two (2) business days of any written or oral inquiries, notifications, or inspection activity by any Governmental Entity (or any third party authorized by a Governmental Entity) in regard to any Drug Substance. HCC shall provide a reasonable description to Pharmacyclics of any such governmental inquiries, notifications or inspections promptly (but in no event later than five (5) business days) after such visit or inquiry. HCC shall furnish to Pharmacyclics (i) within two (2) business days after receipt, any report or correspondence issued by the Governmental Entity (or a third party authorized by a Governmental Entity) in connection with such visit or inquiry, including but not limited to, any FDA Form 483 (List of Inspectional Observations) or warning letter and (ii) not later than five (5) business days prior to the time it provides to a Governmental Entity, copies of any and all proposed responses or explanations relating to items set forth above (each, a "Proposed Response"), in each case purged only of trade secrets or other confidential or proprietary information of HCC that are unrelated to the obligations under this Agreement or are unrelated to the Drug Substance. HCC shall discuss with Pharmacyclics any comments provided by Pharmacyclics on the Proposed Response and the parties shall mutually agree on the final response or explanation to be provided to the Governmental Entity. After the filing of a response with the appropriate Governmental Entity, HCC will notify Pharmacyclics of any further contacts with a Governmental Entity (or a third party authorized by a Governmental Entity) relating to HCC's production of the Drug Substance. (c) HCC shall notify Pharmacyclics of any other production issues or other information of which HCC becomes aware which may affect the regulatory status of a Product or the ability of HCC to supply Drug Substance in accordance with Pharmacyclics' forecasted requirements. (d) HCC agrees to promptly rectify or resolve any deficiencies noted by a Governmental Entity (or a third party authorized by a Governmental Entity) in a report or correspondence issued to HCC, and which are based on HCC's performance under this Agreement. 15. 16 9.6 ACCESS TO HCC FACILITIES AND RECORDS. Pharmacyclics shall have reasonable access to HCC's facilities and procedures, at least once per calendar quarter and more frequently for good cause, for the purpose of (i) observing process development and manufacturing operations and (ii) auditing such facilities for compliance with cGMP, other applicable regulatory requirements and standards and the terms of any Drug Substance Appendices. HCC shall provide Pharmacyclics with access, on a continuing basis, to all of HCC's protocols, standard operating procedures (SOPs), equipment specifications, and manufacturing records as is necessary, relevant or useful for the development, manufacture, handling, storage, labeling, packaging, transportation, distribution, and use of Drug Substance, and other documentation or materials prepared by HCC which may be necessary, relevant or useful in obtaining or maintaining licenses, registrations, authorizations, and approvals of Product. Pharmacyclics acknowledges that it and its designee may be permitted only to review, rather than obtain copies of, certain proprietary documents of HCC which are not required for submission to a Governmental Entity with respect to regulatory applications for licenses, registrations, authorizations, or approvals of Products. Employees of Pharmacyclics who visit HCC's facilities shall at all times comply with HCC's rules and regulations. Except as otherwise set forth in this Agreement, all information disclosed to employees of Pharmacyclics who visit HCC's facilities shall be deemed to be HCC's Confidential Information, as such term is defined in Article 16. 9.7 RECORDS. HCC shall maintain all records necessary to evidence compliance with (i) all applicable laws, regulations and other requirements of applicable Governmental Entities relating to the manufacture of Drug Substance; (ii) each Drug Substance Appendix; and (iii) relevant sections of the INDA or NDA (whichever is applicable) relevant to such Drug Substance, and corresponding licenses, registrations, authorizations or approvals for each Applicable Foreign Jurisdiction. HCC shall also maintain records with respect to its costs, obligations and performance under this Agreement. All such records shall be maintained for a period of not less than three (3) years from the date of expiration of each Drug Substance Batch to which said records pertain, or such longer period as may be required by law, rule or regulation. Prior to destruction of any record, HCC shall give written notice to Pharmacyclics which shall have the right to request, receive and retain such record with no further compensation to HCC. 9.8 HCC SCALE-UP AND VALIDATION. For each Drug Substance, HCC shall perform and provide Pharmacyclics with quarterly reports and documentation of the progress of all activities related to scale-up of the manufacturing process to commercial size batches and validation of the scale-up process. Such activities shall be performed according to plans agreed between Pharmacyclics and HCC in advance, and may include activities such as protocol writing and review, design and execution of sampling plans, creation of standard operating procedures for each validation run, and such tests for acceptance, quality control, assurance and such other scale-up related tests and activities as may be reasonably required by Pharmacyclics, in the manner reasonably specified by Pharmacyclics. 9.9 QUALITY CONTROL PROGRAM; ADDITIONAL TESTING PROGRAMS. HCC shall maintain a quality control program consistent with cGMP, as required by the FDA and/or any other 16. 17 Governmental Entity, whether United States or part of an Applicable Foreign Jurisdiction, with respect to HCC's manufacture of Drug Substances hereunder. In addition, HCC will perform such additional testing programs, and provide Pharmacyclics with documentation arising from such testing programs, as may be specified in each Drug Substance Appendix. 9.10 RETENTION OF SAMPLES. HCC shall retain a sufficient quantity of each Drug Substance Batch to perform at least two (2) full sets of duplicate quality control tests as described in Section 9.9. Retained repository samples shall be maintained in a suitable storage facility (under conditions set forth in the applicable Drug Substance Appendix) for a period of not less than five (5) years from the date of expiration of each Drug Substance Batch. Pharmacyclics will notify HCC of the expiration date for each Drug Substance Batch. All such samples shall be available for inspection and testing by Pharmacyclics at reasonable times and upon reasonable notice. 9.11 SAFETY AND HANDLING INFORMATION. Each Party will provide the other Party with periodic reports of any information such Party has regarding the safe handling and processing of Drug Substance and any Intermediates. 9.12 COMPLAINTS AND ADVERSE REACTIONS. HCC shall within twenty-four (24) hours advise Pharmacyclics of any complaints, adverse reaction reports, safety issues or toxicity issues relating to Product or Drug Substance of which it becomes aware, regardless of the origin of such information. Pharmacyclics' obligation to notify HCC promptly of such complaints shall extend only to those complaints which may have a relevance to the manufacturing activities conducted by HCC and shall not extend to complaints or adverse reactions due to inherent Product or Drug Substance characteristics or arising from the activities of third parties unrelated to HCC. HCC agrees to cooperate with Pharmacyclics and any Governmental Entity in evaluating any complaint, claim, or adverse reaction report related to the manufacture of the Product or Drug Substance. In addition to the foregoing, Pharmacyclics shall provide HCC a quarterly summary report of all Serious Adverse Experiences (as defined in 21 CFR 312.32) and Adverse Drug Experiences (as defined in 21 CFR 314.80) with respect to Product or Drug Substance suffered during such quarter. 9.13 RECALLS. Pharmacyclics shall notify HCC promptly if any Product is the subject of a recall, market withdrawal or correction, and Pharmacyclics and/or its designee shall have sole responsibility for the handling and disposition of such recall, market withdrawal or correction. Pharmacyclics and/or its designee shall bear the costs of all recalls, market withdrawals or corrections of Product unless such recall, market withdrawal or correction shall have been solely the result of HCC's breach of any of the warranties set forth in Section 13.2 hereof, in which case HCC shall, upon substantiation and subject to Section 14.4 and 14.6, bear the cost of such recall, market withdrawal or correction. Pharmacyclics and/or its designee shall maintain records of all sales of Product and customers sufficient to adequately administer a recall, market withdrawal or correction for a period of five (5) years after termination or expiration of this Agreement. Pharmacyclics and/or its designee shall serve as the sole point of contact with the FDA or other applicable Governmental Entity concerning any recalls, market withdrawals or corrections with respect to the Product. 17. 18 9.14 APPROVAL FOR MANUFACTURING CHANGES. HCC agrees that no changes will be made to any materials, specifications, equipment or methods of production or testing of any Drug Substance, without Pharmacyclics' prior written approval. Subsequent to such approval of Pharmacyclics, HCC may then make such approved changes in manufacturing procedures, so long as, in any event, (i) such changes are permitted by applicable government regulations and the terms of any licenses, registrations, authorizations, or approvals previously granted by the applicable Governmental Entity with respect to such Drug Substance and (ii) Pharmacyclics receives copies of all documentation relating to such approved changes. If the changes require the additional license, registration, authorization, or approval of any applicable Governmental Entity, HCC may not implement the changes until it receives written notice from Pharmacyclics that the Governmental Entity has authorized or approved the change. HCC shall cooperate fully with Pharmacyclics in preparing, and will provide all necessary data and information for, a submission requesting prior authorization or approval of a change in materials, specifications, equipment or methods of production or testing of the Drug Substance. 9.15 NEW REGULATORY REQUIREMENTS. Each Party shall promptly notify the other of new regulatory requirements of which it becomes aware which are relevant to the manufacture of Drug Substance under this Agreement and which are required by the FDA, other applicable Governmental Entity, or other applicable laws or governmental regulations and shall confer with each other with respect to the best means to comply with such requirements. ARTICLE 10. PAYMENTS 10.1 OPTIMIZING SALES OF PRODUCT. Pharmacyclics will use commercially reasonable efforts to execute a marketing strategy that optimizes sales of any approved Product, within the framework of applicable laws and regulations. 10.2 PURCHASE PRICE. (a) [ * ] (b) [ * ] (c) [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 18. 19 [ * ] 10.3 [ * ] (a) [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 19 20 [ * ] (b) [ * ] 10.4 [ * ] 10.5 REPORTS. Included with each quarterly payment under Section 10.3 shall be a [ * ] for such quarter. The [ * ] 10.6 RECORDS. Each Party shall keep accurate books and accounts of record in connection with the manufacture, use and/or sale by or for it of the Drug Substances and the Products in sufficient detail to permit accurate determination of all figures necessary for * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 20. 21 verification of [ * ] Each Party shall maintain such records for a period of three (3) years after the end of the year in which they were generated. 10.7 AUDITS. At such Party's expense, a Party, through an independent certified public accountant reasonably acceptable to the other Party, shall have the right to access the books and records of the other Party relating to compensation due hereunder for the sole purpose of verifying such statements. Such access shall be conducted after reasonable prior written notice to the Party during ordinary business hours and shall not be more frequent than once during each calendar year. Each Party agrees to keep in strict confidence all information learned in the course of such audit, except when it is necessary to reveal such information in order to enforce its rights under this Agreement. Each Party's right to have such records examined shall survive termination or expiry of this Agreement. In the event an audit of Pharmacyclics reveals [ * ] 10.8 FOREIGN EXCHANGE. For the purpose of computing Net Product Sales for Products sold in a currency other than United States Dollars and for purposes of determining [ * ] in a currency other than United States Dollars, such currency shall be converted into United States Dollars in accordance with the applicable Party's customary and usual conversion procedures, consistently applied. ARTICLE 11. LICENSES, PATENTS AND TECHNOLOGY 11.1 LICENSE GRANT BY PHARMACYCLICS. During the term of this Agreement, Pharmacyclics hereby grants to HCC an exclusive, royalty-free, worldwide license, without a right to sublicense (except as set forth below), under the Licensed Technology, for the sole purpose of manufacturing Drug Substance and Intermediates for Pharmacyclics, as provided herein. Notwithstanding anything to the contrary in this Section, the foregoing license (i) is non-exclusive with respect to the right to manufacture Drug Substance for clinical trials and other non-commercial purposes; (ii) will become non-exclusive in the event Pharmacyclics elects to utilize a third party to supply Drug Substance pursuant to Section 4.2 or 12.1 or Article 15 for so long as Pharmacyclics utilizes such third party in such capacity; (iii) grants HCC the right to grant a sublicense to an HCC Affiliate and (iv) grants HCC the right to grant a sublicense to a third party contractor in the event Pharmacyclics accepts an HCC proposal under Section 4.2 or Article 15 which requires the use of a such third party subcontractor, for so long as HCC utilizes such third party subcontractor in such capacity. Notwithstanding any other provision of this Agreement to the contrary, this license and conditional right to sublicense shall not be assigned or transferred by HCC without the prior written consent of Pharmacyclics, except with respect to a permitted assignment pursuant to Section 17.4. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 21. 22 11.2 OWNERSHIP OF INVENTIONS. It is anticipated that HCC will develop processes that are suitable for the commercial-scale manufacture of each Drug Substance or which are suitable for the manufacture of key precursors or intermediates for each Drug Substance. Pharmacyclics may also conduct process development work by itself or in cooperation with HCC. Subject to Section 11.6, the ownership of any inventions including, but not limited to, those related to processes, compositions of matter, and methods of use made by either Party individually or jointly and which pertain to the subject matter of this Agreement, whether protectable by patents or a trade secret, shall be determined in accordance with United States patent laws. Thus, inventions and any patent applications filed on such inventions and any patents issued thereon shall be owned by the Party or Parties employing the inventors at the time the invention is made, unless ownership changes pursuant to Section 11.6. Each Party shall promptly notify the other Party of any invention made in the course of work performed under this Agreement, as provided in Section 11.4. 11.3 PREPARATION OF PATENT APPLICATIONS. The Party owning the invention shall have the worldwide right to control the drafting, filing, prosecution and maintenance of patents covering the invention, including decisions about the countries in which to file patent applications. Responsibility for joint inventions shall be decided by the Parties, in good faith, on a case by case basis. Patent costs associated with the patent activities described in this Section shall be borne by the sole owner or shared equally by the parties for jointly owned inventions. Each Party shall have the right to consult with the other Party regarding patent strategy and the countries for filing of patent applications covering all inventions developed hereunder which are applicable to the production of any Drug Substance. Each Party will cooperate with the other Party in the filing and prosecution of patent applications. The cooperation will include, but not be limited to, furnishing supporting data and affidavits for the prosecution of patent applications and completing and signing forms needed for the prosecution, assignment and maintenance of patent applications. 11.4 REVIEW OF PATENT APPLICATIONS. Each Party shall promptly provide the other Party with a copy of any formal invention disclosure document submitted to that Party's patent department and which relates to the subject matter of this Agreement. Each Party shall promptly notify the other Party of its intent to file any patent applications based on such invention disclosure documents and the identity of the inventors to be listed on the patent application. The Party preparing the patent application based on the invention disclosure document described herein shall submit periodic drafts of the patent application for review by the other Party, including those drafts which contain substantial changes from the previous draft (for example, additional examples, new processes, a new best mode, revised claim coverage). The time periods for notice to the other Party and review by the other Party hereunder shall be determined by the disclosing Party and shall be reasonable under the circumstances. 11.5 DISCLOSURE OF CONFIDENTIAL INFORMATION. The protection of each Party's Confidential Information is described elsewhere in this Agreement. Any disclosure of information under the provisions of this Article 11 shall be treated as the disclosing Party's Confidential Information under this Agreement. It shall be the responsibility of the Party preparing the patent application to obtain the written permission of the other Party to use or 22. 23 disclose the other Party's Confidential Information in the patent application before the application is filed and for other disclosures made during the prosecution of the patent application. 11.6 OPTION OF THE OTHER PARTY TO PURSUE PATENT PROTECTION AT ITS EXPENSE. In the event that (i) a first Party which is the initial sole owner of an invention arising under this Agreement elects not to file for patent protection for that invention or elects not to maintain an application or an issued patent for that invention in a selected country or (ii) a first Party which is an initial joint owner of an invention arising under this Agreement elects not to share patent costs (whether relating to filing or maintenance) of a jointly owned invention in a selected country, such first Party shall provide written notice of its decision (the "Patent Protection Notice") to the second Party. Thereafter, the second Party shall have the option to assume complete ownership and control at its expense for the patent applications or patents that cover such invention in the non-elected countries (the "Second Party Option"). If the second Party does not exercise its option in writing to the first Party within sixty (60) days of the Patent Protection Notice, the first Party shall retain its ownership of the patent applications and patents which are the subject of the option. If the second Party does exercise its option within the sixty (60) days term, the first Party shall transfer to the second Party all right, title and interest in and to the invention the first Party elects not to patent or maintain in the non-elected countries, except that the first Party retains the right to practice the technology for its own use, subject to the restrictions in Section 11.8 below. 11.7 TIME PERIODS. Each Party shall act promptly under the notice provisions of this Article so as to allow the other Party sufficient time to file patent applications for inventions which the Party initially owning the invention elects not to pursue. 11.8 LIMITED NON-USE OF TECHNOLOGY. HCC agrees that for the term of this Agreement and for a period of [ * ] from the effective date of termination, it will not use any process, invention or other technology it has developed during any phase of this Agreement for the manufacture of any Texaphyrins or expanded porphyrins. This Section shall not be binding upon HCC if the Agreement is terminated by HCC for breach of the Agreement by Pharmacyclics. 11.9 LICENSE UPON EXPIRATION UNDER ARTICLE 5 OR TERMINATION UNDER SECTION 12.2. Upon the expiration of this Agreement under Article 5 or the termination of this Agreement by either party under Section 12.2, HCC shall grant Pharmacyclics a worldwide, non-exclusive license, with a right to sublicense, under the HCC Technology, to make, have made, use, sell and have sold Drug Substance. The terms of such non-exclusive license shall be negotiated in good faith by the Parties prior to the date of such expiration or termination and such license shall contain commercially reasonable compensation to HCC for the rights granted under such license. 11.10 LICENSE UPON TERMINATION BY PHARMACYCLICS UNDER SECTION 12.1 OR 12.3. In the event that this Agreement is terminated in its entirety by Pharmacyclics under Section 12.1 or Section 12.3, HCC shall grant to Pharmacyclics a worldwide, non-exclusive license, with a right to sublicense, under the HCC Technology, to make, have made, use, sell and have sold Drug Substance. In the event that this Agreement is terminated by Pharmacyclics under Section * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 23. 24 12.1 with respect to one or more Drug Substances, HCC shall grant to Pharmacyclics a worldwide, non-exclusive license, with a right to sublicense, under the HCC Technology, to make, have made, use, sell and have sold such Drug Substances. The terms of any non-exclusive license under this Section shall be negotiated in good faith by the Parties prior to the date of such termination and such license shall contain commercially reasonable compensation to HCC for the rights granted under such license, taking into consideration the nature of the breach by HCC and the damage caused by Pharmacyclics' need to terminate the Agreement. 11.11 LICENSE UPON PHARMACYCLICS' ELECTION TO USE THIRD PARTY SUPPLIER UNDER SECTIONS 4.2 OR 12.1 OR ARTICLE 15. In the event of an election by Pharmacyclics to manufacture Drug Substance itself or to purchase Drug Substance from one or more third party suppliers under Section 4.2 or 12.1 or Article 5, HCC shall grant to Pharmacyclics a worldwide, non-exclusive license, with a right to sublicense, under the HCC Technology, to make, have made, use, sell and have sold Drug Substance. The terms of such non-exclusive license shall be negotiated in good faith by the Parties prior to the date of such election and such license shall contain commercially reasonable compensation to HCC for the rights granted under such license. 11.12 LICENSE UPON PHARMACYCLICS' ELECTION TO USE THIRD PARTY SUPPLIER TO MANUFACTURE DECLINED ADDITIONAL TEXAPHYRINS. In the event of an election by Pharmacyclics, pursuant to Section 2.6, to manufacture Declined Additional Texaphyrins (as such term is defined in Section 2.6) or to purchase Declined Additional Texaphyrins from one or more third party suppliers, HCC shall grant to Pharmacyclics a worldwide, non-exclusive license, with a right to sublicense, under the HCC Technology, to make, have made, use, sell and have sold such Declined Additional Texaphyrin. The terms of such non-exclusive license shall be negotiated in good faith by the Parties prior to the date of such election and such license shall contain commercially reasonable compensation to HCC for the rights granted under such license. 11.13 LICENSE FOR RESEARCH PURPOSES. HCC hereby grants to Pharmacyclics a worldwide, royalty-free, non-exclusive license, with a right to sublicense, under the HCC Technology, to make, have made and use Texaphyrins, porphyrins and expanded porphyrins, for research and pre-clinical development purposes only. It shall be the responsibility of Pharmacyclics to obtain written confidentiality agreements with any third party sublicensees under this Section with terms no less restrictive than those contained herein to protect HCC's Confidential Information. Pharmacyclics shall provide written notice to HCC of the names of any parties to be included under this Section and a list of the patents, trade secrets and related know-how to be disclosed to such third parties. 11.14 LICENSE FOR PHASE I AND PHASE II CLINICAL TRIALS. In the event Pharmacyclics desires to have any Texaphyrins, porphyrins or expanded porphyrins manufactured for purposes of Phase I or Phase II clinical trials, Pharmacyclics shall provide written notice to HCC of such desire, along with specifications for the manufacture work to be performed. Within [ * ] of such notice, HCC shall provide written notice to Pharmacyclics as to whether it is interested in performing such manufacture. If HCC indicates it is interested in doing so, the Parties will then meet to negotiate in good faith for [ * ] to sign a definitive agreement for such manufacture work, on commercially reasonable terms. In the event that * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 24. 25 HCC indicates it is not interested in performing such manufacture work or the Parties are unable to reach agreement pursuant to the preceding sentence, HCC hereby grants to Pharmacyclics a worldwide, royalty-free, non-exclusive license, with a right to sublicense, under the HCC Technology, to make, have made and use such Texaphyrins, porphyrins and/or expanded porphyrins, for Phase I and Phase II clinical development purposes only. It shall be the responsibility of Pharmacyclics to obtain written confidentiality agreements with any third party sublicensees under this Section with terms no less restrictive than those contained herein to protect HCC's Confidential Information. Pharmacyclics shall provide written notice to HCC of the names of any parties to be included under this Section and a list of the patents, trade secrets and related know-how to be disclosed to such third parties. For purposes of this Section 11.14, "Phase I" shall mean that phase of clinical development of pharmaceutical products defined as "Phase I" in FDA regulations, as amended from time to time, and "Phase II" shall mean that phase of clinical development of pharmaceutical products defined as "Phase II" in FDA regulations, as amended from time to time. 11.15 NO LICENSE UPON TERMINATION BY HCC UNDER SECTION 12.1 OR 12.3. In the event that this Agreement is terminated in its entirety by HCC under Section 12.1 or Section 12.3, Pharmacyclics shall have no right to use the HCC Technology for any purpose and HCC shall not have any obligation to grant Pharmacyclics a license under the HCC Technology. ARTICLE 12. TERMINATION 12.1 TERMINATION FOR DEFAULT. This Agreement may be terminated (i) in its entirety by either Party in the event of the material breach or default by the other Party of the terms and conditions hereof or (ii) with respect to any Drug Substance by either Party in the event of the material breach or default by the other Party of the terms and conditions hereof with respect to such Drug Substance; provided, however, the other Party shall first give to the defaulting Party written notice of the proposed termination or cancellation of this Agreement, specifying the grounds therefor. Upon receipt of such notice, the defaulting Party shall have [ * ] to respond by curing such default (or [ * ] with respect to a failure by Pharmacyclics to pay any amounts hereunder when due) or by delivering to the other Party a certificate that such breach is not capable of being cured within such [ * ] and that the breaching Party is working diligently to cure such breach, but in no event shall the time period for curing such breach exceed an additional [ * ]. If the breaching Party does not so respond or fails so to work diligently to cure such breach within the additional time set forth above, then the other Party may either do nothing, suspend the Agreement indefinitely, or terminate the Agreement, either in its entirety or with respect to such Drug Substances. Termination of this Agreement pursuant to this Section shall not affect any other rights or remedies which may be available to the nondefaulting Party. Notwithstanding Section 4.1, in the event of an uncured material breach by HCC with respect to a particular Drug Substance, Pharmacyclics may, in lieu of termination and upon written notice to HCC, elect to purchase some or all of its requirements for that Drug Substance from one or more third parties, subject to Article 11. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 25. 26 12.2 TERMINATION BY EITHER PARTY; [ * ] (a) If, at any time during the term of this Agreement, no Drug Substance is either (i) being commercialized by Pharmacyclics or a Pharmacyclics licensee or (ii) undergoing development by Pharmacyclics or a Pharmacyclics licensee with the intent of commercializing such Drug Substance, then either Party may terminate this Agreement upon one (1) year's prior written notice to the other Party. Termination of the Agreement will be effective on the one (1) year anniversary of such notice if such commercialization or development does not commence during such one (1) year period. If the failure to commercialize or develop any Drug Substance is due to the prohibitively high cost to Pharmacyclics of purchasing Drug Substance from HCC, Pharmacyclics will notify HCC of this fact and the parties will work together in good faith to attempt to develop and implement a strategy to overcome such economic factors. (b) [ * ] (c) [ * ] 12.3 BANKRUPTCY; INSOLVENCY. Either Party may terminate this Agreement upon the occurrence of either of the following: (a) The entry of a decree or order for relief by a court having jurisdiction in the premises in respect of such Party in an involuntary case under the Federal Bankruptcy Code, as now constituted or hereafter amended, or any other applicable federal or state insolvency or other similar law and the continuance of any such decree or order unstayed and in effect for a period of sixty (60) consecutive days; or (b) The filing by such Party of a petition for relief under the Federal Bankruptcy Code, as now constituted or hereafter amended, or any other applicable federal or state insolvency or other similar law. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 26. 27 12.4 EXPIRATION; TERMINATION; CONSEQUENCES. (a) Upon expiration or termination of this Agreement, whichever is sooner, (but in the case of termination, only if directed by the terminating Party in the notice of termination), [ * ] (b) Upon expiration or termination of this Agreement, the obligations of the Parties under Sections 9.7, 9.10, 9.12, 9.13, 10.6, 11.6, 11.8, 11.9, 11.10, 11.11, 11.12, 11.13, 12.2 and Articles 14 and 16 hereof shall survive such expiration or termination. ARTICLE 13. REPRESENTATIONS AND WARRANTIES 13.1 MUTUAL REPRESENTATIONS AND WARRANTIES. Each Party hereby represents and warrants to the other Party that this Agreement is legal and valid and the obligations binding upon such Party are enforceable in accordance with their terms, and that the execution, delivery and performance of this Agreement does not conflict with any agreement, instrument or understanding, oral or written, to which such Party may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it. 13.2 HCC WARRANTIES. HCC warrants that each Drug Substance delivered to Pharmacyclics, including any labeling and other packaging for such Drug Substance, will (a) conform to the Specifications set forth in the corresponding Drug Substance Appendix; (b) have been manufactured in accordance with all manufacturing instructions set forth in the corresponding Drug Substance Appendix; (c) have been developed, manufactured, handled, stored, labeled, packaged, transported and distributed in accordance with cGMP and all other applicable laws, regulations, and other requirements of all applicable Governmental Entities; (d) have been manufactured consistent with relevant sections of the INDA or NDA (whichever is applicable), and corresponding licenses, registrations, authorizations, or approvals for the Drug Substance and Product for each Applicable Foreign Jurisdiction; and (e) not be (i) adulterated or misbranded by HCC within the meaning of the FD&C Act, or (ii) an article that may not be introduced into interstate commerce under the provisions of Sections 404 or 505 of the FD&C Act. EXCEPT AS PROVIDED IN SECTIONS 13.2 AND 13.3 HEREIN, THIS WARRANTY IS THE ONLY WARRANTY, EXPRESS OR IMPLIED, MADE BY HCC * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 27. 28 AS TO THE DRUG SUBSTANCE, AND ALL OTHER WARRANTIES, INCLUDING MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE, ARE DISCLAIMED. In no event will HCC be liable to Pharmacyclics for any alteration, change, improper packaging or other improper treatment of a Drug Substance by Pharmacyclics or its customers nor will HCC be liable to Pharmacyclics for any damage arising solely from Pharmacyclics marketing, advertising, distribution or sale of Products containing Drug Substances which conform to the warranties set forth above. 13.3 NO DEBARRMENT OR CONVICTIONS. HCC represents and warrants that: (a) it has not and will not use in any capacity the services of any persons debarred under 21 U.S.C. Section 335(a) or 335(b) in connection with its development or manufacture of the Drug Substance or Product; (b) neither HCC nor any HCC official or employee has been convicted of a felony under federal law for conduct relating to the development or approval, including the process for development or approval, of any drug, product, NDA, or abbreviated NDA; and (c) no HCC official or employee has been convicted of a felony under United States law for conduct otherwise relating to the regulation of any drug substance or drug product under the FD&C Act. 13.4 PHARMACYCLICS WARRANTIES. Pharmacyclics warrants that it has the right to give HCC any information provided by Pharmacyclics hereunder and that HCC has the right to use such information for the manufacture of each of the Drug Substances for any FDA-approved use. In addition, Pharmacyclics warrants that, as of the Effective Date, and with respect to any given Drug Substance, as of the date of full execution of the relevant Drug Substance Appendix, there are no valid United States patents in force of which it is aware that would be infringed by practice of the rights granted under the licenses to HCC contained in Section 11.1 of this Agreement. ARTICLE 14. INDEMNITY 14.1 INDEMNIFICATION BY PHARMACYCLICS. Subject to HCC's compliance with Section 14.4, Pharmacyclics agrees to indemnify, defend and hold HCC and its directors, officers, employees and agents harmless from and against any damages, claims, liabilities and expenses (including, but not limited to, reasonable attorneys' fees) resulting from any third party claims or suits ("General Claims Against HCC") arising out of (a) the use, handling, distribution, marketing or sale of the Drug Substance or Product, (b) Pharmacyclics' breach of any of its warranties or representations hereunder or (c) Pharmacyclics' negligent acts or omissions or willful misconduct. Notwithstanding the foregoing, Pharmacyclics will not be required to indemnify, defend and hold HCC or its directors, officers, employees and agents harmless from and against any General Claims Against HCC arising out of (i) HCC's breach of any of its warranties or representations hereunder; (ii) HCC's negligent acts or omissions or willful misconduct; (iii) any failure of the Drug Substance to meet the specifications set forth on the corresponding Drug Substance Appendix; (iv) any failure of HCC to develop, manufacture, handle, store, label, package, transport or distribute the Drug Substance in accordance with cGMP or any other applicable laws, regulations, or other requirements of any applicable 28. 29 Governmental Entity; or (v) any failure of HCC to manufacture the Drug Substance consistent with the applicable sections of the INDA, any amendments or modifications to the INDA mutually agreed to by the Parties or the NDA (whichever is applicable) and any corresponding licenses, registrations, authorizations or approvals in any Applicable Foreign Jurisdiction. Notwithstanding anything in this Section 14.1, General Claims Against HCC shall not include IP Claims Against HCC (as such term is defined below). 14.2 INDEMNIFICATION BY HCC. Subject to Pharmacyclics' compliance with Section 14.4, HCC agrees to indemnify, defend and hold Pharmacyclics and its directors, officers, employees and agents harmless from and against any damages, claims, liabilities and expenses (including, but not limited to, reasonable attorneys' fees) resulting from any third party claims or suits ("General Claims Against Pharmacyclics") arising out of (a) HCC's manufacture, handling, or delivery of the Drug Substance; (b) HCC's breach of any of its warranties or representations hereunder; (c) HCC's negligent acts or omissions or willful misconduct; (d) any failure of the Drug Substance to meet the specifications set forth on the corresponding Drug Substance Appendix; (e) any failure of HCC to develop, manufacture, handle, store, label, package, transport or distribute the Drug Substance in accordance with cGMP or any other applicable laws, regulations, or other requirements of any applicable Governmental Entity; or (f) any failure of HCC to manufacture the Drug Substance consistent with the applicable sections of the INDA, any amendments or modifications to the INDA mutually agreed to by the Parties or the NDA (whichever is applicable) and any corresponding licenses, registrations, authorizations or approvals in any Applicable Foreign Jurisdiction. Notwithstanding the foregoing, HCC will not be required to indemnify, defend and hold Pharmacyclics or its directors, officers, employees and agents harmless from and against any General Claims Against Pharmacyclics arising out of (i) Pharmacyclics' breach of any of its warranties or representations hereunder or (ii) Pharmacyclics' negligent acts or omissions or willful misconduct. Notwithstanding anything in this Section 14.2, General Claims Against Pharmacyclics shall not include IP Claims Against Pharmacyclics (as such term is defined below). 14.3 INTELLECTUAL PROPERTY CLAIMS. (a) Subject to HCC's compliance with Section 14.4, Pharmacyclics agrees to indemnify, defend and hold HCC and its directors, officers, employees and agents harmless from and against any damages, claims, liabilities and expenses (including, but not limited to, reasonable attorneys' fees) resulting from any third party claims or suits ("IP Claims Against HCC") arising out of any proceeding instituted by or on behalf of a third party based upon a claim that the manufacture, use or sale of the Drug Substance or the Product infringes a United States patent or any other proprietary rights, including any IP Claims Against HCC by such third party for lost profits. Notwithstanding the foregoing, Pharmacyclics will not be required to indemnify, defend and hold HCC or its directors, officers, employees and agents harmless from and against any IP Claims Against HCC arising out of the infringement of any third party intellectual property right by any manufacturing processes (i) developed by HCC, either alone or with one or more third parties (ii) developed by one or more third parties or (iii) jointly developed by Pharmacyclics and HCC, unless such claim is based solely on the use of information furnished to HCC by Pharmacyclics. 29. 30 (b) Subject to Pharmacyclics' compliance with Section 14.4, HCC agrees to indemnify, defend and hold Pharmacyclics and its directors, officers, employees and agents harmless from and against any damages, claims, liabilities and expenses (including, but not limited to, reasonable attorneys' fees) resulting from any third party claims or suits ("IP Claims Against Pharmacyclics") arising out of any proceeding instituted by or on behalf of a third party based upon a claim that the process used in manufacturing the Drug Substance infringes a United States patent or any other proprietary rights, including any IP Claims Against Pharmacyclics by such third party for lost profits. Notwithstanding the foregoing, HCC will not be required to indemnify, defend and hold Pharmacyclics or its directors, officers, employees and agents harmless from and against any IP Claims Against Pharmacyclics arising out of the infringement of any third party intellectual property right by any manufacturing processes developed in whole or in part by Pharmacyclics, unless such claim is based solely on the use of information furnished to Pharmacyclics by HCC. 14.4 INDEMNIFICATION PROCEDURES. A Party (the "Indemnitee") which intends to claim indemnification under this Article 14 shall promptly notify the other Party (the "Indemnitor") in writing of any action, claim or other matter in respect of which the Indemnitee or any of its Affiliates, or any of their respective directors, officers, employees or agents intend to claim such indemnification; provided, however, the failure to provide such notice within a reasonable period of time shall not relieve the Indemnitor of any of its obligations hereunder except to the extent the Indemnitor is prejudiced by such failure. The Indemnitee shall permit, and shall cause its Affiliates, and their respective directors, officers, employees and agents to permit, the Indemnitor, at its discretion, to settle any such action, claim or other matter. The Indemnitee agrees to the complete control of such defense or settlement by the Indemnitor; provided, however, such settlement does not adversely affect the Indemnitee's rights hereunder or impose any obligations on the Indemnitee in addition to those set forth herein in order for it to exercise such rights. No such action, claim or other matter shall be settled without the prior written consent of the Indemnitor, and the Indemnitor shall not be responsible for any attorneys' fees or other costs incurred other than as provided herein. The Indemnitee, its Affiliates, and their respective directors, officers, employees and agents shall cooperate fully with the Indemnitor and its legal representatives in the investigation and defense of any action, claim or other matter covered by this indemnification. The Indemnitee shall have the right, but not the obligation, to be represented by counsel of its own selection and at its own expense. 14.5 SURVIVAL OF INDEMNIFICATION OBLIGATIONS. The provisions of this Article 14 shall survive the expiration or termination of this Agreement. 14.6 DISCLAIMER OF CONSEQUENTIAL DAMAGES. In no event shall either Party be liable to the other Party for incidental, special or consequential damages, including, but not limited to, any claim for damages based upon lost profits, except as set forth in Sections 14.3(a) and 14.3(b) with respect to lost profits. 30. 31 14.7 INSURANCE. (a) PHARMACYCLICS INSURANCE. During the period in which HCC is making any of the Drug Substances, Pharmacyclics shall at all times maintain general liability (including product liability) insurance coverage at its own expense in full force and effect. Pharmacyclics shall maintain insurance coverage comparable to coverage maintained by biotechnology companies of similar size with a responsible insurance carrier. This policy will provide that the insurer shall give HCC ten (10) days advance notice of any termination or cancellation of such coverage. HCC may request reasonable proof of the existence and maintenance of this insurance coverage at any time. (b) HCC INSURANCE. During the period in which HCC is making any of the Drug Substances, HCC shall at all times maintain general liability (including product liability) insurance coverage at its own expense in full force and effect. HCC shall maintain insurance coverage comparable to coverage maintained by bulk pharmaceutical manufacturing companies of similar size with a responsible insurance carrier. This policy will provide that the insurer shall give Pharmacyclics ten (10) days advance notice of any termination or cancellation of such coverage. Pharmacyclics may request reasonable proof of the existence and maintenance of this insurance coverage at any time. ARTICLE 15. FORCE MAJEURE In the event of war, fire, flood, strike, labor trouble, accident, riot, act of government authority (including changes in FDA laws and regulations), lack of fuel or energy, natural disasters, or other contingencies, whether of like or different nature, beyond the control of the Parties hereto, and interfering with the production, supply, transportation, marketing, or consumption of any of the Drug Substances or Products, with the supply of raw materials used in connection therewith or with due performance of this Agreement by any Party (a "Force Majeure Event"), the Party affected thereby shall give prompt written notice to the other. The Parties shall use all reasonable efforts to avoid or overcome the causes affecting performance, and the Party whose performance is affected by such Force Majeure Event shall fulfill all outstanding obligations as soon as possible. [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 31. 32 [ * ] ARTICLE 16. CONFIDENTIALITY 16.1 CONFIDENTIALITY AND EXCEPTIONS. Except as set forth below, all information disclosed by one Party to the other Party shall be deemed to be the disclosing Party's "Confidential Information". Confidential Information shall include, but not be limited to, information relating to the structure of any Drug Substance, any know-how relating to the manufacture of any Drug Substance, the manufacturing cost and other financial arrangements made pursuant to this Agreement. In addition, Pharmacyclics' Confidential Information shall be deemed to include all information disclosed by Pharmacyclics under the MOU and all * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 32. 33 information developed by HCC and provided to Pharmacyclics under the MOU. Each Party agrees that it will take the same steps to protect the confidentiality of the other Party's Confidential Information as it takes to protect its own proprietary and confidential information, which shall in no event be less than reasonable steps. Each Party, and its employees and agents shall protect and keep confidential and shall not use, publish or otherwise disclose to any third party, except as permitted by this Agreement, or with the other Party's written consent, the other Party's Confidential Information. For the purposes of this Agreement, Confidential Information shall not include such information that: (a) was already known to the receiving Party at the time of disclosure by the other Party; other than under an obligation of confidentiality; or (b) was generally available to the public or was otherwise part of the public domain at the time of disclosure or became generally available to the public or otherwise part of the public domain after disclosure other than through any act or omission of the receiving party in breach of this Agreement; or (c) was lawfully disclosed to the receiving Party, other than under an obligation of confidentiality, by a third party who had no obligation not to disclose such information to others; or (d) was independently developed by or for the receiving Party without the aid, application or use of Confidential Information by persons who did not access the Confidential Information; or (e) was disclosed to a third party by the disclosing Party without an obligation of confidentiality. 16.2 AUTHORIZED DISCLOSURE. Each Party may disclose Confidential Information hereunder to the extent such disclosure is reasonably necessary for prosecuting or defending litigation, complying with applicable government regulations or conducting preclinical or clinical trials, provided that if a Party is required by law or regulation to make any such disclosure of the other Party's Confidential Information it will, except where impracticable for necessary disclosures, for example in the event of medical emergency, give reasonable advance notice to the other Party of such disclosure requirement and will use its reasonable efforts to secure a protective order or confidential treatment of such Confidential Information required to be disclosed. Subject to the specific conditions described elsewhere in this Agreement, with respect to the licensing of HCC Technology, Pharmacyclics may disclose HCC Confidential Information (excluding financial information) relating to the manufacture of Drug Substance to any permitted third party manufacturer of Drug Substance for the sole purpose of allowing such third party to manufacture Drug Substance. In addition, Pharmacyclics may disclose, under a comparable binder of confidentiality, and on a need-to-know basis only and after notice to HCC, information received under this Agreement to its other partners for the development or commercialization of Products. Neither Party shall disclose Confidential Information of the other Party in any patent filings without the prior written consent of the disclosing Party. 33 34 16.3 CONFIDENTIALITY AND PUBLICITY. The Parties agree that, except as may otherwise be required by applicable laws, regulations, rules, or orders, and except as may be authorized in Section 16.2, no information concerning this Agreement and the transactions contemplated herein shall be made public by either Party without the prior written consent of the other. The Parties agree that the public announcement of the execution of this Agreement shall be by one or more press releases mutually agreed to by the Parties. 16.4 SURVIVAL OF CONFIDENTIALITY. All obligations of confidentiality and non-use imposed upon the Parties under this Agreement shall expire ten (10) years after the expiration or termination of this Agreement. ARTICLE 17. GENERAL PROVISIONS 17.1 NOTICE. All notices under this Agreement must be made in writing and mailed or delivered to the following: Pharmacyclics: Pharmacyclics, Inc. 995 E. Arques Avenue Sunnyvale, California 94086-4521 Attention: Vice President, Business Development with a copy to: Director of Legal Affairs Pharmacyclics, Inc. 995 E. Arques Avenue Sunnyvale, California 94086-4521 HCC: Hoechst Celanese Corporation 5200 77 Center Drive Charlotte, NC 28217 Attention: V.P. & General Manager, Fine Chemicals with a copy to: Vice President and General Counsel Specialty Chemicals Group 5200 77 Center Drive Charlotte, NC 28217 17.2 USE OF PURCHASE ORDERS. If either or both Parties employ purchase order or acknowledgment forms or other commercial forms in the administering of this Agreement, none of the terms and conditions printed or otherwise appearing on such forms will be applicable 34. 35 except to the extent that they reflect quantity, destination, mode of shipment or timing of deliveries. 17.3 PARTNERS AND SUBLICENSEES OF PHARMACYCLICS. All rights and benefits inuring to Pharmacyclics under this Agreement shall also inure to the benefit of partners and sublicensees of Pharmacyclics who have development or commercialization rights to Products. 17.4 ASSIGNMENT. This Agreement may not be assigned or otherwise transferred by either Party without the prior written consent of the other Party; provided, however, either Party may, without such consent, assign this Agreement (a) in connection with the transfer or sale of all or substantially all of the assets of such Party or the line of business of which this Agreement forms a part or (b) in the event of the merger or consolidation of a Party hereto with another company; and provided that any such assignee shall assume all obligations of its assignor under this Agreement. Any purported assignment in violation of the preceding sentence shall be void. No assignment shall relieve either Party of responsibility for the performance of any obligation which accrued prior to the effective date of such assignment. This Agreement shall be binding upon, and shall inure to the benefit of, the respective successors and permitted assigns of the Parties. 17.5 APPLICABLE LAW. This Agreement will be interpreted in accordance with the state laws of Delaware, without regard to the conflict of laws provisions thereof. 17.6 DISPUTE RESOLUTION. Both Parties agree that, in the event of a dispute relating to this Agreement, they are prepared to explore resolution of the dispute through negotiation or Alternative Dispute Resolution techniques before pursuing litigation. No lawsuit may be commenced unless a Party gives the other side fifteen (15) days notice of its intent to initiate litigation. 17.7 SEVERABILITY. If any portion of this agreement is held invalid by a court of competent jurisdiction, such portion will be deemed to be of no force and effect and the agreement will be construed as if such portion had not been included herein. 17.8 ENTIRE AGREEMENT. Subject to Section 2.5, this Agreement, together with its Exhibits and Appendices, contains the sole and entire understanding of the parties related to its subject matter and supersedes all prior or contemporaneous oral or written agreements concerning the subject matter, except with respect to those provisions of the MOU which the parties expressly stated were binding. 17.9 MODIFICATION. This Agreement cannot be changed orally and no modification of this Agreement will be recognized or have any effect, unless the writing in which it is set forth is signed by HCC and Pharmacyclics, nor will any waiver of any of the provisions of this agreement be effective unless in writing and signed by the party to be charged therewith. 17.10 WAIVER. The failure of either Party to enforce, at any time, or for any period of time, the provisions hereof or the failure of either Party to exercise any option herein will not 35. 36 be construed as a waiver of such provision or option and will in no way effect that Party's right to enforce such provisions or exercise such option. No waiver of any provision hereof will be deemed a waiver of any succeeding breach of the same or any other provisions of this Agreement. 17.11 HEADINGS. The headings herein are for the purpose of convenience of reference only and are not intended to define or limit the contents of this Agreement. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by the respective duly authorized officers as of the date first written above. HOECHST CELANESE CORPORATION By: /s/ Klaus Warning ---------------------------------- Printed Name: Klaus Warning ----------------------- Title: Senior Vice President ------------------------------ PHARMACYCLICS, INC. By: /s/ Richard A. Miller ---------------------------------- Printed Name: Richard A. Miller ----------------------- Title: President and CEO ------------------------------ 36. 37 EXHIBIT 1.18 UNIVERSITY OF TEXAS PATENTS AND TECHNOLOGY Patent/ Serial No. Title [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 38 EXHIBIT 1.19 LU-TEX STRUCTURE 39 EXHIBIT 1.19 LU-TEX (PCI-0123) NAME AND STRUCTURE [GRAPHIC OMITTED Graphical representation of chemical structure of Lu-Tex (PCI-0123) molecule.] IUPAC NAME: Bis(acetato-O)[9,10-diethyl-20,21-bis[2-[2-(2- methoxyethoxy)ethoxy]ethoxy]-4,15-dimethyl-8,11-imino-6,3:16,13-dinitrilo-1,18- benzodiazacycloeicosine-5,14-dipropanolato-N(1), N(18), N(23), N(24), N25]lutetium hydrate 40 LU-TEX DRUG SUBSTANCE APPENDIX EFFECTIVE/REVISION DATE: September 6, 1996 TEXAPHYRIN IUPAC NAME: Bis(acetato-O)[9,10-diethyl-20,21-bis[2-[2-(2- methoxyethoxy)ethoxy]ethoxy]-4,15-dimethyl-8,11-imino-6,3:16,13-dinitrilo-1,18- benzodiazacycloeicosine-5,14-dipropanolato-N(1), N(18), N(23), N(24), N(25)]lutetium hydrate SYNONYMS: Lu-Tex, PCI-0123, FP-LP1, Lu-Tex-PEG STRUCTURE: [GRAPHIC OMITTED Graphical representation of chemical structure of Lu-Tex (PCI-0123) molecule.] 1. 41 LU-TEX DRUG SUBSTANCE APPENDIX
LU TEX PROCESS DEVELOPMENT AND MANUFACTURING ACTIVITIES: PRIMARY TARGETED ACTIVITY RESPONSIBILITY COMPLETION DATE [ * ]
* Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 2. 42 LU-TEX DRUG SUBSTANCE APPENDIX DRUG SUBSTANCE (FP-LP1) SPECIFICATIONS: Release Specifications: [to be determined] Packaging Specifications: [to be determined] Labeling Specifications: [to be determined] Storage Conditions: [to be determined] Drug Substance Identification Tests: [to be determined] INTERMEDIATE PRODUCT SPECIFICATIONS: [to be determined] [ * ] PROCESS INFORMATION: [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 3. 43 LU-TEX DRUG SUBSTANCE APPENDIX [GRAPHIC OMITTED][ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 4. 44 LU-TEX DRUG SUBSTANCE APPENDIX MANUFACTURING REQUIREMENTS: [ * ] APPLICABLE FOREIGN JURISDICTIONS: [ * ] GOVERNMENTAL ENTITIES: The FDA and all other national, supra-national (e.g., the European Commission or the Council of the European Union), state or local regulatory agencies, departments, bureaus, commissions, councils or other governmental entities with jurisdiction in an Applicable Foreign Jurisdiction or, in the case of supra-national bodies, with jurisdiction over an Applicable Foreign Jurisdiction. [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 5. 45 LU-TEX DRUG SUBSTANCE APPENDIX [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 6. 46 EXHIBIT 1.30 TEXAPHYRIN STRUCTURE 47 EXHIBIT 1.30 TEXAPHYRIN STRUCTURE [GRAPHIC OMITTED Graphical representation of chemical structure of Texaphyrin molecule.] 48 EXHIBIT 1.9 GD-TEX STRUCTURE 49 EXHIBIT 1.9 GD-TEX (PCI-0120) NAME AND STRUCTURE [GRAPHIC OMITTED Graphical representation of chemical structure of GD-Tex (PCI-0120 molecule.] IUPAC NAME: Bis(acetato-0[9,10-diethyl-20,21-bis[2-[2-(2- methoxyethoxy)ethoxy]ethoxy]-4,15-dimethyl-8,11-imino-6,3:16,13-dinitrilo-1,18- benzodiazacycloeicosine-5,14-dipropanolato-N(1),N(18),N(23),N(24),N(25)] gadolinium hydrate 50 GD-TEX DRUG SUBSTANCE APPENDIX EFFECTIVE/REVISION DATE: September 6, 1996 TEXAPHYRIN IUPAC NAME: Bis(acetato-O)[9,10-diethyl-20,21-bis[2-[2-(2- methoxyethoxy)ethoxy]ethoxy]-4,15-dimethyl-8,11-imino-6,3:16,13-dinitrilo-1,18- benzodiazacycloeicosine-5,14-dipropanolato-N1,N18, N23, N24, N25]gadolinium hydrate SYNONYMS: Gd-Tex, PCI-0120, FP-GP1, Gd-Tex-PEG STRUCTURE: [GRAPHIC OMITTED Graphical representation of chemical structure of Gd-Tex (PCI-0120) molecule.] 1. 51 Gd-TEX Drug Substance Appendix GD TEX PROCESS DEVELOPMENT AND MANUFACTURING ACTIVITIES:
PRIMARY TARGETED ACTIVITY RESPONSIBILITY COMPLETION DATE [ * ]
* Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 2. 52 GD-TEX DRUG SUBSTANCE APPENDIX DRUG SUBSTANCE (FP-GP1) SPECIFICATIONS: Release Specifications: [to be determined] Packaging Specifications: [to be determined] Labeling Specifications: [to be determined] Storage Conditions: [to be determined] Drug Substance Identification Tests: [to be determined] INTERMEDIATE PRODUCT SPECIFICATIONS: [to be determined] [ * ] PROCESS INFORMATION: [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 3. 53 GD-TEX DRUG SUBSTANCE APPENDIX [GRAPHIC OMITTED] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 4. 54 GD-TEX DRUG SUBSTANCE APPENDIX MANUFACTURING REQUIREMENTS: [ * ] APPLICABLE FOREIGN JURISDICTIONS: [ * ] GOVERNMENTAL ENTITIES: The FDA and all other national, supra-national (e.g., the European Commission or the Council of the European Union), state or local regulatory agencies, departments, bureaus, commissions, councils or other governmental entities with jurisdiction in an Applicable Foreign Jurisdiction or, in the case of supra-national bodies, with jurisdiction over an Applicable Foreign Jurisdiction. [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 5. 55 GD-TEX DRUG SUBSTANCE APPENDIX [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 6. 56 EXHIBIT 10.2 [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 57 EXHIBIT 10.3 [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. EX-11.1 3 COMPUTATION OF NET LOSS AND PRO FORMA NET LOSS 1 EXHIBIT 11.1 PHARMACYCLICS, INC. (A DEVELOPMENT STAGE COMPANY) COMPUTATION OF NET LOSS AND PRO FORMA NET LOSS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED JUNE 30, ---------------------- 1996 1995 ------- -------- Weighted average common shares outstanding............................ 6,106 870 Convertible preferred stock........................................... 1,611 5,157 Common stock equivalent arising from options and warrants issued subsequent to June 30, 1994 through October 23, 1995................ 98 326 ------- -------- Weighted average common and common equivalent shares.................. 7,815 ======= Pro forma weighted average common and common equivalent shares........ 6,353 ======== Net Loss.............................................................. $(8,232) $(10,479) Net loss per share.................................................... $ (1.05) ======= Pro forma net loss per share.......................................... $ (1.65) ========
53 EX-23.1 4 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-98514) of Pharmacyclics, Inc. of our report dated August 20, 1996 appearing on page 33 of this Form 10-K. PRICE WATERHOUSE LLP San Jose, California September 27, 1996 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLARS YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 1 13,950 8,053 0 0 0 22,244 4,263 1,641 25,015 1,970 941 0 0 1 21,990 25,015 0 301 0 9,156 0 0 (320) (8,235) 0 0 0 0 0 (8,235) (1.05) 0
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