item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements following financial statements company contained pages 2441 report form 10k consolidated balance sheets december 31 1996 1995 consolidated statements operations three years ended december 31 1996 1995 1994 consolidated statements shareholders equity three years ended december 31 1996 1995 1994 consolidated statements cash flows three years ended december 31 1996 1995 1994 notes consolidated financial statements report ernst young llp independent auditors 2 financial statement schedules refer item 14d 3 exhibits refer item 14c b reports form 8k none filed quarter ended december 31 1996 c exhibits numbered accordance item 601 regulation sk exhibit number description 3i11 restated articles incorporation 3i22 certificate amendment restated articles incorporation 3ii11 bylaws 3ii22 certificate amendment bylaws 411 representatives warrant agreement dated march 24 1992 registrant josephthal lyon ross incorporated 1015 thymosin license agreement dated august 19 1994 registrant alpha 1 biomedicals inc 1023 license development supply agreement dated january 12 1993 registrant scheringplough kk 1036 supply agreement dated october 19 1994 registrant ucb bioproducts sa 1044 manufacturing services agreement dated july 27 1993 sciclone pharmaceuticals international limited sclavo spa 1051 services agreement dated august 28 1991 registrant nichimen corporation nichimen services agreement 1063 restated nichimen services agreement dated october 5 1992 1072em registrants 1991 stock plan together forms agreements thereunder 1081em registrants 1992 stock plan together forms agreements thereunder 1093em letter agreement dated january 6 1992 registrant philip h vander werf amended january 28 1993 10109 employment agreement addendum dated december 5 1994 registrant philip h vander werf related memorandum dated january 30 1995 thomas e moore philip h vander werf 10119 promissory notes dated april 8 1994 may 3 1994 registrant philip h vander werf 10123 letter agreement dated april 1 1992 registrant david l horwitz md phd 10136 compensation agreement dated november 11 1994 registrant marc l steuer 10149 employment agreement dated january 3 1995 registrant mark culhane 10151 lease dated september 10 1991 registrant spiekersingleton 68 concerning property located 901 mariners island boulevard san mateo california amended spieker lease 10167 amendment 4 spieker lease dated october 4 1994 10179 amendment 7 spieker lease dated november 14 1995 10188 registrants 1995 equity incentive plan together forms agreement thereunder 10198 registrants 1995 nonemployee director stock option plan together forms agreement thereunder 10209 form promissory note deed trust assignment rents registrant david l horwitz md phd 10219 compensation agreement dated january 19 1996 registrant philip h vander werf 10229 employment agreement dated february 1 1996 registrant donald r sellers 10239 sublease dated january 1 1996 registrant cord blood registry inc concerning property located 901 mariners island boulevard san mateo california 102410 license agreement effective april 19 1996 registrant national institute health office technology transfer 102511 form promissory note secured deed trust registrant donald r sellers 102611 amendment 8 spieker lease dated august 26 1996 1027 expanded amended license development supply agreement dated october 28 1996 registrant scheringplough kk japanese corporation 1028 promissory note secured deed trust registrant thomas e diane g moore dated july 14 1995 1029 promissory note secured deed trust registrant thomas e diane g moore dated december 26 1995 211 subsidiaries registrant 231 consent ernst young llp independent auditors 241 powers attorney see page 46 27 financial data schedule 1 incorporated reference companys registration statement form sl 3345446 declared effective commission march 17 1992 2 incorporated reference companys registration statement form s8 3366832 filed commission august 3 1993 3 incorporated reference companys annual report form 10k year ended december 31 1992 4 incorporated reference companys quarterly report form 10q quarter ended september 30 1993 5 incorporated reference companys report form 8k dated august 19 1994 6 incorporated reference companys quarterly report form 10q quarter ended september 30 1994 7 incorporated reference companys annual report form 10k year ended december 31 1994 8 incorporated reference companys registration statement form s8 3380911 filed commission december 28 1995 9 incorporated reference companys annual report form 10k year ended december 31 1995 10 incorporated reference companys quarterly report form 10q quarter ended march 31 1996 11 incorporated reference companys quarterly report form 10q quarter ended june 30 1996 12 incorporated reference companys quarterly report form 10q quarter ended september 30 1996 confidential treatment requested management compensatory plan arrangement financial statement schedules omitted either inapplicable required information given consolidated financial statements notes hereto signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc date march 1997 donald r sellers chief executive officer power attorney know persons presents person whose signature appears constitutes appoints donald r sellers mark culhane attorneysinfact agents power substitution resubstitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof schedule a1 alpha patents redacted omitted filed separately commissioner schedule a2 sciclone patents redacted omitted filed separately commissioner schedule a3 ta1 specifications redacted omitted filed separately commissioner exhibit c marks redacted omitted filed separately commissioner exhibit development program redacted omitted filed separately commissioner schedule d1 phase ii dose ranging safety efficacy trial thymosin a1 chronic hepatitis b redacted omitted filed separately commissioner exhibit e adverse event reporting procedures sciclone spkk hereby agree following conditions govern disclosures party respect adverse event reporting relating licensed products definitions adverse event ae defined expected unexpected experience adverse including commonly described adverse undesirable experiences adverse events adverse reactions side effects death due cause associated use licensed product observed conjunction use licensed product whether considered related use licensed product occurring course use licensed product associated observed conjunction licensed product overdose whether accidental intentional associated observed conjunction licensed product abuse associated observed conjunction licensed product withdrawal ii significant failure expected pharmacological biologic therapeutic action exception clinical trials b serious ae nonserious ae defined follows serious ae one lifethreatening fatal permanently disabling requires inpatient hospitalization prolonged hospitalization congenital anomaly cancer overdose addition endorgan toxicity including hematological renal hepatic central nervous system aes may considered serious laboratory tests animals serious ae includes experience suggesting significant risk human subjects ii nonserious ae meet criteria serious ae c following terms used paragraphs ii meanings set forth lifethreatening defined patient immediate risk death ae occurs ii endorgan toxicity defined medically significant event laboratory value change patient may necessarily hospitalized disabled clinically significant enough warrant monitoring eg seizures blood dyscrasias etc iii expected experience defined experience listed sciclones investigators brochure clinical trials included local labelling eg summary licensed product characteristics licensed product countries local labelling listed sciclones corporate standard prescribing document iv unexpected experience defined experience meet criteria expected ae listed differs event terms severity specificity v associated use licensed product observed conjunction use licensed product means reasonable possibility exists ae caused licensed product ii reporting initial reports followups oral written serious aes defined respect animal studies become known one party disclosure behalf party must communicated telephone telefax party within three 3 working days case death one 1 day receipt information written confirmation serious ae sent party soon becomes available event within one 1 day initial report ae reporting party sciclone may conduct investigation reported serious aes initial reports followups oral written nonserious aes defined become known spkk disclosure behalf sciclone must communicated writing sciclone monthly basis sciclone may conduct investigation reported serious ae nonserious ae b reporting requirements respect aes shall follows aes occurring animal studies suggest potential significant risk humans written report must forwarded sciclone soon results received spkk ii within thirty 30 days receipt request sciclone often twice year spkk give sciclone printout computer disk aes reported within last year iii sciclone wishes access ae reports spkk relating licensed products spkk shall make available records including computer disks viewing copying sciclone promptly upon request c disclosure information concerning aes spkk sciclone shall continue long spkk continues clinically test market licensed products iii implementation sciclone spkk also agree meet timely fashion time may reasonably required implement adverse event reporting consultation procedures described article exhibit f intentionally omitted exhibit g prior agreements 1 letter department health education welfare board regents university texas system dated september 14 1978 2 agreement board regents university texas system hoffmannla roche inc dated april 23 1980 3 letter hoffmannla roche inc university texas system dated february 9 1984 4 license agreement f hoffmannla roche co limited company alpha1 biomedicals inc dated october 21 1988 5 letter agreement f hoffmannla roche co limited company alpha1 biomedicals inc dated march 4 1991 two pages 6 letter agreement f hoffmannla roche co limited company alpha1 biomedicals inc dated march 4 1991 referring meeting september 24 1990 exhibit h outline commercial supply agreement 1 commercial price redacted 2 ordering redacted 3 forecasts rolling forecasts supplied spkk set forth section 638 hereof 4 payment terms set forth section 637 5 delivery transportation insurance costs risk loss negotiated delivery schedule negotiated 6 inspection acceptance rejection negotiated adequate time spkks testing evaluation ta1 material 7 remedies repair replacement 8 warranties ta1 material manufactured compliance gmps according specifications good workmanlike manner omitted filed separately commissioner 9 indemnification sciclone indemnify spkk extent indemnified alpha agreement sciclone manufactures ta1 material usual customary industry 10 contingent manufacturing rights set forth section 633 11 term termination term equal expanded amended license development supply agreement exhibit third party royalties 1 sciclones royalty obligations agreement board regents university texas system hoffmannla roche inc dated april 23 1980 amended 2 sciclones royalty obligations license agreement f hoffmannla roche co limited company alpha 1 biomedicals inc dated october 21 1988 amended 3 sciclones royalty obligations license supply agreement alpha 1 biomedicals inc sciclone pharmaceuticals inc dated september 21 1990 amended restated dated august 19 1994 4 sciclones royalty obligations restated services agreement sciclone pharmaceuticals inc sciclone japan kk nichimen corporation dated october 5 1992 exhibit j arbitration parties recognize bona fide dispute certain matters may time arise term agreement event occurrence dispute controversy claim arising relating validity construction enforceability performance agreement including disputes relating alleged breach termination agreement shall settled binding alternative dispute resolution adr manner set forth provided however neutral referred shall give effect provisions agreement shall adjust modify change effects termination set forth agreement party intends begin adr resolve dispute party shall provide written notice adr request certified registered mail properly documented overnight delivery party informing party intention issues resolved notice shall explain nature complaint refer relevant sections agreement upon complaint based complaining party shall also set forth proposed solution problem including suggested time frame within parties must act b noncomplaining party must respond writing within fortyfive 45 days receiving notice explanation including references relevant provisions agreement response proposed solution suggested time frame action noncomplaining party may add additional issues resolved c within fifteen 15 days receipt response noncomplaining party parties shall meet discuss options resolving dispute complaining party must initiate scheduling resolution meeting party shall make available appropriate personnel meet confer party within fifteen 15 day period following complaining partys receipt response noncomplaining party disputes cannot resolved pursuant paragraphs b c shall submitted neutral shall selected mutual agreement parties unable agree upon neutral shall selected accordance procedures american arbitration association neutral shall individual shall preside resolve disputes parties neutral selected shall former judge state federal court shall current former employee director shareholder otherwise current previous relationship either party respective affiliates adr shall conducted accordance rules american arbitration association effect subject time periods provisions exhibit otherwise set forth agreement e consistent time schedule established pursuant paragraphs g neutral shall hold hearing resolve issues identified parties shall render award expeditiously possible event thirty 30 days close hearings making award neutral shall rule disputed issue shall based whole part proposed ruling one parties disputed issue f meeting referred paragraph c parties shall negotiate good faith scope schedule discovery relating depositions document production discovery devices taking account nature dispute submitted resolution parties unable reach agreement scope schedule discovery neutral may order discovery deems necessary extent practicable taking account nature dispute submitted resolution discovery shall completed within sixty 60 days date selection neutral hearing shall commence within twenty 20 days completion discovery unless neutral otherwise orders parties may present testimony either live witness deposition subject crossexamination documentary evidence extent practicable taking account nature dispute submitted resolution availability neutral hearing shall conducted period exceed thirty 30 consecutive business days party entitled approximately half allotted time unless otherwise ordered neutral event sciclone files adr request pursuant paragraph hereof hearing shall conducted newark new jersey event spkk files adr request pursuant paragraph hereof hearing shall conducted san francisco california party shall sole discretion regard admissibility evidence matters relating conduct hearing neutral shall rendering decision apply substantive law california decision neutral shall final appealable except case fraud bad faith part neutral party adr proceeding connection conduct proceedings g least twenty 20 business days prior date set hearing party shall submit party neutral list documents party intends rely oral written presentation neutral list witnesses party intends call hearing brief summary witness testimony least five 5 business days prior hearing party must submit neutral serve party proposed findings fact conclusions law issue resolved following close hearings parties shall submit posthearing briefs neutral addressing evidence issues resolved may required permitted neutral h except otherwise set forth herein neutral shall determine proportion parties shall pay costs fees adr except party shall pay costs including without limitation reasonable attorneys fees expenses connection adr provided however neutral determines action party arbitrary frivolous bad faith neutral may award costs expenses prevailing party adr proceeding shall confidential except required law neither party shall make instruct neutral make public announcement respect proceedings decision neutral without prior written consent party existence dispute submitted adr award neutral shall kept confidence parties neutral except required connection enforcement award otherwise required applicable law j purposes arbitration provisions parties acknowledge diversity agree accept jurisdiction federal district court newark new jersey san francisco california selected party seeking enforce purposes enforcing awards entered pursuant arbitration provisions enforcing agreements reflected paragraph j k nothing contained herein shall construed permit neutral court forum award punitive exemplary similar damages entering agreement exercising rights arbitrate parties expressly waive claim punitive exemplary similar damages recoverable agreement compensatory damages l procedures specified herein shall sole exclusive procedures resolution disputes parties expressly identified resolution accordance arbitration provisionsitem 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements following financial statements company contained pages 2842 report form 10k consolidated balance sheets december 31 1998 1997 consolidated statements operations three years ended december 31 1998 1997 1996 consolidated statement shareholders equity three years ended december 31 1998 1997 1996 consolidated statements cash flows three years ended december 31 1998 1997 1996 notes consolidated financial statements report ernst young llp independent auditors 2 financial statement schedules following schedule filed part report schedule ii valuation qualifying accounts three years ended december 31 1998 1997 1996 schedules omitted either inapplicable required information given consolidated financial statements notes hereto 3 exhibits refer item 14c b reports form 8k none c exhibits numbered accordance item 601 regulation sk confidential treatment requested management compensatory plan arrangement 1 incorporated reference companys registration statement form sl 3345446 declared effective commission march 17 1992 2 incorporated reference companys registration statement form s8 3366832 filed commission august 3 1993 3 incorporated reference companys annual report form 10k year ended december 31 1992 4 incorporated reference companys quarterly report form 10q quarter ended september 30 1993 5 incorporated reference companys report form 8k dated august 19 1994 6 incorporated reference companys quarterly report form 10q quarter ended september 30 1994 7 incorporated reference companys annual report form 10k year ended december 31 1994 8 incorporated reference companys registration statement form s8 3380911 filed commission december 28 1995 9 incorporated reference companys annual report form 10k year ended december 31 1995 10 incorporated reference companys quarterly report form 10q quarter ended march 31 1996 11 incorporated reference companys quarterly report form 10q quarter ended june 30 1996 12 incorporated reference companys quarterly report form 10q quarter ended september 30 1996 13 incorporated reference companys annual report form 10k year ended december 31 1996 14 incorporated reference companys current report form 8k filed october 14 1997 15 incorporated reference companys current report form 8k filed january 26 1998 16 incorporated reference companys amendment 3 registration statement form s3 33338773 filed commission december 2 1997 17 incorporated reference companys annual report form 10k year ended december 31 1998 18 incorporated reference companys current report form 8k filed july 23 1998 19 incorporated reference companys quarterly report form 10q november 17 1998 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc donald r sellers donald r sellers chief executive officer date march 31 1999 power attorney know persons presents person whose signature appears constitutes appoints donald r sellers shawn k singh attorneysinfact agents power substitution resubstitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated schedule ii valuation qualifying accounts sciclone pharmaceuticals inc 1 transfer general reserve 2 adjustment reserve index exhibits confidential treatment requested management compensatory plan arrangement 1 incorporated reference companys registration statement form sl 3345446 declared effective commission march 17 1992 2 incorporated reference companys registration statement form s8 3366832 filed commission august 3 1993 3 incorporated reference companys annual report form 10k year ended december 31 1992 4 incorporated reference companys quarterly report form 10q quarter ended september 30 1993 5 incorporated reference companys report form 8k dated august 19 1994 6 incorporated reference companys quarterly report form 10q quarter ended september 30 1994 7 incorporated reference companys annual report form 10k year ended december 31 1994 8 incorporated reference companys registration statement form s8 3380911 filed commission december 28 1995 9 incorporated reference companys annual report form 10k year ended december 31 1995 10 incorporated reference companys quarterly report form 10q quarter ended march 31 1996 11 incorporated reference companys quarterly report form 10q quarter ended june 30 1996 12 incorporated reference companys quarterly report form 10q quarter ended september 30 1996 13 incorporated reference companys annual report form 10k year ended december 31 1996 14 incorporated reference companys current report form 8k filed october 14 1997 15 incorporated reference companys current report form 8k filed january 26 1998 16 incorporated reference companys amendment 3 registration statement form s3 33338773 filed commission december 2 1997 17 incorporated reference companys annual report form 10k year ended december 31 1998 18 incorporated reference companys current report form 8k filed july 23 1998 19 incorporated reference companys quarterly report form 10q november 17 1998item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements following financial statements company contained pages 30 47 report form 10k consolidated balance sheets december 31 1999 1998 consolidated statements operations three years ended december 31 1999 1998 1997 consolidated statement shareholders equity three years ended december 31 1999 1998 1997 consolidated statements cash flows three years ended december 31 1999 1998 1997 notes consolidated financial statements report ernst young llp independent auditors 2 financial statement schedules following schedule filed part report schedule ii valuation qualifying accounts three years ended december 31 1999 1998 1997 schedules omitted either inapplicable required information given consolidated financial statements notes hereto 3 exhibits refer item 14c b reports form 8k none c exhibits yet revised exhibits numbered accordance item 601 regulation sk confidential treatment requested management compensatory plan arrangement 1 incorporated reference companys registration statement form sl 3345446 declared effective commission march 17 1992 2 incorporated reference companys registration statement form s8 3366832 filed commission august 3 1993 3 incorporated reference companys annual report form 10k year ended december 31 1992 4 incorporated reference companys quarterly report form 10q quarter ended september 30 1993 5 incorporated reference companys report form 8k dated august 19 1994 6 incorporated reference companys quarterly report form 10q quarter ended september 30 1994 7 incorporated reference companys annual report form 10k year ended december 31 1994 8 incorporated reference companys registration statement form s8 3380911 filed commission december 28 1995 9 incorporated reference companys annual report form 10k year ended december 31 1995 10 incorporated reference companys quarterly report form 10q quarter ended march 31 1996 11 incorporated reference companys quarterly report form 10q quarter ended june 30 1996 12 incorporated reference companys quarterly report form 10q quarter ended september 30 1996 13 incorporated reference companys annual report form 10k year ended december 31 1996 14 incorporated reference companys current report form 8k filed october 14 1997 15 incorporated reference companys current report form 8k filed january 26 1998 16 incorporated reference companys amendment 3 registration statement form s3 33338773 filed commission december 2 1997 17 incorporated reference companys annual report form 10k year ended december 31 1998 18 incorporated reference companys current report form 8k filed july 23 1998 19 incorporated reference companys quarterly report form 10q november 17 1998 20 incorporated reference companys annual report form 10k year ended december 31 1998 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc donald r sellers donald r sellers president chief executive officer date march 30 2000 power attorney know persons presents person whose signature appears constitutes appoints donald r sellers shawn k singh attorneysinfact agents power substitution resubstitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated schedule ii valuation qualifying accounts sciclone pharmaceuticals inc 1 transfer general reserve 2 adjustment reserve index exhibits confidential treatment requested management compensatory plan arrangement 1 incorporated reference companys registration statement form sl 3345446 declared effective commission march 17 1992 2 incorporated reference companys registration statement form s8 3366832 filed commission august 3 1993 3 incorporated reference companys annual report form 10k year ended december 31 1992 4 incorporated reference companys quarterly report form 10q quarter ended september 30 1993 5 incorporated reference companys report form 8k dated august 19 1994 6 incorporated reference companys quarterly report form 10q quarter ended september 30 1994 7 incorporated reference companys annual report form 10k year ended december 31 1994 8 incorporated reference companys registration statement form s8 3380911 filed commission december 28 1995 9 incorporated reference companys annual report form 10k year ended december 31 1995 10 incorporated reference companys quarterly report form 10q quarter ended march 31 1996 11 incorporated reference companys quarterly report form 10q quarter ended june 30 1996 12 incorporated reference companys quarterly report form 10q quarter ended september 30 1996 13 incorporated reference companys annual report form 10k year ended december 31 1996 14 incorporated reference companys current report form 8k filed october 14 1997 15 incorporated reference companys current report form 8k filed january 26 1998 16 incorporated reference companys amendment 3 registration statement form s3 33338773 filed commission december 2 1997 17 incorporated reference companys annual report form 10k year ended december 31 1998 18 incorporated reference companys current report form 8k filed july 23 1998 19 incorporated reference companys quarterly report form 10q november 17 1998 20 incorporated reference companys annual report form 10k year ended december 31 1998item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements following financial statements company contained pages 33 53 report form 10k report ernst young llp independent auditors consolidated balance sheets december 31 2001 2000 consolidated statements operations three years period ended december 31 2001 consolidated statement shareholders equity three years period ended december 31 2001 consolidated statements cash flows three years period ended december 31 2001 notes consolidated financial statements 2 financial statement schedules following schedule filed part report schedule ii valuation qualifying accounts three years period ended december 31 2001 schedules omitted either inapplicable required information given consolidated financial statements notes hereto 3 exhibits refer item 14c b reports form 8k none c exhibits numbered accordance item 601 regulation sk certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 200 80b4 20083 23046 management compensatory plan arrangement 1 incorporated reference companys registration statement form sl 3345446 declared effective commission march 17 1992 2 incorporated reference companys registration statement form s8 3366832 filed commission august 3 1993 7 incorporated reference companys annual report form 10k year ended december 31 1994 8 incorporated reference companys registration statement form s8 3380911 filed commission december 28 1995 9 incorporated reference companys annual report form 10k year ended december 31 1995 10 incorporated reference companys quarterly report form 10q quarter ended march 31 1996 11 incorporated reference companys quarterly report form 10q quarter ended june 30 1996 14 incorporated reference companys current report form 8k filed october 14 1997 15 incorporated reference companys current report form 8k filed january 26 1998 16 incorporated reference companys form 8k filed april 20 2000 17 incorporated reference companys annual report form 10k year ended december 31 1998 18 incorporated reference companys current report form 8k filed july 23 1998 19 incorporated reference companys quarterly report form 10q november 17 1998 20 incorporated reference companys annual report form 10k year ended december 31 1997 21 incorporated reference companys annual report form 10k year ended december 31 2000 22 incorporated reference companys quarterly report form 10q may 15 2001 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc donald r sellers donald r sellers president chief executive officer date march 22 2002 power attorney know persons presents person whose signature appears constitutes appoints donald r sellers richard waldron attorneysinfact agents power substitution resubstitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated schedule ii valuation qualifying accounts sciclone pharmaceuticals inc index exhibits certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 200 80b4 20083 23046 management compensatory plan arrangement 1 incorporated reference companys registration statement form sl 3345446 declared effective commission march 17 1992 2 incorporated reference companys registration statement form s8 3366832 filed commission august 3 1993 7 incorporated reference companys annual report form 10k year ended december 31 1994 8 incorporated reference companys registration statement form s8 3380911 filed commission december 28 1995 9 incorporated reference companys annual report form 10k year ended december 31 1995 10 incorporated reference companys quarterly report form 10q quarter ended march 31 1996 11 incorporated reference companys quarterly report form 10q quarter ended june 30 1996 14 incorporated reference companys current report form 8k filed october 14 1997 15 incorporated reference companys current report form 8k filed january 26 1998 16 incorporated reference companys form 8k filed april 20 2000 17 incorporated reference companys annual report form 10k year ended december 31 1998 18 incorporated reference companys current report form 8k filed july 23 1998 19 incorporated reference companys quarterly report form 10q november 17 1998 20 incorporated reference companys annual report form 10k year ended december 31 1997 21 incorporated reference companys annual report form 10k year ended december 31 2000 22 incorporated reference companys quarterly report form 10q may 15 2001item 14 controls procedures maintain disclosure controls procedures designed ensure information required disclosed filings securities exchange act 1934 recorded processed summarized reported within time periods specified securities exchange commission’s rules forms information accumulated communicated management including chief executive officer chief financial officer appropriate allow timely decisions regarding required disclosure chief executive officer chief financial officer assistance members management evaluated disclosure controls procedures defined rule 13a14c securities exchange act 1934 within 90 days filing date report concluded based evaluation disclosure controls procedures effective since date evaluation significant changes including corrective actions regard significant deficiencies material weaknesses internal controls factors could significantly affect controls item 15item 14 principal accountant fees services information required item incorporated reference proxy statement caption “ratification appointment independent auditors principal accountant fees” part iv item 15item 14 principal accountant fees services information required item incorporated reference proxy statement caption ratification appointment independent auditors principal accountant fees part iv item 15item 14 principal accountant fees services information required item 14 incorporated reference proxy statement caption “ratification appointment independent auditors principal accountant fees” part iv item 15item 14 principal accountant fees services information required item 14 incorporated reference proxy statement caption “ratification appointment independent auditors principal accountant fees” part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference proxy statement caption “ratification appointment independent auditors principal accountant fees” part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference proxy statement caption “proposal 2 ratification appointment independent registered public accounting firm principal accountant fees” part iv item 15item 14 principal accounting fees services information required item 14 incorporated reference proxy statement caption “proposal 2 ratification appointment independent registered public accounting firm principal accountant fees” part iv item 15item 14 principal accountant fees services information required item 14 incorporated reference proxy statement caption “proposal 3 ratification appointment independent registered public accounting firm principal accountant fees” part iv item 15item 14 principal accountant fees services information required item 14 incorporated reference proxy statement caption “proposal 3 ratification appointment independent registered public accounting firm principal accountant fees” part iv item 15item 14principal accountant fees services information required item 14 incorporated reference proxy statement caption “proposal 3 ratification appointment independent registered public accounting firm principal accountant fees” part iv item 15item 14principal accountant fees services information required item 14 incorporated reference proxy statement caption “proposal 4 ratification appointment independent registered public accounting firm principal accountant fees” part iv item 15item 14principal accountant fees services information required item included proxy statement caption “appointment independent registered public accounting firm principal accountant fees” incorporated herein reference ﻿ ﻿ part iv item 15item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements following financial statements company contained pages 2641 report form 10k consolidated balance sheets december 31 1997 1996 consolidated statements operations three years ended december 31 1997 1996 1995 consolidated statement shareholders equity three years ended december 31 1997 1996 1995 consolidated statements cash flows three years ended december 31 1997 1996 1995 notes consolidated financial statements report ernst young llp independent auditors 2 financial statement schedules following schedule filed part report schedule ii valuation qualifying accounts three years ended december 31 1997 1996 1995 schedules omitted either inapplicable required information given consolidated financial statements notes hereto 3 exhibits refer item 14c b reports form 8k form 8k filed january 26 1998 announcing execution alpha rights acquisition agreement c exhibits numbered accordance item 601 regulation sk confidential treatment requested management compensatory plan arrangement 1 incorporated reference companys registration statement form sl 3345446 declared effective commission march 17 1992 2 incorporated reference companys registration statement form s8 3366832 filed commission august 3 1993 3 incorporated reference companys annual report form 10k year ended december 31 1992 4 incorporated reference companys quarterly report form 10q quarter ended september 30 1993 5 incorporated reference companys report form 8k dated august 19 1994 6 incorporated reference companys quarterly report form 10q quarter ended september 30 1994 7 incorporated reference companys annual report form 10k year ended december 31 1994 8 incorporated reference companys registration statement form s8 3380911 filed commission december 28 1995 9 incorporated reference companys annual report form 10k year ended december 31 1995 10 incorporated reference companys quarterly report form 10q quarter ended march 31 1996 11 incorporated reference companys quarterly report form 10q quarter ended june 30 1996 12 incorporated reference companys quarterly report form 10q quarter ended september 30 1996 13 incorporated reference companys annual report form 10k year ended december 31 1996 14 incorporated reference companys current report form 8k filed october 14 1997 15 incorporated reference companys current report form 8k filed january 26 1998 16 incorporated reference companys amendment 3 registration statement form s3 33338773 filed commission december 2 1997 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc donald r sellers donald r sellers date april 2 1998 chief executive officer power attorney know persons presents person whose signature appears constitutes appoints donald r sellers shawn k singh attorneysinfact agents power substitution resubstitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated schedule ii valuation qualifying accounts sciclone pharmaceuticals inc 1 transfer general reserve 2 adjustment reserve index exhibits confidential treatment requested management compensatory plan arrangement 1 incorporated reference companys registration statement form sl 3345446 declared effective commission march 17 1992 2 incorporated reference companys registration statement form s8 3366832 filed commission august 3 1993 3 incorporated reference companys annual report form 10k year ended december 31 1992 4 incorporated reference companys quarterly report form 10q quarter ended september 30 1993 5 incorporated reference companys report form 8k dated august 19 1994 6 incorporated reference companys quarterly report form 10q quarter ended september 30 1994 7 incorporated reference companys annual report form 10k year ended december 31 1994 8 incorporated reference companys registration statement form s8 3380911 filed commission december 28 1995 9 incorporated reference companys annual report form 10k year ended december 31 1995 10 incorporated reference companys quarterly report form 10q quarter ended march 31 1996 11 incorporated reference companys quarterly report form 10q quarter ended june 30 1996 12 incorporated reference companys quarterly report form 10q quarter ended september 30 1996 13 incorporated reference companys annual report form 10k year ended december 31 1996 14 incorporated reference companys current report form 8k filed october 14 1997 15 incorporated reference companys current report form 8k filed january 26 1998 16 incorporated reference companys amendment 3 registration statement form s3 33338773 filed commission december 2 1997item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements following financial statements company contained pages 35 53 report form 10k report ernst young llp independent auditors consolidated balance sheets december 31 2000 1999 consolidated statements operations three years ended december 31 2000 1999 1998 consolidated statement shareholders equity three years ended december 31 2000 1999 1998 consolidated statements cash flows three years ended december 31 2000 1999 1998 notes consolidated financial statements 2 financial statement schedules following schedule filed part report schedule ii valuation qualifying accounts three years ended december 31 2000 1999 1998 schedules omitted either inapplicable required information given consolidated financial statements notes hereto 3 exhibits refer item 14c b reports form 8k none c exhibits numbered accordance item 601 regulation sk certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 200 80b4 20083 23046 management compensatory plan arrangement 1 incorporated reference companys registration statement form sl 3345446 declared effective commission march 17 1992 2 incorporated reference companys registration statement form s8 3366832 filed commission august 3 1993 7 incorporated reference companys annual report form 10k year ended december 31 1994 8 incorporated reference companys registration statement form s8 3380911 filed commission december 28 1995 9 incorporated reference companys annual report form 10k year ended december 31 1995 10 incorporated reference companys quarterly report form 10q quarter ended march 31 1996 11 incorporated reference companys quarterly report form 10q quarter ended june 30 1996 14 incorporated reference companys current report form 8k filed october 14 1997 15 incorporated reference companys current report form 8k filed january 26 1998 16 incorporated reference companys form 8k filed april 20 2000 17 incorporated reference companys annual report form 10k year ended december 31 1998 18 incorporated reference companys current report form 8k filed july 23 1998 19 incorporated reference companys quarterly report form 10q november 17 1998 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc donald r sellers donald r sellers president chief executive officer date march 29 2001 power attorney know persons presents person whose signature appears constitutes appoints donald r sellers richard waldron attorneysinfact agents power substitution resubstitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated schedule ii valuation qualifying accounts sciclone pharmaceuticals inc index exhibits certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 200 80b4 20083 23046 management compensatory plan arrangement 1 incorporated reference companys registration statement form sl 3345446 declared effective commission march 17 1992 2 incorporated reference companys registration statement form s8 3366832 filed commission august 3 1993 7 incorporated reference companys annual report form 10k year ended december 31 1994 8 incorporated reference companys registration statement form s8 3380911 filed commission december 28 1995 9 incorporated reference companys annual report form 10k year ended december 31 1995 10 incorporated reference companys quarterly report form 10q quarter ended march 31 1996 11 incorporated reference companys quarterly report form 10q quarter ended june 30 1996 14 incorporated reference companys current report form 8k filed october 14 1997 15 incorporated reference companys current report form 8k filed january 26 1998 16 incorporated reference companys form 8k filed april 20 2000 17 incorporated reference companys annual report form 10k year ended december 31 1998 18 incorporated reference companys current report form 8k filed july 23 1998 19 incorporated reference companys quarterly report form 10q november 17 1998item 14 principal accounting fees services information required item 14 incorporated reference proxy statement caption “ratification appointment independent auditors principal accountant fees” part iv item 15item 14 principal accountant fees services information required item 14 incorporated reference proxy statement caption “proposal 4 ratification appointment independent registered public accounting firm principal accountant fees” part iv item 15 item 7 managements discussion analysis financial condition results operations company international biopharmaceutical company involved acquisition development commercialization pharmaceuticals worldwide company focuses specialist oriented products address significantly unmet chronic lifethreatening diseases company concentrates infectious diseases hepatitis b c cancer immune system disorders cystic fibrosis currently company acquired two drugs development commercialization zadaxinr thymosin alpha 1 hepatitis b c cancer immune system disorders cpx cystic fibrosis date companys principal focus development commercialization zadaxin commencement operations december 31 1996 company incurred cumulative net loss approximately 714 million company expects operating expenses increase next several years expands research development clinical testing marketing capabilities companys ability achieve profitable operations primarily dependent securing regulatory approvals zadaxin additional countries successfully launching zadaxin approved meeting increased demand zadaxin arises addition factors may also impact companys ability achieve profitable level operations successful development cpx acquiring rights additional drugs entering extending agreements product development commercialization appropriate assurance company able attain objectives company ever achieve profitable level operations companys operating results may fluctuate period result among things timing costs associated clinical trials regulatory approval process acquisition additional product rights company participates highly dynamic industry often results significant volatility companys common stock price setbacks clinical trials regulatory approval process relationships collaborative partners shortfalls revenue earnings levels expected securities analysts among developments past could future immediate significant adverse effect trading price companys common stock given period results operations product sales approximately 703000 273000 years ended december 31 1996 1995 respectively product sales 1994 currently company received approval market zadaxin china philippines singapore addition company filed approval market zadaxin several countries anticipates additional filings countries result company expects product sales increase 1997 beyond upon commencement commercial launch zadaxin existing approved markets additional markets regulatory approvals secured level product sales increase dependent upon additional zadaxin marketing approvals successfully launching zadaxin although company remains optimistic regarding prospects zadaxin assurance company achieve significant levels product sales cost product sales approximately 740000 737000 years ended december 31 1996 1995 respectively cost product sales 1994 cost product sales 1996 1995 primarily consists fixed costs associated acquiring warehousing inventory lesser extent direct product cost company expects cost product sales vary quarter dependent upon level product sales absorption fixed productrelated costs research development expenses approximately 9904000 10386000 12752000 years ended december 31 1996 1995 1994 respectively year ended december 31 1996 decrease research development expenses compared 1995 primarily attributable decreases regulatory expenses costs associated decreased zadaxin clinical trials essentially due completion zadaxin taiwan phase iii hepatitis b trial first half 1996 offset increased preclinical development expenses associated cpx april 1996 company acquired exclusive license cpx synthetic compound developed national institutes health potential treatment cystic fibrosis company incurred additional preclinical development expenses initiate clinical development compound year ended december 31 1995 decrease research development expenses compared 1994 primarily attributable onetime special charge 3470000 related companys acquisition us european thymosin alpha 1 rights agreement alpha 1 biomedicals inc alpha 1 1994 1995 decrease offset increased professional service expenses primarily consulting fees associated zadaxin development activities us europe company currently finalizing us european zadaxin clinical trial strategy results review significant effect companys research development expenses future addition company plans initiate clinical trials cpx 1997 impact research development expenses general company expects research development expenses increase next several years vary quarter company pursues strategy initiating additional clinical trials testing acquiring product rights expanding regulatory activities marketing expenses approximately 4240000 4323000 4375000 years ended december 31 1996 1995 1994 respectively decrease 1996 compared 1995 primarily attributable decreased payroll costs related executive officer left company 1995 offset increased professional services primarily consulting services expenses regarding preparations launch zadaxin approved markets early 1997 decrease 1995 compared 1994 primarily attributable decreased professional services related zadaxin marketing activities materials offset increased personnel costs primarily associated severance costs related executive officer left company 1995 company expects marketing expenses increase significantly next several quarters years anticipates expanding commercialization marketing efforts pursuing strategic relationships general administrative expenses approximately 3183000 2904000 3811000 years ended december 31 1996 1995 1994 respectively increase 1996 compared 1995 primarily attributable increased payroll costs offset decreased expenses professional services primarily legal services consulting fees decrease 1995 1994 primarily attributable decreased professional service expenses primarily legal services associated 1994 securities class action lawsuit companys 1994 legal proceedings alpha 1 legal proceedings completed early 1995 late 1994 respectively near term company expects general administrative expenses vary quarter company augments general administrative activities support increased expenditures clinical trials testing regulatory precommercialization marketing activities net interest investment income approximately 2618000 3302000 3057000 years ended december 31 1996 1995 1994 respectively decrease 1996 compared 1995 resulted decreased interest investment income due lower average invested cash balances increase 1995 compared 1994 resulted overall increased interest rates 1995 gains sale certain shortterm investments offset lower average invested cash balances compared 1994 liquidity capital resources prior companys initial public offering companys principal sources funds equity debt private placements salary deferrals officers funds advanced officers march 1992 company completed initial public offering 3450000 shares common stock 3450000 redeemable warrants purchase common stock receiving net proceeds approximately 21774000 august 1993 company received approximately 38100000 net proceeds exercise substantially companys 4258231 outstanding redeemable warrants company called redemption july 1993 january 1994 company completed public offering 2000000 shares common stock receiving net proceeds approximately 43600000 december 31 1996 1995 company approximately 35106000 47390000 respectively cash equivalents marketable securities marketable securities consist primarily highly liquid shortterm longterm investments net cash used company operating activities amounted approximately 14641000 17098000 12909000 years ended december 31 1996 1995 1994 respectively net cash used operating activities year ended december 31 1996 less companys net loss period primarily due noncash charges associated depreciation furniture equipment amortization deferred compensation addition increases amounts owed third parties goods services amounts partially offset cash used inventory purchases increases prepayments certain future period expenses payments amounts owed third parties related clinical trial expenses compensation benefits net cash used operating activities year ended december 31 1995 greater companys net loss period primarily due cash used inventory purchases prepayment certain future period expenses increases accounts receivable cash uses partially offset increases amounts owed third parties goods services related clinical trial expenses addition noncash charges associated depreciation amortization net cash used operating activities year ended december 31 1994 less companys net loss period primarily due noncash charges associated depreciation furniture equipment amortization deferred compensation acquisition inprocess technology addition increases amounts owed third parties clinical trials compensation benefits goods services amounts partially offset increases payments accrued professional fees net cash provided investing activities year ended december 31 1996 primarily related net sale approximately 12319000 marketable securities offset purchase approximately 94000 equipment furniture net cash provided investing activities year ended december 31 1995 primarily related net sale approximately 14729000 marketable securities offset purchase approximately 204000 equipment furniture net cash used investing activities year ended december 31 1994 primarily related net purchase approximately 18957000 marketable securities purchase approximately 113000 equipment furniture net cash provided financing activities year ended december 31 1996 related approximately 3731000 proceeds received issuance common stock companys stock option plan offset approximately 659000 related companys repurchase common stock net cash used financing activities year ended december 31 1995 related companys repurchase approximately 1925000 common stock offset approximately 192000 proceeds received issuance common stock companys stock option plan net cash provided financing activities year ended december 31 1994 related approximately 44731000 net proceeds received sale common stock public offering proceeds received issuance common stock companys stock option plan offset companys repurchase approximately 7798000 common stock management believes existing capital resources interest funds available adequate maintain current planned operations least 1998 however companys capital requirements may change depending upon numerous factors including level zadaxin product sales availability complementary products technologies businesses results clinical trials testing timing regulatory approvals developments relationships collaborative partners status competitive products company cannot eventually generate sufficient funds operations need raise additional financing assurance financing available acceptable terms october 1995 financial accounting standards board issued statement financial accounting standards 123 sfas 123 accounting stockbased compensation permitted sfas 123 company accounts stock option employee stock purchase plans provisions accounting principles board opinion 25 apb 25 related interpretations accordingly company recognize compensation expense accounting stock option stock purchase plans awards exercise price equal fair value companys common stock date grant factors may affect future results material contained herein contains certain forwardlooking statements including statements regarding application zadaxin disease areas beyond hepatitis b potential regulatory approvals zadaxin launching zadaxin additional markets companys expectations regarding increases revenues zadaxin increases marketing research development expense levels statements subject certain risks uncertainties risks uncertainties include companys reliance single product zadaxinr thymosin alpha 1 revenues absence regulatory approval zadaxin significant markets expensive time consuming uncertain regulatory approval process risks associated manufacture supply zadaxin competition competing therapies uncertainties regarding outcome companys efforts commercialize additional products well risks uncertainties described herein companys reports filed securities exchange commission item 8item 7 managements discussion analysis financial condition results operations company global biopharmaceutical company acquires develops commercializes specialistoriented proprietary drugs treating chronic lifethreatening diseases hepatitis b hepatitis c cancer immune system disorders cystic fibrosis currently company two drugs clinical development zadaxin hepatitis b hepatitis c cancer immune system disorders cpx cystic fibrosis company also drug candidates preclinical development date companys principal focus development commercialization zadaxin development cpx commencement operations december 31 1998 company incurred cumulative net loss approximately 1096 million company expects sales gross margin operating expenses increase next several years expands sales research development clinical testing marketing capabilities companys ability achieve profitable operations primarily dependent obtaining additional financing support operations longterm product development commercialization programs increasing zadaxin sales approved markets securing regulatory approvals zadaxin additional countries successfully launching zadaxin approved countries addition factors may also impact companys ability achieve profitable level operations spending associated successful development cpx acquiring rights additional drugs entering extending agreements product development commercialization appropriate companys operating results may fluctuate period result among things market acceptance zadaxin timing costs associated preclinical clinical development companys products regulatory approval process acquisition additional product rights setbacks launch sale distribution zadaxin preclinical clinical development companys products particularly cpx regulatory approval process relationships collaborative partners shortfalls revenue earnings levels expected securities analysts among developments past could future immediate significant adverse effect trading price companys common stock given period results operations product sales 3625000 2223000 703000 years ended december 31 1998 1997 1996 respectively sales 1996 largely fourth quarter sales peoples republic china establish importation duty rates internal distribution patterns 1997 sales relatively flat quarters four geographic regions peoples republic china northern central southern guangzhou area established 1998 unit us dollar sales grew average 25 quarter awareness use zadaxin expanded currently company received approval market zadaxin argentina cambodia italy kuwait mexico myanmar peoples republic china pakistan peru philippines singapore venezuela vietnam peoples republic china like japan certain asian markets uses tiered method import distribute products distributors make sales country product imported licensed importers 1997 company sold one principal importeragent resold four distributors inside peoples republic china reflecting expansion stability companys sales peoples republic china 1998 company began working extensively second importing agent addition agent used 1997 enabled expansion sales four distributors year ended december 31 1998 four distributors china accounted 84 companys product sales addition company filed approval market zadaxin 19 additional countries anticipates additional filings countries company expects product sales increase existing approved markets 1999 beyond upon commencement commercial launch zadaxin additional markets regulatory approvals secured level product sales increase dependent upon increased zadaxin market penetration companys existing approved markets additional zadaxin marketing approvals successful launch zadaxin new markets although company remains optimistic regarding prospects zadaxin assurance company ever achieve significant levels product sales company receive additional zadaxin market approvals cost product sales 1036000 990000 740000 years ended december 31 1998 1997 1996 respectively increase attributable increased product sales company expects cost product sales vary quarter depending upon level product sales absorption fixed productrelated costs charges associated excess expiring finished product research development expenses 9293000 8642000 9904000 years ended december 31 1998 1997 1996 respectively year ended december 31 1998 increase research development expenses compared 1997 due increased clinical trial expenses additional pilot clinical studies expand use zadaxin overseas markets started 1998 clinical trial expenses 1998 also increased due clinical trial expenses japan additional clinical trial expenses clinical development cpx initiation continuation programs company continue significant effect companys research development expenses future require company seek additional capital resources immediate future year ended december 31 1997 decrease research development expenses compared 1996 primarily attributable decreases regulatory expenses costs associated decreased zadaxin clinical trials essentially due completion companys zadaxin phase 3 hepatitis b taiwan first half 1996 offset increased preclinical development expenses associated cpx general company expects product research development expenses increase next several years vary quarter company pursues strategy initiating additional clinical trials testing entering one corporate partnering arrangements acquiring product rights expanding regulatory activities marketing expenses 5391000 4145000 4240000 years ended december 31 1998 1997 1996 respectively increase 1998 1997 reflected increases activities related expanding distribution marketing efforts around world addition increased professional services related 1998 sales increase slight reduction expenses 1997 compared 1996 largely related preparatory marketing expenses 1996 beneficial throughout 1997 company expects marketing expenses increase significantly next several quarters years anticipates expanding commercialization marketing efforts pursuing strategic relationships general administrative expenses 3714000 3662000 3183000 years ended december 31 1998 1997 1996 respectively increase 1997 compared 1996 primarily due increased general office expenses associated increased rent office relocation expenses investment banking fees professional services primarily legal accounting fees associated companys adoption shareholder rights plan proposed public offering near term company expects general administrative expenses vary quarter company augments general administrative activities resources support increased expenditures clinical trials testing regulatory precommercialization marketing activities july 23 1997 company loaned thomas e moore former chairmanceo 5944000 exchange promise repay loan demand pledge 1882500 shares sciclone common stock owned mr moore collateral loan 1998 determined value collateral underlying loan made mr moore temporarily impaired writedown book value note would required upon investigation relative collectibility demand note determined entire 5944 million plus accumulated interest approximately 689000 substantial doubt result determination company elected write entire remaining book value noncash charge earnings fourth quarter 1988 cancel 1882500 shares held collateral new agreement mr moore received credit total indebtedness approximately 6633 million credit calculated value mr moores 1882500 shares sciclone common stock cancelled company based greater two stock prices first stock price calculated average 5day closing stock price closing agreement second stock price calculated average 5day closing stock price september 30 1999 calculating applying appropriate credit balance remaining debt paid five installments according schedule beginning october 1 1999 20000 increasing factor 4 six month anniversary thereafter final payment due later october 1 2001 event higher 5day average stock price exceeds amount indebtedness excess remitted mr moore cash stock companys sole discretion stock number shares exceed 1882500 shares see note 8 shareholders equity notes consolidated financials noncash charge earnings recorded april 1998 3143000 representing deemed dividend associated issuance series c preferred stock net interest investment income approximately 582000 1219000 2618000 years ended december 31 1998 1997 1996 respectively decrease 1998 compared 1997 compared 1996 resulted lower average invested cash balances liquidity capital resources april 1998 company received approximately 4000000 deducting expenses sale 661157 shares series c preferred stock private placement december 31 1998 58356 shares series c preferred stock converted 3168404 shares common stock january 1999 46922 remaining 58356 shares series c preferred stock converted 299483 shares common stock 11434 remaining shares series c preferred stock redeemed conversion price approximately 095 per common share result outstanding shares series c preferred stock march 1998 company also received approximately 754000 one executive officers partial payment outstanding loan see note 1 notes receivable officers november 1998 company settled note former executive officer accepting payment approximately 950000 cash offsetting approximately 181000 retained salary housing allowance accruals debt december 31 1998 1997 1996 company 5410000 12901000 35106000 respectively cash equivalents marketable securities marketable securities consist primarily highly liquid shortterm longterm investments net cash used company operating activities amounted 13353000 14056000 14641000 years ended december 31 1998 1997 1996 respectively net cash used operating activities year ended december 31 1998 less net loss primarily due increases clinical trial expense accruals primarily japan inventory decreases deemed dividend connection issuance companys series c preferred stock impairment note receivable former officer amounts partially offset increases prepaid expense primarily product marketing rights acquired us europe net cash used operating activities year ended december 31 1997 greater companys net loss period primarily due increases accounts receivable associated sales companys launch zadaxin approved markets increases payments third parties goods services employees compensation benefits amounts partially offset noncash charges associated depreciation amortization decreases prepayments certain future expenses increases amounts owed third parties clinical trials net cash used operating activities year ended december 31 1996 less companys net loss period primarily due noncash charges associated depreciation furniture equipment amortization deferred compensation addition increases amounts owed third parties goods services amounts partially offset cash used inventory purchases increases prepayments certain future period expenses payments amounts owed third parties related clinical trial expenses compensation benefits net cash provided investing activities year ended december 31 1998 primarily related net sale 7388000 marketable securities offset purchase approximately 99000 equipment furniture net cash provided investing activities year ended december 31 1997 primarily related net sale 21335000 marketable securities offset purchase approximately 404000 equipment furniture net cash provided investing activities year ended december 31 1996 primarily related net sale 12319000 marketable securities offset purchase approximately 94000 equipment furniture net cash provided financing activities year ended december 31 1998 consisted 6342000 proceeds approximately 3931000 related companys sale issuance 661157 shares series c preferred stock approximately 529000 related issuance common stock approximately 1882000 related payment notes receivable former current officers net cash used financing activities year ended december 31 1997 consisted 4267000 related companys repurchase common stock companys approved stock repurchase plan amounts loaned mr moore referred 5944000 offset 2313000 proceeds received issuance common stock exercise outstanding warrants issuance common stock companys stock option plan employee stock purchase plan net cash provided financing activities year ended december 31 1996 related 3731000 proceeds received issuance common stock companys stock option plan offset approximately 659000 related companys repurchase common stock report independent auditors companys financial statements contains explanatory paragraph indicating companys historical operating losses lack sufficient significant revenues product sales raises substantial doubt companys ability continue going concern without additional financing significant reduction operation expenses sales growth beyond managements expectations combination thereof management believes existing capital resources interest funds available adequate maintain current planned operations june 1999 support operations beyond june 1999 company need raise additional financing near term company pursuing additional financings including private placement common stock common stock warrants use equity line see note 8 consolidated financial statements bank debt financing corporate partnering develop zadaxin us europe company plans conclude one additional financings next two six months although assurance given financing occur time frame expected company terms favorable company companys capital requirements may change depending upon numerous factors including level zadaxin product sales availability complementary products technologies businesses initiation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative partners status competitive products impact year 2000 true companies year 2000 computer issue could create risk company systems correctly recognize date information year changes 2000 could adverse impact companys operations risk company exists following areas systems used company run business systems used companys vendors company currently evaluating exposure areas company reviewed current systems evaluating whether appropriate replace upgrade systems known year 2000 noncompliant areas identified year 2000 noncompliant cost upgrade replace expected material companys operating results company process contacting critical vendors determine vendors operations products services provide year 2000 compliant varying degrees company dependent upon large number third parties provide information goods services company include financial institutions suppliers vendors research partners governmental entities significant numbers third parties experience failures computer systems equipment due year 2000 noncompliance could affect companys ability process transactions manufacture products engage similar normal business activities risks outside control company instituted programs including internal records review use external questionnaires identify key third parties assess level year 2000 compliance update contracts address noncompliance issues total costs related year 2000 compliance cannot known precisely time expected material companys financial position results operations cash flows risk factors dependence zadaxinr cpx companys principal drug development efforts currently focused primarily zadaxin cpx clinical trials zadaxin sponsored company andor parties currently progress planned favorable results trials necessary gain regulatory approval major pharmaceutical markets sales zadaxin commenced 1997 zadaxin approved commercial sale 13 countries assurance given zadaxin approvals obtained additional countries treatment additional indications cancer timely fashion companys launch zadaxin peoples republic china philippines singapore first commercial introduction zadaxin company assurance given continued commercialization zadaxin prove successful company yet launched zadaxin argentina cambodia italy kuwait mexico myanmar pakistan peru vietnam assurance given future launches zadaxin prove successful countries additional countries future sales zadaxin depend market acceptance successful distribution particular although peoples republic china highest hepatitis b prevalence world low average income poorly developed distribution infrastructure present ongoing challenges successful commercialization zadaxin market company currently relies zadaxin sole source revenue failure demonstrate drugs efficacy future clinical trials obtain additional marketing approvals commercialize drug successfully would material adverse effect company may experience delays encounter difficulties clinical trials cpx drug phase 2 clinical development treatment cystic fibrosis cf addition assurance clinical trial provide statistically significant evidence efficacy cpx treating cf failure demonstrate safety efficacy cpx cf clinical trial obtain regulatory approval cpx cf successfully commercialize cpx could material adverse effect company history significant revenues continuing operating losses company recently generated revenues commercialization lead product zadaxin substantial uncertainty regarding timing amount future revenues whether future revenues material company cannot predict marketing approvals cpx obtained additional marketing approvals zadaxin obtained even approvals obtained assurance zadaxin cpx commercialized successfully company experienced significant operating losses since inception substantial accumulated deficit sales increase next several years company expects operating expenses also increase next several years expands development clinical testing marketing capabilities companys ability achieve profitable level operations dependent large part obtaining additional financing support operations longterm product development commercialization efforts successful expansion market zadaxin asia latin america middle east obtaining additional regulatory approvals zadaxin andor future products entering corporate partnering arrangement development us europe combination therapy hepatitis c including zadaxin plus interferon entering agreements product development commercialization appropriate continuing expand development successful marketing assurance company ever achieve profitable level operations future capital needs uncertainty additional financing since inception company financed operations primarily sales equity securities however company need obtain substantial additional financing june 1999 support operations longterm product development commercialization programs without additional financing management believes existing capital resources interest funds available adequate maintain current planned operations june 1999 company exploring corporate partnering private placement equity securities sale equity securities equity line opportunities including debt instruments increase capital resources however companys future capital requirements depend many factors including level zadaxin product sales availability complementary products technologies businesses initiation preclinical clinical development expenses opportunities timing cost regulatory approvals patent costs competing technological market developments nature existing future collaborative relationships ability use equity line companys ability establish development sales manufacturing marketing arrangements assurance financing available acceptable terms timely basis equity line company commitments arrangements additional funding may able obtain needed financing draws equity line subject satisfaction certain conditions including registration investors resale shares minimum trading price per share volume limitations number shares issued without shareholder approval limitations number shares companys common stock investor may hold point time unless company investor agree otherwise facility available companys stock trading less 150 per share price decreased 100 pursuant oral agreement parties unavailability timing financing could prevent delay companys longterm product development commercialization programs would require company curtail cease operations compliance nasdaq listing requirements disclosure relating lowpriced stock companys common stock quoted nasdaq national market national market however order continue included national market company must meet certain maintenance criteria maintenance criteria require minimum bid price 100 per share 4000000 net tangible assets total assets less total liabilities goodwill 5000000 market value public float excluding shares held directly indirectly officer director company person holding beneficially 10 companys outstanding shares march 12 1999 closing bid price companys common stock 1969 december 31 1998 company net tangible assets 6992000 failure meet maintenance criteria may result delisting companys common stock national market trading companys common stock would thereafter conducted nonnasdaq overthecounter market companys common stock delisted trading nasdaq investor may find difficult dispose obtain accurate quotation market value companys common stock could severely limit market liquidity common stock limit ability companys stockholders sell common stock secondary market dependence third parties companys strategy contemplates enter various collaborative arrangements entities date company acquired rights zadaxin cpx certain drugs actively pursuing clinical development zadaxin cpx failure license otherwise acquire rights additional drugs would result shortage products development addition company licensed exclusive rights develop market zadaxin japan scheringplough kk scheringplough kk substantial commitment alpha interferon approved therapy hepatitis b hepatitis c japan assurance relationship prove successful company able negotiate additional arrangements future including corporate partnering arrangement development us europe combination therapy hepatitis c including zadaxin plus interferon amount timing resources collaborators devote activities company within control company may affected financial difficulties factors affecting third parties assurance parties perform obligations expected moreover companys ability obtain regulatory approval one country may delayed adversely affected timing regulatory activities approvals one countries particularly company participate regulatory approval process countries foreign sales operations companys financial condition near term highly dependent zadaxin sales foreign jurisdictions sales operations subject inherent risks including difficulties delays obtaining pricing approvals reimbursement difficulties delays obtaining product health registration importation permits unexpected changes regulatory requirements tariffs barriers political instability difficulties staffing managing foreign operations longer payment cycles greater difficulty accounts receivable collection currency fluctuations potential adverse tax consequences certain foreign countries regulate pricing pharmaceuticals regulation may result prices significantly would prevail free market majority companys current sales customers peoples republic china patents proprietary rights us european composition matter patents thymosin alpha 1 expired company future limited composition matter patents thymosin alpha 1 could adversely affect companys proprietary rights however company owns exclusive licenses use andor process patents patent applications us europe japan jurisdictions thymosin alpha 1 cpx us seek protect products competition patent protection means companys success significantly dependent ability obtain patent protection products technologies preserve trade secrets operate without infringing proprietary rights third parties assurance given companys pending patent applications result issuance patents provide competitive advantages invalidated circumvented competitors moreover assurance given patents issued patent applications filed companies would adverse effect companys ability use manufacture market products maintain competitive position respect products numerous patents patent applications relating thymosin alpha 1 held exclusive license breach company terms license could result loss companys rights patents patent applications companies obtaining patents claiming products processes useful company may bring infringement actions company litigation typically costly timeconsuming result company may required obtain licenses others able use manufacture market products licenses may available commercially reasonable terms patent positions biotechnology firms generally highly uncertain involve complex legal factual questions consistent policy emerged regarding validity scope claims biotechnology patents courts issued varying interpretations recent past legal standards concerning validity scope interpretations claims biotechnology patents may continue evolve even issued patents may later modified revoked us patent trademark office european patent office courts proceedings instituted third parties moreover issuance patent one country assure issuance patent similar claims another country claim interpretation infringement laws vary among countries extent patent protection uncertain may vary different countries pharmaceuticals patentable certain countries sciclones zadaxin territory recently become patentable enforcement intellectual property rights many countries territory limited nonexistent future enforcement patents proprietary rights many countries sciclones zadaxin territory expected problematic unpredictable assurance patents issued licensed company provide competitive advantages challenged others assurance given holders patents licensed company file prosecute extend maintain patents countries company rights furthermore assurance others independently develop similar products design around patents issued licensed company see business patents proprietary rights government regulation product approvals research preclinical clinical development manufacturing marketing sales pharmaceuticals including zadaxin cpx companys drug candidates subject extensive regulation governmental authorities products developed company cannot marketed commercially jurisdiction approved process obtaining regulatory approvals lengthy requires expenditure substantial resources countries company contemplates marketing zadaxin regulatory approval process drugs previously approved countries established clinical trial review procedures uncertain uncertainty may result delays granting regulatory approvals company currently sponsoring clinical trials pursuing regulatory approvals zadaxin number countries currently sponsoring clinical trials cpx us assurance company able complete trials completed fulfill regulatory approval criteria company ultimately obtain approvals countries adverse results companys development programs also could result placement restrictions use zadaxin approved cpx failure comply applicable us foreign regulatory requirements among things result warning letters fines suspensions regulatory approvals product recalls seizures operating restrictions injunctions criminal prosecutions additional government regulation may established imposed could prevent delay regulatory approval zadaxin cpx future products company see business government regulation manufacturing company entered contract manufacturing supply agreements source zadaxin cpx successful companys products must manufactured commercial quantities compliance regulatory requirements acceptable cost company believes able future establish maintain manufacturing relationships experienced suppliers capable meeting companys needs assurance company establish maintain long term manufacturing relationships suppliers prove satisfactory company currently vialing packaging supply agreements effect sufficient supply finished zadaxin near term company recently changed upgraded manufacturing source finished zadaxin international markets excluding japan certain countries change may require additional regulatory approvals regulatory approvals manufacturing change required obtained timely fashion new zadaxin marketing approvals may delayed sales may interrupted manufacturing change approved production interruptions occur could significantly delay clinical development potential products reduce third party clinical researcher interest support proposed clinical trials interruptions could also impede commercialization companys products including sales zadaxin approved markets impair competitive position would material adverse effect business financial condition company see business manufacturing marketing sales company established distribution arrangements local pharmaceutical importers distribution companies covering countries asia latin america middle east however assurance given distribution arrangements remain place prove successful see business marketing sales technological change competition rapid technological development may result companys products becoming obsolete marketed company recovers significant portion related development commercialization expenses competition pharmaceutical field intense company expects competition increase companys competitors include major pharmaceutical companies biotechnology firms universities research institutions us abroad actively engaged research development products therapeutic areas pursued company many companies institutions substantially greater financial technical manufacturing marketing human resource capabilities company extensive experience undertaking clinical testing obtaining regulatory approvals necessary market drugs principal competitive factors pharmaceutical field include efficacy safety price therapeutic regimen comparable products marketed companies price also competitive factor uncertainty third party reimbursement resources patient populations companys ability successfully commercialize products may depend part extent reimbursement cost products available government health administration authorities private health insurers organizations significant uncertainty exists reimbursement status new therapeutic products assurance third party reimbursement available therapeutic products company might develop many foreign countries company intends operate reimbursement zadaxin government private health insurance programs available us health care reform area increasing national attention priority many governmental officials certain reform proposals adopted could impose limitations prices company able charge us products amount reimbursement companys products governmental agencies third party payors many countries company marketing rights zadaxin government resources per capita income levels may low companys products prohibitively expensive large percentage population countries assurance company successful marketing products economically favorable terms dependence qualified personnel key individuals specialized scientific international nature companys business company highly dependent upon ability continue attract retain qualified management scientific technical personnel intense competition qualified personnel areas companys activities assurance company able continue attract retain qualified personnel necessary development business addition many key responsibilities within company assigned relatively small number individuals loss services individuals unless promptly replaced could significantly detrimental companys development company maintain key person life insurance lives key personnel product liability absence insurance companys business expose potential product liability risks inherent testing manufacturing marketing sale pharmaceutical products assurance product liability claims asserted company product liability insurance pharmaceutical industry generally expensive extent available company product liability insurance coverage clinical trials commercial sales however assurance product liability claim would adversely affect business financial condition company preferred stock companys board directors authority issue additional series preferred stock determine price rights preferences privileges restrictions including voting rights without vote action companys shareholders rights holders common stock subject may adversely affected rights holders preferred stock may issued future issuance preferred stock providing desirable flexibility connection possible acquisitions corporate purposes could effect making difficult third party acquire majority outstanding voting stock company item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operation read conjunction selected consolidated financial data financial statements related notes thereto included elsewhere annual report form 10k managements discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties actual results may differ materially results discussed forwardlooking statements factors might cause difference include limited discussed risk factors overview periods encompassed annual report form 10k devoted substantially resources zadaxin cpx product development programs zadaxin commercialization activities conduct research product development efforts combination internal collaborative programs addition internal management staff rely upon arrangements universities clinical research sites contract research organizations significant portion product development efforts oversight external collaborative programs conducted executive officers staff headquarters located san mateo california commencement operations december 31 1999 company incurred cumulative net loss approximately 115 million expect sales gross margin operating expenses increase next several years expand sales research development clinical testing marketing capabilities ability achieve sustain operating profitability primarily dependent obtaining additional financing support operations longterm product development commercialization programs initiation continuation new clinical trials maintaining zadaxin corporate partnering arrangements europe japan increasing zadaxin sales approved markets securing regulatory approvals zadaxin additional countries particularly us europe japan successfully launching zadaxin approved countries addition factors may also impact ability achieve sustain operating profitability spending associated successful development cpx acquiring rights additional drugs entering extending agreements product development commercialization appropriate operating results may fluctuate quarter fluctuations may substantial result among factors market acceptance zadaxin number timing costs results preclinical clinical trials products regulatory approval process timing fda international regulatory approvals acquisition additional product rights funding provided result corporate partnering arrangements setbacks launch sale distribution zadaxin preclinical clinical development products regulatory approval process relationships collaborative partners shortfalls revenue earnings levels expected securities analysts among developments past could future immediate significant adverse effect trading price common stock given period results operations product sales 9091000 3625000 2223000 years ended december 31 1999 1998 1997 respectively 1997 sales relatively flat quarters four geographic regions peoples republic china northern central southern guangzhou area established 1998 1999 unit us dollar sales grew average 25 24 respectively quarter awareness use zadaxin expanded currently received approval market zadaxin 19 countries peoples republic china currently zadaxins largest market like japan certain asian markets uses tiered method import distribute products distributors make sales country product imported licensed importers 1997 sold one principal importeragent resold four distributors inside peoples republic china reflecting expansion stability sales peoples republic china 1998 began working extensively second importing agent addition agent used 1997 enabled expansion sales four distributors year ended december 31 1999 four distributors china accounted 87 product sales addition filed approval market zadaxin 18 additional countries anticipate additional filings countries expect zadaxin sales increase existing approved markets new markets regulatory approvals secured level sales increase dependent upon increased zadaxin market penetration existing approved markets additional zadaxin marketing approvals successful launch zadaxin new markets although remain optimistic regarding prospects zadaxin assurance ever achieve significant levels sales receive additional zadaxin market approvals cost product sales 1761000 1036000 990000 years ended december 31 1999 1998 1997 respectively increase attributable increased zadaxin sales expect cost product sales vary quarter depending upon level zadaxin sales absorption fixed productrelated costs charges associated excess expiring finished product gross margin 7637000 2689000 1233000 years ended december 31 1999 1998 1997 respectively gross profit margin increased 55 1997 71 1998 81 1999 due increased unit sales zadaxin associated economies scale addition cost improvement cost reduction programs research development expenses 4604000 9293000 8642000 years ended december 31 1999 1998 1997 respectively decrease 1999 1998 primarily attributable decreased clinical trial expenses decreased license fees expense associated acquisition rights zadaxin decreased consulting fees partially offset increased payroll expenses related restructuring program year ended december 31 1998 increase research development expenses compared 1997 due increased clinical trial expenses additional pilot clinical studies expand use zadaxin overseas markets started 1998 clinical trial expenses 1998 also increased due clinical trial expenses japan additional clinical trial expenses clinical development cpx initiation continuation programs additional programs us continue significant effect research development expenses require us seek additional capital resources general expect product research development expenses increase next several years vary quarter pursue strategy initiating additional preclinical clinical trials testing acquiring product rights expanding regulatory activities marketing expenses 5911000 5391000 4145000 years ended december 31 1999 1998 1997 respectively increase 1999 1998 related increased payroll expenses advertising conferences associated expansion existing zadaxin markets partially offset decreased travel expenses increase 1998 1997 reflected increases activities related expanding distribution marketing efforts around world addition increased professional services related 1998 sales increase expect marketing expenses increase significantly next several quarters years expand commercialization marketing efforts pursue additional strategic collaborations general administrative expenses 2978000 3714000 3662000 years ended december 31 1999 1998 1997 respectively decrease 1999 compared 1998 attributable decreased payroll investor public relations expenses partially offset increased amortization expense relation intangible product rights acquired 1998 near term expect general administrative expenses vary quarter augment general administrative activities resources support increased expenditures preclinical clinical trials testing regulatory precommercialization marketing activities july 23 1997 loaned thomas e moore former chairman chief executive officer 5944000 exchange promise repay loan demand pledge 1882500 shares sciclone common stock owned mr moore collateral loan 1998 determined value collateral underlying loan made mr moore temporarily impaired writedown book value note would required upon investigation relative collectibility demand note repeated attempts obtain full repayment note receivable determined repayment 5944000 loan plus accumulated interest approximately 689000 substantial doubt result determination elected cancel 1882500 shares sciclone common stock held collateral write entire remaining book value noncash charge earnings fourth quarter 1998 march 23 2000 shares would market value approximately 28708000 new agreement 1999 mr moore received credit total indebtedness approximately 6633000 equal value date 1882500 shares sciclone common stock calculating applying appropriate credit 3142000 mr moore agreed pay balance remaining debt 3615000 five installments according schedule beginning october 1 1999 20000 increasing factor 4 six month anniversary thereafter final payment due later october 1 2001 first 20000 payment paid october 1999 see note 8 shareholders equity notes consolidated financials noncash charge earnings recorded april 1998 3143000 representing deemed dividend associated issuance series c preferred stock net interest investment income approximately 389000 582000 1219000 years ended december 31 1999 1998 1997 respectively decrease 1999 compared 1998 compared 1997 resulted lower average invested cash balances recognized income approximately 242000 based net value asset available sale approximately 1184000 less current liability approximately 942000 related foreclosure loans see note 1 assets available sale liquidity capital resources december 31 1999 1998 3621000 5410000 respectively cash equivalents marketable securities marketable securities consist primarily highly liquid shortterm longterm investments net cash used us operating activities amounted 8909000 13353000 14056000 years ended december 31 1999 1998 1997 respectively net cash used operating activities year ended december 31 1999 greater net loss due increases accounts receivable decreases amounts owed third parties clinical trials amounts partially offset noncash charges associated depreciation amortization decreases prepayments certain future expenses inventory net cash used operating activities year ended december 31 1998 less net loss primarily due increases clinical trial expense accruals primarily japan inventory decreases impairment note receivable former officer amounts partially offset increases prepaid expense primarily product marketing rights acquired us europe net cash used operating activities year ended december 31 1997 greater net loss period primarily due increases accounts receivable associated sales launch zadaxin approved markets increases payments third parties goods services employees compensation benefits amounts partially offset noncash charges associated depreciation amortization decreases prepayments certain future expenses increases amounts owed third parties clinical trials net cash provided investing activities year ended december 31 1999 primarily related net sale 120000 marketable securities offset net purchase disposal approximately 42000 equipment furniture net cash provided investing activities year ended december 31 1998 primarily related net sale 7388000 marketable securities offset purchase approximately 99000 equipment furniture net cash provided investing activities year ended december 31 1997 primarily related net sale 21335000 marketable securities offset purchase approximately 404000 equipment furniture net cash provided financing activities year ended december 31 1999 consisted 7169000 proceeds approximately 5430000 related issuance common stock redeemable warrants institutional accredited investors two private placements payment full 235000 note receivable president chief executive officer approximately 1581000 related issuance common stock employee stock purchase plan exercise warrants issuance restricted common stock sigmatau zadaxin development marketing partner europe net cash provided financing activities year ended december 31 1998 consisted 6342000 proceeds approximately 3931000 related sale issuance 661157 shares series c preferred stock approximately 529000 related issuance common stock approximately 1882000 related payment notes receivable former current officers net cash used financing activities year ended december 31 1997 consisted 4267000 related repurchase common stock approved stock repurchase plan amounts loaned mr moore referred 5944000 offset 2313000 proceeds received issuance common stock exercise outstanding warrants issuance common stock option plan employee stock purchase plan july 1999 completed two private placements common stock redeemable common stock warrants institutional accredited investors resulted aggregate net proceeds approximately 5430000 280000 warrants exercised resulted gross proceeds approximately 377000 1999 january 2000 completed private placement common stock redeemable common stock warrants institutional investor resulted aggregate net proceeds approximately 6100000 excluding gross proceeds 5600000 received warrants issued connection private placements fully exercised march 2000 completed 3100000 private placement sigmatau consisting 198072 shares restricted common stock 400000 common stock warrants fully exercised result additional gross proceeds 9400000 march 22 2000 3650336 warrants exercised resulted aggregate gross proceeds approximately 7100000 capital requirements may change depending upon numerous factors including level zadaxin product sales availability complementary products technologies businesses initiation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative partners status competitive products assuming zadaxin product sales continue increase quarter growth rates similar achieved past eight quarters management believes existing capital resources interest funds available adequate maintain current planned operations initiation continuation us clinical development programs could however require additional funding either collaborative partner equity debt financing timing sustainability operating profitability capital requirements may change depending upon numerous factors including level zadaxin product sales timing amount manufacturing costs related zadaxin cpx availability complementary products technologies businesses initiation continuation preclinical clinical trials testing particularly us timing regulatory approvals developments relationships existing future collaborative partners status competitive products event need raise additional financing unavailability timing financing could prevent delay longterm product development commercialization programs without additional financing sales growth beyond managements expectations combination thereof management believes existing capital resources interest funds available adequate maintain current planned operations least next twelve months income taxes december 31 1999 company net operating loss carryforwards federal income tax purposes approximately 47700000 expire years 2006 2019 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred companys foreign subsidiaries december 31 1999 company federal tax credit carryforwards approximately 2100000 expire years 2009 2019 change ownership provisions internal revenue code portion companys net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities impact year 2000 prior years discussed nature progress plans become year 2000 ready late 1999 completed remediation testing systems result planning implementation efforts experienced significant disruptions mission critical information technology noninformation technology systems believed systems successfully responded year 2000 date change expensed approximately 10000 1999 connection remediating systems aware material problems resulting year 2000 issues either internal systems products services third parties continue monitor mission critical computer applications suppliers vendors throughout year 2000 ensure latent year 2000 matters may arise addressed promptly recent accounting pronouncement december 1999 securities exchange commission issued staff accounting bulletin 101 revenue recognition financial statements sab 101 summarizes certain areas staffs view applying generally accepted accounting principles revenue recognition financial statements currently evaluating impact sab 101 results operations financial position risk factors evaluating company business prospects carefully consider risk factors discussed addition information contained report achieved operating profitability expect continue incur losses near term continue increase zadaxin sales may achieve operating profitability may prevent delay longterm product development commercialization efforts began generate revenues zadaxin december 1996 future zadaxin sales uncertain drug clinical development cpx targets underlying cause cystic fibrosis disease caused genetic defects marketing approvals cpx additional marketing approvals zadaxin particularly us europe japan uncertain experienced significant operating losses since inception substantial accumulated deficit furthermore expect operating expenses increase next several years expand development testing marketing capabilities ability achieve sustain operating profitability depends large part whether increase zadaxin sales existing markets launch zadaxin newlyapproved markets commence continue clinical programs obtain additional regulatory approvals zadaxin cpx scv07 dax andor future products particularly us europe japan able maintain partnering arrangements development marketing zadaxin europe japan enter agreements product development commercialization products us achieve operating profitability anticipated may delay curtail longterm product development commercialization efforts experience difficulties foreign sales operations financial condition would suffer financial condition near term highly dependent zadaxin sales foreign jurisdictions majority current zadaxin sales customers peoples republic china however zadaxin sales peoples republic china may limited due low average income poorly developed infrastructure addition zadaxin sales operations asia latin america middle east subject inherent risks including difficulties delays obtaining pricing approvals reimbursement difficulties delays obtaining product health registration difficulties delays obtaining importation permits unexpected changes regulatory requirements tariffs barriers political instability difficulties staffing managing foreign operations long payment cycles difficulty accounts receivable collection currency fluctuations potential adverse tax consequences currently product sales us offset decrease revenue zadaxin sales asia latin america middle east addition countries territories regulate pharmaceutical prices regulation may reduce prices zadaxin significantly would prevail free market fail obtain additional regulatory approvals market acceptance zadaxin fail obtain regulatory approval cpx potential future revenue would limited principal latestage clinical development efforts currently focus zadaxin cpx need favorable results additional clinical trials zadaxin get regulatory approval us europe japan zadaxin approved commercial sale 19 countries principally treatment hepatitis b hepatitis c vaccine adjuvant however may able obtain approvals zadaxin us europe japan countries treatment hepatitis hiv medical conditions cancer future sales zadaxin depend market acceptance successful distribution additional countries many zadaxin markets particularly peoples republic china low average per capita income poorly developed distribution infrastructure may make difficult successfully commercialize zadaxin currently rely zadaxin sales primary source revenue failure demonstrate zadaxins safety efficacy future clinical trials obtain additional marketing approvals successfully commercialize zadaxin would adversely affect future revenue operating results cpx currently undergoing phase 2 development us may experience delays difficulties preclinical clinical development cpx addition clinical trials may prove cpx effective treatment cystic fibrosis inability demonstrate safety efficacy cpx treatment cystic fibrosis clinical trial obtain regulatory approval cpx treatment cystic fibrosis successfully commercialize cpx could adversely affect potential future revenue operating results regardless whether achieve operating profitability anticipated may need obtain additional funds order support longterm product development commercialization programs since inception financed operations primarily sales stock continue increase zadaxin revenue achieve operating profitability anticipated need obtain additional financing support longterm product development commercialization programs need capital depend many factors including level future zadaxin sales timing location scope results ongoing planned preclinical studies clinical trials size complexity programs timing cost fda international regulatory approvals costs involved filing prosecuting enforcing patent claims competing technological market developments whether outstanding common stock warrants exercised timing amount exercises ability establish maintain partnering arrangements development sales manufacturing marketing products whether elect establish additional partnering arrangements development sales manufacturing marketing products cost manufacturing obtaining preclinical clinical materials many foregoing factors within control unavailability timing necessary financing could prevent delay longterm product development commercialization programs commitments arrangements additional funding may able obtain financing needed price common stock experienced substantial volatility may continue future significant volatility market prices publicly traded shares biopharmaceutical companies including 1999 price common stock fluctuated low 106 high 613 march 23 2000 common stock closed price 1525 price common stock may remain exceed current levels following factors may adverse impact market price common stock announcements technical product developments us competitors market conditions pharmaceutical biotechnology stocks market conditions generally governmental regulation healthcare legislation public announcements regarding advances treatment disease states targeting public announcements government officials relating biotechnology pharmaceutical industries patent proprietary rights developments changes thirdparty reimbursement policies products fluctuations operating results issue additional common stock securities convertible common stock percentage ownership thencurrent shareholders would reduced market price common stock may decrease future sales substantial amounts common stock could adversely affect market price common stock march 23 2000 outstanding stock options 4210345 shares common stock 3138379 currently exercisable warrants outstanding exercisable 2903471 shares common stock upon exercise issuance shares common stock freely tradable similarly raise additional funds issuance common stock securities convertible exercisable common stock percentage ownership thencurrent shareholders reduced obtain additional product rights third parties licensees perform obligations potential future revenue would limited future development expenses would increase strategy includes entering various partnering arrangements date inlicensed rights zadaxin cpx scv07 dax drug candidates actively pursuing clinical development zadaxin cpx time license otherwise acquire rights additional drugs advance scv07 dax preclinical clinical development may shortage drugs develop would limit potential future revenue addition exclusively sublicensed rights develop market zadaxin europe japan sigmatau spa scheringplough kk respectively however companies already substantial commitment alpha interferon approved drug cancer hepatitis b hepatitis c europe japan relationships companies may successful may able negotiate similar additional arrangements future europe japan major markets generally control amount timing resources collaborators devote activities us parties perform obligations expect development expenses would increase development sale products could limited delayed ability obtain regulatory approval one country may delayed adversely affected timing regulatory activities approvals countries particularly participate regulatory approval process countries delay failure achieve regulatory approvals may limit potential future revenue fail protect products technologies trade secrets may able successfully use manufacture market sell products may fail advance maintain competitive position us composition matter patent covers chemical structure zadaxin european composition matter patents zadaxin expired going forward limited patents covering chemical structure zadaxin could adversely affect proprietary rights success depends significantly ability obtain patent protection products technologies preserve trade secrets avoid infringing proprietary rights third parties however pending patent applications may result issued patents issued may provide competitive advantage us may invalidated circumvented competitors others may independently develop similar products designs around patents issued licensed us patents issued patent applications filed companies could adverse effect ability use manufacture market products maintain competitive position respect products many patents patent applications relating zadaxin held exclusive licenses breach terms licenses could lose rights patents patent applications holders patents licensed us may file prosecute extend maintain patents countries rights companies obtaining patents products processes useful us may bring infringement actions us type litigation typically costly timeconsuming could require us obtain licenses others prevent us using manufacturing marketing products licenses may available commercially reasonable terms pharmaceuticals patentable recently become patentable several countries territory exclusive rights zadaxin enforcement intellectual property rights many countries territory limited nonexistent future enforcement patents proprietary rights many countries territory likely problematic unpredictable moreover issuance patent one country assure issuance similar patent another country claim interpretation infringement laws vary nation extent patent protection uncertain may vary different jurisdictions fail obtain regulatory approvals products countries approved cannot develop market sell products countries research preclinical clinical development manufacturing marketing sale zadaxin cpx drug candidates subject extensive regulation governmental authorities zadaxin cpx products must approved sold jurisdiction obtaining regulatory approval timeconsuming expensive countries contemplating marketing selling zadaxin regulatory approval process drugs previously approved countries established clinical trial review procedures uncertain may delay grant regulatory approvals zadaxin currently sponsoring planning clinical trials pursuing regulatory approvals zadaxin number countries currently sponsoring clinical trials cpx us however may able commence complete trials timely costeffective manner even completed trials may fulfill relevant regulatory approval criteria ultimately may able obtain regulatory approvals countries adverse results development programs also could result restrictions use zadaxin approved cpx failure one partners comply applicable us foreign regulatory requirements could among things result warning letters fines suspensions regulatory approvals product recalls seizures operating restrictions injunctions criminal prosecutions addition government regulations may established imposed prevent delay regulatory approval zadaxin cpx future products able establish maintain adequate manufacturing supply relationships development sale products could impaired entered longterm contract manufacturing supply agreements zadaxin cpx successful products must manufactured commercial quantities compliance regulatory requirements acceptable cost currently longterm manufacturing relationships experienced suppliers may able maintain longterm manufacturing relationships suppliers currently vialing packaging supply agreements effect sufficient supply finished zadaxin near term recently changed upgraded manufacturing source finished zadaxin international markets excluding japan countries change may require additional regulatory approvals obtain required regulatory approvals manufacturing change timely fashion new zadaxin marketing approvals may delayed sales may interrupted manufacturing change approved production interruptions could significantly delay clinical development potential products reduce third party clinical researcher interest support proposed trials kinds interruptions could also impede commercialization products including sales zadaxin approved markets impair competitive position would material adverse effect business may lose market share otherwise fail compete intensely competitive pharmaceutical industry competition pharmaceutical industry intense expect competition increase believe principal competitive factors pharmaceutical industry include efficacy safety price therapeutic regimen manufacturing quality assurance associated given drug competitors include pharmaceutical companies biotechnology firms universities research institutions us abroad actively engaged research development chronic lifethreatening diseases hepatitis b hepatitis c cancer immune system disorders cystic fibrosis competitors particularly large pharmaceutical companies substantially greater financial technical regulatory manufacturing marketing human resource capabilities also extensive experience undertaking clinical testing obtaining regulatory approvals necessary market drugs addition currently rely sales zadaxin treatment hepatitis b hepatitis c primary source revenue several large pharmaceutical companies substantial commitments alpha interferon approved drug treating hepatitis b hepatitis c third party reimbursement available patients cannot otherwise pay zadaxin may able successfully market zadaxin ability successfully sell zadaxin depends part whether pharmaceutical drug consumers reimbursed cost zadaxin reimbursement may come government health administration authorities private health insurers organizations thirdparty reimbursement new therapeutic products highly uncertain may available future products foreign countries sell zadaxin intend sell zadaxin reimbursement zadaxin government private health insurance programs currently widely available us proposed health care reforms could limit amount thirdparty reimbursement available products many countries marketing rights zadaxin government resources per capita income may low products prohibitively expensive countries may able market products economically favorable terms unable attract retain qualified personnel president chief executive officer chief operating officer chief business officer regional managing director greater china left company may able successfully develop commercialize products highly dependent upon ability attract retain qualified personnel specialized scientific international nature business intense competition qualified management scientific technical personnel pharmaceutical industry may able attract retain qualified personnel need grow develop business globally addition numerous key responsibilities sciclone assigned small number individuals president chief executive officer chief operating officer chief business officer regional managing director greater china unable attract retain qualified personnel needed promptly replace employees critical product development commercialization development commercialization products would adversely affected maintain key person life insurance key personnel limited product liability insurance product liability claims asserted us could result significant expenses decreased demand products companies test manufacture market sell pharmaceutical products commonly receive product liability claims may asserted us product liability insurance pharmaceutical industry generally expensive available product liability insurance coverage clinical trials commercial sales however product liability claims excess insurance coverage resulted payment large deductibles would adversely affect financial condition demand products issuing preferred stock rights senior common stock could adversely affect holders common stock hinder takeover transactions offer common shareholders optimal price shares charter documents give board directors authority issue additional series preferred stock without vote action shareholders board also authority determine terms preferred stock including price preferences voting rights holders common stock may adversely affected rights granted holders preferred stock example series preferred stock may granted right receive liquidation preference preset distribution event sciclone liquidated would reduce amount available distribution holders common stock addition issuance preferred stock could make difficult third party acquire majority outstanding voting stock result common shareholders could prevented participating transactions would offer optimal price shares item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations read conjunction selected consolidated financial data financial statements related notes thereto included elsewhere annual report form 10k managements discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see note regarding forwardlooking statements risk factors overview periods encompassed annual report form 10k devoted substantially resources zadaxin cpx product development programs zadaxin commercialization activities conduct research product development efforts combination internal collaborative programs addition internal management staff rely upon arrangements universities clinical research sites contract research organizations significant portion product development efforts oversight external collaborative programs conducted executive officers staff headquarters located san mateo california commencement operations december 31 2001 incurred cumulative net loss approximately 123 million expect sales gross margin operating expenses increase next several years expand sales research development clinical testing marketing capabilities ability achieve sustain operating profitability primarily dependent initiation execution completion new zadaxin clinical trials securing regulatory approvals zadaxin additional countries particularly us europe japan successfully launching zadaxin approved countries increasing zadaxin sales approved markets developing maintaining zadaxin corporate partnering arrangements us europe japan addition factors may also impact ability achieve sustain operating profitability including manufacturing costs zadaxin ability obtain additional financing support operations longterm product development commercialization programs acquiring rights additional drugs entering extending agreements product development commercialization appropriate operating results may fluctuate quarter fluctuations may substantial result among factors number timing costs results preclinical clinical trials products market acceptance zadaxin timing large orders zadaxin regulatory approval process timing fda international regulatory approvals acquisition additional product rights funding provided result corporate partnering arrangements setbacks launch sale distribution zadaxin preclinical clinical development products regulatory approval process relationships collaborative partners shortfalls revenue earnings levels expected securities analysts among developments past could future immediate significant adverse effect trading price common stock given period critical accounting policies general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout managements discussion analysis financial condition results operations policies affect reported expected financial results detailed discussion application accounting policies see note 1 notes consolidated financial statements item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united sates requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates base estimates historical experience various market specific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition company recognizes revenue product sales time shipment recognizes contract grant revenue period services performed peoples republic china currently zadaxins largest market like japan certain asian markets uses tiered method import distribute products distributors make sales country product imported licensed importers recognize revenue sales principal importing agents resell distributors inside china sales customers importing agents distributors recognized time shipment title products transferred significant customer acceptance requirements post shipment obligations part company importing agents distributors contractual rights return except limited terms regarding product quality payments us importing agents distributors contingent upon sale end user import agents distributors date recorded estimated reductions revenue expected sales returns conditions become competitive markets served zadaxin circumstances change may take actions record product return estimates would result reduction future revenue time return estimate changed accounts receivable required estimate collectibility trade receivables considerable amount judgment required assessing ultimate realization receivables including current creditworthiness customer ability collect outstanding receivables customers critical operating performance cash flows maintain allowances doubtful accounts estimated losses resulting inability customers make required payments financial condition customers deteriorate resulting impairment ability make payments additional allowances may required year ended december 31 2001 importing agents china accounted 89 companys product sales accounted 86 87 product sales years ended december 31 2000 1999 respectively december 31 2001 approximately 8653000 91 accounts receivable attributable four customers china company performs ongoing credit evaluations customers financial condition generally require collateral customers maintain reserves credit losses within expectations recognize reserves bad debts ranging 25 100 based length time receivables past due inventories required state inventories lower cost realizable market value assessing ultimate realization inventories required make judgments future demand requirements compare current committed inventory levels possible changes inventory reserves may required future due change market conditions impairment intangible assets december 31 2001 net intangible assets 1091000 related zadaxin product rights never recorded impairment losses related intangible assets assessing recoverability intangible assets must make assumptions regarding estimated future cash flows factors determine fair value respective assets estimates related assumptions change future may required record impairment charges assets previously recorded research development expenses research development expenditures charged operations incurred including accruals estimated clinical preclinical study costs latestage clinical programs us japan increase research development expenditures significantly next several years contract research organization management fees expensed monthly remaining clinical program activity generally expensed straightline basis life individual contract study monitor patient enrollment levels related activity extent possible adjust estimates accordingly however management underestimated activity levels associated various studies given point time could underestimate actual research development expenses results operations product sales 13831000 15357000 9091000 years ended december 31 2001 2000 1999 respectively decrease sales 2000 2001 mostly due large sale zadaxin new customer china third quarter 2000 march 2002 zadaxin approved sale 26 countries worldwide year ended december 31 2001 importing agents china accounted 89 product sales accounted 86 87 years ended december 31 2000 1999 respectively sales emphasis concentrated china one developed markets marketing expenditures result rapid benefits sales profits compared newer markets require investment development spending expect zadaxin sales increase existing approved markets new markets regulatory approvals secured zadaxin launched level sales increase dependent upon increased zadaxin market penetration existing approved markets additional zadaxin marketing approvals successful launch zadaxin new markets although remain optimistic regarding prospects zadaxin cannot assure achieve sales increases maintain existing sales levels ever achieve significant levels sales receive additional zadaxin market approvals revenue results difficult predict shortfall revenue delay recognizing revenue could cause operating results vary significantly quarter could result future operating losses cost product sales 2742000 3113000 1761000 years ended december 31 2001 2000 1999 respectively expect cost product sales vary quarter depending upon level zadaxin sales absorption fixed productrelated costs charges associated excess expiring finished product gross margin 11089000 12244000 7637000 years ended december 31 2001 2000 1999 respectively gross profit margin 80 2001 80 2000 81 1999 expect maintain approximately gross margin going forward however assurance decrease 2001 2000 1999 research development rd expenses represented approximately 40 27 34 respectively total costs expenses major components rd expenses consist personnel costs including salaries benefits clinical studies performed contract research organizations materials supplies overhead allocations consisting various support facilities related costs research development activities also separated three main categories research clinical development pharmaceutical development research costs typically consist preclinical toxicology work clinical development costs include phase 1 2 3 clinical trials well expanded access programs pharmaceutical development costs consist product formulation chemical analysis 2001 recorded approximately 28 million research 50 million clinical development 08 million pharmaceutical development activities compares expenses 2000 approximately 24 million research 05 million clinical development 13 million pharmaceutical development activities expenses 1999 approximately 27 million research 1 million clinical development 09 million pharmaceutical development activities research development expenses 8561000 4182000 4604000 years ended december 31 2001 2000 1999 respectively increase 2001 2000 support latestage clinical programs us japan initiation continuation zadaxin cpx product clinical development programs continue significant effect research development expenses expected require us seek additional capital resources decrease 2000 1999 primarily attributable decreased clinical trial expenses related cpx consulting fees currently sponsoring two phase 2 clinical trials using zadaxin treatment liver cancer development work support new phase 2 trial using cpx treatment cystic fibrosis two phase 3 us trials using zadaxin plus pegylated interferon treatment hepatitis c us conducting phase 3 clinical trial using zadaxin monotherapy treatment hepatitis b japan conducting several preclinical clinical studies scv07 treatment tuberculosis russia major components research development expenses consist personnel costs including salaries benefits clinical development performed contract research organizations preclinical work pharmaceutical development materials supplies third party research funding overhead allocations consisting various administrative facilities related costs due uncertain nature trial process possible determine timing completion total cost expected incurred trial cpx expenditures expected decrease level 2001 zadaxin expenditures increase account development expenditures general expect product research development expenses increase significantly next several years vary substantially quarter pursue strategy initiating additional preclinical clinical trials testing acquiring product rights expanding regulatory activities sales marketing expenses 8764000 7720000 5503000 years ended december 31 2001 2000 1999 respectively increase years related increased payroll expenses advertising conferences associated expansion markets zadaxin expect sales marketing expenses increase next several quarters years expand commercialization marketing efforts pursue additional strategic collaborations general administrative expenses 3897000 3538000 3386000 years ended december 31 2001 2000 1999 respectively increase attributable greater general administrative activities support increased level research development latestage clinical programs near term expect general administrative expenses vary quarter augment general administrative activities resources support increased expenditures preclinical clinical trials testing regulatory precommercialization marketing activities income payment note receivable former officer approximately 3497000 400000 20000 years ended december 31 2001 2000 1999 respectively july 1997 company loaned former officer 5944000 exchange promissory note pledge 1882500 shares sciclone common stock collateral loan 1998 determined value collateral underlying loan temporarily impaired writedown book value note would required accounting purposes company wrote entire remaining book value noncash charge earnings fourth quarter 1998 new agreement 1999 1882500 shares sciclone common stock held collateral retired value shares date applied credit total indebtedness former officer applying credit retired stock 3142000 officer entered new note amount 3615000 note fully repaid interest investment income approximately 751000 1066000 157000 years ended december 31 2001 2000 1999 respectively decrease 2001 2000 due lower average invested cash balances lower interest rates increase 2000 1999 due higher average invested cash balances interest investment expense approximately 334000 36000 0 years ended december 31 2001 2000 1999 respectively increase years interest accrued senior unsecured convertible notes investment institution income expense approximately 13000 49000 212000 years ended december 31 2001 2000 1999 respectively 1999 recognized income approximately 262000 related gain generated loan foreclosure liquidity capital resources december 31 2001 2000 1999 16468000 22497000 3621000 respectively cash equivalents shortterm investments shortterm investments consist primarily highly liquid marketable securities lease agreement required line credit amount 633000 line credit secured certificate deposit totaled 633000 december 31 2001 net cash used operating activities totaled 12008000 5917000 8929000 years ended december 31 2001 2000 1999 respectively net cash used operating activities year ended december 31 2001 greater net loss primarily due gain 3497000 related collection note receivable previously written 1998 former officer increase inventory decrease accounts payable accrued expenses net cash used operating activities year ended december 31 2000 greater net loss primarily due increases accounts receivable inventory amounts partially offset decrease prepaid expenses assets increase accounts payable net cash used operating activities year ended december 31 1999 greater net loss due increase accounts receivable decrease amounts owed third parties clinical trials amounts partially offset increases accrued compensation employee benefits accounts payable accrued expenses net cash used investing activities 450000 year ended december 31 2001 related net purchase 351000 marketable securities 99000 equipment furniture net cash used investing activities 430000 year ended december 31 2000 related net purchase 331000 marketable securities partially offset purchase 99000 equipment furniture net cash provided investing activities 349000 year ended december 31 1999 related net sale 391000 marketable securities partially offset purchase 42000 equipment furniture net cash provided financing activities totaled 5995000 24886000 7189000 years ended december 31 2001 2000 1999 respectively net cash provided financing activities year ended december 31 2001 consisted 1600000 proceeds issuance convertible note 544000 net proceeds issuance common stock 354000 granting investor right purchase approximately 2400000 senior unsecured convertible notes 3497000 payment note receivable former officer net cash provided financing activities year ended december 31 2000 consisted approximately 5326000 private placement common stock warrants institutional investors approximately 8606000 exercise outstanding warrants purchase common stock institutional accredited investors approximately 191000 issuance common stock employee stock purchase plan approximately 3100000 private placement 198072 common stock sigmatau partner development marketing zadaxin europe approximately 2363000 exercises outstanding options employee stock option plans 4000000 issuance convertible note 900000 granting investors right purchase approximately 5900000 senior unsecured convertible notes 400000 payment note receivable former officer net cash provided financing activities year ended december 31 1999 consisted approximately 5430000 issuance common stock warrants institutional accredited investors two private placements 235000 payment full note receivable president chief executive officer approximately 1504000 issuance common stock employee stock purchase plan exercise warrants issuance restricted common stock sigmatau 20000 payment note receivable former officer january 2000 completed private placement common stock immediately exercisable common stock warrants institutional investor resulted gross proceeds approximately 6100000 warrants issued connection private placement fully exercised receive additional 5600000 march 2000 completed 3100000 private placement sigmatau consisting 198072 shares restricted common stock warrants 400000 shares common stock fully exercised result additional gross proceeds 9400000 march april 2000 aggregate 4597690 common stock warrants exercised resulting aggregate gross proceeds approximately 8606000 december 2000 completed 4 million senior unsecured convertible note investment affiliate ubs ag 4 million note convertible 407610 shares common stock fixed conversion price 98133 per share note accrue interest rate 6 per year mature december 2005 also received 900000 granting investor right purchase time notes maturity date approximately 59 million senior unsecured convertible notes due december 2005 issued notes bear interest zero coupon convertible 407610 shares common stock fixed conversion price 145066 per share may elect lieu delivering convertible notes deliver respective number shares common stock march 2001 received 16 million senior unsecured convertible note investment affiliate ubs ag 16 million note convertible 276530 shares common stock fixed conversion price 57860 per share note accrue interest rate 6 per year mature march 2006 also received 354000 granting investor right purchase time notes maturity date approximately 24 million senior unsecured convertible notes due march 2006 issued notes bear interest zero coupon convertible 276530 shares common stock fixed conversion price 85532 per share may elect lieu delivering convertible notes deliver respective number shares common stock besides last note receivable payment former officer officers directors involved related party transactions 2001 management believes zadaxin product sales continue increase remain valuable source capital generation initiation continuation us clinical development programs however expected require additional funding either collaborative partner equity debt financing timing achievement sustainability operating profitability capital requirements may change depending upon numerous factors including level zadaxin product sales timing amount manufacturing costs related zadaxin availability complementary products technologies businesses initiation continuation preclinical clinical trials testing particularly us timing regulatory approvals developments relationships existing future collaborative partners status competitive products without additional financing sales growth beyond managements expectations combination thereof management believes existing capital resources interest funds available adequate maintain current planned operations end 2002 company actively reviewing alternatives equity debt financings potential partnering activities income taxes december 31 2001 net operating loss carryforwards federal income tax purposes approximately 59700000 expire years 2006 2021 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred foreign subsidiaries december 31 2001 federal tax credit carryforwards approximately 3200000 expire years 2009 2021 change ownership provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities recent accounting pronouncements financial accounting standards board issued statements financial accounting standards 141 business combinations sfas 141 142 goodwill intangible assets sfas 142 june 2001 new rules goodwill intangible assets deemed indefinite lives longer amortized subjected annual impairment tests accordance statements intangible assets continue amortized useful economic lives statements effective combinations initiated july 1 2001 sfas 142 applies assets related acquisitions prior date january 1 2002 based current circumstances believe application new rules material impact consolidated financial statements financial accounting standards board issued statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 august 2001 statement addresses financial accounting reporting impairment disposal longlived assets sfas 144 effective fiscal years beginning december 15 2001 earlier application encouraged based current circumstances believe application new rules material impact consolidated financial statements risk factors carefully consider risks described together information included report form 10k making investment decision risk factors could adversely affect business financial condition operating results well adversely affect value investment common stock phase 3 program us approval zadaxin combination pegylated interferon treatment hepatitis c may fail harm business conservatively designed phase 3 study program based use zadaxin combination pegylated interferon assurances results previous phase 2 phase 3 hepatitis c studies enabled us produce design carryover trials involving combination zadaxin pegylated interferon resulting data may insufficient demonstrate efficacy fda guidelines may able enroll patients quickly enough meet expectations completing trial independent use pegylated form interferon may perform better anticipated results efforts market sell zadaxin combination pegylated interferon impaired may able successfully develop commercialize products many products development stage require commitment substantial resources devoted extensive research development preclinical testing clinical trials manufacturing scaleup regulatory approval prior ready sale cannot assure commercially viable products result efforts face significant technological risks inherent developing products may also abandon proposed products become commercially viable limited experience conducting managing us clinical trials rely part third parties particularly clinical research organizations development partners assist us managing monitoring clinical trials reliance third parties may result delays completing failure complete clinical trials third parties fail perform obligations us products even developed approved cannot successfully commercialized timely manner business harmed price stock may decline yet sold product zadaxin future revenue growth depends increased market acceptance commercialization zadaxin additional countries particularly us europe japan fail successfully market zadaxin cannot commercialize drug us additional markets revenue operating results suffer future revenue also depend part ability develop commercially viable accepted products market acceptance products depend many factors including ability convince prospective customers prospective strategic partners products attractive alternative treatments therapies manufacture products sufficient quantities acceptable quality acceptable cost fail satisfy comply governmental regulations government regulations change business suffer new drugs including products developed development subject extensive rigorous regulation fda comparable agencies state local jurisdictions foreign countries regulations govern among things development testing manufacturing labeling storage premarket approval importation advertising promotion sale distribution products regulations change time new regulations may adopted example prior years legislation introduced us congress would restrict duration marketing exclusivity orphan drug assurances type legislation reintroduced passed law benefits existing statute remain effect failure satisfy comply regulations adopted fda comparable agencies state local jurisdictions foreign countries may delay stop approval drugs particular failure among things result warning letters fines suspensions regulatory approvals product recalls seizures operating restrictions injunctions total partial suspension production civil penalties criminal prosecutions furthermore additional government regulation may established imposed legislation otherwise could prevent delay regulatory approval zadaxin future products adverse events related products existing future markets could cause regulatory authorities withdraw market approval products prevent us receiving market approval future assurance zadaxin products demonstrate efficacy sufficient obtain approval fda counterpart regulatory agencies countries satisfaction government regulations may take several years time needed satisfy varies substantially based type complexity novelty pharmaceutical product result government regulation may cause us delay introduction prevent us marketing existing potential products considerable period time impose costly procedures upon activities regulatory approval products granted approval may impose limitations indicated uses products may marketed pegylated interferon use phase 3 program us yet approved fda pegylated interferon approved fda would need conduct additional trial approved form resulting additional delays expenses fail obtain regulatory approvals products countries targeted regulatory approval may able sustain increase revenues stock price may decline research preclinical clinical development manufacturing marketing sale zadaxin drug candidates subject extensive regulation governmental authorities zadaxin products may sell countries outside us must approved foreign counterparts fda sold jurisdiction obtaining regulatory approval timeconsuming expensive countries contemplating marketing selling zadaxin regulatory approval process drugs previously approved countries established clinical trial review procedures uncertain may delay grant regulatory approvals zadaxin addition secure regulatory approvals need among things demonstrate favorable results additional clinical trials zadaxin safety efficacy cpx treatment cystic fibrosis preclinical clinical trials assurance ultimately obtain regulatory approvals targeted countries timely costeffective manner failure obtain required regulatory approvals develop market sell products countries currently rights may limit revenues even able complete clinical trials sponsored planning timely costeffective manner trials may fulfill applicable regulatory approval criteria case able obtain regulatory approvals countries failure obtain additional regulatory approvals harm operating results addition adverse results occur clinical trials could result restrictions use zadaxin need obtain additional capital support longterm product development commercialization programs ability achieve sustain operating profitability depends large part ability commence execute complete clinical programs obtain additional regulatory approvals zadaxin drug candidates particularly us europe japan increase zadaxin sales existing markets launch zadaxin new markets cannot assure ever achieve significant levels sales receive additional zadaxin market approvals current sales levels zadaxin expected generate funds anticipate needed support current plans product development including us phase 3 clinical trials zadaxin need obtain additional financing support product development commercialization programs may seek additional funds public private stock offerings arrangements corporate partners borrowings lease lines credit sources cannot raise necessary funds reduce capital expenditures curtail delay phase 3 clinical trials scale back development new products reduce workforce outlicense others products technologies otherwise would seek commercialize amount capital need depend many factors including timing location scope results ongoing planned preclinical studies clinical trials cost manufacturing obtaining preclinical clinical materials timing cost involved applying obtaining fda international regulatory approvals whether elect establish additional partnering arrangements development sales manufacturing marketing products level future zadaxin sales expense levels international sales marketing efforts ability establish maintain strategic arrangements development sales manufacturing marketing products competing technological market developments costs involved filing prosecuting enforcing patent claims whether outstanding common stock warrants exercised timing amount exercises many foregoing factors within control need raise additional funds available reasonable terms may required delay cancel product development commercialization programs additional equity financing dilutive shareholders debt financing available may include restrictive covenants history operating losses accumulated deficit expect continue incur losses near term may never achieve profitability experienced significant operating losses since inception december 31 2001 accumulated deficit approximately 123000000 expect operating expenses increase next several years plan dedicate substantially resources expanding development testing marketing capabilities particularly us may never achieve profitability failure achieve profitability may cause stock price decline dependent sale zadaxin foreign countries particularly china experience difficulties foreign sales efforts financial condition harmed financial condition near term highly dependent sale zadaxin foreign countries experience difficulties foreign sales efforts business suffer financial condition harmed substantially zadaxin sales customers peoples republic china sales zadaxin china may limited due low average income lack patient cost reimbursement poorly developed infrastructure existing potential competition products possibly including generics china uses tiered method import distribute finished pharmaceutical products port entry prior moving product forward distributors government licensed importing agents must process evaluate shipment determine whether shipment satisfies chinas quality assurance requirements order efficiently manage process importing agents place relatively orders time six month period order typically large quantities therefore sales importing agent vary substantially quarter depending size timing orders past may future cause quarterly results fluctuate use four importing agents china account receivable one importing agent material unable collect receivables importer business cashflow would adversely affected least short term addition zadaxin sales operations parts asia well latin america middle east subject number risks including difficulties delays obtaining pricing approvals reimbursement product health registrations importation permits unexpected changes regulatory requirements difficulties staffing managing foreign operations long payment cycles difficulties accounts receivable collection difficulties enforcing proprietary rights currency fluctuations adverse deteriorating economic conditions potential adverse tax consequences product sales us offset decrease revenue zadaxin sales asia latin america middle east addition countries regions including china regulate pharmaceutical prices pharmaceutical importation regulations may reduce prices zadaxin levels significantly would prevail unregulated market limit volume product may imported sold place high import duties product may limit growth revenues cause decline limited sales marketing distribution capabilities may adversely affect ability successfully commercialize products currently limited sales marketing distribution capabilities anticipate relying thirdparty collaborators sell market distribute products foreseeable future arrangements third parties successful unable enter additional thirdparty arrangements may need substantially expand sales marketing distribution force efforts expand may succeed may lack sufficient resources expand timely manner either harm operating results addition able expand sales marketing distribution capabilities begin competing companies experienced well funded operations cannot successfully compete larger companies revenues may grow business may suffer able establish maintain adequate manufacturing supply relationships development sale products could impaired successful products must manufactured commercial quantities compliance regulatory requirements acceptable cost may able maintain longterm manufacturing relationships currently suppliers manufacturing interruptions could significantly delay clinical development potential products reduce thirdparty clinical researcher interest support proposed trials interruptions could also impede commercialization products including sales zadaxin approved markets impair competitive position developments would harm business countries manufacturing change may require additional regulatory approvals obtain required regulatory approvals manufacturing change timely fashion new zadaxin marketing approvals may delayed sales may interrupted manufacturing change approved either results harm business addition manufacturing supply quality control problems may arise either alone subcontractors attempt scaleup manufacturing procedures may able scaleup timely manner commercially reasonable cost either could cause delays pose threat ultimate commercialization products harm business obtain rights additional products third parties prospects future revenue may decline actively pursuing clinical development zadaxin cpx time advance scv07 dax products inlicensed rights preclinical clinical development may lose rights products may also shortage drugs develop commercialize license otherwise acquire rights additional drugs shortage number drugs able develop commercialize may reduce prospects future revenue commercialization products depends collaborations others collaborators successful unable find future collaborators may able properly develop commercialize products depend part distributors business partners develop andor promote drugs successful efforts fail business suffer generally control amount timing resources business partners devote zadaxin always performed expected perform obligations expect particularly obligations regarding clinical trials development expenses would increase development andor sale products could limited delayed could cause business suffer stock price decline addition relationships companies may successful disputes may arise ownership rights intellectual property knowhow technologies developed collaborators may able negotiate similar additional arrangements future develop commercialize zadaxin products fail protect products technologies trade secrets may able successfully use manufacture market sell products may fail advance maintain competitive position success depends significantly ability obtain maintain meaningful patent protection products technologies preserve trade secrets avoid infringing proprietary rights third parties pending patent applications may result issuance patents future patents patent applications may priority others applications existing patents additional patents issued may provide competitive advantage us may invalidated circumvented competitors others may independently develop similar products design around patents issued licensed us patents issued patent applications filed companies could harm ability use manufacture market products maintain competitive position respect products many patents relating zadaxin expired rights patents patent applications relating zadaxin exclusive licenses breach terms licenses could lose rights patents patent applications commercial success also depends part us infringing valid enforceable patents proprietary rights third parties breaching licenses may relate technologies products aware thirdparty patents may relate products possible may unintentionally infringe patents proprietary rights third parties may future receive notices claiming infringement third parties well invitations take licenses thirdparty patents legal action us collaborative partners claiming damages seeking enjoin commercial activities relating products processes affected thirdparty rights may require us collaborative partners obtain licenses order continue manufacture market affected products processes efforts defend claims even unmeritorious would require us devote resources attention could directed operation growth plans addition actions may subject us potential liability damages collaborative partners may prevail patent action license required patent may made available commercially acceptable terms pharmaceuticals either patentable recently become patentable countries exclusive rights zadaxin past enforcement intellectual property rights many countries limited nonexistent future enforcement patents proprietary rights many countries likely problematic unpredictable moreover issuance patent one country assure issuance similar patent another country claim interpretation infringement laws vary nation extent patent protection uncertain may vary different jurisdictions make acquisitions incur variety costs may never realize anticipated benefits appropriate opportunities become available may attempt acquire products product candidates businesses believe fit strategically business currently commitments agreements respect material acquisitions undertake transaction sort process integrating acquired product candidate business may result operating difficulties expenditures may absorb significant management attention would otherwise available ongoing business development plans moreover may never realize anticipated benefits acquisition future acquisitions could result inprocess research development expenses potentially dilutive issuances equity securities incurrence debt contingent liabilities andor impairment goodwill amortization impairment intangible assets could adversely affect business financial condition results operations may lose market share otherwise fail compete effectively intensely competitive biopharmaceutical industry competition biopharmaceutical industry intense expect competition increase success depends ability compete believe principal competitive factors industry include efficacy safety price therapeutic regimen manufacturing quality assurance patents associated given drug competitors include biopharmaceutical companies biotechnology firms universities research institutions us abroad actively engaged research development products therapeutic areas pursuing particularly hepatitis c hepatitis b cancer cystic fibrosis competitors currently marketing drugs hepatitis c hepatitis b cancer products latestage clinical trials competitors particularly large biopharmaceutical companies substantially greater financial technical regulatory manufacturing marketing human resource capabilities also extensive experience undertaking preclinical clinical testing obtaining regulatory approvals necessary market drugs additional mergers acquisitions pharmaceutical industry may result even resources concentrated competitors comparable products marketed companies price competitive factor increased competitive pressure could lead intensified pricebased competition resulting lower prices margins would hurt operating results currently rely sales zadaxin treatment hepatitis c hepatitis b primary source revenue however several large biopharmaceutical companies substantial commitments alpha interferon approved drug treating hepatitis b hepatitis c lamivudine approved drug treat hepatitis b cannot assure compete successfully competitors potential competitors develop drugs treatments hepatitis c hepatitis b cystic fibrosis cancer diseases superior however area immune system enhancer therapy anticipate competition zadaxin may reduced fact zadaxin administered combination numerous antiviral anticancer agents expected complementary rather competitive agents enhancing immune system believe position zadaxin complementary rather competitive drug many therapies cannot guarantee successful endeavor expect continuing advancements increasing awareness use immune system enhancer therapy fight cancer infectious diseases may create new competitors well numerous new opportunities expanded use zadaxin worldwide cannot assure able meet objectives however thirdparty reimbursement available patients cannot otherwise pay zadaxin may able successfully market zadaxin ability successfully commercialize products may depend part extent coverage reimbursement patients products available government health care programs private health insurers third party payors organizations significant uncertainty exists reimbursement status new therapeutic products zadaxin cannot assure third party insurance coverage reimbursement available therapeutic products might develop emerging markets sell zadaxin intend sell zadaxin reimbursement zadaxin government private health insurance programs yet widely available failure obtain thirdparty reimbursement products particularly us europe japan harm business us proposed health care reforms could limit amount thirdparty reimbursement available products cannot assure additional limitations imposed future drug coverage reimbursement many emerging markets marketing rights zadaxin government resources per capita income may low products prohibitively expensive countries may able market products economically favorable terms efforts governmental thirdparty payors contain reduce health care costs could cause us reduce prices market drugs reduce gross margins may harm business various governments thirdparty payors trying contain reduce costs health care various means expect continue number legislative proposals implement government controls announcement proposals reforms could cause us reduce prices market drugs reduce gross margins may harm business current economic slowdown us causes economies countries particularly asia latin america middle east experience slowdown recession business suffer us worlds largest consumer current economic slowdown us may adversely affect economies countries including developing countries asia latin america middle east derive revenues economic conditions us continue worsen developing countries may also experience economic slowdown recession would likely result decrease sales zadaxin decrease sales zadaxin would harm operating results delay efforts achieve profitability likely cause stock price decline lose key personnel unable attract retain additional highly skilled personnel required expansion activities business suffer highly dependent upon ability attract retain qualified personnel specialized scientific international nature business intense competition qualified management scientific technical personnel pharmaceutical industry may able attract retain qualified personnel need grow develop business globally addition numerous key responsibilities sciclone assigned small number individuals unable attract retain qualified personnel needed promptly replace employees critical product development commercialization development commercialization products would adversely affected time maintain key person life insurance key personnel may subject product liability lawsuits insurance may inadequate cover damages clinical trials marketing current potential products may expose us liability claims use products currently carry product liability insurance however cannot certain able maintain insurance acceptable terms clinical commercial activities insurance would sufficient cover potential product liability claim recall fail sufficient coverage business results operations cash flows could adversely affected unable comply environmental laws regulations business may harmed subject federal state local laws regulations governing use manufacture storage handling disposal hazardous materials waste products currently maintain supply hazardous materials facilities event accident could liable damages result liability could exceed resources outsource research development programs involving controlled use biohazardous materials future conduct programs might required incur significant cost comply environmental laws regulations price common stock experienced substantial volatility may fluctuate due factors beyond control result september 11 2001 events pennsylvania new york city washington dc us global economies weakened may result decrease revenues cause stock price decline high profile corporate governance accounting problems resulting corporate failures eroded investor confidence wake events us global capital markets experienced period extreme volatility may continue time addition significant volatility market prices publicly traded shares pharmaceutical biotechnology companies including following factors may adverse impact market price common stock significant negative changes major equity market indices announcements technical product developments us competitors governmental regulation health care legislation public announcements regarding advances treatment disease states targeting public announcements government officials relating biotechnology pharmaceutical industries patent proprietary rights developments changes thirdparty reimbursement policies products fluctuations operating results addition price common stock may remain exceed current levels current war terrorism causes economic slowdowns economies certain countries business suffer united states allied nations aggressively attacking terrorism military economic actions lead economic slowdowns economies developing countries asia latin america middle east currently derive product revenue sales could decrease sales would harm operating results delay efforts achieve profitability likely cause stock price decline indebtedness may result future liquidity problems december 31 2001 56 million convertible notes payable 40 million issued quarter ended december 31 2000 16 million issued quarter ended march 31 2001 increased indebtedness continue impact us increasing interest expense making difficult obtain additional financing notes payable five years issuance unless converted common stock sole discretion holder unable satisfy debt service requirements substantial liquidity problems could result would negatively impact future prospects december 31 2001 cash shortterm investments 165 million substantial sales stock convertible securities may impact market price common stock december 31 2001 stock options 4926857 shares common stock outstanding options 3457061 shares exercisable warrants exercisable 1970500 shares common stock outstanding two issues convertible notes payable december 31 2001 convertible total 684140 shares common stock beginning one year date issuance notes addition investors given right purchase senior unsecured convertible notes due december 2005 march 2006 issued additional notes bear interest zero coupon convertible 684140 shares common stock upon exercise options warrants conversion notes issued shares common stock freely tradable future sales substantial amounts common stock could adversely affect market price common stock similarly raise additional funds issuance common stock securities convertible exercisable common stock percentage ownership shareholders reduced price common stock may fall issuing preferred stock rights senior common stock could adversely affect holders common stock charter documents give board directors authority issue additional series preferred stock without vote action shareholders board also authority determine terms preferred stock including price preferences voting rights holders common stock may adversely affected rights granted holders preferred stock example series preferred stock may granted right receive liquidation preference preset distribution event liquidation would reduce amount available distribution holders common stock addition issuance preferred stock could make difficult third party acquire majority outstanding voting stock result common shareholders could prevented participating transactions would offer optimal price shares item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations read conjunction “selected consolidated financial data” financial statements related notes thereto included elsewhere annual report form 10k management’s discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see “note regarding forwardlooking statements” “risk factors” contained annual report form 10k overview periods encompassed annual report form 10k devoted substantially resources zadaxin clinical trials zadaxin commercialization activities conduct research development efforts combination internal collaborative programs addition internal management staff rely upon arrangements universities clinical research sites contract research organizations significant portion product development efforts oversight external collaborative programs conducted executive officers staff headquarters located san mateo california commencement operations december 31 2002 accumulated deficit approximately 133000000 expect sales gross margin operating expenses increase next several years expand research development clinical testing sales marketing capabilities ability achieve sustain operating profitability primarily dependent initiation execution completion zadaxin clinical trials securing regulatory approvals zadaxin additional countries particularly us europe japan successfully launching zadaxin approved countries increasing zadaxin sales approved markets developing maintaining zadaxin corporate partnering arrangements us europe japan addition factors may also impact ability achieve sustain operating profitability including manufacturing costs zadaxin ability obtain additional financing support operations longterm product development commercialization programs acquiring rights additional drugs entering extending agreements product development commercialization appropriate operating results may fluctuate quarter fluctuations may substantial result among factors number timing costs results preclinical clinical trials products market acceptance zadaxin timing orders zadaxin international markets particularly china regulatory approval process timing fda international regulatory approvals acquisition additional product rights funding provided result corporate partnering arrangements setbacks delays launch sale distribution zadaxin preclinical clinical development products regulatory approval process relationships collaborative partners shortfalls revenue earnings levels expected securities analysts among developments past could future immediate significant adverse effect trading price common stock given period critical accounting policies general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout management’s discussion analysis financial condition results operations policies affect reported expected financial results detailed discussion application accounting policies see note 1 notes consolidated financial statements item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united sates requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates base estimates historical experience various market specific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition company recognizes revenue product sales time shipment significant customer acceptance requirements post shipment obligations part company sales importing agents distributors recognized time shipment title product transferred contractual rights return except limited terms regarding product quality however company replace products expired deemed damaged defective delivered payments importing agents distributors contingent upon sale end user importing agents distributors contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement company recognized earlier payments received collection assured revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment date recorded estimated reductions revenue expected sales returns experienced sales returns conditions become competitive markets served zadaxin circumstances change may take actions record product return estimates would result reduction future revenue time return estimate changed accounts receivable required estimate collectibility trade receivables considerable amount judgment required assessing ultimate realization receivables including current creditworthiness customer ability collect outstanding receivables customers critical operating performance cash flows maintain allowances doubtful accounts estimated losses resulting inability customers make required payments financial condition customers deteriorate resulting impairment ability make payments additional allowances may required year ended december 31 2002 sales six importing agents china accounted 88 company’s product sales four importing agents accounted 89 86 product sales years ended december 31 2001 2000 respectively 2002 largest customer accounted 41 sales second largest customer accounted 27 sales customers accounted 10 sales 2002 2001 largest customer accounted 47 sales second largest customer accounted 30 sales customers accounted 10 sales 2001 2000 largest customer accounted 63 sales second largest customer accounted 14 sales customers accounted 10 sales 2000 december 31 2002 approximately 8627000 87 accounts receivable attributable four customers china perform ongoing credit evaluations customers’ financial condition generally require collateral customers maintain reserves credit losses within expectations recognize reserves bad debts ranging 25 100 past due accounts receivable based length time receivables past due collectibility experience inventories required state inventories lower cost realizable market value assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels possible changes inventory reserves may required future due change market conditions impairment intangible assets december 31 2002 net intangible assets 682000 related zadaxin product rights never recorded impairment losses related intangible assets assessing recoverability intangible assets must make assumptions regarding estimated future cash flows factors determine fair value respective assets estimates related assumptions change future may required record impairment charges assets research development expenses phase 3 clinical trials us increase research development expenditures significantly next year research development expenditures charged operations incurred cost accruals clinical trials based estimates services received efforts expended pursuant contracts numerous institutions conduct clinical trials behalf financial terms agreements subject negotiation variation contract may result uneven payment flows payments contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses financial statements actual services received efforts expended expenses related grants institutions accrued based level patient enrollment activity according protocol general expenses higher initial final months patient’s scheduled 18 months treatment observation expenses relating clinical research organization managing trials laboratory direct expenses recognized period incurred services performed monitor patient enrollment levels related activity extent possible adjust estimates accordingly however management underestimated activity levels associated various studies given point time could underestimate actual research development expenses results operations product sales 17101000 13831000 15357000 years ended december 31 2002 2001 2000 respectively increase sales 2001 2002 primarily due increased sales volume importing agents china whereas greater sales 2000 compared 2001 primarily due large sale zadaxin new importer china third quarter 2000 year ended december 31 2002 importing agents china accounted 88 product sales accounted 89 86 years ended december 31 2001 2000 respectively sales emphasis concentrated china one developed markets marketing expenditures result rapid benefits sales profits compared newer markets require investment development spending expect zadaxin sales increase existing approved markets new markets regulatory approvals secured zadaxin actively marketed level sales increase dependent upon increased zadaxin market penetration existing approved markets additional zadaxin marketing approvals successful launch zadaxin new markets however primary corporate focus execution funding phase 3 clinical trials us concentrating resources efforts focusing international sales marketing efforts maintaining developing sales existing active markets rather investing development new markets although remain optimistic regarding prospects zadaxin cannot assure achieve sales increases maintain existing sales levels receive additional marketing indication approvals zadaxin revenue results difficult predict shortfall revenue delay recognizing revenue could cause operating results vary significantly quarter could result additional future operating losses part collaborative agreement sigmatau received 2685000 payment sigmatau january 2002 recognized evenly contract revenue period us hepatitis c clinical development activities estimated three years beginning second quarter 2002 cost product sales 3487000 2742000 3113000 years ended december 31 2002 2001 2000 respectively expect cost product sales vary quarter depending upon level zadaxin sales absorption fixed productrelated costs charges associated excess expiring finished product gross margin 14285000 11089000 12244000 years ended december 31 2002 2001 2000 respectively gross profit margin 80 2002 2001 2000 expect slight decreases gross margin going forward international markets including china largest mature market maintain product pricing absorb increases product costs research development expenses 11647000 8561000 4182000 years ended december 31 2002 2001 2000 respectively increase year primarily support zadaxin phase 3 clinical trials us japan 2002 2001 2000 research development rd expenses represented approximately 48 40 27 respectively total costs expenses major components rd expenses consist clinical studies performed clinical trial institutions contract research organizations related materials supplies preclinical work pharmaceutical development personnel costs including salaries benefits third party research funding overhead allocations consisting various support facilities related costs research development activities also separated three main categories research clinical development pharmaceutical development research costs typically consist preclinical toxicology work clinical development costs include phase 1 2 3 clinical trials well expanded clinical access programs pharmaceutical development costs consist product formulation chemical analysis 2002 recorded approximately 2300000 research 8300000 clinical development 1100000 pharmaceutical development activities compares expenses 2001 approximately 2800000 research 5000000 clinical development 800000 pharmaceutical development activities expenses 2000 approximately 2400000 research 500000 clinical development 1300000 pharmaceutical development activities initiation continuation clinical development programs continue significant effect research development expenses expected require us seek additional capital resources due uncertain nature clinical trial process enrollment rates particular possible determine timing completion total cost expected incurred trial general expect research development expenses increase significantly next several years vary substantially quarter pursue strategy initiating additional preclinical clinical trials testing acquiring product rights expanding regulatory activities sales marketing expenses 8724000 8764000 7720000 years ended december 31 2002 2001 2000 respectively decrease 2001 2002 related slightly lower promotional advertising expenses increase 2000 2001 related increased payroll expenses advertising conferences associated expansion markets zadaxin expect sales marketing expenses increase next several quarters years expand commercialization marketing efforts general administrative expenses 3902000 3897000 3538000 years ended december 31 2002 2001 2000 respectively increase 2000 2001 attributable greater general administrative activities support increased level research development latestage clinical programs near term expect general administrative expenses vary quarter increase general administrative activities resources support increased expenditures preclinical clinical trials testing regulatory precommercialization marketing activities income payment note receivable former officer approximately 3497000 400000 years ended december 31 2001 2000 respectively july 1997 company loaned former officer 5944000 exchange promissory note pledge 1882500 shares sciclone common stock collateral loan 1998 determined value collateral underlying loan temporarily impaired writedown book value note would required accounting purposes company wrote entire remaining book value noncash charge earnings fourth quarter 1998 new agreement 1999 1882500 shares sciclone common stock held collateral retired value shares date applied credit total indebtedness former officer applying credit retired stock 3142000 officer entered new note amount 3615000 note fully repaid third quarter 2001 interest investment income approximately 323000 751000 1066000 years ended december 31 2002 2001 2000 respectively decrease years due lower average invested cash balances lower interest rates interest investment expense approximately 361000 334000 36000 years ended december 31 2002 2001 2000 respectively increase years interest accrued senior unsecured convertible notes liquidity capital resources december 31 2002 2001 2000 21151000 16468000 22497000 respectively cash equivalents shortterm investments shortterm investments consist primarily highly liquid marketable securities two letters credit secured certificate deposit december 31 2002 letters credit total 685000 one 633000 lease agreement 52000 facilitate value added tax filings europe net cash used operating activities totaled 5869000 12008000 5917000 years ended december 31 2002 2001 2000 respectively net cash used operating activities year ended december 31 2002 less net loss primarily due receipt payment sigmatau 2685000 clinical trial collaboration increased deferred revenue balances increases accounts payable increases accrued clinical trials expense decreases inventories partially offset increases prepaid expenses accounts receivable net cash used operating activities year ended december 31 2001 greater net loss primarily due gain 3497000 related collection note receivable previously written 1998 increase inventories decrease accounts payable accrued expenses net cash used operating activities year ended december 31 2000 greater net loss primarily due increases accounts receivable inventories increases 2000 partially offset decrease prepaid expenses assets increase accounts payable net cash provided investing activities 7000 year ended december 31 2002 related net sale 73000 short term investments purchases 66000 property equipment net cash used investing activities 450000 year ended december 31 2001 related net purchases 351000 short term investments 99000 property equipment net cash used investing activities 430000 year ended december 31 2000 related net purchases 331000 short term investments partially offset purchases 99000 property equipment net cash provided financing activities totaled 10577000 5995000 24886000 years ended december 31 2002 2001 2000 respectively net cash provided financing activities year ended december 31 2002 consisted approximately 9914000 direct offering common stock institutional investors approximately 514000 related exercises outstanding options employee stock option plans 149000 issuance common stock employee stock purchase plan net cash provided financing activities year ended december 31 2001 consisted 1600000 proceeds issuance convertible note 544000 net proceeds issuance common stock 354000 granting investor right purchase approximately 2400000 senior unsecured convertible notes 3497000 payment note receivable former officer net cash provided financing activities year ended december 31 2000 consisted approximately 5326000 private placement common stock warrants institutional investors approximately 8606000 exercise outstanding warrants purchase common stock institutional accredited investors approximately 191000 issuance common stock employee stock purchase plan approximately 3100000 private placement approximately 2363000 exercises outstanding options employee stock option plans 4000000 issuance convertible note 900000 granting investors right purchase approximately 5900000 senior unsecured convertible notes 400000 payment note receivable former officer following tables summarize contractual cash obligations commitments december 31 2002 officers directors involved related party transactions 2002 believe zadaxin product sales continue increase remain valuable source capital generation initiation continuation us clinical development programs however expected require additional funding either equity debt financing collaborative partner timing achievement sustainability operating profitability capital requirements may change depending upon numerous factors including level zadaxin product sales timing amount manufacturing costs related zadaxin availability complementary products technologies businesses initiation continuation preclinical clinical trials testing particularly us timing regulatory approvals developments relationships existing future collaborative partners status competitive products without additional financing sales growth beyond expectations combination thereof believe existing capital resources interest funds available adequate maintain current planned operations 2004 actively reviewing alternatives equity debt financings potential partnering activities income taxes december 31 2002 net operating loss carryforwards federal income tax purposes approximately 71400000 expire years 2006 2022 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred foreign subsidiaries december 31 2002 federal tax credit carryforwards approximately 4100000 expire years 2009 2022 “change ownership” provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities recent accounting pronouncements financial accounting standards board issued statement financial accounting standards 148 “accounting stockbased compensation transition disclosure” “sfas 148” december 2002 sfas 148 amends statement financial accounting standards 123 “accounting stockbased compensation” “sfas 123” provide alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results additional disclosure requirements sfas 148 effective fiscal years ending december 15 2002 included consolidated financial statements included elsewhere annual report form 10k company elected continue follow intrinsic value method accounting prescribed accounting principles board opinion 25 “accounting stock issued employees” account employee stock options risk factors carefully consider risks described addition information report form 10k making investment decision risk factors could adversely affect business financial condition operating results well adversely affect value investment common stock phase 3 clinical trials us approval zadaxin combination pegylated interferon alpha treatment hepatitis c may fail harm business currently us fda approved therapy hepatitis c patients failed respond prior therapy interferon alpha plus ribavirin interferon alpha alone designed phase 3 clinical trials based use zadaxin combination pegylated interferon alpha address medical need assurances results previous hepatitis c studies zadaxin nonpegylated interferon alpha enabled us produce design carryover trials involving combination zadaxin pegylated interferon alpha resulting data may insufficient inadequate demonstrate appropriate efficacy fda guidelines addition insufficient data resulting clinical trials would also adversely affect ability market sell zadaxin markets approved sale 2002 began enrolling patients phase 3 trials hepatitis c clinical program us however trials conducted competitors seeking enroll similar patients competition appropriate patients clinical trials significant may able enroll patients quickly enough meet timing expectations completing trial would delay preparation new drug application nda may able fully enroll studies patient drop rates could higher anticipated either could weaken quality nda hepatitis c clinical trials designed show combination zadaxin pegylated interferon alpha adds significant clinical benefit compared use pegylated interferon alpha alone retreatment hepatitis c patients responded prior therapy however independent use pegylated form interferon alpha may perform better anticipated could weaken quality nda zadaxin used clinically commercially thousands patients without producing reported zadaxin related significant side effects toxicities pegylated interferon alpha used clinical trials approved fda documented adverse side effects combination therapy zadaxin pegylated interferon alpha cause significant new greater degree adverse side effects clinical trials could delayed patients may drop greater anticipated rate may forced halt trials fda may reject nda due safety issues foregoing occurs efforts market sell zadaxin impaired business suffer price stock may decline phase 3 clinical trials japan approval zadaxin treatment hepatitis b may fail harm business need better hepatitis b therapies improve efficacy cause side effects phase 3 clinical trial designed based use zadaxin address medical need assurances results previous hepatitis b studies enabled design carryover trials involving zadaxin resulting data may insufficient inadequate demonstrate appropriate efficacy japanese ministry health guidelines addition insufficient data resulting clinical trial would also adversely affect ability market sell zadaxin markets approved sale may able compile analyze trial data quickly enough meet timing expectations would delay preparation japanese new drug application jnda hepatitis b clinical trial designed show zadaxin adds significant clinical benefit treatment hepatitis b patients although zadaxin used safely 10000 patients date zadaxin cause significant adverse side effects jnda could delayed japanese ministry health may reject jnda safety issues foregoing occurs efforts market sell zadaxin impaired business suffer price stock may decline rely third parties manufacture clinical trial product deficiencies work could delay harm trials approval process harm business manufacture zadaxin used phase 3 trials cgmp guidelines direct manufacturing quality control using third party cgmp manufacturers suppliers unanticipated deficiencies manufacturers suppliers occur could create delay assembling timely acceptable nda zadaxin planned used hepatitis c clinical trials manufactured received pegylated interferon alpha supplied us roche needed basis delay receiving recall pegylated interferon alpha zadaxin could delay clinical trials detract integrity trial data foregoing occurs efforts market sell zadaxin combination pegylated interferon alpha impaired business suffer price stock may decline may able successfully develop commercialize products many products development stage require commitment substantial resources devoted extensive research development preclinical testing clinical trials manufacturing scaleup regulatory approval prior ready sale cannot assure commercially viable products result efforts face significant technological risks inherent developing products may also abandon proposed products become commercially viable limited experience conducting managing clinical trials rely part third parties particularly clinical research organizations development partners assist us managing monitoring clinical trials reliance third parties may result delays completing failure complete clinical trials third parties fail fulfill obligations us products even developed approved cannot successfully commercialized timely manner business harmed price stock may decline yet sold product zadaxin experienced difficulties formulation cpx delayed development future revenue growth depends increased market acceptance commercialization zadaxin additional countries particularly us europe japan fail successfully market zadaxin cannot commercialize drug us additional markets revenue operating results suffer future revenue also depend part ability develop commercially viable accepted products however obtain additional resources substantially resources focused development zadaxin market acceptance products depend many factors including ability convince prospective customers prospective strategic partners products attractive alternative treatments therapies manufacture products sufficient quantities acceptable quality acceptable cost failure hurt operations fail satisfy comply governmental regulations government regulations change business may suffer new drugs including products developed development subject extensive rigorous regulation fda comparable agencies state local jurisdictions foreign countries regulations govern among things development testing manufacturing labeling storage premarket approval importation advertising promotion sale distribution products regulations change time new regulations may adopted example prior years legislation introduced us congress would restrict duration marketing exclusivity orphan drug assurances type legislation reintroduced passed law benefits existing statute remain effect failure satisfy comply regulations adopted fda comparable agencies state local jurisdictions foreign countries may delay stop approval drugs particular failure among things result warning letters fines suspensions regulatory approvals product recalls seizures operating restrictions injunctions total partial suspension production civil penalties criminal prosecutions furthermore additional government regulation may established imposed legislation otherwise could prevent delay regulatory approval zadaxin future products adverse events related products existing future markets could cause regulatory authorities withdraw market approval products prevent us receiving market approval future assurance zadaxin products demonstrate efficacy sufficient obtain approval fda counterpart regulatory agencies indications countries satisfaction government regulations may take several years time needed satisfy varies substantially based type complexity novelty pharmaceutical product result government regulation may cause us delay introduction prevent us marketing existing potential products considerable period time impose costly procedures upon activities regulatory approval products granted approval may impose limitations indicated uses products may marketed fail obtain regulatory approvals products countries targeted regulatory approval may able sustain increase revenues stock price may decline research preclinical clinical development manufacturing marketing sale zadaxin drug candidates subject extensive regulation governmental authorities zadaxin products may sell countries outside us must approved foreign counterparts fda sold jurisdiction obtaining regulatory approval timeconsuming expensive countries contemplating marketing selling zadaxin regulatory approval process drugs previously approved countries established clinical trial review procedures uncertain may delay prevent grant regulatory approvals zadaxin addition secure regulatory approvals need among things demonstrate favorable results additional clinical trials zadaxin even able complete clinical trials sponsored planning timely cost effective manner trials may fulfill applicable regulatory approval criteria case able obtain regulatory approval countries assurance ultimately obtain regulatory approvals targeted countries timely costeffective manner failure obtain required regulatory approvals develop market sell products countries currently rights limit revenues addition adverse results occur clinical trials could result restrictions use zadaxin may also hurt business need obtain additional capital support longterm product development commercialization programs ability achieve sustain operating profitability depends large part ability commence execute complete clinical programs obtain additional regulatory approvals zadaxin drug candidates particularly us europe japan increase zadaxin sales existing markets launch zadaxin new markets cannot assure ever achieve significant levels sales receive additional zadaxin market approvals current sales levels zadaxin expected generate funds anticipate needed support current plans product development including us phase 3 clinical trials zadaxin need obtain additional financing support product development commercialization programs may seek additional funds public private stock offerings arrangements corporate partners borrowings lease lines credit sources cannot raise necessary funds reduce capital expenditures curtail delay phase 3 clinical trials scale back development new products reduce workforce outlicense others products technologies otherwise would seek commercialize may harm business cause stock price fall amount capital need depend many factors including timing location scope results ongoing planned preclinical studies clinical trials cost manufacturing obtaining preclinical clinical materials timing cost involved applying obtaining fda international regulatory approvals whether elect establish additional partnering arrangements development sales manufacturing marketing products level future zadaxin sales expense levels international sales marketing efforts ability establish maintain strategic arrangements development sales manufacturing marketing products competing technological market developments costs involved filing prosecuting enforcing patent claims whether outstanding convertible notes converted common stock whether outstanding common stock warrants exercised timing amount exercises many foregoing factors within control need raise additional funds available reasonable terms may required delay cancel product development commercialization programs additional equity financing dilutive shareholders debt financing available may include restrictive covenants history operating losses accumulated deficit expect continue incur losses near term may never achieve profitability experienced significant operating losses since inception december 31 2002 accumulated deficit approximately 133000000 expect operating expenses increase next several years plan dedicate substantially resources expanding development testing marketing capabilities particularly us may never achieve profitability failure achieve profitability may cause stock price decline revenue dependent sale zadaxin foreign countries particularly china experience difficulties foreign sales efforts financial condition harmed product revenue near term highly dependent sale zadaxin foreign countries experience difficulties foreign sales efforts business suffer financial condition harmed substantially zadaxin sales customers china sales zadaxin china may limited due low average personal income lack patient cost reimbursement poorly developed infrastructure existing potential competition products including generics currently process renewing importation permit allow us continue sell product importers china business would severely harmed unable renew permit renewal process prolonged granted exemption make periodic shipments china zadaxin sold imported finished product attractiveness zadaxin market encouraged local companies introduce lower priced locally manufactured generic competitive products occurs could negative impact price volume zadaxin sold country would harm business addition zadaxin sales operations parts asia well latin america middle east subject number risks including difficulties delays obtaining pricing approvals reimbursement product health registrations importation permits unexpected changes regulatory requirements difficulties staffing managing foreign operations long payment cycles difficulties accounts receivable collection difficulties enforcing proprietary rights currency fluctuations adverse deteriorating economic conditions potential adverse tax consequences product sales us offset decrease revenue zadaxin sales asia latin america middle east addition countries regions including china regulate pharmaceutical prices pharmaceutical importation regulations may reduce prices zadaxin levels significantly would prevail unregulated market limit volume product may imported sold place high import duties product may limit growth revenues cause decline china’s tiered method importing distributing finished pharmaceutical products quarterly results may vary substantially one period next china uses tiered method import distribute finished pharmaceutical products port entry prior moving product forward distributors government licensed importing agents must process evaluate shipment determine whether shipment satisfies china’s quality assurance requirements order efficiently manage process importing agents place relatively orders time six month period order typically large quantities therefore sales importing agent vary substantially quarter depending size timing orders past may future cause quarterly results fluctuate use small number importing agents china account receivable one importing agent material unable collect receivables importer business cashflow would adversely affected least short term limited sales marketing distribution capabilities may adversely affect ability successfully commercialize products currently limited sales marketing distribution capabilities anticipate relying thirdparty collaborators sell market distribute products foreseeable future arrangements third parties successful unable enter additional thirdparty arrangements may need substantially expand sales marketing distribution force efforts expand may succeed may lack sufficient resources expand timely manner either harm operating results addition able expand sales marketing distribution capabilities begin competing companies experienced well funded operations cannot successfully compete larger companies revenues may grow business may suffer able establish maintain adequate manufacturing supply relationships development sale products could impaired successful products must manufactured commercial quantities compliance regulatory requirements acceptable cost may able maintain longterm manufacturing relationships currently suppliers anticipate changes needed volume requirements increase manufacturing interruptions could significantly delay clinical development potential products reduce thirdparty clinical researcher interest support proposed trials interruptions could also impede commercialization products including sales zadaxin approved markets impair competitive position developments would harm business countries manufacturing change may require additional regulatory approvals obtain required regulatory approvals manufacturing change timely fashion new zadaxin marketing approvals may delayed sales may interrupted manufacturing change approved either results would harm business addition manufacturing supply quality control problems may arise either alone subcontractors attempt scaleup manufacturing procedures may able scaleup timely manner commercially reasonable cost either could cause delays pose threat ultimate commercialization products harm business obtain rights additional products third parties prospects future revenue may decline clinical development zadaxin primary product development objective however devote additional resources cpx advance scv07 dax products inlicensed rights preclinical clinical development may lose rights products may also shortage drugs develop commercialize license otherwise acquire rights additional drugs shortage number drugs able develop commercialize may reduce prospects future revenue commercialization products depends collaborations others collaborators successful unable find future collaborators may able properly develop commercialize products depend part distributors business partners develop andor promote drugs successful efforts fail business suffer generally control amount timing resources business partners devote zadaxin always performed expected perform obligations expect particularly obligations regarding clinical trials development expenses would increase development andor sale products could limited delayed could hurt business cause stock price decline addition relationships companies may successful disputes may arise ownership rights intellectual property knowhow technologies developed collaborators may able negotiate similar additional arrangements future develop commercialize zadaxin products fail protect products technologies trade secrets may able successfully use manufacture market sell products may fail advance maintain competitive position success depends significantly ability obtain maintain meaningful patent protection products technologies preserve trade secrets avoid infringing proprietary rights third parties pending patent applications may result issuance patents future patents patent applications may priority others’ applications existing patents additional patents may issued may provide competitive advantage us may invalidated circumvented competitors others may independently develop similar products design around patents issued licensed us patents issued patent applications filed companies could harm ability use manufacture market sell products maintain competitive position respect products although many patents relating zadaxin expired rights patents patent applications relating zadaxin exclusive licenses breach terms licenses could lose rights patents patent applications commercial success also depends part us infringing valid enforceable patents proprietary rights third parties breaching licenses may relate technologies products aware thirdparty patents may relate products possible may unintentionally infringe patents proprietary rights third parties may future receive notices claiming infringement third parties well invitations take licenses thirdparty patents legal action us collaborative partners claiming damages seeking enjoin commercial activities relating products processes affected thirdparty rights may require us collaborative partners obtain licenses order continue manufacture market affected products processes efforts defend claims even unmeritorious would require us devote resources attention could directed operations growth plans addition actions may subject us potential liability damages collaborative partners may prevail patent action license required patent may made available commercially acceptable terms pharmaceuticals either patentable recently become patentable countries exclusive rights zadaxin past enforcement intellectual property rights many countries limited nonexistent future enforcement patents proprietary rights many countries likely problematic unpredictable moreover issuance patent one country assure issuance similar patent another country claim interpretation infringement laws vary nation extent patent protection uncertain may vary different jurisdictions make acquisitions incur variety costs may never realize anticipated benefits appropriate opportunities become available may attempt acquire products product candidates businesses believe fit strategically business currently commitments agreements respect material acquisitions undertake transaction sort process integrating acquired product candidate business may result operating difficulties expenditures may absorb significant management attention would otherwise available ongoing business development plans moreover may never realize anticipated benefits acquisition future acquisitions could result inprocess research development expenses potentially dilutive issuances equity securities incurrence debt contingent liabilities andor amortization impairment goodwill intangible assets could adversely affect business financial condition results operations may lose market share otherwise fail compete effectively intensely competitive biopharmaceutical industry competition biopharmaceutical industry intense expect competition increase success depends ability compete believe principal competitive factors industry include efficacy safety price therapeutic regimen manufacturing quality assurance patents associated given drug competitors include biopharmaceutical companies biotechnology firms universities research institutions us abroad actively engaged research development products therapeutic areas pursuing particularly hepatitis c hepatitis b cancer competitors currently marketing drugs hepatitis c hepatitis b cancer products latestage clinical trials competitors particularly large biopharmaceutical companies substantially greater financial technical regulatory manufacturing marketing human resource capabilities also extensive experience undertaking preclinical clinical testing obtaining regulatory approvals necessary market drugs additional mergers acquisitions pharmaceutical industry may result even resources concentrated competitors comparable products marketed companies price competitive factor increased competitive pressure could lead intensified pricebased competition resulting lower prices margins would hurt operating results currently rely sales zadaxin outside us treatment hepatitis c hepatitis b certain cancers primary source product revenue several large biopharmaceutical companies substantial commitments interferon alpha approved drug treating hepatitis b hepatitis c lamivudine adefovir approved drugs treat hepatitis b cannot assure compete successfully competitors potential competitors develop drugs treatments hepatitis c hepatitis b cancer diseases superior us product zadaxin evaluated combination pegylated interferon alpha treatment hepatitis c patients failed respond prior therapy interferon alpha plus ribavirin interferon alpha alone companies researching developing marketing products use alone combination interferon alphas pegylated interferon alphas clinical indications including hcv hbv competitive products include ribavirin allegedly improved ribavirin molecules products yet late stage clinical trials therapeutic vaccines reverse transcriptase inhibitors clinical trials may show zadaxin advantages existing future competitive products clinically significant synergistic value believe position zadaxin complementary rather competitive drug many therapies cannot guarantee successful endeavor expect continuing advancements increasing awareness use immune system enhancer therapy fight cancer infectious diseases development may create new competitors cannot assure able successfully compete competitors thirdparty reimbursement available patients cannot otherwise pay zadaxin may able successfully market zadaxin ability successfully commercialize products may depend part extent coverage reimbursement patients products available government health care programs private health insurers third party payors organizations significant uncertainty exists reimbursement status new therapeutic products zadaxin cannot assure third party insurance coverage reimbursement available therapeutic products might develop emerging markets sell zadaxin intend sell zadaxin reimbursement zadaxin government private health insurance programs yet widely available failure obtain thirdparty reimbursement products particularly us europe japan harm business us proposed health care reforms could limit amount thirdparty reimbursement available products cannot assure additional limitations imposed future drug coverage reimbursement many emerging markets marketing rights zadaxin government resources per capita income may low products prohibitively expensive countries may able market products economically favorable terms efforts governmental thirdparty payors contain reduce health care costs could cause us reduce prices market drugs reduce gross margins may harm business various governments thirdparty payors trying contain reduce costs health care various means expect continue number legislative proposals implement government controls announcement proposals reforms could cause us reduce prices market drugs reduce gross margins may harm business current economic slowdown us causes economies countries particularly asia latin america middle east experience slowdown recession business suffer us world’s largest consumer current economic slowdown us may adversely affect economies countries including developing countries asia latin america middle east derive essentially revenues economic conditions us continue worsen developing countries may also experience economic slowdown recession would likely result decrease sales zadaxin decrease sales zadaxin would harm operating results delay efforts achieve profitability likely cause stock price decline current geopolitical situation middle east countries may cause business suffer current geopolitical conditions middle east north korea continue worsen resulting global developments would likely result decrease sales zadaxin decrease sales zadaxin would harm operating results delay efforts achieve profitability likely cause stock price decline current war terrorism causes economic slowdowns economies business disruptions certain countries business suffer united states allied nations aggressively attacking terrorism military economic actions lead economic slowdowns economies developing countries asia latin america middle east currently derive essentially product revenue sales could decrease addition commercial product manufactured europe distributed us operations hong kong disruption supply distribution activities due war acts terrorism could decrease sales decrease sales would harm operating results delay efforts achieve profitability likely cause stock price decline lose key personnel unable attract retain additional highly skilled personnel required expansion activities business suffer highly dependent upon ability attract retain qualified personnel specialized scientific international nature business intense competition qualified management scientific technical personnel pharmaceutical industry may able attract retain qualified personnel need grow develop business globally addition numerous key responsibilities sciclone assigned small number individuals unable attract retain qualified personnel needed promptly replace employees critical product development commercialization development commercialization products would adversely affected time maintain “key person” life insurance key personnel may subject product liability lawsuits insurance may inadequate cover damages clinical trials marketing current potential products may expose us liability claims use products currently carry product liability insurance however cannot certain able maintain insurance acceptable terms clinical commercial activities insurance would sufficient cover potential product liability claim recall fail sufficient coverage business results operations cash flows could adversely affected future changes financial accounting standards may cause adverse unexpected revenue expense fluctuations affect reported future results operations impact reported future financial position change accounting policies significant effect reported results may affect reporting transactions completed change effective new pronouncements varying interpretations pronouncements occurred frequency may occur future changes existing rules questioning current practices may adversely affect reported financial results financial position way conduct business specifically legislative proposals could result changes accounting rules requiring us account employee stock options issued market value expense potential changes could materially increase expenses report generally accepted accounting principles adversely affect operating results compliance legislative actions changing regulations related corporate governance public disclosure may result additional expenses including higher insurance costs changing laws regulations standards relating corporate governance public disclosure including sarbanesoxley act 2002 new sec regulations nasdaq stock market rules creating increased requirements companies may additional regulatory rulings changes committed maintaining high standards corporate governance public disclosure result intend invest reasonably necessary resources comply evolving standards investment may result increased general administrative expenses diversion management time attention revenuegenerating activities compliance activities addition insurers increased rates result higher claims rates past year may increase rates future years rates various insurance policies increased significantly may increase future years unable comply environmental laws regulations business may harmed subject federal state local laws regulations governing use manufacture storage handling disposal hazardous materials waste products currently maintain supply hazardous materials facilities event accident could liable damages result liability could exceed resources outsource research development programs involving controlled use biohazardous materials future conduct programs might required incur significant cost comply environmental laws regulations price common stock experienced substantial volatility may fluctuate due factors beyond control us global economies weakened due effects uncertainties caused events september 2001 may result decrease revenues cause stock price decline high profile corporate governance accounting problems resulting corporate failures eroded investor confidence wake events us global capital markets experienced period extreme volatility may continue time addition significant volatility market prices publicly traded shares pharmaceutical biotechnology companies including following factors may adverse impact market price common stock significant negative changes major equity market indices announcements technical product developments us competitors governmental regulation health care legislation public announcements regarding advances treatment disease states targeting public announcements government officials relating biotechnology pharmaceutical industries patent proprietary rights developments changes thirdparty reimbursement policies products fluctuations operating results cannot assure price common stock remain exceed current levels indebtedness may result future liquidity problems december 31 2002 5600000 convertible notes payable 4000000 issued quarter ended december 31 2000 1600000 quarter ended march 31 2001 indebtedness additional debt may incur fund operations may make difficult us obtain additional financing outstanding notes payable five years issuance unless converted common stock sole discretion holder unable satisfy debt service requirements substantial liquidity problems could result would negatively impact future prospects december 31 2002 cash equivalents shortterm investments 21100000 substantial sales stock convertible securities may impact market price common stock december 31 2002 stock options 5097482 shares common stock outstanding options 3677142 shares exercisable also outstanding date warrants exercisable 1970500 shares common stock prices ranging 225 3133 per share 400000 cancelled january 2003 two issues notes convertible total 684140 shares common stock addition note holder right purchase senior unsecured convertible notes due december 2005 march 2006 issued additional notes bear interest zero coupon convertible 684140 shares common stock upon exercise options warrants conversion notes issued shares common stock freely tradable future sales substantial amounts common stock could adversely affect market price common stock similarly raise additional funds issuance common stock securities convertible exercisable common stock percentage ownership shareholders reduced price common stock may fall issuing preferred stock rights senior common stock could adversely affect holders common stock charter documents give board directors authority issue series preferred stock without vote action shareholders board also authority determine terms preferred stock including price preferences voting rights holders common stock may adversely affected rights granted holders preferred stock example series preferred stock may granted right receive liquidation preference preset distribution event liquidation would reduce amount available distribution holders common stock addition issuance preferred stock could make difficult third party acquire majority outstanding voting stock result common shareholders could prevented participating transactions would offer optimal price shares item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations read conjunction “selected consolidated financial data” financial statements related notes thereto included elsewhere annual report form 10k management’s discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see “note regarding forwardlooking statements” “risk factors” contained annual report form 10k overview current primary business objective obtain regulatory approval commercialize zadaxin major pharmaceutical markets united states europe japan long term business objective leading biopharmaceutical company engaged development commercialization therapeutics treat lifethreatening diseases periods encompassed annual report form 10k devoted substantially resources zadaxin clinical trials zadaxin commercialization activities primary focus clinical development zadaxin part new combination therapy treatment hepatitis c believe worldwide market hcv therapies approximately 3 billion 2003 could exceed 8 billion 2012 united states europe japan account essentially market opportunity currently two approved marketed therapies hepatitis c interferon alpha predominantly pegylated forms ribavirin combination interferon alpha two large pharmaceutical companies scheringplough roche market brands pegylated interferon alpha ribavirin dominate hepatitis c therapeutic market strategy develop zadaxin used combination improve efficacy current therapy currently conducting united states two phase 3 hepatitis c clinical trials zadaxin combination pegylated interferon intend complete trials end 2005 successful file nda mid2006 also developing zadaxin japan monotherapy treatment hepatitis b completed phase 3 clinical trial 2003 targeting file nda japan end 2004 estimate worldwide market hbv therapeutics approximately 320 million 2003 expected increase 2 billion 2012 largest market hepatitis b therapies asia regulatory approval several countries commercialization marketing activities date concentrated china believe ability significantly expand zadaxin sales opportunities developing countries future depend securing regulatory approval united states europe japan manufacture zadaxin sale clinical trials third party contract manufacturers conduct research development efforts principally arrangements clinical research sites contract research organizations universities commencement operations december 31 2003 accumulated deficit approximately 138000000 least next two years expect net losses increase due increased operating expenses expand research development clinical testing sales marketing capabilities ability achieve sustain operating profitability primarily dependent execution successful completion zadaxin clinical trials securing regulatory approvals zadaxin united states europe japan approved countries successful commercialization marketing zadaxin addition factors may also impact ability achieve sustain operating profitability including pricing zadaxin manufacturing marketing costs cost longterm product development commercialization programs timing costs acquiring rights additional drugs ability fund operations entrance extension agreements product development commercialization appropriate expect net sales 2004 lower net sales 2003 anticipating significant new source demand zadaxin sars epidemic china second quarter 2003 expect quarterly net sales 2004 similar reported third fourth quarters 2003 expected research development expenses 2004 higher research development expenses 2003 due increased expenses phase 3 hepatitis c clinical trials united states well development scv07 expected net loss net loss per share 2004 higher net loss net loss per share 2003 based lower net sales estimates higher research development expenses cash equivalents shortterm investments december 31 2004 expected lower december 31 2003 primarily due expected net loss operations operating results may fluctuate quarter fluctuations may substantial result among factors number timing costs results preclinical clinical trials products market acceptance zadaxin timing orders zadaxin international markets particularly china regulatory approval process timing fda international regulatory approvals acquisition additional product rights funding provided result corporate partnering arrangements critical accounting policies general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout “management’s discussion analysis financial condition results operations” policies affect reported expected financial results detailed discussion application accounting policies see note 1 “notes consolidated financial statements” item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united sates requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates base estimates historical experience various market specific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition recognize revenue product sales time shipment significant customer acceptance requirements postshipment obligations part sales importing agents distributors recognized time shipment title product transferred contractual rights return except limited terms regarding product quality however replace products expired deemed damaged defective delivered payments importing agents distributors contingent upon sale end user importing agents distributors contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement us recognized earlier payments received collection assured exercise judgment determining period performance obligations fulfilled impact timing amount revenue recognized particular reporting period revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment exercise judgment determination achievement milestones impact timing amount revenue recognized particular reporting period amounts invoiced relating arrangements revenue cannot recognized reflected balance sheet deferred revenue recognized applicable revenue recognition criteria satisfied accounts receivable required estimate collectibility trade receivables maintain reserves credit losses within expectations recognize reserves bad debts ranging 25 100 past due accounts receivable based length time receivables past due collectibility experience considerable amount judgment required assessing ultimate realization receivables including limited analysis historical payment patterns customers individual customer circumstances geographic region including review local economic environment ability collect outstanding receivables customers critical operating performance cash flows maintain allowances doubtful accounts estimated losses resulting inability customers make required payments financial condition customers economic environment operate deteriorate resulting impairment ability make payments additional allowances may required would increase general administrative expenses increase reported net loss conversely actual credit losses significantly less reserve would decrease general administrative expenses decrease reported net loss inventories stated lower cost realizable market value assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels possible changes inventory reserves may required future due change market conditions begun production new contract manufacturer currently process qualifying product permit importation china fourth quarter 2003 began building inventory levels ensure uninterrupted supply product distributors china elsewhere expect inventory levels decrease second half 2004 unable qualify timely fashion product produced new contract manufacturer inventory reserves may insufficient could result increase inventory reserves net loss impairment intangible assets december 31 2003 net intangible assets 612000 related zadaxin product rights never recorded impairment losses related intangible assets assessing recoverability intangible assets must make assumptions regarding estimated future cash flows factors determine fair value respective assets estimates related assumptions change future may required record impairment charges assets research development expenses research development expenses principally incurred phase 3 clinical trials united states research development expenses charged operations incurred cost accruals clinical trials based estimates services received efforts expended pursuant contracts numerous institutions conduct clinical trials behalf financial terms agreements subject negotiation variation contract may result uneven payment flows payments contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses financial statements actual services received efforts expended expenses related grants institutions accrued based level patient enrollment activity according protocol general expenses higher initial final months patient’s scheduled 18 months treatment observation expenses relating clinical research organization managing trials laboratory direct expenses recognized period incurred services performed monitor patient enrollment levels related activity extent possible adjust estimates accordingly however management underestimated activity levels associated various studies given point time could underestimate actual research development expenses requiring recording additional expenses increase net loss results operations product sales 31732000 17101000 13831000 years ended december 31 2003 2002 2001 respectively derived sales zadaxin increases attributable higher volume product sold prices remained stable sales customers china accounted approximately 88 89 revenue years ended december 31 2003 2002 2001 respectively total increase sales 14631000 2002 2003 approximately 11000000 unanticipated temporary increase demand zadaxin hospitals china time sars outbreak second quarter 2003 years ended december 31 2001 2003 sales four six importing agents china accounted approximately 88 product sales single largest customer accounted 52 41 47 sales years ended december 31 2003 2002 2001 respectively however importing agent single largest customer varied year december 31 2003 approximately 9112000 89 accounts receivable attributable five customers china perform ongoing credit evaluations customers’ financial condition generally require collateral customers contract revenue 806000 671000 0 years ended december 31 2003 2002 2001 respectively contract revenue recognized connection 2685000 payment received sigmatau january 2002 revenue recognized contract revenue course zadaxin hepatitis c us clinical program period sharing clinical data program sigmatau accordance requirements contract sigmatau gross margin 83 2003 80 2002 2001 increase gross margin 2003 largely attributable productrelated fixed costs spread significantly larger volume units sold expect cost product sales hence gross margin vary year depending upon level zadaxin sales absorption productrelated fixed costs charges associated excess expiring finished product inventory research development expenses 18949000 11647000 8561000 years ended december 31 2003 2002 2001 respectively increase year support zadaxin phase 3 clinical trials primarily united states lesser extent japan 2003 2002 2001 research development rd expenses represented approximately 59 48 40 respectively total costs expenses major components rd expenses consist clinical studies performed clinical trial institutions contract research organizations related materials supplies preclinical work pharmaceutical development personnel costs including salaries benefits third party research funding overhead allocations consisting various support facilities related costs research development activities also separated three main categories research clinical development pharmaceutical development research costs typically consist preclinical toxicology work clinical development costs include phase 1 2 3 clinical trials well expanded clinical access programs pharmaceutical development costs consist product formulation chemical analysis 2003 recorded approximately 2100000 research 13200000 clinical development 2300000 pharmaceutical development activities compares expenses 2002 approximately 2300000 research 8300000 clinical development 1100000 pharmaceutical development activities expenses 2001 approximately 2800000 research 5000000 clinical development 800000 pharmaceutical development activities initiation continuation current clinical development programs continue significant effect research development expenses expansion significant extension clinical development programs may require us seek additional capital resources due uncertain nature clinical trial process enrollment rates particular possible determine timing completion total cost expected incurred trial general expect research development expenses increase significantly least next two years vary substantially quarter pursue strategy initiating additional preclinical clinical trials testing acquiring product rights expanding regulatory activities sales marketing expenses 9018000 8724000 8764000 years ended december 31 2003 2002 2001 respectively yeartoyear increases 2001 2003 related increased payroll expenses advertising conferences associated expansion markets zadaxin however expect sales marketing expenses increase next several quarters years expand commercialization marketing efforts general administrative expenses 4134000 3902000 3897000 years ended december 31 2003 2002 2001 respectively yeartoyear increases 2001 2003 attributable greater general administrative activities support increased level research development latestage clinical programs near term expect general administrative expenses vary quarter increase general administrative activities resources support increased expenditures preclinical clinical trials testing regulatory precommercialization marketing activities interest investment income approximately 266000 323000 751000 years ended december 31 2003 2002 2001 respectively decrease years primarily due lower interest rates interest expense relating 5600000 convertible notes payable 361000 year ended december 31 2003 net loss years ended december 31 2003 2002 2001 5275000 10037000 6232000 respectively net loss decreased 2003 due higher net sales gross margin net loss 2002 higher 2001 due increase research development expenses gain 2001 3497000 full repayment note receivable former officer net loss per share years ended december 31 2003 2002 2001 013 029 019 respectively weighted average shares outstanding year ending december 31 2003 2002 2001 39568199 35002003 32356287 respectively increase shares outstanding primarily due financing activities 2003 2002 liquidity capital resources december 31 2003 2002 2001 62975000 21150000 16468000 respectively cash equivalents shortterm investments years principal factors affecting balances net loss cash provided financing activities currently estimate cash equivalents shortterm investments december 31 2004 lower balance december 31 2003 expected decrease balance attributable expected net loss plan financing year shortterm investments consist primarily highly liquid marketable securities two letters credit secured certificate deposit december 31 2003 letters credit totaled 695000 one 633000 lease agreement 62000 facilitate value added tax filings europe net cash used operating activities totaled 8055000 5890000 12042000 years ended december 31 2003 2002 2001 respectively net cash used operating activities year ended december 31 2003 net loss primarily due 2347000 increase inventory levels expected provide uninterrupted supply zadaxin began production new contract manufacturer net cash used operating activities year ended december 31 2002 less net loss primarily due receipt payment sigmatau clinical trial collaboration increased deferred revenue balances 2014000 due increases accounts payable 1576000 partially offset increases prepaid expenses assets 967000 mostly associated phase 3 clinical trials united states net cash used operating activities year ended december 31 2001 12042000 mainly attributable net loss operations 6232000 increase inventory 2039000 cash provided investing activities primarily net result purchases sales shortterm investments provide working capital operations purchased 303000 property equipment year ended december 31 2003 net cash provided financing activities totaled 50074000 10577000 5995000 years ended december 31 2003 2002 2001 respectively net cash provided financing activities year ended december 31 2003 consisted approximately 44426000 followon public offering common stock approximately 2536000 exercise outstanding warrants purchase common stock institutional accredited investors approximately 1800000 issuance common stock sigmatau approximately 1050000 related exercises outstanding options employee stock option plans 262000 issuance common stock employee stock purchase plan net cash provided financing activities year ended december 31 2002 consisted approximately 9914000 direct offering common stock institutional investors approximately 514000 related exercises outstanding options employee stock option plans 149000 issuance common stock employee stock purchase plan net cash provided financing activities year ended december 31 2001 consisted 1600000 proceeds issuance convertible note 544000 net proceeds issuance common stock 354000 granting investor right purchase approximately 2400000 senior unsecured convertible notes 3497000 payment note receivable former officer following table summarizes contractual obligations commitments december 31 2003 4 represents 20000 per year minimum royalty payments us army 5 required noncancelable prepaid royalties paid wayne state university see note 5 consolidated financial statements intend give priority use financial resources zadaxin clinical programs united states believe existing capital resources funds product sales sufficient complete current us phase 3 clinical trials successful receive fda approval begin commercialization zadaxin united states however cannot assure funds sufficient sales zadaxin approved united states result profitable operations event need raise additional financing unavailability inopportune timing financing could prevent delay longterm product development commercialization programs either would severely hurt business need timing amount financing would depend upon numerous factors including level zadaxin sales timing amount manufacturing costs related zadaxin availability complementary products technologies businesses initiation continuation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative parties status competitive products officers directors involved related party transactions 2003 offbalance sheet arrangements offbalance sheet arrangements 2003 2002 2001 income taxes december 31 2003 net operating loss carryforwards federal income tax purposes approximately 86000000 expire years 2006 2023 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred foreign subsidiaries december 31 2003 federal tax credit carryforwards approximately 4900000 expire years 2009 2023 “change ownership” provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities risk factors carefully consider risks described addition information report form 10k making investment decision risk factors could adversely affect business financial condition operating results well adversely affect value investment common stock unable commercialize zadaxin various markets multiple indications particularly united states treatment hcv business harmed ability achieve sustain operating profitability depends large part ability commence execute complete clinical programs obtain additional regulatory approvals zadaxin drug candidates particularly united states europe japan also dependent ability increase zadaxin sales existing markets launch zadaxin new markets particular ability achieve sustain profitability depend large part ability commercialize zadaxin treatment hcv united states cannot assure achieve significant levels sales receive approval zadaxin treatment hcv united states treatment hcv indications countries unable business harmed obtain regulatory approval zadaxin intended indications evaluating revenues limited become profitable ability execute business strategy requires obtain regulatory approval use zadaxin particularly treatment hcv united states hbv hcv japan hcv malignant melanoma europe current phase 3 trials united states current future trials europe yield favorable results intend submit applications marketing approval zadaxin treatment hcv united states partner sigmatau treatment hcv malignant melanoma europe based results recently completed phase 3 trial japan intend submit regulatory filing treatment hbv japan regulatory approval process united states europe japan demanding typically requires 12 months united states 18 months europe japan date submission new drug application committed significant resources including capital time develop zadaxin particularly hcv united states goal obtaining approvals obtain approvals unable achieve substantial increase revenue new drugs including products developed development subject extensive rigorous regulation fda comparable agencies state local jurisdictions foreign countries regulations govern among things development testing manufacturing labeling storage premarket approval importation advertising promotion sale distribution products regulations may change time new regulations may adopted obtaining regulatory approval developing countries also timeconsuming expensive countries contemplating marketing selling zadaxin regulatory approval process often relies prior approvals obtained united states europe japan without prior approvals ability obtain regulatory approvals zadaxin countries may delayed prevented addition secure regulatory approvals need among things demonstrate favorable results additional clinical trials zadaxin even able complete clinical trials sponsored planning timely costeffective manner trials may fulfill applicable regulatory approval criteria case able obtain regulatory approval countries cannot assure ultimately obtain regulatory approvals targeted countries timely costeffective manner fail obtain required regulatory approvals develop market sell products countries currently rights revenues limited satisfaction government regulations may take several years time needed satisfy varies substantially based type complexity novelty pharmaceutical product result government regulation may cause us delay introduction prevent us marketing existing potential products considerable period time impose costly procedures upon activities even obtain regulatory approval products approval may impose limitations indicated uses products may marketed unsatisfactory data resulting clinical trials may also adversely affect ability market sell zadaxin markets approved sale results clinical trials favorable unable obtain regulatory approval intended indications evaluating obtain regulatory approvals must among requirements complete carefully controlled welldesigned clinical trials demonstrating particular drug safe effective applicable disease cannot depend data prior trial results predict demonstrate drug products safe efficacious regulatory guidelines qualify commercial sale cannot assure rely previous clinical trial results predict ongoing future clinical trials yield favorable results adverse inconclusive clinical results would prevent us filing regulatory approval zadaxin indications evaluating current programs areas would fail past alpha 1 biomedical acquired certain rights thymosin alpha 1 conducted phase 3 clinical trial thymosin alpha 1 therapy hbv produce statistically significant results alpha 1 biomedical submit new drug application fda currently conducting phase 3 clinical trials based use zadaxin combination pegylated interferon alpha treatment hcv patients previously respond treatment cannot assure phase 3 clinical trials yield sufficient adequate data demonstrate appropriate safety efficacy fda guidelines failure obtain sufficient adequate data could delay prevent us securing fda approval two phase 3 hcv clinical trials united states designed show combination zadaxin pegylated interferon alpha adds significant clinical benefit compared use pegylated interferon alpha alone non responders cannot assure results combination therapy yield favorable results expect independent use pegylated interferon alpha perform better anticipated could reduce chances new drug application nda approved combination therapy zadaxin pegylated interferon alpha causes significant adverse side effects beyond caused pegylated interferon alpha alone clinical trials could delayed patients may drop greater anticipated rate may forced halt trials fda may reject nda due safety issues foregoing occurs efforts market sell zadaxin united states significantly impaired business suffer price stock may decline phase 3 hbv clinical trial japan designed demonstrate clinical benefit measured analysis combination safety efficacy data points cannot assure results study warrant favorable consideration japanese ministry health welfare result marketing registration zadaxin additional studies data required regulatory consideration efforts market sell zadaxin japan significantly impaired business suffer price stock may decline experience delays patient enrollment clinical trials may able obtain regulatory approval accordance anticipated timeline two current phase 3 hcv clinical trials united states designed enroll 500 patients one trial treating patients liver damage trial treating patients mild cirrhosis liver 500 patient enrollment complete first trial however unable enroll sufficient number patients second trial enrollment delayed patient drop rates either trial higher anticipated ability proceed clinical trials prepare nda would adversely affected particular experiencing competition patients mild cirrhosis liver trials sponsored commercial drug developers trial sponsored national institutes health competition enrollment similar patients clinical trials delays enrollment may prevent us enrolling patients quickly enough meet current timing expectations completing phase 3 trials would delay preparation nda able fully enroll patients clinical trials patient drop rates higher anticipated could reduce chances nda approved cannot predict safety profile use zadaxin used combination drugs many trials involve use zadaxin combination drugs known cause adverse patient reactions even zadaxin produce adverse side effects used alone cannot predict work drugs including causing possible adverse side effects directly attributable drugs could compromise safety profile zadaxin used certain combination therapies due outbreak sars china sales zadaxin second quarter 2003 significantly higher expected indicative future sales quarter ended june 30 2003 200 greater sales quarter history result previously unanticipated increase sales zadaxin hospitals china increase related use immune system enhancers including zadaxin connection treatment severe acute respiratory syndrome sars future quarters sales zadaxin treatment sars could affected changes treatment china changes rate infection emergence evidence effectiveness ineffectiveness zadaxin potential treatments sars result containment sars epidemic expect sales future quarters consistent sales patterns third fourth quarters significantly lower sales results second quarter 2003 could experience fluctuations sales future quarters result similar factors sales zadaxin may fluctuate due seasonality product orders sales quarter may indicative future sales quarter ended june 30 2003 greatly affected demand china zadaxin connection treatment sars possible predict time sars reemerge like influenza seasonal public health problem effect would future sales zadaxin extent zadaxin purchased connection future outbreaks sars seasonal viral contagions product sales could become concentrated certain quarters calendar year quarterly sales levels could fluctuate sales quarter may indicative sales future periods revenue dependent sale zadaxin foreign countries particularly china experience difficulties foreign sales efforts financial condition harmed product revenue near term highly dependent sale zadaxin foreign countries experience difficulties foreign sales efforts business suffer financial condition harmed substantially zadaxin sales customers china sales zadaxin china may limited due low average personal income lack patient cost reimbursement poorly developed infrastructure existing potential competition products including generics several local companies introduced lower priced locally manufactured generic competitive products sales continue could negative impact price volume zadaxin sold china would harm business addition zadaxin sales operations parts asia well latin america middle east subject number risks including difficulties delays obtaining registrations permits pricing approvals reimbursement unexpected changes regulatory requirements addition experience issues managing foreign sales operations including long payment cycles difficulties accounts receivable collection especially significant customers fluctuations timing amount orders operations foreign countries also expose us risks relating difficulties enforcing proprietary rights currency fluctuations adverse deteriorating economic conditions product sales united states offset decrease revenue zadaxin sales asia latin america middle east addition countries regions including china regulate pharmaceutical prices pharmaceutical importation regulations may reduce prices zadaxin levels significantly would prevail unregulated market limit volume product may imported sold place high import duties product may limit growth revenues cause decline china’s tiered method importing distributing finished pharmaceutical products quarterly results may vary substantially one period next china uses tiered method import distribute finished pharmaceutical products port entry prior moving product forward distributors governmentlicensed importing agents must process evaluate shipment determine whether shipment satisfies china’s quality assurance requirements order efficiently manage process importing agents typically place large therefore relatively orders within six month period therefore sales importing agent vary substantially quarter depending size timing orders past may future cause quarterly results fluctuate rely six importers supply substantially product china use small number importing agents china receivables one importing agent material unable collect receivables importer business cashflow would adversely affected fail protect products technologies trade secrets may able successfully use manufacture market sell products may fail advance maintain competitive position success depends significantly ability obtain maintain meaningful patent protection products technologies preserve trade secrets pending patent applications may result issuance patents future patents patent applications may priority others’ applications existing patents additional patents may issued may provide competitive advantage us may invalidated circumvented competitors others may independently develop similar products design around patents issued licensed us patents issued patent applications filed companies could harm ability use manufacture market sell products maintain competitive position respect products although many patents relating zadaxin expired including composition matter patents rights patents patent applications relating zadaxin analogues including method use patents respect use zadaxin certain indications parties develop generic forms zadaxin indications including conducting clinical trials indications patents rights might sufficient prohibit marketing selling generic forms zadaxin parties develop analogues derivatives zadaxin patents rights might sufficient prohibit marketing analogues derivatives pharmaceutical products either patentable recently become patentable countries market may market zadaxin past enforcement intellectual property rights many countries including china particular limited nonexistent future enforcement patents proprietary rights many countries likely problematic unpredictable aware companies marketing generic thymosin alpha 1 china possibly violation trademark rights expect violations rights continue moreover issuance patent one country assure issuance similar patent another country claim interpretation infringement laws vary nation extent patent protection uncertain may vary different jurisdictions involved intellectual property claims litigation proceedings may divert resources subject us significant liability damages substantial litigation expense loss proprietary rights commercial success depends part us infringing valid enforceable patents proprietary rights third parties breaching licenses may relate technologies products aware thirdparty patent may relate products may cover method action used zadaxin cannot assure mechanism action infringe claim addition may aware patents patent applications may impact ability make use sell potential products example us patent applications may kept confidential 18 months pending patent trademark office patent applications filed foreign countries often first published six months filing possible may unintentionally infringe patents proprietary rights third parties may future receive notices claiming infringement third parties well invitations take licenses thirdparty patents legal action us collaborative partners claiming damages seeking enjoin commercial activities relating products processes affected thirdparty rights may require us collaborative partners obtain licenses order continue manufacture market affected products processes efforts defend claims regardless merit would require us devote resources attention could directed operations growth plans addition actions may subject us potential liability damages collaborative partners may prevail patent action license required patent may made available commercially acceptable terms conflicts resulting patent rights others could significantly reduce coverage patents limit ability obtain meaningful patent protection companies obtain patents conflicting claims may required obtain licenses patents develop obtain alternative technology manufacture market affected products processes may able obtain licenses acceptable terms failure obtain licenses could delay prevent us pursuing development commercialization potential products efforts defend claims would require us devote resources attention could directed operations growth plans may need initiate litigation could timeconsuming expensive enforce proprietary rights determine scope validity others’ rights litigation results court may find patents licensors invalid may find infringed competitor’s rights competitors filed patent applications united states claim technology also invented patent trademark office may require us participate expensive interference proceedings determine right patent technology actions may subject us potential liability damages collaborative partners may prevail patent action license required patent may made available commercially acceptable terms rely third parties supply clinical trial commercial products deficiencies work could delay harm one important areas business including sales clinical trials regulatory approval process rely third parties subject regulatory oversight supply clinical commercial products typically time one supplier phase manufacturing product unanticipated deficiencies suppliers occur could experience delays ability assemble timely acceptable nda sales zadaxin increase dramatically thirdparty suppliers may able supply zadaxin quickly enough could limit ability satisfy increased demand could adversely affect ability suppliers provide products clinical trials zadaxin planned used hcv clinical trials manufactured received roche exclusive supplier pegylated interferon alpha current us clinical trials received pegylated interferon used clinical trials roche’s agreement us provide supply pegylated interferon alpha terminated without cause 30days’ notice case would need purchase product use clinical trials delay receiving recall pegylated interferon alpha zadaxin including reason roche’s termination supply arrangement us could delay clinical trials detract integrity trial data foregoing occurs ability complete clinical trials united states market sell zadaxin worldwide delayed impaired business suffer price stock may decline process qualifying new manufacturer zadaxin encounter problems process validation sales clinical trials could adversely affected able establish maintain adequate manufacturing relationships development sale products could impaired successful products must manufactured commercial quantities compliance stringent regulatory requirements acceptable cost typically time one supplier phase manufacturing product manufacturing interruptions failure comply regulatory requirements could significantly delay clinical development potential products reduce thirdparty clinical researcher interest support proposed trials interruptions failures could also impede commercialization products including sales zadaxin approved markets impair competitive position developments would harm business process changing suppliers zadaxin changes require qualification new suppliers regulatory agencies quality assurance steps could cause delays interruptions supply obtain required regulatory approvals manufacturing change timely fashion especially china sales may interrupted manufacturing change approved although increasing inventories prepare manage occurrences may still experience interruptions supply could adversely affect results countries manufacturing change may require additional regulatory approvals may delay zadaxin marketing approvals new markets addition manufacturing supply quality control problems may arise either alone subcontractors attempt scaleup manufacturing procedures may able scaleup timely manner commercially reasonable cost either could cause delays pose threat ultimate commercialization products harm business may able successfully develop commercialize products limited sales zadaxin certain markets yet regulatory approval zadaxin principal target markets respect zadaxin still developed potential products earlier stages development zadaxin fully develop products need commit substantial resources extensive research development preclinical testing clinical trials manufacturing scaleup regulatory approval prior ready sale cannot assure efforts produce commercially viable products face significant technological risks inherent developing products may also abandon proposed products become commercially viable products even developed approved cannot successfully commercialized timely manner business harmed price stock may decline yet sold product zadaxin sales primarily single country china future revenue growth depends increased market acceptance commercialization zadaxin additional countries particularly united states europe japan fail successfully market zadaxin cannot commercialize drug united states additional markets revenue operating results suffer unexpected serious adverse events reported expected efficacy results achieved would material adverse effect business future revenue also depend part ability develop commercially viable accepted products market acceptance products depend many factors including ability convince prospective customers use products alternative treatments therapies convince prospective strategic partners market products effectively manufacture products sufficient quantities acceptable quality acceptable cost addition doctors must opt use treatments involving products doctors elect use different course treatment demand drug products would reduced failure hurt operations rely thirdparty clinical investigators conduct clinical trials result may encounter delays outside control limited experience conducting managing clinical trials rely part third parties particularly clinical research organizations development partners assist us managing monitoring clinical trials reliance third parties may result delays completing failure complete clinical trials third parties fail fulfill obligations us may need obtain additional capital support longterm product development commercialization programs believe existing resources sufficient complete current us phase 3 clinical trials successful receive fda approval begin commercialization zadaxin united states however cannot assure funds sufficient sales zadaxin approved united states result profitable operations addition may need additional funds future support future growth achieve profitability need raise additional funds future funds available reasonable terms commercialization efforts may impeded revenues may limited operating results may suffer history operating losses accumulated deficit expect continue incur losses near term may never achieve profitability experienced significant operating losses since inception december 31 2003 accumulated deficit approximately 138 million expect operating expenses increase next several years plan dedicate substantially resources expanding development testing marketing capabilities particularly united states losses may increase cannot increase sustain revenue result may never achieve profitability limited sales marketing distribution capabilities may adversely affect ability successfully commercialize products currently limited sales marketing distribution capabilities anticipate may relying thirdparty collaborators sell market distribute products foreseeable future arrangements third parties successful unable enter additional thirdparty arrangements may need substantially expand sales marketing distribution force efforts expand may succeed may lack sufficient resources expand timely manner either harm operating results moreover able expand sales marketing distribution capabilities begin competing companies experienced wellfunded operations cannot successfully compete larger companies revenues may grow business may suffer commercialization products depends collaborations others collaborators successful unable find future collaborators may able properly develop commercialize products depend part distributors business partners develop andor promote drugs successful efforts fail business suffer example sigmatau responsible development marketing zadaxin europe generally control amount timing resources business partners devote zadaxin always performed expected perform obligations expect particularly obligations regarding clinical trials development expenses would increase development andor sale products could limited delayed could hurt business cause stock price decline addition relationships companies may successful disputes may arise collaborators including disputes ownership rights intellectual property knowhow technologies developed collaborators may able negotiate similar additional arrangements future develop commercialize zadaxin products may lose market share otherwise fail compete effectively intensely competitive biopharmaceutical industry competition biopharmaceutical industry intense expect competition increase success depends ability compete industry cannot assure able successfully compete competitors increased competitive pressure could lead intensified pricebased competition resulting lower prices margins would hurt operating results focused developing zadaxin treatment hcv hbv certain cancers several large biopharmaceutical companies substantial commitments interferon alpha approved drug treating hbv hcv lamivudine adefovir approved drugs treat hbv cannot assure compete successfully competitors potential competitors develop drugs treatments hcv hbv cancer diseases superior thirdparty reimbursement available patients cannot otherwise pay zadaxin may able successfully market zadaxin significant uncertainty exists reimbursement status new therapeutic products zadaxin cannot assure thirdparty insurance coverage reimbursement available therapeutic products might develop failure obtain thirdparty reimbursement products particularly united states europe japan would harm business cannot assure additional limitations imposed future united states drug coverage reimbursement due proposed health care reforms many emerging markets marketing rights zadaxin government resources per capita income may low products prohibitively expensive may able market products economically favorable terms efforts governmental thirdparty payors contain reduce health care costs announcement legislative proposals reforms implement government controls could cause us reduce prices market drugs reduce gross margins may harm business lose key personnel unable attract retain additional highly skilled personnel required expansion activities business suffer highly dependent upon ability attract retain qualified personnel specialized scientific worldwide nature business intense competition qualified management scientific technical personnel pharmaceutical industry may able attract retain qualified personnel need grow develop business globally addition assign numerous key responsibilities limited number individuals would experience difficulty finding immediate replacements unable attract retain qualified personnel needed promptly replace employees critical product development commercialization development commercialization products would adversely affected time maintain “key person” life insurance key personnel may subject product liability lawsuits insurance may inadequate cover damages clinical trials marketing current potential products may expose us liability claims use products currently carry product liability insurance however cannot certain able maintain insurance acceptable terms clinical commercial activities insurance would sufficient cover potential product liability claim recall fail sufficient coverage business results operations cash flows could adversely affected depend international sales global conditions could negatively affect operating results large majority sales china heightened tensions resulting current geopolitical conditions middle east north korea elsewhere could worsen causing disruptions foreign trade would harm sales particular commercial product manufactured europe distributed us operations hong kong disruption supply distribution activities due geopolitical conditions could decrease sales harm operating results unable comply environmental laws regulations business may harmed subject various federal state local laws regulations recommendations relating use manufacture storage handling disposal hazardous materials waste products including radioactive compounds infectious disease agents well safe working conditions laboratory manufacturing practices experimental use animals extent government regulation might result future legislation administrative action areas cannot accurately predicted currently maintain hazardous materials facilities outsource research development programs involving controlled use biohazardous materials future conduct programs might required incur significant cost comply environmental laws regulations event accident would liable damages result liability could exceed resources stock price may volatile investment stock could suffer decline value market price common stock experienced may continue experience substantial volatility due many factors control including • results clinical trials involving zadaxin • progress zadaxin regulatory process especially regulatory actions united states japan • timing achievement milestones • announcements technological innovations new products us competitors • government regulatory action affecting drug products competitors’ drug products united states foreign countries • developments disputes concerning patent proprietary rights • changes company assessments financial estimates securities analysts • actual anticipated fluctuations quarterly operating results • general stock market conditions fluctuations emerging growth biopharmaceutical market sectors • economic conditions united states abroad • broad financial market fluctuations united states europe asia past following periods large price declines public market price company’s securities class action litigation often initiated company litigation type could result substantial costs diversion attention resources would hurt business adverse determination litigation could also subject us significant liabilities substantial sales stock exercise conversion options convertible securities may impact market price common stock december 31 2003 stock options purchase 5533718 shares common stock outstanding options purchase 3943906 shares exercisable also outstanding date warrants exercisable 904760 shares common stock 700 per share 100000 shares 225 per share two notes convertible total 684140 shares common stock note holder right purchase 83 million additional convertible notes due march 2006 fully issued convertible 684140 shares common stock upon exercise options warrants conversion notes issued shares common stock freely tradable future sales substantial amounts common stock could adversely affect market price common stock similarly raise additional funds issuance common stock securities convertible exercisable common stock percentage ownership stockholders reduced price common stock may fall sales common stock officers directors could affect stock price board directors approved amendment trading policy permits officers directors enter trading plans comply requirements rule 10b51 securities exchange act 1934 rule 10b51 allows corporate officers directors adopt written prearranged stock trading plans material nonpublic information using plans officers directors gradually diversify investment portfolios spread stock trades extended period time reduce market impact avoid concerns initiating stock transactions time might possession material nonpublic information march 2004 one director adopted plan sales commencing earlier may 2004 directors officers may future general officers directors rarely sold stock company though held options stock many years expect future sales officers directors either 10b51 plans otherwise result personal financial planning believe volume sales would affect trading price however market could react negatively sales officers directors affecting trading price stock officers directors largest stockholders elect act together may able control management operations acting best interests necessarily stockholders december 31 2003 directors officers owned right acquire approximately 74 outstanding shares common stock two largest stockholders sigmatau affiliates randal j kirk owned aggregate approximately 152 outstanding shares capital stock result due concentration stock ownership directors officers largest stockholders act together may able influence management operation may able affect influence matters requiring stockholder vote including election directors amendment charter documents approval merger sale assets major corporate transactions although independent part group 2003 obtained support sigmatau mr kirk proposal stockholders reincorporate delaware without support would able obtain required stockholder approval matter antitakeover provisions charter documents delaware law may make acquisition us may beneficial stockholders difficult certain antitakeover provisions delaware law charter documents currently effect may make change control company difficult even change control would beneficial stockholders prior recent reincorporation delaware stockholder rights plan also commonly known “poison pill” terminated connection reincorporation currently intend adopt stockholder rights plan however charter documents contain certain antitakeover provisions including provisions certificate incorporation providing stockholders may cumulate votes stockholders’ meetings may called stockholders hold 25 common stock provisions bylaws providing stockholders may take action written consent additionally board directors authority issue 10 million shares preferred stock determine terms shares stock without action stockholders rights holders common stock subject rights holders preferred stock may issued issuance preferred stock could make difficult thirdparty acquire majority outstanding voting stock delaware law also prohibits corporations engaging business combination holders 15 capital stock holder held stock three years unless among possibilities board directors approves transaction board directors may use provisions prevent changes management control company also applicable delaware law board directors may adopt additional antitakeover measures future may subject currency exchange rate fluctuations could adversely affect financial performance substantially product sales denominated us dollars fluctuation us dollar exchange rate local currency directly affects customer’s cost product particular stronger us dollar visàvis local currency would tend adverse effect sales potentially collection accounts receivable date exposure currency exchange rate fluctuations minimal chinese currency pegged us dollar however fixed nature chinese currency relation us dollar may continue future consequently foreign operations may expose us greater risk currency exchange rate fluctuations future addition subject currency exchange rate fluctuations result expenses incurred foreign operations particular one supply arrangements purchase finished products denominated euros consequently changes exchange rates could unpredictably adversely affect operating results could result exchange losses date hedged risks associated fluctuations exchange rates therefore exchange rate fluctuations could material adverse impact operating results stock price item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations read conjunction selected consolidated financial data consolidated financial statements related notes thereto included elsewhere annual report form 10k managements discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see note regarding forwardlooking statements risk factors contained annual report form 10k overview current primary business objective obtain regulatory approval commercialize zadaxin part combination therapy treatment hcv united states europe long term business objective leading biopharmaceutical company engaged development commercialization therapeutics treat lifethreatening diseases periods encompassed annual report form 10k devoted substantially resources zadaxin clinical trials zadaxin commercialization activities primary focus clinical development zadaxin part new combination therapy treatment hepatitis c believe worldwide market hcv therapies approximately 3 billion 2004 could exceed 8 billion 2012 united states europe japan account essentially market opportunity currently two approved marketed therapies hepatitis c interferon alpha predominantly pegylated forms ribavirin combination interferon alpha two large pharmaceutical companies scheringplough roche market brands pegylated interferon alpha ribavirin dominate hepatitis c therapeutic market strategy develop zadaxin used combination improve efficacy current therapy currently conducting united states two phase 3 hepatitis c clinical trials zadaxin combination pegylated interferon alpha intend complete trials end 2005 results successful file nda end 2006 estimate worldwide market hbv therapeutics approximately 480 million 2004 expected increase 2 billion 2012 largest market hepatitis b therapies asia regulatory approval several countries commercialization marketing activities date concentrated china manufacture zadaxin sale clinical trials third party contract manufacturers conduct research development efforts principally arrangements clinical research sites contract research organizations universities commencement operations december 31 2004 accumulated deficit approximately 152000000 least next years expect net losses increase due increased operating expenses expand research development clinical testing sales marketing capabilities ability achieve sustain operating profitability primarily dependent execution successful completion zadaxin clinical trials securing regulatory approvals zadaxin major pharmaceutical markets united states europe japan approved countries successful commercialization marketing zadaxin addition factors may also impact ability achieve sustain operating profitability including pricing zadaxin manufacturing marketing costs ability compete pharmaceutical markets cost longterm product development commercialization programs timing costs acquiring rights additional drugs ability fund operations entrance extension agreements product development commercialization appropriate expect quarterly net sales 2005 slightly higher reported 2004 expected research development expenses 2005 higher research development expenses 2004 due increased expenses phase 3 hepatitis c clinical trial europe well development scv07 expected net loss net loss per share 2005 higher net loss net loss per share 2004 based higher research development expenses general administrative expenses cash equivalents shortterm investments december 31 2005 expected lower december 31 2004 primarily due expected net loss operations assumption 4 million convertible note due december 2005 repaid rather converted operating results may fluctuate quarter fluctuations may substantial result among factors number timing costs results preclinical clinical trials products market acceptance zadaxin timing orders zadaxin international markets particularly china regulatory approval process timing fda international regulatory approvals acquisition additional product rights funding provided result corporate partnering arrangements critical accounting policies general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout managements discussion analysis financial condition results operations policies affect reported expected financial results detailed discussion application accounting policies see note 1 notes consolidated financial statements part ii item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united sates requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates base estimates historical experience various market specific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition recognize revenue product sales time shipment significant customer acceptance requirements postshipment obligations part sales importing agents distributors recognized time shipment title product transferred contractual rights return except limited terms regarding product quality however replace products expired deemed damaged defective delivered exercise judgment estimating return reserves payments importing agents distributors contingent upon sale end user importing agents distributors contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement us recognized earlier payments received collection assured exercise judgment determining period performance obligations fulfilled impact timing amount revenue recognized particular reporting period revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment exercise judgment determination achievement milestones impact timing amount revenue recognized particular reporting period amounts invoiced relating arrangements revenue cannot recognized reflected balance sheet deferred revenue recognized applicable revenue recognition criteria satisfied accounts receivable required estimate collectibility trade receivables maintain reserves credit losses within expectations recognize reserves bad debts ranging 25 100 past due accounts receivable based length time receivables past due collectibility experience considerable amount judgment required assessing ultimate realization receivables including limited analysis historical payment patterns customers individual customer circumstances geographic region including review local economic environment ability collect outstanding receivables customers critical operating performance cash flows maintain allowances doubtful accounts estimated losses resulting inability customers make required payments financial condition customers economic environment operate deteriorate resulting impairment ability make payments additional allowances may required would increase general administrative expenses increase reported net loss conversely actual credit losses significantly less reserve would decrease general administrative expenses decrease reported net loss inventories stated lower cost realizable market value assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels begun production new contract manufacturer currently process qualifying product permit importation china inventory levels decreased second half 2004 expect begin build inventory levels second quarter 2005 ensure uninterrupted supply product customers china unable qualify timely fashion product produced new contract manufacturer may determine inventory may saleable could result writedowns inventory net loss impairment intangible assets december 31 2004 net intangible assets 542000 related zadaxin product rights never recorded impairment losses related intangible assets assessing recoverability intangible assets must make assumptions regarding estimated future cash flows factors determine fair value respective assets estimates related assumptions change future may required record impairment charges assets research development expenses research development expenses principally incurred phase 3 clinical trials united states research development expenses charged operations incurred cost accruals clinical trials based estimates services received efforts expended pursuant contracts numerous institutions conduct clinical trials behalf financial terms agreements subject negotiation vary contract may result uneven payment flows payments contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses financial statements actual services received efforts expended expenses related grants institutions accrued based level patient enrollment activity according protocol general expenses higher initial final months patients scheduled 18 months treatment observation expenses relating clinical research organizations entities managing trials laboratory direct expenses recognized period estimated incurred services performed monitor active patient enrollment levels related activity extent possible adjust estimates accordingly however management underestimated activity levels associated various studies given point time could underestimate actual research development expenses requiring recording additional expenses increase net loss stock option valuation preparation financial statement footnotes requires us estimate fair value stock options granted employees directors fair value may readily determinable awards stock market quotes available longterm nontransferable stock options instruments traded currently use blackscholes option pricing model estimate fair value employee stock options option valuation models require input highly subjective assumptions including stock price volatility changes subjective input assumptions could materially affect estimated fair value stock options currently evaluating option valuation methodologies assumptions light new accounting standard related employee stock options results operations product sales 22765000 31732000 17101000 years ended december 31 2004 2003 2002 respectively derived sales zadaxin sales customers china accounted approximately 91 88 revenue years ended december 31 2004 2003 2002 respectively product prices remained stable throughout 2002 2003 2004 periods total increase sales 14631000 2002 2003 approximately 11000000 unanticipated temporary increase demand zadaxin hospitals china time sars outbreak second quarter 2003 years ended december 31 2004 2003 2002 sales four six importing agents china accounted approximately 91 88 respectively product sales single largest customer accounting 32 52 41 sales years ended december 31 2004 2003 2002 respectively importing agent december 31 2004 approximately 9609000 90 accounts receivable attributable four customers china perform ongoing credit evaluations customers financial condition generally require collateral customers contract revenue 1631000 806000 671000 years ended december 31 2004 2003 2002 respectively contract revenue includes 1000000 payment received sigmatau june 2004 relating completion enrollment us phase 3 hcv clinical trials remaining contract revenue recognized 2002 2003 2004 connection 2685000 payment received sigmatau january 2002 revenue recognized contract revenue course zadaxin us phase 3 hcv clinical trials period sharing clinical data sigmatau accordance requirements contract gross margin 81 83 82 2004 2003 2002 respectively increase gross margin 2003 largely attributable productrelated fixed costs spread significantly larger volume units sold expect cost product sales hence gross margin vary year depending upon level zadaxin sales absorption productrelated fixed costs charges associated excess expiring finished product inventory research development rd expenses 17994000 18949000 11647000 years ended december 31 2004 2003 2002 respectively decrease 2004 primarily related us phase 3 hepatitis c clinical trials nearing completion end 2005 increase 2003 primarily support zadaxin phase 3 hcv clinical trials united states 2004 2003 2002 rd expenses represented approximately 53 59 48 respectively total costs expenses major components rd expenses consist clinical studies performed clinical trial institutions contract research organizations related materials supplies preclinical work pharmaceutical development personnel costs including salaries benefits third party research funding overhead allocations consisting various support facilities related costs research development activities also separated three main categories research clinical development pharmaceutical development research costs typically consist preclinical toxicology work clinical development costs essentially include clinical trials pharmaceutical development costs consist product formulation chemical analysis 2004 recorded approximately 4100000 research 11800000 clinical development 2100000 pharmaceutical development activities compares expenses 2003 approximately 2100000 research 14500000 clinical development 2300000 pharmaceutical development activities expenses 2002 approximately 2300000 research 8300000 clinical development 1100000 pharmaceutical development activities initiation continuation current clinical development programs continue significant effect research development expenses general expect research development expenses increase least next years vary substantially quarter pursue strategy initiating additional preclinical clinical trials testing acquiring product rights expanding regulatory activities expansion significant extension clinical development programs may require us seek additional capital resources sales marketing expenses 9665000 9018000 8724000 years ended december 31 2004 2003 2002 respectively yeartoyear increases 2002 2004 related increased payroll expenses advertising conferences associated expansion marketing efforts zadaxin expect sales marketing expenses 2005 similar incurred 2004 general administrative expenses 6311000 4134000 3902000 years ended december 31 2004 2003 2002 respectively yeartoyear increases 2002 2004 attributable greater general administrative activities support increased level research development latestage clinical programs addition increase 2004 period attributable nonrecurring expense incurred connection separation former chief executive officer company july 2004 greater general administrative activities associated increased securities regulation requirements near term expect increased general administrative expenses increase general administrative activities support increased expenditures business development legal regulatory activities interest investment income approximately 1285000 266000 323000 years ended december 31 2004 2003 2002 respectively increase 2003 2004 primarily related gain sale equity securities amount approximately 697000 remaining increase due higher cash balances earning interest 2004 period interest expense relating 5600000 convertible notes payable 361000 years ended december 31 2004 2003 2002 net loss years ended december 31 2004 2003 2002 13278000 5275000 10037000 respectively net loss higher 2004 2003 principally due higher net sales gross margin related sars epidemic china 2003 net loss per share years ended december 31 2004 2003 2002 030 013 029 respectively weighted average shares outstanding year ending december 31 2004 2003 2002 44626337 39568199 35002003 respectively increases shares outstanding primarily due financing activities 2003 2002 income taxes december 31 2004 net operating loss carryforwards federal income tax purposes approximately 104000000 expire years 2006 2024 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred foreign subsidiaries december 31 2004 federal tax credit carryforwards approximately 5000000 expire years 2009 2024 change ownership provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities liquidity capital resources december 31 2004 2003 2002 51299000 62975000 21150000 respectively cash equivalents shortterm investments years principal factors affecting balances net loss cash provided financing activities currently estimate cash equivalents shortterm investments december 31 2005 lower balance december 31 2004 expected decrease balance attributable expected net loss assumption 4 million convertible note due december 2005 repaid rather converted shortterm investments consist primarily highly liquid marketable securities two letters credit secured certificate deposit december 31 2004 letters credit totaled 700000 one 633000 lease agreement 67000 facilitate value added tax filings europe net cash used operating activities totaled 12335000 8055000 5890000 years ended december 31 2004 2003 2002 respectively net cash used operating activities year ended december 31 2004 less net loss primarily due 1599000 decrease inventory levels net cash used operating activities year ended december 31 2003 net loss primarily due 2347000 increase inventory levels provide uninterrupted supply zadaxin transferred production new contract manufacturer net cash used operating activities year ended december 31 2002 less net loss primarily due receipt payment sigmatau clinical trial collaboration increased deferred revenue balances 2014000 due increases accounts payable 1576000 partially offset increases prepaid expenses assets 967000 mostly associated phase 3 clinical trials united states net cash provided investing activities primarily net result purchases sales shortterm investments provide working capital operations purchased 196000 property equipment year ended december 31 2004 net cash provided financing activities totaled 289000 50074000 10577000 years ended december 31 2004 2003 2002 respectively net cash provided financing activities year ended december 31 2004 consisted approximately 12000 related exercises outstanding options employee stock option plans 277000 issuance common stock employee stock purchase plan net cash provided financing activities year ended december 31 2003 consisted approximately 44426000 public offering common stock approximately 2536000 exercise outstanding warrants purchase common stock institutional accredited investors approximately 1800000 issuance common stock sigmatau approximately 1050000 related exercises outstanding options employee stock option plans 262000 issuance common stock employee stock purchase plan net cash provided financing activities year ended december 31 2002 consisted approximately 9914000 direct offering common stock institutional investors approximately 514000 related exercises outstanding options employee stock option plans 149000 issuance common stock employee stock purchase plan following table summarizes contractual obligations commitments december 31 2004 payments due period less contractual obligations total 1 year 13 years 35 years 5 years convertible notes payable 1 5960000 4336000 1624000 operating leases 2 3623000 1396000 2198000 29000 purchase obligations 3 6456000 3542000 2914000 royalty obligations 4 1020000 420000 540000 40000 20000 total 17059000 9694000 7276000 69000 20000 1 4000000 convertible notes mature december 2005 1600000 mature march 2006 see note 7 consolidated financial statements included amounts 360000 interest payments 2 future minimum rental commitments office space copiers leased noncancelable operating lease arrangements 3 includes approximately 1173000 minimum purchase requirement contract manufacturer approximately 1633000 research development fees payable contract research organization agreement us phase 3 hepatitis c clinical trials approximately 3650000 european marketing development partner sigmatau conduct complete hepatitis c clinical trial europe 4 includes 20000 per year 2010 minimum royalty payments us army 900000 noncancelable prepaid royalties paid wayne state university upon regulatory approval zadaxin commercialization product company obligated pay us army wayne state university royalty based percentage zadaxin sales see note 8 notes consolidated financial statements intend give priority use financial resources zadaxin clinical programs united states believe existing capital resources funds product sales sufficient complete current us phase 3 clinical trials successful receive fda approval begin commercialization zadaxin united states however cannot assure funds sufficient sales zadaxin approved united states result profitable operations need raise additional financing unavailability inopportune timing financing could prevent delay longterm product development commercialization programs either would severely hurt business need timing amount financing would depend upon numerous factors including level zadaxin sales timing amount manufacturing costs related zadaxin availability complementary products technologies businesses initiation continuation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative parties status competitive products officers directors involved related party transactions 2004 offbalance sheet arrangements offbalance sheet arrangements 2004 2003 2002 recent accounting pronouncement december 2004 financial accounting standards board fasb issued fasb statement 123 revised 2004 sharebased payment sfas 123r revises sfas 123 supersedes apb 25 related implementation guidance generally approach sfas 123r similar approach described sfas 123 however sfas 123r requires sharebased payments employees directors including grants stock options recognized statement operations based fair values pro forma disclosure longer alternative amount compensation cost measured based grantdate fair value instruments issued compensation cost recognized period employee director provides service exchange award expect adopt sfas 123r july 1 2005 permitted sfas 123 company currently accounts sharebased payments employees directors using apb 25s intrinsic value method generally recognizes compensation cost employee director stock options accordingly adoption sfas 123rs fair value method significant impact result operations although impact overall financial position impact adoption sfas 123r cannot predicted time depend levels sharebased payments granted future however adopted sfas 123r prior periods impact standard would approximated impact sfas 123 described disclosure pro forma net loss net loss per share accounting stockbased compensation section note 1 consolidated financial statements risk factors carefully consider risks described addition information report form 10k making investment decision risk factors could adversely affect business financial condition operating results well adversely affect value investment common stock unable commercialize zadaxin various markets multiple indications particularly united states treatment hcv business harmed ability achieve sustain operating profitability depends large part ability commence execute complete clinical programs obtain additional regulatory approvals zadaxin drug candidates particularly united states europe japan also dependent ability increase zadaxin sales existing markets launch zadaxin new markets particular ability achieve sustain profitability depend large part ability commercialize zadaxin treatment hcv united states cannot assure achieve significant levels sales receive approval zadaxin treatment hcv united states treatment hcv indications countries unable business harmed obtain regulatory approval zadaxin intended indications evaluating revenues limited become profitable ability execute business strategy requires obtain regulatory approval use zadaxin particularly treatment hcv united states hcv malignant melanoma europe current phase 3 trials united states current future trials europe yield favorable results intend submit applications marketing approval zadaxin treatment hcv united states partner sigmatau treatment hcv malignant melanoma europe regulatory approval processes united states europe demanding typically require 12 months united states 18 months europe date submission nda committed significant resources including capital time develop zadaxin particularly hcv united states goal obtaining approvals obtain approvals unable achieve substantial increase revenue zadaxin sales jurisdictions could decline new drugs including products developed development subject extensive rigorous regulation fda comparable agencies state local jurisdictions foreign countries regulations govern among things development testing manufacturing labeling storage premarket approval importation advertising promotion sale distribution products regulations may change time new regulations may adopted obtaining regulatory approval developing countries also timeconsuming expensive countries contemplating marketing selling zadaxin regulatory approval process often relies prior approvals obtained united states europe without prior approvals ability obtain regulatory approvals zadaxin countries may delayed prevented addition secure regulatory approvals need among things demonstrate favorable results additional clinical trials zadaxin even able complete clinical trials sponsored planning timely costeffective manner trials may fulfill applicable regulatory approval criteria case able obtain regulatory approval countries experienced difficulties preparing regulatory approval japan cannot assure ultimately obtain regulatory approvals targeted countries timely costeffective manner fail obtain required regulatory approvals develop market sell products countries currently rights revenues limited satisfaction government regulations may take several years time needed satisfy varies substantially based type complexity novelty pharmaceutical product result government regulation may cause us delay introduction prevent us marketing existing potential products considerable period time impose costly procedures upon activities even obtain regulatory approval products approval may impose limitations indicated uses products may marketed unsatisfactory data resulting clinical trials may also adversely affect ability market sell zadaxin markets approved sale results clinical trials favorable unable obtain regulatory approval intended indications evaluating obtain regulatory approvals must among requirements complete carefully controlled welldesigned clinical trials demonstrating particular drug safe effective applicable disease cannot depend data prior trial results predict demonstrate potential drug products safe efficacious regulatory guidelines qualify commercial sale cannot assure rely previous clinical trial results predict ongoing future clinical trials yield favorable results adverse inconclusive clinical results would prevent us filing regulatory approval zadaxin thymosin alpha 1 indications evaluating current programs areas would fail past alpha 1 biomedical acquired certain rights thymosin alpha 1 conducted phase 3 clinical trial thymosin alpha 1 therapy hbv produce statistically significant results alpha 1 biomedical submit nda fda currently conducting phase 3 clinical trials based use zadaxin combination pegylated interferon alpha treatment hcv patients previously respond treatment cannot assure phase 3 clinical trials yield sufficient adequate data demonstrate appropriate safety efficacy fda guidelines failure obtain sufficient adequate data could delay prevent us securing fda approval two phase 3 hcv clinical trials united states designed show combination zadaxin pegylated interferon alpha adds significant clinical benefit compared use pegylated interferon alpha alone nonresponders cannot assure results combination therapy yield favorable results expect independent use pegylated interferon alpha perform better anticipated could reduce chances nda approved submit nda based results combination therapy zadaxin pegylated interferon alpha causes significant adverse side effects beyond caused pegylated interferon alpha alone clinical trials could delayed may forced halt trials fda may reject nda due safety issues foregoing occurs efforts market sell zadaxin united states significantly impaired business suffer price stock may decline results documentation hepatitis b clinical trials zadaxin japan may sufficient obtain japanese regulatory approval despite favorable data phase 3 hepatitis b clinical trial japan identified problems meeting requirements filing japanese new drug application jnda zadaxin jnda filing requires complete documentation phases clinical trials phase 1 phase 2 clinical trials part phase 3 clinical trials conducted sponsored schering plough kk spkk pharmaceutical company japan development agreement sciclone several months soliciting spkk data documentation necessary proceed filing japan receiving additional documentation determined certain information documentation earlier stages development process still delivered furthermore concerned necessary documentation may available certain administrative formalities may observed drug development process necessary documentation obtained reproduced near future intend proceed jnda reviewing legal rights remedies respect third parties continue seek resolution matter spkk higher anticipated patient drop rates clinical trials could make difficult obtain regulatory approval two current phase 3 hcv clinical trials united states enrolled planned number 500 patients one trial treating patients liver damage trial treating patients mild cirrhosis liver trials require patient treatment 48 weeks followup observation period additional 24 weeks patient dropouts expected higher anticipated patient drops point 72 weeks trial considered failure respond results clinical trial dropouts prevent us completing trials however fewer patients complete trial general higher positive response rate group remaining zadaxin treated patients needs demonstrate statistical significance therefore higher anticipated dropout rate lowers chances proving statistical significance could adversely effect preparation nda cannot predict safety profile use zadaxin used combination drugs many trials involve use zadaxin combination drugs known cause adverse patient reactions even zadaxin produce adverse side effects used alone cannot predict work drugs including causing possible adverse side effects directly attributable drugs could compromise safety profile zadaxin used certain combination therapies lose key personnel unable attract retain additional highly skilled personnel required expansion activities business suffer board directors conducting search new chief executive officer highly dependent upon ability attract retain qualified personnel specialized scientific worldwide nature business following departure chief executive officer july 14 2004 established office president believe company function effectively work identify new chief executive officer however may still affected adversely particularly cannot retain new chief executive officer reasonable time frame intense competition qualified management scientific technical personnel pharmaceutical industry may able attract retain qualified personnel need grow develop business globally addition assign numerous key responsibilities limited number individuals would experience difficulty finding immediate replacements unable attract retain qualified personnel needed promptly replace employees critical product development commercialization development commercialization products would adversely affected time maintain key person life insurance key personnel revenue dependent sale zadaxin foreign countries particularly china experience difficulties foreign sales efforts financial condition harmed product revenue near term highly dependent sale zadaxin foreign countries experience difficulties foreign sales efforts business suffer financial condition harmed substantially zadaxin sales customers china sales zadaxin china may limited due low average personal income lack patient cost reimbursement poorly developed infrastructure existing potential competition products including generics china zadaxin approved treatment hbv face competition certain large global pharmaceutical companies aggressively marketing competing products treatment hbv indications zadaxin used offlabel basis addition several local companies introduced lower priced locally manufactured generic thymosin expect competition continue could negative impact price volume zadaxin sold china would harm business zadaxin sales operations parts asia well latin america middle east subject number risks including difficulties delays obtaining registrations permits pricing approvals reimbursement unexpected changes regulatory requirements experience issues managing foreign sales operations including long payment cycles difficulties accounts receivable collection especially significant customers fluctuations timing amount orders operations foreign countries also expose us risks relating difficulties enforcing proprietary rights currency fluctuations adverse deteriorating economic conditions product sales united states europe japan offset decrease revenue zadaxin sales asia latin america middle east addition countries regions including china regulate pharmaceutical prices pharmaceutical importation regulations may reduce prices zadaxin levels significantly would prevail unregulated market limit volume product may imported sold place high import duties product may limit growth revenues cause decline chinas tiered method importing distributing finished pharmaceutical products quarterly results may vary substantially one period next china uses tiered method import distribute finished pharmaceutical products port entry prior moving product forward distributors governmentlicensed importing agents must process evaluate shipment determine whether shipment satisfies chinas quality assurance requirements order efficiently manage process importing agents typically place large therefore relatively orders within six month period therefore sales importing agent vary substantially quarter depending size timing orders past may future cause quarterly results fluctuate rely four six importers given quarter supply substantially product china use small number importing agents china receivables one importing agent material unable collect receivables importer business cashflow would adversely affected sales zadaxin may fluctuate due seasonality product orders sales quarter may indicative future sales quarter ended june 30 2003 greatly affected demand china zadaxin connection treatment sars date sars reemerged like influenza seasonal public health problem however sars similar epidemic emerge possible predict effect would future sales zadaxin although market zadaxin use treating epidemic diseases zadaxin purchased connection future outbreaks seasonal viral contagions product sales could become concentrated certain quarters calendar year quarterly sales levels could fluctuate sales quarter may indicative sales future periods fail protect products technologies trade secrets may able successfully use manufacture market sell products may fail advance maintain competitive position success depends significantly ability obtain maintain meaningful patent protection products technologies preserve trade secrets pending patent applications may result issuance patents future patents patent applications may priority others applications existing patents additional patents may issued may provide competitive advantage us may invalidated circumvented competitors others may independently develop similar products design around patents issued licensed us patents issued patent applications filed companies could harm ability use manufacture market sell products maintain competitive position respect products although many patents relating zadaxin expired including composition matter patents rights patents patent applications relating zadaxin analogues including method use patents respect use zadaxin certain indications parties develop generic forms zadaxin indications including conducting clinical trials indications patents rights might sufficient prohibit marketing selling generic forms zadaxin parties develop analogues derivatives zadaxin patents rights might sufficient prohibit marketing analogues derivatives pharmaceutical products either patentable recently become patentable countries market may market zadaxin patent protection zadaxin china largest market companies market generic thymosin alpha 1 china sometimes violation trademark rights defend informing physicians hospitals practice well limited legal recourse past enforcement intellectual property rights many countries including china particular limited nonexistent future enforcement patents proprietary rights many countries likely problematic unpredictable moreover issuance patent one country assure issuance similar patent another country claim interpretation infringement laws vary nation extent patent protection uncertain may vary different jurisdictions involved intellectual property claims litigation proceedings may divert resources subject us significant liability damages substantial litigation expense loss proprietary rights commercial success depends part us infringing valid enforceable patents proprietary rights third parties breaching licenses may relate technologies products aware thirdparty patent may relate products may cover method action used zadaxin cannot assure mechanism action infringe claim addition may aware patents patent applications may impact ability make use sell potential products example us patent applications may kept confidential 12 months pending patent trademark office patent applications filed foreign countries often first published six months filing possible may unintentionally infringe patents proprietary rights third parties may future receive notices claiming infringement third parties well invitations take licenses thirdparty patents legal action us collaborative partners claiming damages seeking enjoin commercial activities relating products processes affected thirdparty rights may require us collaborative partners obtain licenses order continue manufacture market affected products processes efforts defend claims regardless merit would require us devote resources attention could directed operations growth plans addition actions may subject us potential liability damages collaborative partners may prevail patent action license required patent may made available commercially acceptable terms conflicts resulting patent rights others could significantly reduce coverage patents limit ability obtain meaningful patent protection companies obtain patents conflicting claims may required obtain licenses patents develop obtain alternative technology manufacture market affected products processes may able obtain licenses acceptable terms failure obtain licenses could delay prevent us pursuing development commercialization potential products efforts defend claims would require us devote resources attention could directed operations growth plans may need initiate litigation could timeconsuming expensive enforce proprietary rights determine scope validity others rights litigation results court may find patents licensors invalid may find infringed competitors rights competitors filed patent applications united states claim technology also invented patent trademark office may require us participate expensive interference proceedings determine right patent technology actions may subject us potential liability damages collaborative partners may prevail patent action license required patent may made available commercially acceptable terms rely third parties supply clinical trial commercial products deficiencies work could delay harm one important areas business including sales clinical trials regulatory approval process rely third parties subject regulatory oversight supply clinical commercial products unanticipated deficiencies suppliers occur could experience delays ability assemble timely acceptable nda sales zadaxin increase dramatically thirdparty suppliers may able supply zadaxin quickly enough could limit ability satisfy increased demand could adversely affect ability suppliers provide products clinical trials roche exclusive supplier pegylated interferon alpha current us phase 3 hcv clinical trials received pegylated interferon used clinical trials recall pegylated interferon alpha could delay clinical trials detract integrity trial data case roches ability complete clinical trials united states market sell zadaxin worldwide delayed impaired business suffer price stock may decline process qualifying new manufacturer zadaxin encounter problems process validation sales clinical trials could adversely affected able establish maintain adequate manufacturing relationships development sale products could impaired successful products must manufactured commercial quantities compliance stringent regulatory requirements acceptable cost typically time one supplier phase manufacturing product manufacturing interruptions failure comply regulatory requirements could significantly delay clinical development potential products reduce thirdparty clinical researcher interest support proposed trials interruptions failures could also impede commercialization products including sales zadaxin approved markets impair competitive position developments would harm business process qualifying new supplier zadaxin regulatory agencies process quality assurance steps could cause delays interruptions supply obtain required regulatory approvals manufacturing change timely fashion especially china sales may interrupted manufacturing change approved although increasing inventories prepare manage occurrences may still experience interruptions supply could adversely affect results countries manufacturing change may require additional regulatory approvals may delay zadaxin marketing approvals new markets addition manufacturing supply quality control problems may arise either alone subcontractors attempt scaleup manufacturing procedures may able scaleup timely manner commercially reasonable cost either could cause delays pose threat ultimate commercialization products harm business may able successfully develop commercialize products may consider strategic alliances companies efforts broaden product development pipeline limited sales zadaxin certain markets yet regulatory approval zadaxin principal target markets respect zadaxin still developed potential products earlier stages development zadaxin may consider undertake various strategies expand portfolio potential products including acquiring product candidate rights licenses relationships strategic relationships including acquisitions companies may proprietary rights development candidates capability discover new drug candidates transactions could require substantial amount financial resources equity involved may result substantial dilution current stockholders strategic transactions also require substantial management time effort subject various risks could adversely affect us financial results fully develop products need commit substantial resources extensive research development preclinical testing clinical trials manufacturing scaleup regulatory approval prior ready sale cannot assure efforts produce commercially viable products face significant technological risks inherent developing products may also abandon proposed products become commercially viable products even developed approved cannot successfully commercialized timely manner business harmed price stock may decline yet sold product zadaxin sales primarily single country china future revenue growth depends increased market acceptance commercialization zadaxin additional countries particularly united states europe japan fail successfully market zadaxin cannot commercialize drug united states additional markets revenue operating results suffer unexpected serious adverse events reported expected efficacy results achieved would material adverse effect business future revenue also depend part ability develop commercially viable accepted products market acceptance products depend many factors including ability convince prospective customers use products alternative treatments therapies convince prospective strategic partners market products effectively manufacture products sufficient quantities acceptable quality acceptable cost addition doctors must opt use treatments involving products doctors elect use different course treatment demand drug products would reduced failure lead unfavorable outcome results operations rely thirdparty clinical investigators conduct clinical trials result may encounter delays outside control limited experience conducting managing clinical trials rely part third parties particularly clinical research organizations development partners assist us managing monitoring clinical trials reliance third parties may result delays completing failure complete clinical trials third parties fail fulfill obligations us may need obtain additional capital support longterm product development commercialization programs believe existing resources sufficient complete current us phase 3 clinical trials successful receive fda approval begin commercialization zadaxin united states however cannot assure funds sufficient sales zadaxin approved united states result profitable operations addition may need additional funds future support future growth achieve profitability need raise additional funds future funds available reasonable terms commercialization efforts may impeded revenues may limited operating results may suffer history operating losses accumulated deficit expect continue incur losses near term may never achieve profitability experienced significant operating losses since inception december 31 2004 accumulated deficit approximately 152 million expect operating expenses increase next several years plan dedicate substantially resources expanding development testing marketing capabilities particularly united states losses may increase cannot increase sustain revenue result may never achieve profitability limited sales marketing distribution capabilities may adversely affect ability successfully commercialize products currently limited sales marketing distribution capabilities anticipate may relying thirdparty collaborators sell market distribute products foreseeable future arrangements third parties successful unable enter additional thirdparty arrangements may need substantially expand sales marketing distribution force efforts expand may succeed may lack sufficient resources expand timely manner either harm operating results moreover able expand sales marketing distribution capabilities begin competing companies experienced wellfunded operations cannot successfully compete larger companies revenues may grow business may suffer commercialization products depends collaborations others collaborators successful unable find future collaborators may able properly develop commercialize products depend part distributors business partners develop andor promote drugs successful efforts fail business suffer example sigmatau responsible development marketing zadaxin europe generally control amount timing resources business partners devote zadaxin always performed expected perform obligations expect particularly obligations regarding clinical trials development expenses would increase development andor sale products could limited delayed could hurt business cause stock price decline addition relationships companies may successful disputes may arise collaborators including disputes ownership rights intellectual property knowhow technologies developed collaborators may able negotiate similar additional arrangements future develop commercialize zadaxin products may lose market share otherwise fail compete effectively intensely competitive biopharmaceutical industry competition biopharmaceutical industry intense expect competition increase success depends ability compete industry cannot assure able successfully compete competitors increased competitive pressure could lead intensified pricebased competition resulting lower prices margins would hurt operating results focused developing zadaxin treatment hcv hbv certain cancers several large biopharmaceutical companies substantial commitments interferon alpha approved drug treating hbv hcv lamivudine adefovir approved drugs treat hbv cannot assure compete successfully competitors potential competitors develop drugs treatments hcv hbv cancer diseases superior thirdparty reimbursement available patients cannot otherwise pay zadaxin may able successfully market zadaxin significant uncertainty exists reimbursement status new therapeutic products zadaxin cannot assure thirdparty insurance coverage reimbursement available therapeutic products might develop failure obtain thirdparty reimbursement products particularly united states europe japan would harm business cannot assure additional limitations imposed future united states drug coverage reimbursement due proposed health care reforms many emerging markets marketing rights zadaxin government resources per capita income may low products prohibitively expensive may able market products economically favorable terms efforts governmental thirdparty payers contain reduce health care costs announcement legislative proposals reforms implement government controls could cause us reduce prices market drugs reduce gross margins may harm business may subject product liability lawsuits insurance may inadequate cover damages clinical trials marketing current potential products may expose us liability claims use products currently carry product liability insurance however cannot certain able maintain insurance acceptable terms clinical commercial activities insurance would sufficient cover potential product liability claim recall fail sufficient coverage business results operations cash flows could adversely affected depend international sales global conditions could negatively affect operating results large majority sales china heightened tensions resulting current geopolitical conditions middle east north korea elsewhere could worsen causing disruptions foreign trade would harm sales particular commercial product manufactured europe distributed us operations hong kong disruption supply distribution activities due geopolitical conditions could decrease sales harm operating results unable comply environmental laws regulations business may harmed subject various federal state local laws regulations recommendations relating use manufacture storage handling disposal hazardous materials waste products including radioactive compounds infectious disease agents well safe working conditions laboratory manufacturing practices experimental use animals extent government regulation might result future legislation administrative action areas cannot accurately predicted currently maintain hazardous materials facilities outsource research development programs involving controlled use biohazardous materials future conduct programs might required incur significant cost comply environmental laws regulations event accident would liable damages result liability could exceed resources stock price may volatile investment stock could suffer decline value market price common stock experienced may continue experience substantial volatility due many factors control including progress results clinical trials involving zadaxin progress zadaxin regulatory process especially regulatory actions adequacy clinical data documentation regulatory purposes united states europe japan timing achievement milestones announcements technological innovations new products us competitors government regulatory action affecting drug products competitors drug products united states foreign countries developments disputes concerning patent proprietary rights changes company assessments financial estimates securities analysts actual anticipated fluctuations quarterly operating results general stock market conditions fluctuations emerging growth biopharmaceutical market sectors economic conditions united states abroad broad financial market fluctuations united states europe asia past following periods large price declines public market price companys securities class action litigation often initiated company litigation type could result substantial costs diversion attention resources would hurt business adverse determination litigation could also subject us significant liabilities substantial sales stock exercise conversion options convertible securities may impact market price common stock december 31 2004 stock options purchase 6706613 shares common stock outstanding options purchase 4971804 shares exercisable also outstanding date warrants exercisable 904760 shares common stock 700 per share however exercise term warrants expired january 2005 december 31 2004 two notes convertible total 684140 shares common stock outstanding note holder right purchase 83 million additional convertible notes due march 2006 fully issued convertible 684140 shares common stock upon exercise options conversion notes issued shares common stock freely tradable future sales substantial amounts common stock could adversely affect market price common stock similarly raise additional funds issuance common stock securities convertible exercisable common stock percentage ownership stockholders reduced price common stock may fall sales common stock officers directors former officer could affect stock price board directors approved amendment trading policy permits officers directors enter trading plans comply requirements rule 10b51 securities exchange act 1934 rule 10b51 allows corporate officers directors adopt written prearranged stock trading plans material nonpublic information using plans officers directors gradually diversify investment portfolios spread stock trades extended period time reduce market impact avoid concerns initiating stock transactions time might possession material nonpublic information march 9 2005 one director adopted plan directors officers may future general officers directors rarely sold stock company though held options stock many years however separation former chief executive officer company july 2004 may affect personal financial plans result exercising stock options selling stock may affected may future affect trading price stock march 9 2005 former ceo 1610454 shares stock options outstanding exercisable expire april 2005 july 2006 expect future sales officers directors either 10b51 plans otherwise result personal financial planning believe volume sales would affect trading price however market could react negatively sales officers directors could affect trading price stock antitakeover provisions charter documents delaware law may make acquisition us may beneficial stockholders difficult certain antitakeover provisions delaware law charter documents currently effect may make change control company difficult even change control would beneficial stockholders prior reincorporation delaware stockholder rights plan also commonly known poison pill terminated connection reincorporation currently intend adopt stockholder rights plan however charter documents contain certain antitakeover provisions including provisions certificate incorporation providing stockholders may cumulate votes stockholders meetings may called stockholders hold 25 common stock provisions bylaws providing stockholders may take action written consent additionally board directors authority issue 10 million shares preferred stock determine terms shares stock without action stockholders rights holders common stock subject rights holders preferred stock may issued issuance preferred stock could make difficult thirdparty acquire majority outstanding voting stock delaware law also prohibits corporations engaging business combination holders 15 capital stock holder held stock three years unless among possibilities board directors approves transaction board directors may use provisions prevent changes management control company also applicable delaware law board directors may adopt additional antitakeover measures future new legislation potential new accounting pronouncements may impact operations financial position results operations future changes financial accounting standards including proposed changes accounting stock options may cause adverse unexpected fluctuations timing recognition revenues expenses may affect financial position results operations new pronouncements varying interpretations pronouncements occurred frequency may occur future may make changes accounting policies future compliance changing regulations concerning corporate governance public disclosure resulted may continue result additional expenses changing laws regulations standards relating corporate governance public disclosure including sarbanesoxley act 2002 new sec regulations nasdaq national market rules creating uncertainty companies costs increasing result uncertainty factors committed maintaining high standards corporate governance public disclosure result intend invest reasonably necessary resources comply evolving standards investment may continue result increased general administrative expenses diversion management time attention revenuegenerating product development activities compliance activities new legislation may impact operations financial position results operations compliance changing regulations concerning corporate governance public disclosure resulted may continue result additional expenses changing laws regulations standards relating corporate governance public disclosure including sarbanesoxley act 2002 new sec regulations nasdaq national market rules creating uncertainty companies costs increasing result uncertainty factors committed maintaining high standards corporate governance public disclosure result intend invest reasonably necessary resources comply evolving standards investment may continue result increased general administrative expenses diversion management time attention revenuegenerating activities compliance activities may subject currency exchange rate fluctuations could adversely affect financial performance substantially product sales denominated us dollars fluctuation us dollar exchange rate local currency directly affects customers cost product particular stronger us dollar visàvis local currency would tend adverse effect sales potentially collection accounts receivable date exposure currency exchange rate fluctuations minimal chinese currency pegged us dollar however fixed nature chinese currency relation us dollar may continue future consequently foreign operations may expose us greater risk currency exchange rate fluctuations future addition subject currency exchange rate fluctuations result expenses incurred foreign operations particular one supply arrangements purchase finished products denominated euros consequently changes exchange rates could unpredictably adversely affect operating results could result exchange losses date hedged risks associated fluctuations exchange rates therefore exchange rate fluctuations could material adverse impact operating results stock price item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations read conjunction “selected consolidated financial data” consolidated financial statements related notes thereto included elsewhere annual report form 10k management’s discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see “note regarding forwardlooking statements” “risk factors” contained annual report form 10k overview biopharmaceutical company engaged development commercialization therapeutics treat lifethreatening diseases primarily cancer viral infectious diseases lead product zadaxin approved sale select markets internationally notably china established sales marketing operation strategy leverage advantage china inlicensing acquiring marketing rights products market rapidly growing pharmaceutical market zadaxin currently evaluated large phase 2 stage iv malignant melanoma clinical trial europe addition large phase 3 clinical trial ongoing europe using zadaxin part novel triple therapy combination treatment hcv december 2005 reported results first two us phase 3 trials evaluating double therapy combination zadaxin pegylated interferon alpha treat hcv patients failed previous therapy results trial demonstrate zadaxin combination pegylated interferon alpha provides statistically significant clinical benefit compared pegylated interferon alpha alone although statistically significant positive zadaxin treatmentrelated trend observed data second us hcv trial expected reported june 2006 periods encompassed annual report form 10k devoted substantially resources zadaxin clinical trials zadaxin commercialization activities primary focus clinical development zadaxin part new combination therapy treatment hcv manufacture zadaxin sale clinical trials third party contract manufacturers conduct research development efforts principally arrangements clinical research sites contract research organizations universities commencement operations december 31 2005 accumulated deficit approximately 159000000 least next years expect net losses continue similar levels increase due increased operating expenses expand research development clinical testing sales marketing capabilities ability achieve sustain operating profitability primarily dependent execution successful completion zadaxin clinical trials securing regulatory approvals zadaxin major pharmaceutical markets united states europe japan approved countries successful commercialization marketing zadaxin addition factors may also impact ability achieve sustain operating profitability including pricing zadaxin manufacturing marketing costs ability compete pharmaceutical markets cost longterm product development commercialization programs timing costs acquiring rights additional drugs ability fund operations entrance extension agreements product development commercialization appropriate expect net sales increase 2006 due increase sales china primarily due level research development activities operations expect net loss reduction cash equivalents shortterm investments 2006 operating results may fluctuate quarter fluctuations may substantial result among factors number timing costs results preclinical clinical trials products market acceptance zadaxin timing orders zadaxin international markets particularly china regulatory approval process timing fda international regulatory approvals acquisition additional product rights funding provided result corporate partnering arrangements critical accounting policies general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout “management’s discussion analysis financial condition results operations” policies affect reported expected financial results detailed discussion application accounting policies see note 1 “notes consolidated financial statements” part ii item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united sates requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates base estimates historical experience various market specific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition recognize revenue product sales time shipment significant customer acceptance requirements postshipment obligations part sales importing agents distributors recognized time shipment title product transferred contractual rights return except limited terms regarding product quality however replace products expired deemed damaged defective delivered exercise judgment estimating return reserves payments importing agents distributors contingent upon sale end user importing agents distributors contract revenue research development recorded earned based performance requirements contract exercise judgment determining period performance obligations fulfilled impact timing amount revenue recognized particular reporting period nonrefundable contract fees performance obligations exist continuing involvement us recognized earlier payments received collection assured revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment exercise judgment determination achievement milestones impact timing amount revenue recognized particular reporting period amounts invoiced relating arrangements revenue cannot recognized reflected balance sheet deferred revenue recognized applicable revenue recognition criteria satisfied accounts receivable required estimate collectibility trade receivables maintain reserves credit losses within expectations recognize reserves bad debts ranging 25 100 past due accounts receivable based length time receivables past due collectibility experience considerable amount judgment required assessing ultimate realization receivables including limited analysis historical payment patterns customers individual customer circumstances geographic region including review local economic environment ability collect outstanding receivables customers critical operating performance cash flows maintain allowances doubtful accounts estimated losses resulting inability customers make required payments financial condition customers economic environment operate deteriorate resulting impairment ability make payments additional allowances may required would increase general administrative expenses increase reported net loss conversely actual credit losses significantly less expected would decrease general administrative expenses decrease reported net loss inventories stated lower cost realizable market value assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels current assumptions future production inventory levels demand change actual market conditions less favorable projected management inventory writedowns may required could negatively impact gross margins results operations impairment intangible assets december 31 2005 net intangible assets 472000 related zadaxin product rights never recorded impairment losses related intangible assets assessing recoverability intangible assets must make assumptions regarding estimated future cash flows factors estimates related assumptions change future may required record impairment charges assets research development expenses research development expenses principally incurred clinical trials including phase 3 clinical trials united states research development expenses charged operations incurred cost accruals clinical trials based estimates services received efforts expended pursuant contracts numerous institutions conduct clinical trials behalf financial terms agreements subject negotiation vary contract may result uneven payment flows payments contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses financial statements actual services received efforts expended expenses related grants institutions accrued based level patient enrollment activity according protocol general phase 3 clinical trials united states expenses higher initial final months patient’s scheduled 18 months treatment observation expenses relating clinical research organizations entities managing trials laboratory direct expenses recognized period estimated incurred services performed monitor active patient enrollment levels related activity extent possible adjust estimates accordingly however management underestimated activity levels associated various studies given point time could underestimate actual research development expenses requiring recording additional expenses increase net loss future stock option valuation preparation financial statement footnotes requires us estimate fair value stock options granted employees directors fair value may readily determinable awards stock market quotes available longterm nontransferable stock options instruments traded currently use blackscholes option pricing model estimate fair value employee director stock options option valuation models require input highly subjective assumptions including stock price volatility changes subjective input assumptions could materially affect estimated fair value stock options disclosed note 1 notes consolidated financial statements order estimate value stock options use blackscholes model requires use certain subjective assumptions significant assumptions estimates expected volatility expected term award utilized historical information available support estimate certain assumptions required value stock options value stock option derived potential appreciation volatile stock valuable option becomes greater possibility significant changes stock price believe appropriate place greater weight historical realized volatilities developing estimate expected volatility believe historical realized volatilities options appropriate terms strong indicator future volatility expected option term also significant effect value option longer term time option holder allow stock price increase without cash investment thus valuable option lengthier option terms provide opportunity exploit market highs however empirical data shows employees variety reasons typically wait end contractual term nontransferable option exercise accordingly companies required estimate expected term option input optionpricing model establishing estimate expected term consider vesting period award historical experience employee stock option exercises expected volatility required accounting rules review valuation assumptions grant date result likely change valuation assumptions used value stock based awards granted future periods results operations product sales 27842000 22765000 31732000 years ended december 31 2005 2004 2003 respectively derived sales zadaxin sales customers china accounted approximately 91 88 revenue years ended december 31 2005 2004 2003 respectively product prices remained stable throughout 2003 2004 2005 periods approximately 11000000 sales 2003 unanticipated temporary increase demand zadaxin hospitals china time sars outbreak second quarter 2003 years ended december 31 2005 2004 2003 sales three five importing agents china accounted approximately 91 88 respectively product sales 2005 guang dong south pharmaceutical foreign trade co ltd zhuhai goldsn medicine co ltd china national pharmaceutical foreign trade corporation accounted 57 19 15 sales respectively 2004 china national pharmaceutical foreign trade corporation china meheco corporation guang dong south pharmaceutical foreign trade co ltd accounted 32 29 23 sales respectively 2003 china national pharmaceutical foreign trade corporation china meheco corporation accounted 52 14 sales respectively customers accounted 10 sales periods december 31 2005 approximately 8847000 90 accounts receivable attributable three customers china perform ongoing credit evaluations customers’ financial condition generally require collateral customers contract revenue 492000 1631000 806000 years ended december 31 2005 2004 2003 respectively contract revenue 2004 includes 1000000 milestone payment received sigmatau relating completion enrollment us phase 3 hcv clinical trials remaining contract revenue recognized 2003 2004 2005 connection 2685000 payment received sigmatau january 2002 revenue recognized contract revenue course zadaxin us phase 3 hcv clinical trials period sharing clinical data trials sigmatau accordance requirements contract gross margin 83 81 83 2005 2004 2003 respectively increase gross margin percentage 2005 period primarily result lower product costs product sold period decrease gross margin percentage 2004 period primarily result higher product costs connection transfer new toll manufacturer zadaxin lower product costs 2003 periods due higher volume productions response sars epidemic china expect cost product sales hence gross margin vary year depending upon level zadaxin sales absorption productrelated fixed costs charges associated excess expiring finished product inventory research development rd expenses 14406000 17994000 18949000 years ended december 31 2005 2004 2003 respectively decrease years 2003 2005 primarily related us phase 3 hcv clinical trials nearing completion end 2005 recorded approximately 3400000 expenses related us phase 3 hcv trial compares expenses 2004 approximately 8600000 approximately 9400000 2003 2005 2004 2003 rd expenses represented approximately 45 53 59 respectively total costs expenses major components rd expenses consist clinical studies performed clinical trial institutions contract research organizations related materials supplies preclinical work pharmaceutical development personnel costs including salaries benefits third party research funding overhead allocations consisting various support facilities related costs research development activities also separated three main categories research clinical development pharmaceutical development research costs typically consist preclinical toxicology work clinical development costs primarily relate clinical trials pharmaceutical development costs consist product formulation chemical analysis 2005 recorded approximately 4300000 research 8300000 clinical development 1800000 pharmaceutical development activities compares expenses 2004 approximately 4100000 research 11800000 clinical development 2100000 pharmaceutical development activities expenses 2003 approximately 2100000 research 14500000 clinical development 2300000 pharmaceutical development activities initiation continuation current clinical development programs continue significant effect research development expenses general expect research development expenses vary substantially quarter pursue strategy initiating additional preclinical clinical trials testing acquiring product rights expanding regulatory activities expansion significant extension clinical development programs may require us seek additional capital resources sales marketing expenses 10237000 9665000 9018000 years ended december 31 2005 2004 2003 respectively yeartoyear increases 2003 2005 related expenses advertising conferences associated expansion marketing efforts zadaxin increase sales marketing expenses 2005 primarily due increased expenses related conferences 244000 increased expenses associated expansion marketing efforts approximately 208000 increase sales marketing expenses 2004 primarily due increased expenses related conferences approximately 581000 expect sales marketing expenses 2006 higher incurred 2005 due increased sales efforts general administrative expenses 7457000 6311000 4134000 years ended december 31 2005 2004 2003 respectively increase 2005 primarily related increased legal fees approximately 625000 support increased legal regulatory activities increased accounting fees approximately 237000 associated increased securities regulation requirements approximately 472000 related noncash stockprice performance based option expenses increase 2004 primarily attributable nonrecurring expense 1098000 incurred connection separation former chief executive officer company july 2004 increased accounting fees approximately 755000 associated increased regulatory requirements increase legal fees approximately 278000 near term expect increased general administrative expenses increase general administrative activities support increased expenditures business development legal regulatory activities interest investment income approximately 1273000 1285000 266000 years ended december 31 2005 2004 2003 respectively interest investment income 2004 included gain sale equity securities amount approximately 697000 excluding gain 2004 increase interest investment income 2005 primarily due cash balances earning higher interest rates 2005 periods interest investment expense relating 5600000 convertible notes payable 345000 361000 years ended december 31 2005 2004 2003 net loss years ended december 31 2005 2004 2003 7713000 13278000 5275000 respectively net loss lower 2005 2004 principally due higher net sales gross margin lower operating expenses net loss per share years ended december 31 2005 2004 2003 017 030 013 respectively weighted average shares outstanding years ended december 31 2005 2004 2003 45328714 44626337 39568199 respectively income taxes december 31 2005 net operating loss carryforwards federal income tax purposes approximately 119000000 expire years 2006 2025 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred foreign subsidiaries december 31 2005 federal tax credit carryforwards approximately 5000000 expire years 2009 2025 “change ownership” provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities liquidity capital resources december 31 2005 2004 2003 42256000 51299000 62975000 respectively cash equivalents shortterm investments years principal factors affecting balances net loss cash provided financing activities currently estimate cash equivalents shortterm investments december 31 2006 lower balance december 31 2005 expected decrease balance primarily attributable expected net loss shortterm investments consist primarily highly liquid marketable securities two letters credit secured certificate deposit december 31 2005 letters credit totaled 692000 one 633000 lease agreement 59000 facilitate value added tax filings europe net cash used operating activities totaled 8091000 12335000 8055000 years ended december 31 2005 2004 2003 respectively net cash used operating activities year ended december 31 2005 primarily due net loss 7713000 net cash used operating activities year ended december 31 2004 less net loss primarily due 1599000 decrease inventory levels net cash used operating activities year ended december 31 2003 net loss primarily due 2347000 increase inventory levels provide uninterrupted supply zadaxin transferred production new contract manufacturer net cash used us investing activities amounted 6434000 year ended december 31 2005 compared net cash provided investing activities amount 351000 year ended december 31 2004 647000 year ended december 31 2003 increase 2005 primarily due purchase us treasury securities amount 6034000 2005 net cash used financing activities totaled 834000 year ended december 31 2005 compared net cash provided financing activities amount 289000 year ended december 31 2004 50074000 year ended december 31 2003 net cash used financing activities year ended december 31 2005 consisted repayment 4000000 convertible note partially offset proceeds received approximately 3003000 related exercises outstanding options employee director stock option plans 163000 issuance common stock employee stock purchase plan net cash provided financing activities year ended december 31 2004 consisted approximately 12000 related exercises outstanding options employee director stock option plans 277000 issuance common stock employee stock purchase plan net cash provided financing activities year ended december 31 2003 consisted approximately 44426000 public offering common stock approximately 2536000 exercise outstanding warrants purchase common stock institutional accredited investors approximately 1800000 issuance common stock sigmatau approximately 1050000 related exercises outstanding options employee director stock option plans 262000 issuance common stock employee stock purchase plan following table summarizes contractual obligations commitments december 31 2005 1 convertible note matures march 2006 see note 11 notes consolidated financial statements included amounts 48000 interest payments 2 future minimum rental commitments office space copiers leased noncancelable operating lease arrangements 3 includes approximately 1012000 minimum purchase requirements contract manufacturer approximately 321000 research development fees payable contract research organization agreement us phase 3 hcv clinical trials approximately 3416000 payable european marketing development partner sigmatau conduct complete hcv clinical trial europe 4 includes 20000 per year 2010 minimum royalty payments us army 500000 noncancelable prepaid royalties paid wayne state university additionally upon regulatory approval zadaxin commercialization product certain countries company obligated pay us army wayne state university royalty based percentage zadaxin sales see note 11 notes consolidated financial statements existing capital resources funds product sales sufficient finance operations immediate future sufficient complete current plans conduct complete clinical trials scv07 zadaxin proceed development efforts planning would need raise additional financing unavailability inopportune timing financing could prevent delay longterm product development commercialization programs either would severely hurt business cannot assure funds financings sufficient complete current plans conduct complete clinical trials need timing amount financing would depend upon numerous factors including level zadaxin sales timing amount manufacturing costs related zadaxin availability complementary products technologies businesses initiation continuation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative parties status competitive products condition capital markets availability financing sciclone particular officers directors involved related party transactions 2005 offbalance sheet arrangements offbalance sheet arrangements 2005 2004 2003 recent accounting pronouncement december 2004 financial accounting standards board “fasb” issued fasb statement 123 revised 2004 “sharebased payment” “sfas 123r” revises sfas 123 supersedes apb 25 related implementation guidance generally approach sfas 123r similar approach described sfas 123 however sfas 123r requires sharebased payments employees directors including grants stock options recognized statement operations based fair values pro forma disclosure longer alternative amount compensation cost measured based grantdate fair value instruments issued compensation cost recognized period employee director provides service exchange award adopted sfas 123r using modified prospective basis january 1 2006 anticipate compensation expense twelve months ended december 31 2006 approximately 2600000 however estimate future stockbased compensation expense affected stock price number stockbased awards board directors may grant 2006 well number complex subjective valuation assumptions valuation assumptions include limited volatility stock price employee stock option exercise behaviors permitted sfas 123 company currently accounts sharebased payments employees directors using apb 25’s intrinsic value method generally recognizes compensation cost employee director stock options employee stock purchase plans accordingly adoption sfas 123r’s fair value method significant impact results operations although impact cash overall financial position however adopted sfas 123r using blackscholes option pricing model prior periods impact standard would approximated impact sfas 123 described disclosure pro forma net loss net loss per share accounting stockbased compensation section note 1 notes consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations read conjunction “selected consolidated financial data” consolidated financial statements related notes thereto included elsewhere annual report form 10k management’s discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see “note regarding forwardlooking statements” “risk factors” contained annual report form 10k overview biopharmaceutical company engaged development commercialization novel therapeutics treat lifethreatening diseases strategy inlicense products areas cancer viral infectious diseases develop commercialization major pharmaceutical markets particular focus china one world’s fastest growing pharmaceutical markets zadaxin one largest selling imported drugs china today currently latestage clinical development europe treatment malignant melanoma hepatitis c virus hcv periods encompassed annual report form 10k devoted substantially resources lead product zadaxin® thymalfasin thymosin alpha 1 clinical trials zadaxin commercialization activities primary focus clinical development zadaxin part new combination therapy treatment hcv expect proprietary compound scv07 enter phase 2 clinical development viral infectious disease second quarter 2007 also submitted regulatory application chinese state food drug administration sfda december 2006 related june 2006 inlicensing chinese marketing rights dc bead™ product treatment liver cancer hepatocellular carcinoma hcc addition current product portfolio believe wellpositioned inlicense additional therapeutics china potentially significantly larger us european markets part ability rapidly costeffectively develop commercialize products china also intend use clinical work support accelerate regulatory applications united states europe december 2005 june 2006 reported results first two us phase 3 trials evaluating double therapy combination zadaxin pegylated interferon alpha treat hcv patients failed previous therapy results trials demonstrate zadaxin combination pegylated interferon alpha provides statistically significant clinical benefit compared pegylated interferon alpha alone european partner sigmatau conducting triple therapy combination zadaxin plus pegylated interferon alpha ribavirin trial europe enrollment trial completed december 2006 also december 2006 reported positive interim survival data phase 2 trial treating patients stage iv malignant melanoma indicating addition 32 mg zadaxin standard dacarbazine dtic chemotherapy increased median survival 102 months addition data show patients treated thymalfasin dtic chemotherapy without interferon alpha achieved double overall tumor response compared control group manufacture zadaxin sale clinical trials third party contract manufacturers conduct research development efforts principally arrangements clinical research sites contract research organizations universities commencement operations december 31 2006 accumulated deficit approximately 159000000 least next years expect net losses due increased operating expenses expand research development clinical testing sales marketing capabilities ability achieve sustain operating profitability dependent expansion sales zadaxin china securing regulatory approval scv07 dc bead china execution successful completion zadaxin scv07 dc bead clinical trials securing regulatory approvals products major pharmaceutical markets united states europe japan regulatory approval secured countries ability achieve sustain operating profitability depend successful commercialization marketing products addition factors may also impact ability achieve sustain operating profitability including pricing zadaxin manufacturing marketing costs ability compete pharmaceutical markets cost product development commercialization programs including scv07 dc bead timing costs acquiring rights additional drugs ability fund operations entrance extension agreements product development commercialization appropriate expect net sales increase 2007 due increased sales china primarily due level research development activities operations expect net loss reduction cash equivalents shortterm investments 2007 operating results may fluctuate quarter fluctuations may substantial result among factors number timing costs results preclinical clinical trials products market acceptance zadaxin scv07 dc bead timing orders products international markets particularly china regulatory approval process timing fda international regulatory approvals acquisition additional product rights funding provided result corporate partnering arrangements critical accounting policies general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout “management’s discussion analysis financial condition results operations” policies affect reported expected financial results detailed discussion application accounting policies see note 1 “notes consolidated financial statements” part ii item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united sates requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates base estimates historical experience various market specific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition recognize revenue product sales time shipment significant customer acceptance requirements postshipment obligations part sales importing agents distributors recognized time shipment title product transferred importing agents distributors contractual rights return except limited terms regarding product quality however intend replace products expired deemed damaged defective delivered exercise judgment estimating return reserves payments importing agents distributors contingent upon sale end user importing agents distributors contract revenue research development recorded earned based performance requirements contract exercise judgment determining period performance obligations fulfilled impact timing amount revenue recognized particular reporting period nonrefundable contract fees performance obligations exist continuing involvement us recognized earlier payments received collection assured revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment exercise judgment determination achievement milestones impact timing amount revenue recognized particular reporting period amounts invoiced relating arrangements revenue cannot recognized reflected balance sheet deferred revenue recognized applicable revenue recognition criteria satisfied accounts receivable required estimate collectibility trade receivables maintain reserves credit losses within expectations recognize reserves bad debts ranging 25 100 past due accounts receivable based length time receivables past due collectibility experience considerable amount judgment required assessing ultimate realization receivables including limited analysis historical payment patterns customers individual customer circumstances geographic region including review local economic environment ability collect outstanding receivables customers critical operating performance cash flows maintain allowances doubtful accounts estimated losses resulting inability customers make required payments financial condition customers economic environment operate deteriorate resulting impairment ability make payments additional allowances may required would increase general administrative expenses conversely actual credit losses significantly less expected would decrease general administrative expenses inventories stated lower cost realizable market value assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels current assumptions future production inventory levels demand change actual market conditions less favorable projected management inventory writedowns may required could negatively impact gross margins results operations impairment intangible assets december 31 2006 net intangible assets 402000 related zadaxin product rights never recorded impairment losses related intangible assets assessing recoverability intangible assets must make assumptions regarding estimated future cash flows factors estimates related assumptions change future may required record impairment charges assets research development expenses research development expenses principally incurred clinical trials including cost sharing sigmatau’s large clinical trial europe using zadaxin part novel triple therapy combination treatment hepatitis c virus hcv large phase 3 clinical trials took place united states primarily 2005 2004 research development expenses charged operations incurred cost accruals clinical trials based estimates services received efforts expended pursuant contracts numerous institutions conduct clinical trials behalf financial terms agreements subject negotiation vary contract may result uneven payment flows payments contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses financial statements actual services received efforts expended expenses related grants institutions us hcv clinical trials accrued based level patient enrollment activity according protocol general clinical trials expenses higher initial final months patients scheduled 18 months treatment observation expenses relating clinical research organizations entities managing trials laboratory direct expenses recognized period estimated incurred services performed monitor active patient enrollment levels related activity extent possible adjust estimates accordingly however management underestimated activity levels associated various studies given point time could underestimate actual research development expenses requiring recording additional expenses increase net loss future stock option valuation effective january 1 2006 adopted fair value recognition provisions financial accounting standards board “fasb” statement 123r sharebased payment “fas 123r” prior january 1 2006 accounted sharebased payments recognition measurement provisions accounting principles board opinion 25 “apb 25” related interpretations permitted fasb statement 123 accounting stockbased compensation “fas 123” accordingly recognize compensation expense accounting employee stock purchase plan stock option plans options employees directors granted exercise prices fair market value adopted fas 123r using modifiedprospective transition method compensation cost recognized year ended december 31 2006 includes compensation cost sharebased payments granted prior yet vested january 1 2006 based grantdate fair value estimated accordance provisions fas 123 compensation cost also includes sharebased payments granted subsequent january 1 2006 based grantdate fair value estimated accordance provisions fas 123r compensation cost calculated date grant using fair value option determined using black scholes option valuation model single option approach company amortizes compensation cost vesting period generally four years using straight line attribution method results prior periods restated reflect impact fas 123r determining fair value option award fas 123r using black scholes option valuation model requires use certain subjective assumptions determined weightedaverage valuation assumptions follows volatilitywe believe historical volatility stock price indicative expectations expected future stock price volatility estimated volatility using historical share price performance time period equivalent expected term option also considered implied volatility market traded puts calls common stock however since puts calls thinly traded information considered representative future estimated volatility expected termwhen establishing estimate expected term award consider vesting period option historical experience employee stock option exercises including forfeitures riskfree interest ratethe risk free interest rate based us treasury constant maturity rates similar terms expected term option dividend yieldthe expected dividend yield 0 paid expect pay dividends foreseeable future expected forfeitures use historical data regarding forfeitures options estimate prevesting option forfeitures record stockbased compensation awards expected vest significant assumptions estimates expected volatility expected term award addition judgment also required estimating amount sharebased awards expected forfeited actual conditions events amounts differ significantly estimates stockbased compensation expense noncash effect results operations could materially impacted december 31 2006 unamortized compensation expense related unvested options approximately 4000000 weighted average period compensation expense related options recognized 209 years results operations product sales 32433000 27842000 22765000 years ended december 31 2006 2005 2004 respectively derived sales zadaxin sales customers china accounted approximately 92 91 revenue years ended december 31 2006 2005 2004 respectively product prices remained stable throughout three year period years ended december 31 2006 2005 2004 sales year three four importing agents china accounted approximately 92 91 respectively product sales 2006 shanghai lingyun china national pharmaceutical foreign trade corporation accounted 66 15 sales respectively two others accounted combined 11 2005 guang dong south pharmaceutical foreign trade co ltd zhuhai goldsn medicine co ltd china national pharmaceutical foreign trade corporation accounted 57 19 15 sales respectively 2004 china national pharmaceutical foreign trade corporation china meheco corporation guang dong south pharmaceutical foreign trade co ltd accounted 32 29 23 sales respectively customers accounted 10 sales periods december 31 2006 approximately 12562000 94 accounts receivable attributable three customers china perform ongoing credit evaluations customers’ financial condition generally require collateral customers contract revenue 229000 492000 1631000 years ended december 31 2006 2005 2004 respectively contract revenue 2004 includes 1000000 milestone payment received sigmatau relating completion enrollment us phase 3 hcv clinical trials remaining contract revenue recognized 2004 2005 2006 connection 2685000 payment received sigmatau january 2002 50000 payment received sigmatau december 2006 revenue recognized contract revenue course zadaxin hcv us clinical program period sharing clinical data program sigmatau accordance performance requirements contract sigmatau gross margin 79 83 81 2006 2005 2004 respectively decrease gross margin 2006 primarily due increase 929000 royalty expense recorded december 2006 related annual minimum royalties due sales product 1997 2006 according license agreement wayne state university wsu increase gross margin percentage 2004 2005 period due lower average cost product sold 2005 period expect cost product sales hence gross margin vary year depending upon level zadaxin sales absorption productrelated fixed costs charges associated excess expiring finished product inventory research development rd expenses 14088000 14406000 17994000 represented approximately 41 45 53 total costs expenses years ended december 31 2006 2005 2004 respectively rd expenses 2006 included stockbased compensation expense 771000 following adoption fas 123r decrease rd expenses years 2004 2006 primarily related us phase 3 hcv clinical trials completed mid2006 2006 recorded approximately 1000000 expenses related us phase 3 hcv trial compares expenses 2005 approximately 3400000 approximately 8600000 2004 major components rd expenses consist clinical studies performed clinical trial institutions contract research organizations related materials supplies preclinical work pharmaceutical development personnel costs including salaries benefits third party research funding overhead allocations consisting various support facilities related costs research development activities also separated three main categories research clinical development pharmaceutical development research costs typically consist preclinical toxicology work clinical development costs primarily relate clinical trials pharmaceutical development costs consist product formulation chemical analysis 2006 recorded approximately 5400000 research 6900000 clinical development 1800000 pharmaceutical development activities compares expenses 2005 approximately 4300000 research 8300000 clinical development 1800000 pharmaceutical development activities expenses 2004 approximately 4100000 research 11800000 clinical development 2100000 pharmaceutical development activities initiation continuation current clinical development programs expected continue significant effect research development expenses general expect research development expenses vary substantially quarter pursue strategy initiating additional preclinical clinical trials testing acquiring product rights expanding regulatory activities expansion significant extension clinical development programs may require us seek additional capital resources sales marketing expenses 11569000 10237000 9665000 years ended december 31 2006 2005 2004 respectively increase sales marketing expenses 2006 primarily due 639000 increase stockbased compensation expense following adoption fas 123r increases compensation expenses approximately 364000 expenses related conferences 100000 increased rent approximately 116000 increase sales marketing expenses 2005 primarily due increase expenses related conferences 244000 increase expenses associated expansion marketing efforts approximately 208000 expect sales marketing expenses 2007 higher incurred 2006 due increased sales efforts general administrative expenses 9040000 7457000 6311000 years ended december 31 2006 2005 2004 respectively increase 2006 primarily related increase salary related expenses 410000 increased consulting fees 656000 increase stockbased compensation expense 564000 following adoption fas 123r increase 2005 primarily related increased legal fees approximately 625000 support increased legal regulatory activities increased accounting fees approximately 237000 associated increased securities regulation requirements approximately 472000 related noncash stockprice performance based option expenses 2007 expect increased general administrative expenses increase general administrative activities support increased expenditures business development legal regulatory activities interest investment income approximately 1764000 1273000 1285000 years ended december 31 2006 2005 2004 respectively interest investment income 2004 included gain sale equity securities amount approximately 697000 excluding gain 2004 increase interest investment income 2005 2006 primarily due cash balances earning higher interest rates periods interest investment expense primarily relating convertible notes payable 94000 345000 361000 years ended december 31 2006 2005 2004 respectively company repaid 4000000 1600000 convertible notes december 2005 march 2006 respectively resulting decrease interest expense periods income expense net 7981000 0 51000 years ended december 31 2006 2005 2004 respectively increase income 2006 period primarily due 8000000 received april 2006 resolution dispute schering plough kk net income loss years ended december 31 2006 2005 2004 727000 7713000 13278000 respectively increase net income 2006 primarily due 8000000 received april 2006 resolution dispute schering plough kk net loss lower 2005 2004 principally due higher net sales gross margin lower operating expenses basic diluted net income loss per share years ended december 31 2006 2005 2004 002 017 030 respectively weighted average shares outstanding used computing basic net income loss per share years ended december 31 2006 2005 2004 45901015 45328714 44626337 respectively weighted average shares outstanding used computing diluted net income loss per share years ended december 31 2006 2005 2004 46072027 45328714 44626337 respectively income taxes recorded federal state income tax expense years ended december 31 2006 2005 2004 undistributed earnings foreign subsidiaries amounted approximately 6126000 6673000 4155000 december 31 2006 2005 2004 respectively earnings considered permanently reinvested accordingly deferred us income taxes provided thereon december 31 2006 net operating loss carryforwards federal income tax purposes approximately 123000000 expire years 2007 2026 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred foreign subsidiaries december 31 2006 federal tax credit carryforwards approximately 7000000 expire years 2009 2026 “change ownership” provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities liquidity capital resources december 31 2006 2005 2004 42592000 42256000 51299000 respectively cash equivalents shortterm investments years principal factors affecting balances net income loss cash used financing activities currently estimate cash equivalents shortterm investments december 31 2007 lower balance december 31 2006 expected decrease balance primarily attributable expected net loss shortterm investments consist primarily highly liquid marketable securities two letters credit secured certificate deposit december 31 2006 letters credit totaled 698000 one 633000 lease agreement 65000 facilitate value added tax filings europe net cash provided used operating activities totaled 1720000 8091000 12335000 years ended december 31 2006 2005 2004 respectively net cash provided operating activities year ended december 31 2006 primarily due net income 727000 noncash expense related employee stock options 2446000 due adoption fas 123r increase accounts payable accrued expenses 1137000 primarily related increase royalty accrual decrease prepaid expenses assets 644000 primarily related reduction prepaid royalties reduction value added tax receivable offset partially increase net accounts receivable 3576000 due increase sales year net cash used operating activities year ended december 31 2005 primarily due net loss 7713000 net cash used operating activities year ended december 31 2004 less net loss primarily due 1599000 decrease inventory levels net cash used us investing activities amounted 615000 year ended december 31 2006 6434000 year ended december 31 2005 compared net cash provided investing activities 351000 year ended december 31 2004 cash used 2006 615000 primarily due increased holdings us treasury securities 4369000 offset partially decrease municipal securities holdings 3850000 due purchases property equipment 75000 increase cash used 2005 primarily due purchase us treasury securities amount 6034000 2005 net cash used financing activities totaled 1335000 year ended december 31 2006 compared net cash used financing activities amount 834000 year ended december 31 2005 net cash provided financing activities 289000 year ended december 31 2004 net cash used financing activities year ended december 31 2006 consisted repayment 1600000 convertible note partially offset proceeds received approximately 221000 related exercises outstanding options employee stock option plans 44000 issuance common stock employee stock purchase plan net cash used financing activities year ended december 31 2005 consisted repayment 4000000 convertible note partially offset proceeds received approximately 3003000 related exercises outstanding options employee director stock option plans 163000 issuance common stock employee stock purchase plan net cash provided financing activities year ended december 31 2004 consisted approximately 12000 related exercises outstanding options employee director stock option plans 277000 issuance common stock employee stock purchase plan following table summarizes contractual obligations commitments december 31 2006 1 future minimum rental commitments office space copiers leased noncancelable operating lease arrangements 2 includes approximately 1198000 minimum purchase requirements contract manufacturer approximately 2486000 payable european marketing development partner sigmatau conduct complete hcv clinical trial europe 3 includes minimum royalty payments us army 2010 wayne state university “wsu” 2012 additionally upon regulatory approval zadaxin commercialization product certain countries company obligated pay us army wsu greater respective minimum annual royalty based percentage zadaxin sales see note 11 notes consolidated financial statements 4 amount represents discretionary accrued longterm bonus payable ceo december 31 2006 based performance targets years 20062008 existing capital resources funds product sales sufficient finance operations immediate future sufficient complete current plans conduct complete clinical trials scv07 zadaxin proceed development efforts planning would need raise additional financing unavailability inopportune timing financing could prevent delay longterm product development commercialization programs either would severely hurt business cannot assure funds financings sufficient complete current plans conduct complete clinical trials need timing amount financing would depend upon numerous factors including level zadaxin sales timing amount manufacturing costs related zadaxin availability complementary products technologies businesses initiation continuation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative parties status competitive products condition capital markets availability financing sciclone particular officers directors involved related party transactions 2006 offbalance sheet arrangements offbalance sheet arrangements 2006 2005 2004 recent accounting pronouncement july 2006 fasb issued financial interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48” change accounting income taxes fin 48 specifies tax benefits uncertain tax positions recognized measured derecognized financial statements requires certain disclosures uncertain tax matters specifies reserves uncertain tax positions classified balance sheet provides transition interim period guidance among provisions fin 48 effective company’s first quarter calendar year 2007 company anticipate fin 48 material impact consolidated financial position results operations cash flows item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations read conjunction “selected financial data” consolidated financial statements related notes thereto included elsewhere annual report form 10k management’s discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see “note regarding forwardlooking statements” “risk factors” contained annual report form 10k overview sciclone pharmaceuticals nasdaq scln forprofit global pharmaceutical company substantial international business product portfolio novel therapies cancer infectious diseases objective believe achieve sustained profitability full year 2009 combination international sales growth costcontaining clinical development strategy focused expense management zadaxin® brand thymalfasin primary product sold 30 countries treatment hepatitis b virus hbv hepatitis c virus hcv certain cancers vaccine adjuvant cash position profit margin product sales marketing operations provide financial resources continued growth international business development pipeline phase 2 drug candidates including rp101 treatment pancreatic cancer scv07 treatment hcv oral mucositis dc bead product awaiting approval peoples republic china treatment liver cancer plan expand commercial operations currently primarily located china goal becoming significant pharmaceutical company rapidly growing market key part strategy leverage decade experience china grow international business adding commercial stage near term commercial stage products portfolio example acquiring chinese marketing rights dc beadtm liver cancer pursuing regulatory approval approved intend launch product 2009 believe wellpositioned inlicense additional therapeutics international business focus china part opportunity develop commercialize products utilizing well established sales marketing organization china years ended december 31 2008 2007 2006 product sales 54108000 37038000 32433000 respectively revenue growth attributable market penetration china related zadaxin years ended december 31 2008 2007 2006 product sales china 50724000 34240000 29722000 respectively sciclone continues clinical development program potential three product candidates studied four indications latest stage opportunity ready phase 3 evaluate thymalfasin therapy stage iv melanoma estimate 200 million market opportunity worldwide targeted patient group extended adjuvant setting additional clinical trials believe global market opportunity could increase 500 million process seeking partner phase 3 trial prior initiating enrollment june 2007 reported positive data phase 2 trial conducted partnership sigmatau treating patients stage iv melanoma showed thymalfasin combination dacarbazine dtic chemotherapy low dose interferon alpha met primary endpoint two thymalfasin treated groups overall response rate three times higher stage iv melanoma patients treated dtic current standard care low dose interferon alpha addition survival key secondary endpoint trial extended nearly 3 months november 2008 reported reached agreement special protocol assessment us food drug administration fda design phase 3 registration trial thymalfasin potential treatment stage iv melanoma adequately addresses objectives necessary support regulatory submission addition thymalfasin developing rp101 scv07 treatment lifethreatening diseases conducting multicenter randomized doubleblinded placebo controlled phase 2 clinical trial using rp101 combination gemcitabine chemotherapy approximately 153 patients unresectable stage iii iv pancreatic cancer announced march 9 2009 completed enrollment trial ahead schedule expect report results first half 2010 september 2008 reported believe promising results proofofconcept phase 2a clinical trial using scv07 sole agent administered patients chronically infected hcv trial designed evaluate effect scv07 hepatitis c viral load well measures immune response scv07 demonstrated activity treated patients higher dosage groups decrease viral load patients accompanied increase biomarker usually correlated immunological response hcv additionally scv07 shown generally safe welltolerated dose limiting toxicities serious adverse events reported planning initiate phase 2b trial scv07 hcv 2009 fourth quarter 2008 scv07 also entered phase 2 clinical development assess safety efficacy scv07 delay onset severe oral mucositis subjects receiving chemoradiation therapy treatment cancers head neck multicenter randomized doubleblind placebocontrolled doseranging study plan enroll approximately 60 patients expect complete enrollment trial end 2009 manufacture zadaxin rp101 scv07 third party contract manufacturers conduct research development efforts principally arrangements clinical research sites contract research organizations universities believe cash hand ongoing business operations 6 million line credit sufficient fund current business activities foreseeable future period may report quarterly losses ability sustain operating profitability impacted numerous factors including expansion sales efforts zadaxin regulatory approval process including timing fda international regulatory approvals number timing costs results preclinical clinical trials products market acceptance zadaxin potentially scv07 dc bead rp101 timing orders zadaxin international markets particularly china acquisition additional product rights funding provided result corporate partnering arrangements critical accounting policies estimates general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout “management’s discussion analysis financial condition results operations” policies affect reported expected financial results detailed discussion application accounting policies see note 1 “notes consolidated financial statements” part ii item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united sates requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates base estimates historical experience various market specific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition recognize revenue product sales time delivery significant customer acceptance requirements postshipment obligations part except sales new market acceptance requirements met sales importing agents distributors recognized time shipment title product transferred importing agents distributors contractual rights return except limited terms regarding product quality however expected replace products expired deemed damaged defective delivered estimate expected returns primarily historical patterns historically product returns damaged defective expired product amount accrued product returns december 31 2008 2007 respective consolidated balance sheets payments importing agents distributors contingent upon sale end user importing agents distributors amounts invoiced relating arrangements collectibility uncertain revenue cannot recognized reflected balance sheet deferred revenue recognized applicable revenue recognition criteria satisfied contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement us recognized earlier payments received collection assured revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment cash equivalents investments cash equivalents consist highly liquid investments maturities three months less date purchase classify investment portfolio availableforsale trading securities record investments fair value balance sheet unrealized gains losses availableforsale securities included accumulated comprehensive income consolidated balance sheet realized gains losses availableforsale trading securities declines value judged temporary availableforsale securities determined basis specific identification included income expense evaluate investments impairment reporting period accordance fsp fas 1151 meaning otherthantemporary impairment application certain investments fsp fas 1151 fsp fas 1151 provides guidance determining investment considered impaired whether impairment otherthantemporary measurement impairment loss investment considered impaired fair value investment less cost consideration available evidence evaluate realizable value investment impairment determined otherthantemporary impairment loss recognized consolidated statement operations equal difference investment’s cost fair value fair value financial instruments adopted provisions financial accounting standards board fasb statement 157 “fair value measurements” sfas 157 effective january 1 2008 february 2008 fasb issued fasb staff position fas 1572 “effective date fasb statement 157” provides one year deferral effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed financial statements fair value least annually therefore deferred adoption sfas 157 relates non financial assets liabilities sfas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles enhances disclosures fair value measurements fair value defined sfas 157 exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date valuation techniques used measure fair value sfas 157 must maximize use observable inputs minimize use unobservable inputs standard describes fair value hierarchy based three levels inputs first two considered observable last unobservable may used measure fair value assessment significance particular input fair value measurements requires judgment may affect valuation assets liabilities measured placement within fair value hierarchy three levels input level 1quoted prices active markets identical assets liabilities level 2inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3unobservable inputs supported little market activity significant fair value assets liabilities adoption statement material impact consolidated results operations financial condition effective january 1 2008 also adopted sfas 159 “the fair value option financial assets financial liabilities” sfas 159 sfas 159 allows entity irrevocable option elect fair value initial subsequent measurement specified financial assets liabilities contractbycontract basis elected adopt fair value accounting sfas 159 initial recognition put option ubs ag respect auction rate securities ars recorded assets consolidated balance sheet following description valuation methodologies assets liabilities measured fair value quoted prices available active market fair value based upon quoted market prices classified level 1 valuation hierarchy level 1 securities include money market funds us term deposits corporate equity securities restricted longterm italian state bonds quoted market price available fair value based upon observable inputs quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities classified level 2 valuation hierarchy level 2 securities include certificate deposit quoted prices observable inputs unavailable fair values based internally developed cash flow models classified level 3 valuation hierarchy internally developed cash flow models primarily use inputs estimates interest rates discount rates including yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods assets inputs reflect assumptions market participants would use pricing assets including assumptions risk developed based best information available circumstances level 3 securities include ars put option respect securities financial instruments including accounts receivable accounts payable accrued liabilities carried cost believe approximates fair value shortterm maturity instruments accounts receivable required estimate collectibility trade receivables maintain reserves credit losses within expectations recognize reserves bad debts ranging 25 100 past due accounts receivable based length time receivables past due collectibility experience considerable amount judgment required assessing ultimate realization receivables including limited analysis historical payment patterns customers circumstances individual customer geographic region including review local economic environment ability collect outstanding receivables customers critical operating performance cash flows maintain allowances doubtful accounts estimated losses resulting inability customers make required payments financial condition customers economic environment operate deteriorate resulting impairment ability make payments additional allowances may required would increase general administrative expenses inventories stated lower cost market cost determined firstin firstout basis assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels current assumptions future production inventory levels demand change actual market conditions less favorable projected management inventory writedowns may required could negatively impact gross margins results operations obsolete items observed alternate uses inventory record writedown net realizable value period impairment first recognized intangible assets december 31 2008 net intangible assets approximately 262000 related zadaxin product rights recorded impairment losses todate related intangible assets assessing recoverability intangible assets must make assumptions regarding estimated future cash flows factors estimates related assumptions change future may required record impairment charges assets research development expenses effective january 1 2008 adopted emerging issues task force eitf issue 073 “accounting nonrefundable advance payments goods services used future research development activities” eitf 073 accordance eitf 073 nonrefundable advance payments goods services received future use research development activities deferred capitalized amounts expensed related goods delivered services performed adoption material impact consolidated results operations financial condition research development expenses principally incurred clinical trials including cost sharing sigmatau’s clinical trial europe using zadaxin part novel triple therapy combination treatment hcv phase 2 clinical trials rp101 scv07 development plans phase 3 clinical trial melanoma research development expenses charged operations incurred cost accruals clinical trials based estimates services received efforts expended pursuant contracts numerous institutions conduct clinical trials behalf financial terms agreements subject negotiation vary contract may result uneven payment flows payments contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses actual services received efforts expended expenses related grants institutions conduct clinical trials behalf accrued based level patient enrollment activity according protocol expenses relating clinical research organization entities managing trials laboratory direct expenses recognized period estimated incurred services performed underestimate overestimate activity associated study service given point time adjustments research development expenses may necessary future periods monitor active patient enrollment levels related activity extent possible adjust estimates accordingly stock option valuation apply statement financial accounting standards fas 123r “sharebased payment” fas 123r stockbased payment transactions receive employee services exchange equity instruments employee stockbased compensation estimated date grant based employee stock award’s fair value using blackscholes optionpricing model recognized expense ratably requisite service period generally four years blackscholes optionpricing model requires use certain subjective assumptions significant assumptions estimate expected volatility market price stock expected term award establishing estimate expected term award consider vesting period award recent historical experience employee stock option exercises including forfeitures expected volatility required accounting rules review valuation assumptions grant date result valuation assumptions used value employee stockbased awards granted future periods may change recognized expect recognize near future tax benefit related employee stockbased compensation cost results operations product sales 54108000 37038000 32433000 years ended december 31 2008 2007 2006 respectively derived sales zadaxin increases 2006 2008 attributable higher volume product sold primarily due continued expansion sales marketing efforts modest increase prices 2007 2008 periods sales customers china denominated us dollars accounted approximately 94 92 revenue years ended december 31 2008 2007 2006 respectively years ended december 31 2008 2007 2006 sales year three four importing agents china accounted approximately 94 92 respectively product sales 2008 shanghai lingyun china national pharmaceutical foreign trade corporation accounted 68 22 sales respectively one importer accounted 4 sales 2007 shanghai lingyun china national pharmaceutical foreign trade corporation accounted 63 21 sales respectively one importer accounted 8 sales 2006 shanghai lingyun china national pharmaceutical foreign trade corporation accounted 66 15 sales respectively two others accounted combined 11 customers accounted 10 sales periods december 31 2008 approximately 11420000 96 accounts receivable attributable two customers china perform ongoing credit evaluations customers’ financial condition generally require collateral customers contract revenue 5000 20000 229000 years ended december 31 2008 2007 2006 respectively 2008 2007 recognized 5000 20000 respectively contract revenue partial license fee zadaxin third party similar revenue year ended december 31 2006 contract revenue recognized 2006 connection 2685000 payment received sigmatau january 2002 50000 payment received sigmatau december 2006 revenue recognized contract revenue course zadaxin hcv us clinical program period sharing clinical data program sigmatau accordance performance requirements contract sigmatau gross margin 82 79 2008 2007 2006 respectively decrease gross margin 2006 primarily due increase 929000 royalty expense recorded december 2006 related agreement wayne state university wsu regarding royalty obligations period 1997 2006 expect cost product sales hence gross margin vary year depending upon level zadaxin sales absorption productrelated fixed costs charges associated excess expiring finished product inventory research development rd expenses 23537000 17446000 14088000 represented approximately 45 42 41 total operating costs expenses years ended december 31 2008 2007 2006 respectively increase 6091000 rd expenses 2007 2008 related phase 2 clinical trials rp101 scv07 development planning phase 3 clinical trial melanoma increase included approximately 2002000 clinical trial management statistical services investigator expenses increase approximately 2659000 drug development manufacturing costs related scale rp101 purchase gemcitabine rp101 clinical trial manufacturing scv07 ribavirin scv07 clinical trial 1320000 milestone payment upon first patient dosing rp101 phase 2 clinical trial increase compensation benefits expense recruiting fees due increase number research development personnel increase consulting travel expenses increases partially offset decrease approximately 2200000 acquisition legal costs related acquisition exclusive rights united states canada develop commercialize rp101 recorded year ended december 31 2007 increase rd expenses 2006 2007 primarily due 2200000 increase acquisition legal costs incurred april 2007 related acquisition exclusive rights united states canada develop commercialize rp101 increase approximately 1893000 clinical trial expenses increase 1131000 drug development expenses mainly related phase 2 trials rp101 scv07 preparation prospective phase 3 trial melanoma increases offset partially decreases rd including decrease 531000 stockbased compensation expense 377000 decrease compensation benefits related expenses net consulting fees decrease 597000 preclinical pharmacology expenses decrease 146000 rent expense due lower rent expense related main office facility second half 2007 compared former facility exited july 2007 decrease 106000 computer software expense major components rd expenses include services fee costs pass expenses investigator expenses incurred clinical studies performed clinical trial institutions contract research organizations related materials supplies preclinical toxicology work pharmaceutical development including product formulation chemical analysis license fees personnel costs including salaries benefits third party research funding overhead allocations consisting various support facilities related costs initiation continuation current clinical development programs expected continue significant effect research development expenses although possible determine total cost expected incurred particular year clinical trial due uncertain nature clinical trial process estimate future costs 2009 relating research development decrease compared 2008 due reduced spending related phase 2 clinical trial rp101 actual costs incurred future periods vary depending particular upon timeline design zadaxin phase 3 melanoma clinical trial final decisions regarding timing expense sharing arrangements trial expansion significant extension clinical development programs may require us seek additional capital resources sales marketing expenses 17325000 13928000 11569000 years ended december 31 2008 2007 2006 respectively increase sales marketing expenses 2007 2008 primarily due increase 1361000 conferences medical education seminar expenses increase 760000 salesforce incentives increase 582000 compensation benefits expense due increase number sales personnel increase 444000 travel entertainment expenses related expanding sales marketing efforts increase sales marketing expenses 2006 2007 primarily due increases sales marketing personnel promotional activities operating expense related expanding sales marketing efforts expect sales marketing expenses 2009 higher incurred 2008 due increased sales efforts general administrative expenses 11858000 10245000 9040000 years ended december 31 2008 2007 2006 respectively general administrative expenses increased 1613000 year ended december 31 2008 compared 2007 primarily due increase severance costs approximately 376000 related departure former chief financial officer increase accounting professional fees approximately 391000 increase legal fees approximately 457000 increase employment recruiting costs approximately 225000 net increase compensation benefits related expenses due increase headcount 2008 offset partially decrease stock based compensation expense increase general administrative expenses 2007 compared 2006 primarily related increase compensation benefits related expenses 713000 due increase general administrative personnel increase stockbased compensation expense 195000 mainly related chief executive officer’s option agreement 150000 increase office expense related relocation corporate office believe general administrative expense 2009 remain comparable level 2008 interest investment income approximately 608000 1629000 1764000 years ended december 31 2008 2007 2006 respectively decreases 2006 2008 resulted reduced interest earned cash balances due lower cash balances due lower interest rates 2008 period 2009 expect decrease interest investment income result lower cash balances lower interest rates interest investment expense 31000 20000 94000 years ended december 31 2008 2007 2006 respectively interest expense 2006 primarily related interest company’s convertible notes payable company repaid 1600000 convertible notes march 2006 resulting decrease interest expense 2007 period expense income net 16000 40000 7981000 years ended december 31 2008 2007 2006 respectively expense income year ended december 31 2008 included otherthantemporary impairment charge 315000 related ars investments 285000 gain related fair value put option income year ended december 31 2006 period primarily related onetime payment 8000000 received april 2006 resolution dispute schering plough kk regarding conduct hbv clinical trials japan zadaxin similar income recorded years ended december 31 2007 2008 provision income tax 475000 301000 years ended december 31 2008 2007 respectively relates foreign operations china increase 174000 2007 2008 due increased operating activity china similar provision income tax recorded year ended december 31 2006 income taxes recorded us federal state income tax expense years ended december 31 2008 2007 2006 undistributed earnings foreign subsidiaries amounted approximately 23521000 december 31 2008 earnings considered permanently reinvested accordingly deferred us income taxes provided thereon december 31 2008 net operating loss carryforwards federal income tax purposes approximately 144102000 expire years 2009 2028 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred foreign subsidiaries december 31 2008 federal tax credit carryforwards approximately 8686000 expire years 2009 2028 “change ownership” provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities liquidity capital resources days’ sales outstanding accounts receivable using average receivables method 103 137 138 days 2008 2007 2006 respectively majority sales customers people’s republic china accounts receivable collections standard credit terms ranging 90 180 days fourth quarter 2008 largest customer people’s republic china agreed payment terms 90 days instead 180 days order procure us increased volume zadaxin volume discount change resulted reduction days’ sales outstanding 2008 compared 2007 2006 december 31 2008 2007 2006 27842000 35281000 42592000 respectively cash equivalents shortterm investments years principal factor affecting balances net loss operating activities currently estimate cash equivalents shortterm investments december 31 2009 lower balance december 31 2008 expected decrease balance primarily attributable cash expected used operations shortterm investments consist primarily highly liquid marketable securities restricted shortterm investment 69000 december 31 2008 relates letter credit secured certificate deposit facilitate value added tax filings europe restricted longterm investment 388000 consists italian state bonds purchased facilitate value added tax filings europe december 31 2008 held fair value 1485000 auction rate securities ars trading securities reclassified availableforsale securities upon reclassification ars trading securities december 31 2008 realized loss 315000 expense previously recorded unrealized losses accumulated comprehensive income included part stockholders’ equity ars investments contractual maturities generally 0 34 years whose underlying assets student loans substantially backed federal government interest rates resetting approximately every 30 days auction process end reset period investors may sell continue hold securities par ars rated one major independent rating agencies either aaa historically ars highly liquid using “dutch” auction process reset applicable interest rate predetermined intervals typically every 30 days turn provided liquidity par value however result liquidity issues global credit capital markets auctions ars failed beginning february 2008 sell orders exceeded buy orders december 31 2008 continues auction market ars failures auctions affect value collateral underlying ars continue earn interest ars failure auctions able liquidate ars issuer calls security successful auction occurs buyer found outside auction process security matures based classified ars longterm investments consolidated balance sheet december 31 2008 november 2008 accepted auction rate securities rights offer rights offer ubs ag return general release claims grant right ubs ag purchase ars time full par value received right require ubs ag purchase par value ars beginning june 2010 rights nontransferable upon acceptance granted ubs ag sole discretion right sell dispose andor enter orders auction process respect eligible ars behalf without prior notification us ubs ag long receive payment par upon sale disposition expect sell ars rights however rights exercised july 2 2012 expire ubs rights obligation buy ars enforceability rights results creation asset akin put option right “put” ars back ubs specified date payment equal par value ars put option free standing asset separate ars recorded 285000 gain income related fair value put option included results operations year ended december 31 2008 continue classify ars investments longterm consolidated balance sheet time investments become shortterm believe even possible requirement hold securities june 30 2010 remaining cash equivalents shortterm investments line credit sufficient meet anticipated cash needs least next twelve months net cash used provided operating activities totaled 4945000 7011000 1682000 years ended december 31 2008 2007 2006 respectively net cash used operating activities 4945000 year ended december 31 2008 comprised primarily net loss 8348000 adjusted noncash items stockbased compensation expense 1843000 depreciation amortization 353000 1140000 net cash inflow related changes operating assets liabilities changes included decrease accrued clinical trials 1477000 primarily result payments made clinical research organization managing phase 2 rp101 clinical trial sigma tau completion phase 3 hepatitis c triple therapy clinical trial europe included increase 820000 accrued compensation employee benefits related increase bonus accrual result increased headcount 2008 continued accrual chief executive officer’s longterm bonus operating asset changes included decrease 723000 accounts receivable related reduction payment terms 2008 largest customer china 180 days 90 days allow customer procure increased volume zadaxin volume discount decrease 1243000 prepaid expenses assets primarily related decrease prepaid royalties prepaid clinical trial expenses net cash used operating activities 7011000 year ended december 31 2007 comprised primarily net loss 9948000 adjusted noncash items stockbased compensation expense 2243000 depreciation amortization 248000 350000 net cash inflow related changes operating assets liabilities changes included increase accrued clinical trials expenses 1431000 increase accounts payable accrued expenses 1852000 increases related primarily phase 2 rp101 scv07 clinical trials development plans melanoma clinical trial inflows partially offset increase inventory levels 2262000 supplier bulk active pharmaceutical ingredient api product manufacture zadaxin able produce higher yields production runs enabling us increase inventory levels compared lower planned inventory levels prior year period increase prepaid expenses assets 1259000 mainly related phase 2 rp101 clinical trial net cash provided operating activities 1682000 year ended december 31 2006 primarily due net income 727000 adjusted noncash expense related employee stock options 2446000 depreciation amortization 233000 1686000 net cash outflow related changes operating assets liabilities changes included increase accounts receivable 3576000 due fluctuations timing payments received within credit terms customers increase accounts payable accrued expenses 1137000 primarily related increase royalty accrual net cash provided investing activities amounted 572000 12994000 years ended december 31 2008 2007 respectively compared cash used investing activities 577000 year ended december 31 2006 net cash provided investing activities year ended december 31 2008 572000 due 1393000 net proceeds sales maturities purchases marketable securities offset partially 448000 purchase restricted longterm italian state bonds facilitate value added tax filings europe purchase 373000 property equipment net cash provided investing activities 2007 12994000 primarily due sale us treasury securities municipal securities holdings fund operations partially offset 446000 purchases property equipment net cash used investing activities 2006 577000 primarily due increased holdings us treasury securities 4369000 offset partially decrease municipal securities holdings 3850000 due purchases property equipment 75000 net cash provided financing activities totaled 149000 241000 years ended december 31 2008 2007 respectively compared net cash used financing activities 1335000 year ended december 31 2006 net cash provided financing activities years ended december 31 2008 2007 primarily consisted proceeds received related exercises outstanding options employee stock option plans net cash used financing activities year ended december 31 2006 consisted repayment 1600000 convertible note partially offset proceeds received approximately 221000 related exercises outstanding options employee stock option plans 44000 issuance common stock employee stock purchase plan following table summarizes contractual obligations commitments december 31 2008 1 future minimum rental commitments office space copiers leased noncancelable operating lease arrangements 2 amounts payable european marketing development partner sigmatau complete hcv clinical trial europe 3 includes minimum royalty payments us army 2021 company obligated pay us army greater either fixed minimum annual royalty based percentage zadaxin sales 4 amount represents discretionary accrued bonus payable chief executive officer december 31 2008 based performance targets years 20062008 additionally company obligated pay wayne state university royalty based percentage zadaxin sales certain countries china see note 13 notes consolidated financial statements addition commitments result acquisition exclusive rights united states canada develop commercialize rp101 may obligated pay post phase 3 successbased regulatory commercial milestone payments 22000000 royalties future sales rp101 avantogen resprotect also entered agreement pharmaceutical research associates inc pra clinical trials management services randomized double blind placebo controlled phase 2 study evaluating efficacy safety rp101 treatment pancreatic cancer estimated cost pra’s management services passthrough costs 8500000 4000000 respectively 6728000 paid company pra 54000 payable pra december 31 2008 remaining amounts expected paid pra incurred second quarter 2010 entered supply agreement resprotect purchase rp101 resprotect clinical trials commercial purposes following regulatory approval terms supply agreement sciclone resprotect share scaleup costs required manufacture rp101 prior fda approval share scaleup costs estimated 1448000 june 2010 paid 1228000 1878000 resprotect december 31 2008 leaving balance approximately 220000 307000 based upon december 31 2008 conversion rates provide us additional flexibility managing operations funding clinical trials november 2008 sciclone subsidiaries spil china borrowers entered loan security agreement unconditional guaranty security agreement silicon valley bank may borrow 6000000 “credit facility” credit facility lineofcredit permits borrowing 6000000 term 36 months subject certain sublimits including 2500000 letters credit facility secured first priority secured interest assets intellectual property credit insurance policy insuring certain foreign account receivable assets sciclone pharmaceuticals inc parent spil china guarantor credit facility line credit bears interest bank’s prime rate 4 plus 175 575 december 31 2008 outstanding balances subsequent november 14 2009 subject unused line fee minimum monthly interest required meet certain financial covenants including minimum consolidated revenue minimum consolidated earnings interest income tax defined also required meet certain operating covenants limit ability incur liabilities create liens make capital expenditures pay dividends distributions make investments dispose assets line credit expires november 2011 upon termination amounts borrowed must repaid full december 31 2008 outstanding borrowings line credit 6000000 available future borrowing believe cash hand ongoing business operations line credit sufficient fund current business activities foreseeable future however intend continue explore alternatives financing provide additional flexibility managing operations funding clinical trials unavailability inopportune timing financing could prevent delay longterm product development commercialization programs either could hurt business cannot assure funds financings sufficient complete current plans conduct complete clinical trials need timing amount financing would depend upon numerous factors including level zadaxin sales timing amount manufacturing costs related zadaxin availability complementary products technologies businesses initiation continuation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative parties status competitive products various alternatives financing determined timing structure transaction related party transactions none officers directors involved related party transactions 2008 licensed sigmatau exclusive zadaxin development marketing rights cover countries european union defined january 1 1995 addition iceland norway switzerland sigmatau affiliated persons stockholders time transaction entered currently largest shareholder agreement sigmatau conducted multicenter phase 3 hepatitis c triple therapy clinical trial europe 553 patients objective european trial provide data thymalfasin’s use part triple therapy treating hcv patients paid sigmatau approximately 2509000 funding support course patient enrollment trial period december 31 2008 also pay 1500000 milestone payment upon completion final report expected 2009 based level activity trial recorded approximately 322000 507000 1750000 research development expense related trial years ended december 31 2008 2007 2006 respectively december 31 2008 2007 accrued clinical trial expenses 1442000 1620000 respectively due sigmatau agreement sigmatau related clinical development zadaxin received 2685000 first quarter 2002 contract revenue recognized estimated time complete zadaxin us phase 3 hcv clinical trials deliver clinical data substantive performance requirements contract year ended december 31 2006 recognized contract revenue 229000 related agreement contract revenue recognized 2007 2008 related agreement offbalance sheet arrangements offbalance sheet arrangements 2008 2007 2006 recent accounting pronouncements december 2007 financial accounting standards board fasb released emerging issues task force eitf issue 071 accounting collaboration arrangements related development commercialization intellectual property” eitf 071 focuses parties collaborative arrangement account costs incurred revenue generated sales third parties sharing payments pursuant collaboration agreement presented income statement certain related disclosure questions eitf 071 effective fiscal years beginning december 15 2008 expect adoption eitf 071 material impact results operations financial position item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations read conjunction “selected financial data” consolidated financial statements related notes thereto included elsewhere annual report form 10k management’s discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see “note regarding forwardlooking statements” “risk factors” contained annual report form 10k overview sciclone pharmaceuticals nasdaq scln profitfocused global specialty pharmaceutical company substantial international business based primarily people’s republic china “china” product portfolio novel therapies cancer infectious diseases strategy focused international sales growth costcontaining clinical development strategy overall expense management zadaxin® brand thymalfasin thymosin alpha 1 primary product sold 30 countries treatment hepatitis b virus “hbv” hepatitis c virus “hcv” certain cancers vaccine adjuvant believe current cash investment position gross profit product sales provide financial resources execute strategy continued growth international business development pipeline latestage product candidates plan expand commercial operations currently located primarily china goal becoming significant pharmaceutical company china’s rapidly growing pharmaceutical market key part strategy leverage decade experience china grow international business adding commercial stage near term commercial stage products portfolio believe wellpositioned inlicense additional therapeutics international business focus china part opportunity commercialize products utilizing well established sales marketing organization china furthermore international growth strategy may include additional partnerships merger acquisition transactions products successfully inlicensed two products part international commercial growth strategy dc bead tm ondansetron rapidfilmtm dc bead product candidate novel treatment advanced liver cancer currently approved 40 countries worldwide including europe us commercialization rights product china commenced small local registration trial first quarter 2010 expected enroll approximately 40 advanced liver cancer patients three sfdacertified liver cancer treatment centers primary endpoint safety secondary endpoint efficacy measured tumor response trial results positive believe may receive regulatory approval dc bead end 2010 second inlicensed product candidate part international commercial growth strategy ondansetron rapidfilm commercialization rights product candidate china vietnam ondansetron rapidfilm currently evaluated regulatory approval europe oral thin film formulation ondansetron serotonin 5ht3 receptor antagonist commonly used treat prevent nausea vomiting caused chemotherapy radiotherapy surgery plan file product registration state food drug administration china “sfda” 2010 believe may receive regulatory approval china 2011 clinical development strategy focused portfolio novel product candidates cancer infectious diseases includes scv07 thymalfasin scv07 developed delay onset severe oral mucositis patients receiving chemoradiation therapy treatment cancers head neck treatment hcv thymalfasin developed ongoing clinical trial enhancement influenza h1n1 vaccination immunocompromised patient populations stage iv melanoma part clinical development strategy moving forward clinical development program scv07 small molecule synthetic peptide immunomodulating properties studied two indications oral mucositis hcv currently conducting phase 2 multicenter randomized doubleblind placebocontrolled dose ranging study designed assess safety efficacy scv07 delay onset severe oral mucositis subjects receiving chemoradiation therapy treatment cancers head neck primary efficacy endpoint delay onset severity severe oral mucositis completed enrollment trial second half 2009 expect report results first quarter 2010 second component scv07 clinical development project treatment hcv multicenter multidose openlabel study designed evaluate safety immunomodulatory effects scv07 monotherapy combination ribavirin noncirrhotic patients genotype 1 chronic hcv relapsed least 44 weeks treatment pegylated interferon ribavirin expect report results end 2010 previous phase 2a clinical trial scv07 designed evaluate effect scv07 hcv viral load well measures immune response scv07 demonstrated activity treated patients higher dosage groups decrease viral load patients accompanied increase biomarker usually correlated immunological response hcv additionally scv07 shown generally safe welltolerated dose limiting toxicities serious adverse events reported continue seek development opportunities zadaxin “thymalfasin” focused vaccine enhancement melanoma fourth quarter 2009 partner sigmatau finanziaria spa “sigmatau” initiated study italy evaluate zadaxin’s thymalfasin ability enhance immune response mf59 adjuvanted h1n1 influenza monovalent vaccine focetria™ novartis study conducted hemodialysis patients reached full enrollment two days early 2010 reported promising preliminary results study regarding zadaxin’s ability enhance response h1n1 vaccine zadaxin currently approved italy 10 countries enhancer influenza vaccine immunecompromised patients addition continue seek partner phase 3 trial evaluate thymalfasin use therapy stage iv melanoma intend proceed trial unless reach agreement partner sciclone’s clinical development strategy focus driving costefficient phase 1 2 development promising compounds seeking development partners costly phase 3 trials allowing us achieve potential upside portfolio drug candidates believe cash investments december 31 2009 ongoing revenue generating business operations sufficient support current operating plan least next 12 months results may fluctuate quarter may report quarterly losses future critical accounting policies significant judgments estimates general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout “management’s discussion analysis financial condition results operations” policies affect reported expected financial results detailed discussion application accounting policies see note 1 “notes consolidated financial statements” part ii item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united sates requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates judgments base estimates historical experience various market specific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition recognize revenue product sales time delivery significant customer acceptance requirements postshipment obligations part except sales new market acceptance requirements met sales importing agents distributors recognized time shipment title product transferred importing agents distributors contractual rights return except limited terms regarding product quality however expected replace products expired deemed damaged defective delivered estimate expected returns primarily historical patterns historically product returns damaged defective expired product amount accrued product returns december 31 2009 2008 respective consolidated balance sheets payments importing agents distributors contingent upon sale end user importing agents distributors amounts invoiced relating arrangements collectibility uncertain revenue cannot recognized reflected balance sheet deferred revenue recognized applicable revenue recognition criteria satisfied cash equivalents investments record investments fair value determined available information consolidated balance sheet date investment considered impaired fair value investment less cost consideration available evidence evaluate realizable value investment impairment determined otherthantemporary impairment loss recognized consolidated statement operations fair value financial instruments record financial assets including cash equivalents accrued liabilities cost approximates fair value due shortterm nature investments marketable securities put option recorded estimated fair value fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs three levels input level 1quoted prices active markets identical assets liabilities level 2inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3unobservable inputs supported little market activity significant fair value assets liabilities quoted prices available active market determine fair value based upon quoted market prices classify values level 1 valuation hierarchy quoted market prices available fair values based upon observable inputs quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities classified level 2 valuation hierarchy quoted prices observable inputs unavailable fair values based internally developed cash flow models classified level 3 valuation hierarchy internally developed cash flow models primarily use inputs estimates interest rates discount rates including yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods assets inputs reflect assumptions market participants would use pricing assets including assumptions risk developed based best information available circumstances assessment significance particular input fair value measurements requires judgment may affect valuation assets measured placement within fair value hierarchy accounts receivable accounts receivable recorded net allowance doubtful accounts maintain allowance doubtful accounts estimated losses resulting inability customers make required payments appropriate record allowance doubtful accounts based assessment various factors estimating need allowance doubtful accounts consider historical payment patterns customers circumstances individual customer geographic region including review local economic environment age accounts receivable balances credit quality customers factors may affect customers’ ability pay december 31 2009 allowance doubtful accounts considered necessary inventories stated lower cost market cost determined firstin firstout basis include amounts related materials labor overhead assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels current assumptions future production inventory levels demand change actual market conditions less favorable projected management inventory writedowns may required could negatively impact gross margins results operations obsolete items observed alternate uses inventory record writedown net realizable value period impairment first recognized accrued expenses make estimates accrued expenses balance sheet date consolidated financial statements based facts circumstances known us examples estimated accrued expenses include fees paid contract research organizations investigative sites connection clinical trials fees paid contract manufacturers connection production clinical trial materials professional services periodically confirm accuracy estimates selected service providers make adjustments necessary expenses related clinical trials generally accrued based estimates work performed level patient enrollment activities according protocols agreements financial terms agreements subject negotiation vary contract may result uneven payment flows payments certain contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses actual services received efforts expended monitor planned protocols work performed patient enrollment levels related activities extent possible adjust estimates accordingly stockbased compensation stockbased compensation estimated date grant based fair value award using blackscholes optionpricing model recognized expense ratably awards vest requisite service period generally one four years value certain targetstockpricebased options using monte carlo simulation options pricing model recognize expense service periods vesting portions awards six eight years optionpricing models require use certain subjective assumptions including expected volatility market price underlying stock expected term award expected volatility based historical volatility stock expected term derived historical data employee exercises terminations contractual life award targetstockpricebased options review valuation assumptions grant date result valuation assumptions used value stockbased compensation awards granted future periods may change income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse provide valuation allowance net deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized realization deferred tax assets dependent upon generation future taxable income timing amount uncertain accordingly deferred tax assets fully offset valuation allowance tax years 19962009 remain open examination major taxing jurisdictions subject results operations product sales 724 million 541 million 370 million years ended december 31 2009 2008 2007 revenue growth attributable higher volume zadaxin due market penetration china modest price increases 2007 2009 periods year ended december 31 2009 believe also increased demand zadaxin result h1n1 flu virus sales customers china denominated us dollars accounted approximately 96 94 92 product sales years ended december 31 2009 2008 2007 respectively 2009 shanghai lingyun china national pharmaceutical foreign trade corporation accounted 66 27 sales respectively two others importer accounted 3 sales 2008 shanghai lingyun china national pharmaceutical foreign trade corporation accounted 68 22 sales respectively one importer accounted 4 sales 2007 shanghai lingyun china national pharmaceutical foreign trade corporation accounted 63 21 sales respectively one importer accounted 8 sales customers accounted 10 sales periods december 31 2009 approximately 208 million 97 accounts receivable attributable four customers china perform ongoing credit evaluations customers’ financial condition generally require collateral customers gross margin 83 81 years ended december 31 2009 2008 2007 respectively increase gross margin year ended december 31 2009 compared years ended december 31 2008 2007 attributable higher sales zadaxin resulting volume discounts lower per vial production costs also attributable lower royalty expense 2009 period addition recorded charge 630000 associated finished goods inventory related vials made obsolete due labeling requirements arising renewed import license 2008 significant charges recorded us associated product inventory year ended december 31 2009 estimate future cost product sales increase year ending december 31 2010 relation expected increase level zadaxin sales expect cost product sales hence gross margin vary year depending upon level zadaxin sales absorption productrelated fixed costs charges associated excess expiring finished product inventory research development “rd” expenses 165 million 229 million 166 million years ended december 31 2009 2008 2007 respectively decrease 64 million 28 rd expenses year ended december 31 2009 compared corresponding period 2008 primarily related discontinuation rp101 clinical trial occurred year ended december 31 2009 offset partially increased expense related scv07 phase 2 clinical trials treatment oral mucositis hcv made 13 million milestone payment upon first patient dosing rp101 phase 2 clinical trial occurred year ended december 31 2008 corresponding payment 2009 decreases partially offset 10 million license fee payment related licensing agreement apr applied pharma research sa “apr” occurred year ended december 31 2009 increase 63 million 38 rd expenses year ended december 31 2008 compared year ended december 31 2007 related phase 2 clinical trials rp101 scv07 development planning latestage clinical trial melanoma increase included approximately 20 million clinical trial management statistical services investigator expenses increase approximately 27 million drug development manufacturing costs related scale rp101 purchase gemcitabine rp101 clinical trial manufacturing scv07 ribavirin scv07 clinical trial 13 million milestone payment upon first patient dosing rp101 phase 2 clinical trial increase compensation benefits expense recruiting fees due increase number research development personnel increase consulting travel expenses increases partially offset decrease approximately 22 million acquisition legal costs related acquisition exclusive rights united states canada develop commercialize rp101 recorded year ended december 31 2007 major components rd expenses include salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment licenserelated fees services performed clinical research organizations research institutions outside service providers sharing certain costs development zadaxin partner sigmatau initiation continuation current clinical development programs expected continue significant effect research development expenses although possible determine total cost expected incurred particular year clinical trial due uncertain nature clinical trial process expect future costs year ending december 31 2010 relating research development programs decrease primarily due discontinuation rp101 phase 2 clinical trial announced october 2009 conclusion scv07 phase 2 trial treatment oral mucositis expect report results first quarter 2010 partially offset ongoing phase 2 clinical trial scv07 treatment hcv actual costs incurred future periods vary depending particular upon timeline design clinical trials final decisions regarding timing expense sharing arrangements trials expansion significant extension clinical development programs may require us seek additional capital resources evaluating opportunities acquire inlicense marketing rights proprietary products china may result increased research development expenses due license fee payments expenses related inlicensing new product future sales marketing expenses 188 million 169 million 136 million years ended december 31 2009 2008 2007 respectively increase sales marketing expenses 19 million 12 year ended december 31 2009 compared year ended december 31 2008 primarily due increase 12 million conference seminar expenses increase 05 million compensation benefits expense result increased bonus sales incentives increase number sales personnel increase 03 million rent business tax expense related expanding sales efforts increase sales marketing expenses 33 million 24 year ended december 31 2008 compared year ended december 31 2007 primarily due increase 14 million conferences medical education seminar expenses increase 08 million salesforce incentives increase 06 million compensation benefits expense due increase number sales personnel increase 04 million travel entertainment expenses related expanding sales marketing efforts expect sales marketing expenses year ending december 31 2010 higher incurred year ended december 31 2009 due increased sales efforts primarily china general administrative expenses 125 million 125 million 111 million years ended december 31 2009 2008 2007 respectively year ended december 31 2009 general administrative expenses decreased 17000 0 compared year ended december 31 2008 although incurred increased expenses related business development efforts china increases offset decreased accounting legal fees general administrative expenses increased 14 million 13 year december 31 2008 compared year ended december 31 2007 primarily due increase severance costs approximately 04 million related departure former officer increase accounting professional fees approximately 04 million increase legal fees approximately 05 million increase employment recruiting costs approximately 02 million net increase compensation benefits related expenses due increase headcount year ended december 31 2008 offset partially decrease stock based compensation expense expect general administrative expenses year ending december 31 2010 comparable general administrative expenses year ended december 31 2009 interest investment income approximately 02 million 06 million 16 million years ended december 31 2009 2008 2007 respectively decrease year ended december 31 2009 compared years ended december 31 2008 2007 resulted lower cash investments balances lower returns due declining interest rate environment 2009 2008 periods interest investment expense 02 million 31000 20000 years ended december 31 2009 2008 2007 respectively increase interest expense year ended december 31 2009 compared years ended december 31 2008 2007 resulted amortization loan origination fees related silicon valley bank line credit established november 2008 provision income tax 06 million 05 million 03 million years ended december 31 2009 2008 2007 respectively relates foreign operations china increases resulted increase operating activities china increase statutory tax rate china 18 year ended december 31 2008 20 year ended december 31 2009 expect provision income tax increase year ending december 31 2010 compared year ended december 31 2009 due increased operating activities china increased statutory tax rate china 22 2010 income taxes recorded us federal state income tax expense years ended december 31 2009 2008 2007 undistributed earnings foreign subsidiaries amounted approximately 22 million december 31 2009 earnings considered permanently reinvested accordingly deferred us income taxes provided thereon december 31 2009 net operating loss carryforwards federal income tax purposes approximately 1306 million expire years 2010 2029 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred foreign subsidiaries december 31 2009 federal tax credit carryforwards approximately 95 million expire years 2010 2029 “change ownership” provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities liquidity capital resources days’ sales outstanding accounts receivable using average receivables method 101 103 137 days 2009 2008 2007 respectively majority sales customers china accounts receivable collections standard credit terms ranging 90 180 days fourth quarter 2008 largest customer china agreed payment terms 90 days instead 180 days order procure us increased volume zadaxin volume discount change resulted reduction days’ sales outstanding 2009 2008 compared 2007 believe 90 day credit terms largest customer china continue foreseeable future december 31 2009 2008 318 million 297 million respectively cash investments including 16 million 15 million respectively ars recorded fair value trading securities ars investments contractual maturities generally 2032 years whose underlying assets student loans substantially backed federal government interest rates resetting approximately every 30 days auction process end reset period investors may sell continue hold securities par disruptions credit markets adversely affected market ars however believe underlying securities collateral permanently affected continue earn interest ars november 2008 accepted auction rate securities rights offer “rights offer” ubs ag return general release claims grant right ubs ag purchase ars time full par value received right require ubs ag purchase par value ars beginning june 2010 “rights” rights nontransferable upon acceptance granted ubs ag sole discretion right sell dispose andor enter orders auction process respect eligible ars behalf without prior notification us ubs ag long receive payment par upon sale disposition expect sell ars rights however rights exercised july 2 2012 expire ubs rights obligation buy ars net cash used operating activities 05 million 49 million 70 million years ended december 31 2009 2008 2007 respectively net cash used operating activities years ended december 31 2009 2008 2007 primarily reflected net income loss period adjusted noncash items stockbased compensation expense depreciation amortization expense changes operating assets liabilities year ended december 31 2009 changes included 95 million increase accounts receivable compared year ended december 31 2008 related increased sales reduction payment terms occurred end fiscal 2008 largest customer china 180 days 90 days addition inventory levels increased 41 million year ended december 31 2009 compared year ended december 31 2008 meet expected sales demands net cash used provided investing activities 01 million 06 million 130 million years ended december 31 2009 2008 2007 respectively cash used provided investing activities primarily related purchases investments net proceeds maturities investments purchases property equipment net cash provided financing activities 26 million 01 million 02 million years ended december 31 2009 2008 2007 respectively consisted proceeds stock option exercises made stock award plans following table summarizes future contractual obligations december 31 2009 thousands 1 future minimum rental commitments office space copiers leased noncancelable operating lease arrangements 2 consist purchase obligations manufacturers 3 amount represents discretionary accrued bonus payable chief executive officer december 31 2009 based achievement performance targets years 20092011 november 2008 sciclone subsidiaries spil china borrowers entered loan security agreement unconditional guaranty security agreement silicon valley bank “credit facility” credit facility lineofcredit permits borrowing 6 million term 36 months subject certain sublimits including 25 million letters credit facility secured first priority secured interest assets intellectual property credit facility also requires us obtain credit insurance policy insuring certain foreign account receivable assets sciclone pharmaceuticals inc parent spil china guarantor credit facility credit facility expires november 2011 upon termination amounts borrowed must repaid full december 31 2009 outstanding borrowings credit facility credit facility bears interest bank’s prime rate plus 175 outstanding balances required meet certain financial covenants including minimum consolidated revenue minimum consolidated earnings interest income tax defined since november 14 2009 subject certain minimum fees interest payments also required meet certain operating covenants limit ability incur liabilities create liens make capital expenditures pay dividends distributions make investments dispose assets carry credit insurance november 2009 received limited waiver credit facility waive certain minimum fees interest payments waive requirement maintain credit insurance policy currently compliance credit facility giving effect limited waiver may 2009 filed shelf registration statement form s3 sec may offer sell 500 million securities plus additional 100 million could sell immediately effective related registration statement assuming continue meet sec’s eligibility requirements primary offerings form s3 believe existing cash investments ongoing revenue generating business operations sufficient support current operating plan least next 12 months current commitments offer sell securities may offered sold pursuant registration statement extent raise additional capital issuing equity securities stockholders may experience dilution debt financing available may subject us restrictive covenants significant interest costs extent raise additional funds collaboration licensing arrangements would required relinquish rights technologies product candidates marketing territories additional financing collaboration licensing arrangements may available needed either favorable terms intend continue explore alternatives financing provide additional flexibility managing operations inlicensing acquiring new products particularly china funding clinical trials unavailability inopportune timing financing could prevent delay longterm product development commercialization programs either could hurt business cannot assure funds financings sufficient conduct complete clinical trials acquire inlicense additional products need timing amount financing would depend upon numerous factors including level zadaxin sales timing amount manufacturing costs related zadaxin availability complementary products technologies businesses initiation continuation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative parties status competitive products various alternatives financing determined timing structure transaction related party transactions none officers directors dr camerini dr jones mr lapointe set forth involved related party transactions 2009 licensed sigmatau exclusive zadaxin development marketing rights cover countries european union defined january 1 1995 addition iceland norway switzerland sigmatau affiliated persons stockholders time transaction entered currently largest shareholder agreement sigmatau conducted multicenter phase 3 hepatitis c triple therapy clinical trial europe 553 patients objective european trial provide data thymalfasin’s use part triple therapy treating hcv patients paid sigmatau approximately 40 million funding support course patient enrollment trial including completion final report october 2009 accounting policy recording funding amounts due sigmatau record amounts research development expense trial period including period completion final report based level activity trial recorded approximately 01 million 03 million 05 million research development expense related trial years ended december 31 2009 2008 2007 respectively december 31 2009 amounts owed us sigmatau december 31 2008 accrued clinical trial expenses 14 million due sigmatau march 30 2009 entered settlement agreement “settlement agreement” affiliates sigmatau “sigmatau group” issued press release march 31 2009 “press release” announcing execution settlement agreement commercial agreement referred herein “zadaxin agreement” well certain actions taken implement provisions settlement agreement press release settlement agreement zadaxin agreement exhibits current report form 8k filed sec april 1 2009 settlement agreement dr camerini dr jones mr lapointe appointed board directors pursuant unanimous recommendation board elected stockholders 2009 annual meeting stockholders certain obligations settlement agreement expired expires entirety around june 15 2010 company longer obligation nominate dr camerini dr jones mr lapointe however board independently decided renominate annual stockholder’s meeting 2010 except result relationships dr camerini dr jones mr lapointe sigma tau none officers directors set forth involved related party transactions 2009 offbalance sheet arrangements offbalance sheet arrangements 2009 2008 2007 recent accounting guidance december 2007 financial accounting standards board “fasb” issued guidance concerning determining whether arrangement constitutes collaborative arrangement costs incurred revenue generated sales third parties payments parties collaborative arrangement reported income statement entity characterize payments income statement participants disclose notes financial statements collaborative arrangement adopted guidance january 1 2009 adoption guidance material impact consolidated financial statements december 2007 fasb issued authoritative guidance business combinations establishes principles requirements acquirer business combination recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree ii recognizes measures goodwill acquired business combination gain bargain purchase iii determines information disclose enable users financial statements evaluate nature financial effects business combination guidance effective prospective basis impact business combination transactions acquisition date occurs december 15 2008 adopted guidance january 1 2009 adoption guidance material impact consolidated financial statements october 2008 april 2009 fasb issued authoritative guidance clarifies determining fair value measurements annual interim disclosures market active identifying transactions orderly guidance applicable valuation auctionrate securities held inactive market december 31 2009 adoption guidance material impact consolidated results operations consolidated financial position april 2009 fasb also issued guidance regarding recognition presentation otherthantemporary impairments amends otherthantemporary impairment guidance us gaap debt securities make guidance operational improve presentation disclosure otherthantemporary impairments debt equity securities adopted guidance january 1 2009 adoption guidance material impact consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations read conjunction “selected financial data” consolidated financial statements related notes thereto included elsewhere annual report form 10k management’s discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see “note regarding forwardlooking statements” “risk factors” contained annual report form 10k overview sciclone pharmaceuticals nasdaq scln revenuegenerating chinacentric specialty pharmaceutical company substantial international business product portfolio novel therapies cancer infectious diseases focused continuing international sales growth containing clinical development costs international business corporate strategy focused primarily people’s republic china “china” believe built solid reputation established strong brand many years experience marketing zadaxin believe strengths position us benefit expanding pharmaceutical markets china elsewhere believe china rank second among global pharmaceutical markets 2015 projected annual growth rates 20 annually next several years seek grow sales region leverage strong balance sheet mergers acquisitions “ma” inlicensing product acquisitions zadaxin brand thymalfasin thymosin alpha 1 regulatory approval 30 countries treatment hbv vaccine adjuvant treatment hcv certain cancers revenues derived sales zadaxin substantially sold china continue grow zadaxin sales china sales force 200 people focused increasing sales country’s largest hospitals class 3 500 beds well smaller hospitals class 2 hospitals serve tier 1 tier 2 cities largest generally affluent populations china mainly located eastern portion nation approval china imported drug license sales made licensed importers sales made two importers recent months sinopharm group co limited acquired majority interest two large importers date able maintain gross margin part due relatively stable even decreasing costs sales part due maintaining relatively stable sales price anticipate gross margins remain historical range however prices china subject regulation currently review regulatory authorities substantial reduction sale price hospitals occurred gross margins would substantially reduced believe current cash investment position gross profit product sales provide financial resources execute strategy continued growth international business development pipeline latestage product candidates continue look inlicensing opportunities latestage approved branded welldifferentiated products approved clear regulatory pathway date inlicensed two products part international commercial growth strategy dc bead® ondansetron rapidfilm® working towards regulatory approval china inlicensed candidates dc bead inlicensed product commercialization rights china novel treatment advanced liver cancer currently approved approximately 40 countries worldwide including countries european union “eu” us commenced small local registration trial 2010 completed enrollment approximately 40 advanced liver cancer patients several liver cancer treatment centers primary objective safety secondary objective efficacy measured tumor response believe may receive regulatory approval dc bead late 2011 second inlicensed product part international commercial growth strategy ondansetron rapidfilm product oral thin film formulation ondansetron serotonin 5ht3 receptor antagonist commonly used treat prevent nausea vomiting caused chemotherapy radiotherapy surgery march 2010 announced approval granted ondansetron rapidfilmtm eu decentralized procedure 16 major eu countries commercialization rights product china including hong kong macau vietnam working towards filing clinical trial application 2011 part product registration process begin regulatory approval process china outside china sciclone’s clinical development strategy focused driving costefficient phase 1 2 development promising compounds seeking development partners costly phase 3 trials currently developing scv07 small molecule synthetic peptide immunomodulating properties phase 2b clinical trial prevention oral mucositis “om” om common painful debilitating complication cancer treatment estimate medical costs treatment oral mucositis approximately 42 billion us 10 billion worldwide 2010 approximately 450000 patients per year us suffer om cancer therapy may 2010 announced topline results phase 2a proof concept clinical trial scv07 modify course oral mucositis patients head neck cancer receiving chemoradiotherapy regimens based findings phase 2a study discussions us food drug administration announced enrollment first patient company’s phase 2b clinical trial scv07 prevention om january 2011 2b study examining three doses scv07 including two higher doses used company’s recent phase 2a study assess drug’s impact modifying course om patients head neck cancer addition trial evaluating scv07’s safety tolerability patient population well role played specific genetic profiles patient response treatment multicenter randomized doubleblind placebocontrolled study designed enroll approximately 160 patients receiving standard chemoradiation therapy treatment cancers head neck patients randomly assigned one trial’s four treatment arms scv07 doses 01 mgkg 03 mgkg 1 mgkg placebo study’s primary efficacy endpoint reduction proportion patients clinically assessed ulcerative om grade ³ 2 time received cumulative radiation dose 45 gy study’s secondary endpoints include incidence duration ulcerative severe grade ³ 3 om analgesic use pain assessments quality life measurements gastrostomy tube placement use breaks radiation chemotherapy treatment unscheduled office hospital visits united states securities exchange commission “sec” united states department justice “doj” conducting formal investigations us regarding range matters including possibility violations foreign corrupt practices act “fcpa” response matters board directors appointed special committee independent directors oversee company’s response government inquiries based initial review special committee decided undertake independent investigation matters reflected arising sec doj investigations including limited certain sales marketing matters china order evaluate whether violation fcpa laws occurred special committee concluded investigation reached conclusions date special committee management made final determination regarding whether violation fcpa law regulation occurred however anticipate special committee finalize findings near future may include findings regarding potential fcpa issues recommendations regarding additional remediation measures possible suggestions regarding personnel issues course review special committee instructed management evaluate expand company’s training employees regarding understanding compliance laws including fcpa antibribery laws regulations ii evaluate existing compliance antibribery guidelines prepare new detailed guideline implementation review board andor committees board iii implement preapproval policy certain expenses including payments reimbursement thirdparty gifts travel expenses honoraria sponsorships certain third party events consistently maintained policy employees comply applicable laws however course evaluating existing training policies internal controls financial reporting expense approval expense reimbursement practices matters brought attention management special committee determined guidelines employee training expense approval practices internal controls respect certain matters including payment reimbursement third party gifts travel expenses honoraria sponsorship certain third party events required improvements order provide reasonable assurance policy compliance applicable laws effective addition management determined material weakness internal control financial reporting december 31 2010 relating implementation policy compliance laws first quarter fiscal 2011 initiated commenced various remediation efforts provide reasonable assurance implementation policy compliance laws including fcpa antibribery laws see “management’s annual report changes internal control financial reporting” information regarding material weakness remediation efforts since special committee reached conclusions reported findings board none disclosures form 10k intended represent special committee’s finding conclusions anticipate special committee conclude investigation soon anticipate special committee may make specific different findings addition disclosures herein also anticipate special committee may recommend additional remediation measures already taken commenced following announcement sec doj investigations various shareholder litigations filed litigation may filed cannot predict outcome matters incurred anticipate continue incur substantial expenses course investigations connection current future litigation determined sales marketing activities occurred violate may violated fcpa laws future operating results could adversely affected addition could incur additional expenses related fines remediative measures including changes compliance programs internal controls disclosure controls believe cash investments december 31 2010 ongoing revenue generating business operations sufficient support current operating plan least next 12 months results may fluctuate quarter may report quarterly losses future critical accounting policies significant judgments estimates general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout “management’s discussion analysis financial condition results operations” policies affect reported expected financial results detailed discussion application accounting policies see note 1 “notes consolidated financial statements” part ii item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united sates require us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates judgments base estimates historical experience various market specific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition recognize revenue product sales time delivery significant customer acceptance requirements postshipment obligations part except sales new market acceptance requirements met sales importing agents distributors recognized time shipment title product transferred importing agents distributors contractual rights return except limited terms regarding product quality however expected replace products expired deemed damaged defective delivered estimate expected returns primarily historical patterns historically product returns damaged defective expired product amount accrued product returns december 31 2010 2009 respective consolidated balance sheets payments importing agents distributors contingent upon sale end user importing agents distributors amounts invoiced relating arrangements collectability uncertain revenue cannot recognized reflected balance sheet deferred revenue recognized applicable revenue recognition criteria satisfied cash equivalents investments record investments fair value determined available information consolidated balance sheet date investment considered impaired fair value investment less cost consideration available evidence evaluate realizable value investment impairment determined otherthantemporary impairment loss recognized consolidated statement operations fair value financial instruments record financial assets including cash equivalents accrued liabilities cost approximates fair value due shortterm nature investments marketable securities recorded estimated fair value fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs three levels input level 1quoted prices active markets identical assets liabilities level 2inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3unobservable inputs supported little market activity significant fair value assets liabilities quoted prices available active market determine fair value based upon quoted market prices classify values level 1 valuation hierarchy quoted market prices available fair values based upon observable inputs quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities classified level 2 valuation hierarchy quoted prices observable inputs unavailable fair values based internally developed cash flow models classified level 3 valuation hierarchy internally developed cash flow models primarily use inputs estimates interest rates discount rates including yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods assets inputs reflect assumptions market participants would use pricing assets including assumptions risk developed based best information available circumstances assessment significance particular input fair value measurements requires judgment may affect valuation assets measured placement within fair value hierarchy accounts receivable accounts receivable recorded net allowance doubtful accounts maintain allowance doubtful accounts estimated losses resulting inability customers make required payments appropriate record allowance doubtful accounts based assessment various factors estimating need allowance doubtful accounts consider historical payment patterns customers circumstances individual customer geographic region including review local economic environment age accounts receivable balances credit quality customers factors may affect customers’ ability pay december 31 2010 allowance doubtful accounts considered necessary inventories stated lower cost market cost determined firstin firstout basis include amounts related materials labor overhead assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels current assumptions future production inventory levels demand change actual market conditions less favorable projected management inventory writedowns may required could negatively impact gross margins results operations obsolete items observed alternate uses inventory record writedown net realizable value period impairment first recognized accrued expenses make estimates accrued expenses balance sheet date consolidated financial statements based facts circumstances known us examples estimated accrued expenses include fees paid contract research organizations investigative sites connection clinical trials fees paid contract manufacturers connection production clinical trial materials professional services periodically confirm accuracy estimates selected service providers make adjustments necessary expenses related clinical trials generally accrued based estimates work performed level patient enrollment activities according protocols agreements financial terms agreements subject negotiation vary contract may result uneven payment flows payments certain contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses actual services received efforts expended monitor planned protocols work performed patient enrollment levels related activities extent possible adjust estimates accordingly record liabilities estimated amounts litigation claims legal actions probable reasonably estimated likelihood material change estimated reserves dependent possible outcome settlement negotiations regulatory judicial review development facts circumstances extended litigation could change claims assessments amount range loss outstanding litigation uncertain disclose footnotes financial statements unable make reasonable estimate material liability could result unfavorable outcomes events occur assess potential liability related pending litigation claims legal actions adjust estimates accordingly adjustments could materially impact financial statements stockbased compensation stockbased compensation estimated date grant based fair value award using blackscholes optionpricing model portion ultimately expected vest recognized expense ratably awards vest requisite service period generally one four years period time estimate probable performance goal performancebased option achieved estimate prevesting forfeitures time grant analyzing historical data revise estimates subsequent periods actual forfeitures differ estimates total expense recognized vesting period awards ultimately vest certain targetstockpricebased options valued using monte carlo simulation options pricing model recognized expense service periods vesting portions awards six eight years optionpricing models require use certain subjective assumptions including expected volatility market price underlying stock expected term award expected volatility based historical volatility stock expected term derived historical data employee exercises terminations contractual life award targetstockpricebased options review valuation assumptions grant date result valuation assumptions used value stockbased compensation awards granted future periods may change income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse provide valuation allowance net deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized realization deferred tax assets dependent upon generation future taxable income timing amount uncertain accordingly deferred tax assets fully offset valuation allowance tax years 19952010 remain open examination major taxing jurisdictions subject furthermore notified internal revenue service 2008 us federal tax return selected examination process yet commenced record liabilities related uncertain tax positions accordance guidance clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribing minimum recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return believe uncertain tax positions currently pending material adverse effect consolidated financial statements although adverse resolution one uncertain tax positions period could material impact results operations period results operations product sales gross margin following tables summarize year changes product sales thousands cost product sales thousands product gross margin product sales 851 million 724 million 541 million years ended december 31 2010 2009 2008 respectively product sales china denominated us dollars accounted approximately 820 million 697 million 507 million 96 94 sales respectively years ended december 31 2010 2009 2008 revenue growth attributable higher volume zadaxin sales due market penetration china modest price increases 2008 2010 periods product sales period derived sales zadaxin year ended december 31 2009 believe also increased demand zadaxin result h1n1 flu virus 2010 shanghai lingyun pharmaceutical company ltd guangdong south pharmaceutical foreign trade company ltd accounted 74 14 sales respectively 2009 shanghai lingyun pharmaceutical company ltd china national pharmaceutical foreign trade corporation accounted 66 27 sales respectively 2008 shanghai lingyun pharmaceutical company ltd china national pharmaceutical foreign trade corporation accounted 68 22 sales respectively customers accounted 10 sales periods recent months sinopharm group co limited acquired majority interest two large importers shanghai lingyun pharmaceutical company ltd guangdong south pharmaceutical foreign trade company ltd believe acquisitions impact sales experience largest importers good anticipate continue sell majority product expect unit sales year ending december 31 2011 increase compared sales year ended december 31 2010 related market penetration china however discussions government reimbursement levels china listed drugs could reviewed 2011 zadaxin’s list price could included review gross margin 851 835 810 years ended december 31 2010 2009 2008 respectively increase gross margin year ended december 31 2010 compared years ended december 31 2009 2008 attributable higher sales zadaxin resulting volume discounts lower per vial production costs also attributable lower royalty expense 2010 2009 periods also recorded charge 630000 associated finished goods inventory related vials made obsolete due labeling requirements arising renewed import license 2008 significant charges recorded us associated product inventory years ended december 31 2010 2009 expect cost product sales gross margins fluctuate period depending upon level sales price zadaxin absorption productrelated fixed costs currency exchange fluctuations charges associated excess expiring finished product inventory timing inventory period costs research development “rd” following tables summarize year changes rd expenses thousands research development “rd” expenses 124 million 165 million 229 million years ended december 31 2010 2009 2008 respectively decrease 41 million 25 rd expenses year ended december 31 2010 compared year ended december 31 2009 primarily related timing clinical trialrelated expenses including completion enrollment patients phase 2a clinical trial scv07 delay onset severe oral mucositis first quarter 2010 discontinuation rp101 clinical trial treatment pancreatic cancer last year decreases partially offset increased expenses related scv07 phase 2b clinical trials treatment hepatitis c virus “hcv” oral mucositis “om” 2010 period decrease 63 million 28 rd expenses year ended december 31 2009 compared year ended december 31 2008 primarily related lower expenses year ended december 31 2009 rp101 clinical trial discontinued offset partially increased expense related scv07 phase 2 clinical trials treatment om hcv made 13 million milestone payment upon first patient dosing rp101 phase 2 clinical trial occurred year ended december 31 2008 corresponding payment 2009 decreases partially offset 10 million license fee payment related licensing agreement apr applied pharma research sa “apr” occurred year ended december 31 2009 major components rd expenses include salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment licenserelated fees services performed clinical research organizations research institutions outside service providers sharing certain costs development zadaxin partner sigmatau initiation continuation completion current clinical development programs expected continue significant effect research development expenses actual costs incurred future periods vary depending particular upon timeline design clinical trials final decisions regarding timing expensesharing arrangements trials though expect research development expenses increase year ending december 31 2011 compared incurred year ended december 31 2010 primarily related scv07 phase 2b trial oral mucositis began enrolling patients january 2011 evaluating opportunities acquire inlicense marketing rights proprietary products primarily china may result increased research development expenses due license fee payments expenses related inlicensing development new products future sales marketing following tables summarize year changes sales marketing expenses thousands sales marketing expenses 220 million 188 million 169 million years ended december 31 2010 2009 2008 respectively increase sales marketing expenses 32 million 17 year ended december 31 2010 compared year ended december 31 2009 primarily related increased conferences local training seminars increase employeerelated costs associated growth sales force sales efforts zadaxin 2010 period increase sales marketing expenses 20 million 12 year ended december 31 2009 compared year ended december 31 2008 primarily due increase conference seminar expenses increase compensation benefits expense result increased bonus sales incentives increase number sales personnel increase rent business tax expense related expanding sales efforts expect sales marketing expenses year ending december 31 2011 higher incurred year ended december 31 2010 due increased sales efforts primarily china general administrative following tables summarize year changes general administrative expenses thousands general administrative expenses 156 million 125 million 125 million years ended december 31 2010 2009 2008 respectively year ended december 31 2010 general administrative expenses increased 31 million 25 compared year ended december 31 2009 primarily result higher corporate legal expenses connection responding sec doj investigations announced august 2010 shareholder litigations filed following announcement investigations conduct independent investigation special committee board directors order evaluate whether violation fcpa laws occurred well business development efforts china year ended december 31 2009 general administrative expenses decreased 17000 0 compared year ended december 31 2008 although incurred increased expenses related business development efforts china 2009 increases offset decreased accounting legal fees expect general administrative expenses increase 2011 related corporate legal expenses connection responding sec doj investigations announced august 2010 shareholder litigations filed following announcement investigations conduct independent investigation special committee board directors order evaluate whether violation fcpa laws occurred well expanding operations ongoing business development efforts china interest investment income interest investment income approximately 01 million 02 million 06 million years ended december 31 2010 2009 2008 respectively although cash balances increased 2010 interest income decreased year ended december 31 2010 compared year ended december 31 2009 result lower returns due declining interest rate environment 2010 period decrease year ended december 31 2009 compared year ended december 31 2008 resulted lower cash investments balances lower returns due declining interest rate environment 2009 period interest investment expense interest investment expense 02 million 02 million 31000 years ended december 31 2010 2009 2008 respectively year ended december 31 2010 interest investment expense 02 million included amortization writeoff remaining loan origination fees related 60 million terminated silicon valley bank line credit interest amortization loan origination fees related new 150 million silicon valley bank line credit established october 2010 increase interest expense year ended december 31 2009 compared year ended december 31 2008 resulted amortization loan origination fees credit insurance policy related 60 million silicon valley bank line credit established november 2008 expect interest investment expense year ending december 31 2011 remain comparable level incurred year ended december 31 2010 income november 2010 awarded approximately 10 million nontaxable grants part us department treasury’s therapeutic discovery project program related research development activities scv07 zadaxin contributing increase income 09 million year ended december 31 2010 compared december 31 2009 expect income related nontaxable grants year ending december 31 2011 provision income tax provision income tax 22 million 06 million 05 million years ended december 31 2010 2009 2008 respectively relates foreign operations china increases resulted increase operating activities china increase statutory tax rate china addition year ended december 31 2010 recorded additional tax expense 08 million related uncertain tax position china statutory tax rate china 22 20 18 years ended december 31 2010 2009 2008 respectively statutory tax rate china 24 2011 expect provision income tax decrease year ending december 31 2011 compared year ended december 31 2010 expect comparable tax expense uncertain tax positions 2011 recorded us federal state income tax expense years ended december 31 2010 2009 2008 undistributed earnings foreign subsidiaries amounted approximately 124 million december 31 2010 earnings considered permanently reinvested accordingly deferred us income taxes provided thereon december 31 2010 net operating loss carryforwards federal income tax purposes approximately 1227 million expire years 2011 2028 december 31 2010 federal research development orphan drug investment tax credit carryforwards approximately 123 million expire years 2011 2030 “change ownership” provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities liquidity capital resources days’ sales outstanding accounts receivable using average receivables method 98 101 103 days 2010 2009 2008 respectively majority sales customers china accounts receivable collections standard credit terms ranging 90 180 days following tables summarize cash investments cash flow activities end periods presented thousands december 31 2010 2009 565 million 318 million respectively cash investments 561 million invested december 31 2010 unrestricted cash shortterm foreign us term deposits money market accounts net cash provided used operating activities 207 million 05 million 49 million years ended december 31 2010 2009 2008 respectively net cash used operating activities years ended december 31 2010 2009 2008 primarily reflected net income loss period adjusted noncash items stockbased compensation expense depreciation amortization expense changes operating assets liabilities year ended december 31 2010 changes included increase accounts receivable 93 million compared year ended december 31 2009 related increased sales fluctuations timing cash receipts customers accounts receivable current december 31 2010 addition inventory levels decreased 31 million year ended december 31 2010 compared year ended december 31 2009 primarily related increase sales decrease production fiscal 2010 accounts payable accrued liabilities increased 37 million mainly related increase legal costs associated sec doj investigations shareholder litigations filed following announcement investigations conduct independent investigation special committee board directors increase accrued taxes tax reserves year ended december 31 2009 changes included 95 million increase accounts receivable compared year ended december 31 2008 related increased sales reduction payment terms occurred end fiscal 2008 largest customer china reducing payment terms 180 days 90 days addition inventory levels increased 41 million year ended december 31 2009 compared year ended december 31 2008 meet expected sales demands net cash used provided investing activities 13 million 01 million 06 million years ended december 31 2010 2009 2008 respectively cash used provided investing activities primarily related purchases investments net proceeds sale maturities investments purchases property equipment net cash provided financing activities 39 million 26 million 01 million years ended december 31 2010 2009 2008 respectively consisted proceeds exercise stock options made stock award plans issuance stock employee stock purchase plan year ended december 31 2010 also received proceeds 25 million borrowing line credit following table summarizes future contractual obligations december 31 2010 thousands 1 future minimum rental commitments office space copiers leased noncancelable operating lease arrangements 2 consist purchase obligations manufacturers 3 amount represents discretionary accrued bonus payable chief executive officer december 31 2010 based achievement performance targets years 20092011 also entered purchase obligation primary manufacturer supplier bulk drug substance purchase aggregate amount 70 total annual forecasted requirements bulk drug substance subject certain conditions october 1 2010 subsidiaries sciclone pharmaceuticals international ltd sciclone pharmaceuticals international china holding ltd borrowers terminated existing 6 million lineofcredit facility silicon valley bank “svb” entered new loan security agreement svb “the debt financing facility” debt financing facility 15 million term 24 months sciclone pharmaceuticals inc guarantor facility debt financing facility bears interest borrowed funds bank’s prime rate plus 125 525 december 31 2010 outstanding balances secured first priority secured interest assets including intellectual property event default required meet certain financial covenants including minimum liquidity defined subject certain minimum fees interest payments also required meet certain operating covenants limit ability incur liabilities create liens make capital expenditures pay dividends distributions make investments dispose assets december 31 2010 borrowed 25 million debt financing facility required maintain debt coverage ratio 135 1 equal 34 million cash svb cash accounts meet financial liquidity covenant compliance covenants december 31 2010 debt financing facility expires october 1 2012 upon termination amounts borrowed must repaid full may 2009 filed shelf registration statement form s3 sec may offer sell 500 million securities assuming continue meet sec’s eligibility requirements primary offerings form s3 believe existing cash investments ongoing revenue generating business operations sufficient support current operating plan least next 12 months current commitments offer sell securities may offered sold pursuant registration statement extent raise additional capital issuing equity securities stockholders may experience dilution debt financing available may subject us restrictive covenants significant interest costs extent raise additional funds collaboration licensing arrangements would required relinquish rights technologies product candidates marketing territories additional financing collaboration licensing arrangements may available needed either favorable terms intend continue explore alternatives financing provide additional flexibility managing operations inlicensing acquiring new products particularly china funding clinical trials unavailability inopportune timing financing could prevent delay longterm product development commercialization programs either could hurt business cannot assure funds financings sufficient conduct complete clinical trials acquire inlicense additional products need timing amount financing would depend upon numerous factors including status pending regulatory investigations pending litigations level price zadaxin sales timing amount manufacturing costs related zadaxin availability complementary products technologies businesses initiation continuation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative parties status competitive products various alternatives financing determined timing structure transaction related party transactions licensed largest shareholder sigmatau finanziaria spa “sigmatau” exclusive zadaxin “thymalfasin thymosin alpha 1” development marketing rights cover countries european union defined january 1 1995 addition iceland norway switzerland collaboration sigmatau governed agreement entered 2000 term expiring march 2012 unless renewed well amendments agreement regarding particular development efforts addition agreement governed joint collaboration development thymalfasin certain indications sharing intellectual property respective territories agreement also provides sigmatau sells zadaxin licensed territory purchase product us specified price subject certain adjustments currently anticipate sigmatau sell zadaxin nominal amounts italy ongoing development reimbursement obligations agreement milestones similar terms currently effect however continue cooperate sigmatau exploring development thymalfasin indications including vaccine adjuvant aspergillosis offbalance sheet arrangements offbalance sheet arrangements 2010 2009 2008 recent accounting guidance january 2010 financial accounting standards board “fasb” issued fasb accounting standards update “asu” 201006 fair value measurements disclosures topic 820improving disclosures fair value measurements asu requires new disclosures significant transfers levels 1 2 fair value measurements separate disclosures purchases sales issuances settlements relating level 3 fair value measurements asu also clarifies existing disclosure requirements regarding inputs valuation techniques well level disaggregation class assets liabilities separate fair value measurements disclosed adopted asu 201006 beginning fiscal 2010 adoption asu material impact condensed consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations read conjunction “selected financial data” consolidated financial statements related notes thereto included elsewhere annual report form 10k management’s discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see “note regarding forwardlooking statements” “risk factors” contained annual report form 10k overview sciclone pharmaceuticals nasdaq scln revenuegenerating profitable united states “us”based chinafocused specialty pharmaceutical company substantial commercial business product portfolio therapies oncology infectious diseases cardiovascular urological respiratory central nervous system disorders focused continuing grow revenue profitability strong sales marketing efforts business corporate strategy focused primarily people’s republic china “china” built solid reputation established strong brand many years experience marketing lead product zadaxin® thymalfasin addition established product promotion business model large pharmaceutical partners focused establishing profitability collaborations believe sales marketing strengths position us benefit longterm expansion pharmaceutical market china pharmaceutical market currently ranks third among global pharmaceutical markets believe china rank second among global pharmaceutical markets 2020 seek expand presence china increase revenues growing sales profitability current product portfolio launching new products development pipeline adding new profitable product services agreements leveraging strong cash position inlicense additional products operate two segments generally based nature location customers 1 china 2 rest world includes us hong kong operations two categories revenues “product sales revenues” “promotion services revenues” product sales revenues result proprietary inlicensed products including lead product zadaxin products pfizer inc “pfizer” iroko pharmaceuticals llc zadaxin highest margins portfolio premium proprietary product sold exclusively sciclone aggrastat® inlicensed product higher margins products promote services agreements anticipate revenues product grow significantly penetrates china market addition anticipate new marketed products introduced increase future revenues profitability pharmaceutical business china coming years “promotion services revenues” result fees receive exclusively promoting products services agreements certain pharmaceutical partners including sanofi aventis sa “sanofi” baxter international inc “baxter” china refer agreements promotion agreements service agreements distribution contract rights agreements recognize promotion services revenues percentage collaborators’ product sales revenue exclusively promoted products depakine® stilnox® tritace® time additional proprietary inlicensed products come market aim shift product mix towards higher margin products january 2013 promotion agreement sanofi renewed december 31 2013 terms previous agreement seek renewals product services agreements strategy establish favorable terms goal achieving profitability agreements improved margins well managing expenses relating product services revenue zadaxin approved 30 countries may used treatment hbv hcv certain cancers vaccine adjuvant according local regulatory approvals countries china thymalfasin included treatment guidelines issued ministry health “moh” liver cancer well guidelines treatment chronic hbv issued chinese medical association asianpacific association study liver invasive fungal infections critically ill patients issued chinese medical association sales force focused increasing sales country’s largest hospitals class 3 500 beds well midsize hospitals class 2 hospitals serve tier 1 tier 2 cities located mostly eastern part china largest generally affluent populations widening market strategies targeting numerous smaller hospitals well hospitals rural areas also seeking expand indications zadaxin could used including sepsis market portfolio also includes antiepileptic drug depakine hypnotic stilnox marketed ambien® us ace inhibitor tritace aggrastat intervention cardiology product launched china 2009 also pursuing registration several therapeutic products china include dc bead® embolic acting bead drug loading capabilities used targeted delivery cancer chemotherapy drugs directly tumor loramyc® mucoadhesive tablet formulation miconazole lauriad treat oropharyngeal candidiasis rapinyl® sublingual tablet formulation fentanyl treat breakthrough cancer pain rapidfilm® oral film formulation ondansetron treat nausea induced chemotherapy continue seek establish profitable inlicensing arrangements approved latestage branded welldifferentiated products yet approved clear regulatory approval pathway china based existing regulatory approval outside china objective inlicense products higher margins augment product sales revenue continue explore opportunities optimize promotion services revenues also working final stage regulatory approval china inlicensed candidate dc bead approval process product candidates clinical trials stages regulatory approval process china acquired novamed pharmaceuticals inc “novamed” april 18 2011 results operations include operations novamed date forward since acquisition novamed put strategies place designed strengthen sales marketing infrastructure china goal meeting growing demand pharmaceuticals china market however believe several developments 2012 may yet material impacts growth rate business china affected company’s financial results second half 2012 responding developments taking actions strengthen business improve financial performance subsequent quarters developments include limited reduction retail price zadaxin products occurred later year expected increase channel inventory levels zadaxin third quarter particularly september 2012 matters relating novamed acquisition including noncash impairment loss fully write value licensing product services agreement intangible assets recorded part novamed acquisition remeasurement valuation contingent consideration expense recorded part novamed acquisition issues internal control financial reporting primarily within novamed subsidiary changes management price reduction zadaxin products zadaxin’s national reimbursement retail list price china recently reviewed regulatory authorities consistent china government’s review pharmaceutical prices product included reimbursement drug list “rdl” result review retail list price hospital pharmacy level zadaxin reduced approximately 18 reduction announced september 2012 became effective october 8 2012 based agreement primary importer zadaxin china importer take larger share price reduction impact exchange certain exclusive importation rights china result actual impact sciclone’s revenue margins expected less 5 decrease sales price zadaxin importer addition national development reform commission’s “ndrc” retail list prices price hospital pharmacy level aggrastat well several oncology products exclusively promoted china pfizer baxter reduced ranging 10 20 zadaxin inventory sales china uses tiered system import distribute products distributors make sales country product imported exclusive zadaxin importer product sales revenues result sale products customers importing agent takes approximately seven weeks customers clear shipment zadaxin importation process sale china importation customer tends purchase infrequent large orders zadaxin inventory facilitate distribution sale chinese hospital pharmacies timing infrequent large orders may significantly affect zadaxin channel inventory levels may cause fluctuations reported sales profitability quarterly period third quarter particularly september 2012 estimate increase approximately 14 million zadaxin channel inventory levels believe sales customers exceeded pace customers able sell zadaxin parties primarily hospital pharmacies zadaxin channel inventory levels decreased approximately 5 million fourth quarter 2012 expect continue decrease next two quarters result expect zadaxin revenues lower first half 2013 compared first half 2012 expect 2013 sales revenue lower comparable 2012 revenues 156 million continue believe grow demand zadaxin increased penetration market addition believe sales organization’s efforts relative zadaxin may affected changes turnover management china particularly departures senior executives turnover among sales personnel china market generally including among sales staff expected continue may experience additional departures china operations transition period unable achieve objectives increased demand may experience declines quarterly sales revenue near term sales profitability next quarters may significantly decrease taken definitive steps address issues affecting product sales revised implementing changes strategy designed increase market penetration growth particularly zadaxin widening market strategies targeting numerous smaller hospitals well hospitals rural areas intent positively affect sales growth next several quarters addition already successful making significant changes china organization recruitment additional senior level management recent appointment chief executive officer china operations aggressively recruiting additional management china operations recent continuing executive recruiting china intended bring additional pharmaceutical company experience china market grow zadaxin sales increase profitability enhance financial capabilities internal controls improve implement sales strategies novamed intangible asset impairment contingent consideration remeasurement acquired novamed april 18 2011 results operations include operations novamed date forward acquisition increased portfolio commercial developmentstage products exclusive licensing product service agreements number leading pharmaceutical companies although revenues novamed business grown since acquisition overall revenue growth profitability met expectations forecast time acquisition condition considered impairment indicator respect intangible assets related promotion distribution contract rights third quarter ended september 30 2012 determined undiscounted cash flows estimated generated intangible assets less carrying amounts performed discounted cash flow analysis related intangible assets determined full impairment recorded result recognized noncash impairment loss approximately 427 million third quarter full year ended december 31 2012 consolidated statements operations january 2013 promotion agreement sanofi renewed december 31 2013 terms prior agreement certain product services agreements third parties expiring soon unless renewed extended renegotiated actively negotiating renewals extensions agreements also assessing terms conditions agreements intent secure favorable terms us relative profitability agreements determined longer beneficial us allowed expire third parties renegotiate renew extend agreements terms acceptable us revenues profitability would affected terms acquisition novamed provided payment additional 430 million earnout payments upon successful achievement revenue earnings targets 2011 2012 fiscal years “earnout” “contingent consideration” initially recorded 189 million estimated fair value contingent consideration fair value contingent consideration remeasured quarter changes fair value recorded contingent consideration expense gain december 31 2012 determined fair value contingent consideration 0 resulting noncash gain 154 million year ended december 31 2012 significant reduction valuation contingent consideration expense year related revenue ebitda earnings interest depreciation taxes targets achieved reduced probability renewal relating novamed’s product distribution agreements including particular target renewing depakine services agreement sanofi fiveyear term depakine services agreement extended december 31 2013 term less five years restatement financial results revised consolidated financial statements year ended december 31 2011 certain quarterly periods 2011 2012 accordingly revised financial information included 2012 form 10k identified “restated” concurrent filing form 10k also filing amended quarterly reports form 10qa first second third quarters 2012 restate consolidated financial statements therein effects restatements reflected items revised herein restatements relate accounting errors originating subsidiary china novamed acquired april 18 2011 accounting errors relate primarily following • timing revenue recognition certain pfizer products sold one distributors subsidiary novamed policy customers’ obligations pay product final product delivered however determined various factors including override certain controls indicating sales novamed’s distribution arrangement pfizer products distributor date acquisition novamed third quarter 2012 “relevant periods” allowed contingent payment terms dependent upon distributor sold products result review evaluation matter believe instead recording revenue time sale distributor “sellin” method previously reflected financial statements relevant periods revenue arrangements effect subsidiary novamed recognized received payment products “sellthrough” “cash receipts” method effective fourth quarter 2012 entered new agreement distributor clarified “sellin” method revenue recognition provide consistency policy regarding revenue recognition prospective basis december 31 2012 received payment revenues recognized “sellthrough” method • recognition previously unrecognized product return reserves sales aggrastat sold subsidiary novamed prior date acquisition concluded liability expired product existed time novamed acquisition related preacquisition sales revisions impact increasing revenues 30 million ninemonths ended september 30 2012 increasing net income 20 million period basic diluted earnings per share increased 004 003 respectively ninemonths ended september 30 2012 september 30 2012 accounts receivable decreased 15 million inventory increased 13 million goodwill related acquisition novamed increased 19 million revisions year ended december 31 2011 impact decreasing revenues 11 million decreasing net income 03 million basic diluted earnings per share decreased 001 december 31 2011 accounts receivable decreased 38 million inventory increased 23 million goodwill related acquisition novamed increased 19 million internal control issues material weakness quarter ended september 30 2012 identified deficiencies design operating effectiveness controls primarily associated product return reserves related aggrastat product line override certain controls financial statement close process related novamed subsidiary certain period adjustments deficiencies identified performance controls processes recently implemented novamed subsidiary part assessment internal control financial reporting 2012 concluded aggregation deficiencies material weakness furthermore fourth quarter 2012 identified deficiencies related timing revenue recognition pfizer products override related controls novamed subsidiary corporate monitoring thereof concluded deficiencies identified fourth quarter 2012 additional indicator material weakness identified third quarter 2012 oversight management audit committee initiated steps address material weakness fourth quarter 2012 implemented additional controls related revenue recognition product return reserve processes strengthen controls provide available information properly considered also reevaluated operation controls novamed subsidiary made adjustments strengthen controls including recent hiring chief financial officer china operations joined company third quarter 2012 terminated personnel involved override certain controls financial statement close process novamed subsidiary resulted material weakness completed certain remediation efforts remediation activities complete december 31 2012 china management turnover announced departures key personnel china organization include individual chief executive officer sciclone’s china operations former chief executive officer novamed resigned december 2012 chief operating officer china left company october 2012 may additional departures within china operations continuing recruit executives address departures expand strengthen china operations including hiring new chief executive officer china operations begin april 1 2013 chief financial officer china operations began august 2012 matters developing scv07 phase 2b clinical trial prevention oral mucositis “om” march 2 2012 announced discontinuation trial based preplanned interim analysis results indicated trial would meet prespecified efficacy endpoints intention curtail usbased development efforts march 2012 implemented reduction workforce 11 fulltime employees primarily research development recorded severancerelated charges approximately 11 million approximately 01 million 10 million recognized general administrative research development expense respectively year ended december 31 2012 substantially completed restructuring us securities exchange commission “sec” us department justice “doj” conducting formal investigations sciclone regarding range matters including possibility violations foreign corrupt practices act “fcpa” continue cooperate fully sec doj conduct investigations response matters board appointed special committee independent directors “special committee” oversee response government inquiry special committee substantially concluded original investigation may 4 5 2011 reported findings recommendations board directors special committee also reported findings sec doj form 10q period ended september 30 2012 filed sec november 9 2012 disclosed among things noncash impairment loss fully write value intangible assets recorded part novamed acquisition remeasurement valuation contingent consideration expense recorded part novamed acquisition significant increase zadaxin channel inventory levels internal control issues primarily within novamed organization concluded represent material weakness internal control financial reporting following disclosure items received subpoena sec requesting documents related various matters regarding novamed acquisition operations china review subpoena order respond inquiries doj sec determine wrongdoing occurred audit committee determined undertake additional independent investigation additional matters including limited matters related acquisition novamed fcpa matters unable predict consequences investigation regulatory agency special committee may us cooperation investigations resulted substantial legal accounting expenses diverted management’s attention business concerns could harm business ongoing investigations regulatory investigations might initiated future result similar substantial expenses management diversion harm business fail comply regulations carry controls chinese foreign operations manner satisfies applicable laws business would harmed civil criminal action commenced us regulatory agency could result administrative orders us imposition significant penalties andor fines us andor imposition civil criminal sanctions certain officers directors andor employees investigations results investigations remedial actions taken may take result investigations may adversely affect business china subject adverse findings resulting sec doj investigations independent investigation could required pay damages penalties remedies imposed upon us addition incur additional expenses related remedial measures undertaking could incur fines penalties period time necessary resolve investigations doj sec uncertain matters could require significant management financial resources could otherwise devoted operation business cannot predict outcome investigations timing resolution february 22 2013 announced reported financial results second third quarters 2011 year ended december 31 2011 first three quarters fiscal 2012 could relied upon would restate subsequently received purported derivative litigation naming certain officers directors defendants believe claims lack merit vigorously defend refer part ii item 8 “notes consolidated financial statements” note 18 “other corporate matters” part item 3 “legal proceedings” form 10k information regarding investigation remedial measures related litigation believe cash investments december 31 2012 ongoing revenue generating business operations sufficient support current operating plan least next 12 months results may fluctuate quarter may report losses future results operations revenues following table summarizes year changes product sales promotion services revenues thousands product sales 1232 million 1120 million 851 million years ended december 31 2012 2011 2010 respectively increases 112 million 10 year ended december 31 2012 compared 2011 268 million 32 year ended december 31 2011 compared 2010 primarily attributable increased sales zadaxin customers lesser extent related oncology aggrastat products increase 2011 period also related addition novamed product sales result acquisition novamed april 2011 zadaxin sales 1122 million year ended december 31 2012 compared 1048 million 851 million years ended december 2011 2010 respectively promotion services revenue relates distribution products promotion contracts result acquisition novamed 2011 promotion services revenue 331 million year ended december 31 2012 compared 206 million corresponding period 2011 increase 125 million 61 reflects addition promotion services revenue result acquisition april 2011 also reflects increase depakine product sales year ended december 31 2012 total revenues attributable china 1522 million 1289 million 820 million 97 96 sales years ended december 31 2012 2011 2010 respectively year ended december 31 2012 sales three customers china accounted approximately 53 20 12 revenues year ended december 31 2011 sales three customers china accounted approximately 62 15 revenues year ended december 31 2010 sales two customers china accounted approximately 74 14 revenues experience customers good anticipate continue sell majority product china uses tiered method import distribute products distributors make sales country product imported exclusive importer product sales revenues result sale company’s proprietary inlicensed products importing agents promotion services revenues result fees received exclusively promoting products certain partners importing agents distributors partners company’s customers takes approximately seven weeks china importation customer clear shipment zadaxin importation process sale china customers tend purchase infrequent large orders zadaxin inventory facilitate distribution sale chinese hospital pharmacies timing infrequent large orders may significantly affect zadaxin channel inventory levels may cause fluctuations reported sales profitability quarterly period third quarter particularly september 2012 estimate increase approximately 14 million zadaxin channel inventory levels believe sales customers exceeded pace customers able sell zadaxin parties primarily hospital pharmacies zadaxin channel inventory levels decreased approximately 5 million fourth quarter 2012 expect continue decrease next two quarters result expect zadaxin revenues lower first half 2013 compared first half 2012 expect 2013 sales revenue lower comparable 2012 revenues 156 million continue believe grow demand zadaxin increased penetration market january 2013 promotion agreement sanofi renewed december 31 2013 terms certain product services agreements third parties expiring next several months unless renewed extended renegotiated actively negotiating renewals extensions agreements also process assessing financial performance products promote agreements overall value within entire portfolio products also assessing terms conditions agreements intent secure favorable terms us relative profitability agreements determined longer beneficial us allowed expire third parties renegotiate renew extend agreements terms acceptable us revenues profitability would adversely affected cost product sales following table summarizes year changes cost product sales thousands cost product sales 220 million year ended december 31 2012 compared 194 million 127 million years ended december 31 2011 2010 respectively increase 26 million 13 year ended december 31 2012 compared year ended december 31 2011 attributable increase 12 million zadaxin cost sales related increase zadaxin sales increase 14 million oncology aggrastat cost sales related increase product sales deliveries increase 67 million 53 year ended december 31 2011 compared year ended december 31 2010 attributable higher zadaxin sales addition novamed cost product sales 2011 result acquisition novamed zadaxin cost sales 162 million year ended december 31 2012 compared 150 million 127 million years ended december 31 2011 2010 respectively gross margin zadaxin 857 year ended december 31 2012 compared 857 851 years ended december 31 2011 2010 respectively increase gross margin zadaxin year ended december 31 2011 compared years ended december 31 2010 due primarily lower per vial production costs mainly result volume efficiencies expect zadaxin cost product sales gross margins fluctuate period depending upon level sales price products absorption productrelated fixed costs currency exchange fluctuations charges associated excess expiring finished product inventory timing inventory period costs manufacturing process improvements goal future cost reductions overall expect gross margin percentages 2013 remain comparable 2012 although may fluctuate quarter sales marketing following tables summarize year changes sales marketing expenses thousands sales marketing expenses 703 million 489 million 220 million years ended december 31 2012 2011 2010 respectively sales marketing expenses increased 215 million 44 year ended december 31 2012 compared year ended december 31 2011 2012 recorded 12 months sales marketing expense novamed compared period 2011 included sales marketing expenses novamed date acquisition april 18 2011 december 31 2012 additional increases sales marketing expenses year ended december 31 2012 related increased growth support commercial efforts expand deeply widely throughout china market sales marketing expenses increased 268 million year ended december 31 2011 compared year ended december 31 2010 increase sales marketing expenses 226 million year ended december 31 2011 compared year ended december 31 2010 primarily related novamed operations result acquisition novamed sales professionals 440 individuals remaining increases 42 million year ended december 31 2011 related increased growth zadaxin sales force china approximately 100 additional sales individuals market penetration china resulting increased sales marketing costs compensation benefits sales incentives travel medical training business taxes expect sales marketing expenses year ending december 31 2013 comparable incurred year ended december 31 2012 amortization impairment acquired intangible assets year ended december 31 2012 2011 recognized 26 million 25 million respectively amortization acquired intangible assets expense amortization acquired intangible assets reflects amortization services distribution contract intangible assets acquired part novamed acquisition april 18 2011 year ended december 31 2012 identified impairment indicator respect intangible assets related promotion distribution contract rights determined undiscounted cash flows estimated generated intangible assets less carrying amounts performed discounted cash flow analysis related intangible assets determined full impairment recorded result recognized noncash impairment loss approximately 427 million year ended december 31 2012 amortization expense recorded future periods related acquired intangible assets research development “rd” following tables summarize year changes rd expenses thousands research development “rd” expenses 61 million 123 million 124 million years ended december 31 2012 2011 2010 respectively march 2 2012 announced discontinuation scv07 phase 2b clinical trial delay onset severe om based results preplanned interim analysis indicated trial would meet prespecified efficacy endpoints rd expenses decreased 62 million 50 year ended december 31 2012 compared year ended december 31 2011 primarily related discontinuation trial decreases offset partially employee severance costs 10 million recognized rd expenses year ended december 31 2012 year ended december 31 2011 rd expenses primarily related scv07 phase 2b clinical trial began enrollment january 2011 treatment om lesser extent addition novamed rd expenses due acquisition novamed year ended december 31 2010 rd expenses primarily related phase 2a clinical trial scv07 delay onset severe om initiation scv07 phase 2b clinical trial treatment om scv07 phase 2b clinical trial treatment hcv major components rd expenses include salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment licenserelated fees services performed clinical research organizations research institutions outside service providers expect research development expenses decrease significantly 2013 compared 2012 result discontinuation scv07 phase 2b clinical trial continue evaluate opportunities inlicense marketing rights proprietary products primarily china may result increased research development expenses due license fee payments local registration clinical trials expenses related inlicensing development new products future general administrative following table summarizes year changes general administrative expenses thousands general administrative expenses 214 million 240 million 156 million years ended december 31 2012 2011 2010 respectively general administrative expenses year ended december 31 2012 decreased 26 million 11 compared year ended december 31 2011 decrease attributable 38 million lower novamed acquisitionrelated costs offset partially increased general administrative expenses related novamed result acquisition novamed april 18 2011 increased professional fees related novamed internal control issues identified third fourth quarters 2012 sec doj’s ongoing investigation year ended december 31 2011 general administrative expenses increased 84 million 54 compared year ended december 31 2010 primarily related acquisition novamed april 2011 including general administrative expenses attributable novamed operations acquisition related transaction costs including legal banker fees accounting advisory services 38 million higher professional services primarily related fcpa compliance efforts various tax planning compliance matters expect general administrative expenses 2013 increase compared 2012 anticipate higher legal accounting costs 2013 ongoing investigations sec doj unpredictable may result higher legal costs fines penalties could affect expenses timing thereof expect incur significant acquisitionrelated costs 2013 though continue evaluate opportunities china may result increased general administrative expenses future see part item 3 “legal proceedings” contingent consideration part acquisition novamed would required pay additional 430 million earnout payments upon successful achievement revenue earnings targets 2011 2012 fiscal years “earnout” “contingent consideration” initially recorded 189 million estimated fair value contingent consideration fair value contingent consideration remeasured quarter changes fair value recorded contingent consideration expense gain december 31 2012 fair value earnout determined 0 resulting gain 154 million year ended december 31 2012 september 30 2012 company used assistance thirdparty valuation expert estimate fair value contingent consideration using monte carlo simulation model estimated fair value contingent consideration subject fluctuations result adjustments certain performance metric projections used estimate fair value resulted gain 35 million year ended december 31 2011 fair value estimates based variety factors significantly fluctuated period including likelihood earnout targets would achieved present value factors associated timing earnout targets significant reduction valuation contingent consideration expense 2012 2011 primarily due revenue ebitda earnings interest depreciation taxes targets achieved reduced probability renewal relating novamed’s product distribution agreements including particular target renewing depakine services agreement sanofi fiveyear term depakine services agreement extended december 31 2013 term less five years income november 2010 awarded approximately 10 million nontaxable grants part us department treasury’s therapeutic discovery project program related research development activities scv07 zadaxin similar grants awarded us years ended december 31 2012 2011 expect income related nontaxable grants year ending december 31 2013 benefit provision income tax benefit provision income tax relates foreign operations china benefit income tax 33 million year ended december 31 2012 compared tax expense 07 million 22 million years ended december 31 2011 2010 respectively tax benefit increased 40 million year ended december 31 2012 compared 2011 primarily related reversal deferred tax liabilities due impairment loss approximately 427 million recorded related intangible assets partially offset impact recording full valuation allowance novamed deferred tax assets increased tax expense related growth china operations tax expense decreased 15 million year ended december 31 2011 compared year ended december 31 2010 decreases related tax benefits recognized 10 million year ended december 31 2011 deferred tax assets liabilities mainly result acquisition novamed april 2011 lower tax expense recorded year ended december 31 2011 related uncertain tax position china offset partially increase tax expense due growth china operations increase statutory tax rate certain operations china 22 2010 2425 2011 statutory tax rate china 25 2012 2425 2011 22 2010 statutory tax rate china 25 2013 expect provision income tax increase year ending december 31 2013 compared year ended december 31 2012 expect tax benefits recorded 2012 related reversal deferred tax liabilities due impairment loss recur 2013 recorded us federal state income tax expense years ended december 31 2012 2011 2010 undistributed earnings foreign subsidiaries amounted approximately 450 million december 31 2012 earnings considered permanently reinvested accordingly deferred us income taxes provided thereon december 31 2012 net operating loss carryforwards federal income tax purposes approximately 874 million expire years 2020 2030 december 31 2012 federal research development orphan drug investment tax credit carryforwards approximately 117 million expire years 2018 2031 “change ownership” provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities liquidity capital resources continue closely manage liquidity capital resources rely operating cash flows cash equivalents shortterm investments shortterm loan arrangement provide liquidity requirements continue believe ability meet liquidity needs least next 12 months fund working capital requirements operations including investments business share repurchases pay shortterm borrowing arrangements fund business development activities following tables summarize cash investments cash flow activities end years presented thousands december 31 2012 842 million cash investments 564 million located subsidiaries company outside us cash held subsidiaries outside us held primarily us dollars cash used fund operating activities foreign subsidiaries investment foreign operations may include inlicensing new products particularly china potential acquisitions generally consider cash permanently reinvested foreign operations based current operating plan next 12 months anticipate repatriation cash held foreign subsidiaries would result payment us federal taxes net cash provided operating activities 435 million year ended december 31 2012 primarily reflected net income period adjusted noncash items intangible asset impairment change fair value contingent consideration stockbased compensation expense depreciation amortization expense changes operating assets liabilities changes included 22 million increase accounts payable mainly related professional manufacturing services 30 million increase accrued liabilities mainly related increases sales marketing tax accruals net cash provided operating activities 295 million year ended december 31 2011 primarily reflected net income period adjusted noncash items stockbased compensation expense depreciation amortization expense changes operating assets liabilities changes included decrease cash received customers accounts receivable 27 million majority sales importers distributors china accounts receivable collections standard credit terms generally ranging 60 180 days changes also included increase inventory levels 23 million related higher inventory stock levels support increased demand zadaxin product related oncology products increase accounts payable accrued expenses 46 million primarily result acquisition novamed net cash used investing activities 12 million 188 million 13 million years ended december 31 2012 2011 2010 respectively year ended december 31 2012 net cash used investing activities primarily related purchases property equipment cash used investing activities year ended december 31 2011 primarily related acquisition novamed used cash approximately 213 million lesser extent related sale availableforsale investments net purchases availableforsale investments purchases property equipment cash used investing activities year ended december 31 2010 primarily related purchases investments net proceeds sale maturities investments purchases property equipment net cash used provided financing activities 247 million 28 million 39 million years ended december 31 2012 2011 2010 years ended december 31 2012 2011 used 248 million 35 million respectively repurchase retire approximately 47 million 781000 shares respectively common stock repurchase program 2012 also used 25 million repayment borrowings loan security agreement silicon valley bank “svb” “the credit facility” 23 million restricted cash secure letter credit related loan agreement shanghai pudong development bank co ltd borrowed 14 million loan agreement shanghai pudong development bank co ltd years ended december 31 2012 2011 2010 also received 35 million 63 million 14 million respectively proceeds issuances common stock made stock award plans following summarizes future contractual obligations december 31 2012 thousands 1 shortterm debt obligations include expected principal interest obligations related loan agreement shanghai pudong development bank co ltd calculations expected principal interest payments incorporate current period assumptions interest rates borrowings 2 future minimum rental commitments office space copiers leased noncancelable operating lease arrangements 3 consist purchase obligations manufacturers distributors 4 able reasonably estimate timing payments amount obligations unrecognized tax benefits increase decrease time related balances reflected “payments due period” section table august 2012 subsidiary novamed pharmaceuticals shanghai co ltd entered loan agreement shanghai pudong development bank co ltd borrow 125 million renminbi approximately 20 million usd december 31 2012 december 31 2012 90 million renminbi 14 million usd borrowings loan agreement loan agreement secured 23 million letter credit required maintain 23 million cash restricted bank account secure letter credit loan agreement bears interest borrowed funds 75 expires august 29 2013 amounts borrowed must repaid expiration date march 15 2012 filed shelf registration sec may offer sell 1000 million securities assuming continue meet sec’s eligibility requirements primary offerings form s3 subsequently affiliates sigmatau sold approximately 63 million shares aggregate price approximately 331 million registration statement approximately 669 million available future use april 18 2011 issued 8298110 shares common stock former stockholders novamed part acquisition novamed may november 2012 announced board directors approved increases 105 million 100 million respectively company’s stock repurchase program bringing total authorized since program’s inception october 2011 405 million program repurchased retired approximately 55 million shares cost 281 million december 31 2012 current repurchase program expire october 2013 unless extended renewed consider several factors determining make share repurchases including among things cash needs availability funding market price stock expect cash provided future operating activities well available cash equivalents shortterm investments sources funding share repurchase program believe existing cash investments ongoing revenue generating business operations sufficient support current operating plan least next 12 months current commitments offer sell securities may offered sold pursuant registration statement extent raise additional capital issuing equity securities stockholders may experience dilution debt financing available may subject us restrictive covenants significant interest costs extent raise additional funds collaboration licensing arrangements would required relinquish rights technologies product candidates marketing territories additional financing collaboration licensing arrangements may available needed either favorable terms intend continue explore alternatives financing provide additional flexibility managing operations inlicensing new products particularly china potential acquisitions may required unavailability inopportune timing financing could prevent delay longterm product development commercialization programs either could hurt business cannot assure funds financings sufficient inlicense additional products need timing amount financing would depend upon numerous factors including status pending regulatory investigations pending litigations level price products timing amount manufacturing costs related products availability complementary products technologies businesses initiation continuation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative parties status competitive products various alternatives financing determined timing structure transaction offbalance sheet arrangements offsheet balance sheet arrangements critical accounting policies significant judgments estimates general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout “management’s discussion analysis financial condition results operations” policies affect reported expected financial results detailed discussion application accounting policies see note 1 “notes consolidated financial statements” part ii item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united sates require us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates judgments base estimates historical experience various market specific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition recognize revenue persuasive evidence arrangement exists services rendered delivery occurred price buyer fixed determinable collectability reasonably assured product revenue earn product revenue selling manufactured zadaxin product time delivery sales zadaxin importing agents distributors recognized time shipment title product transferred also earn product revenue purchasing medical products pharmaceutical companies selling directly importers distributors sales pfizer products date acquisition novamed october 2012 based “sellthrough” method distribution arrangement products allowed payment terms dependent distributor sold product maintain information timing “sellthrough” pfizer products distributor period therefore applied cash receipts approach application “sellthrough” method reliable information available accordingly period time revenue sales pfizer products recognized upon receipt cash distributor effective fourth quarter 2012 entered new agreement distributor clarified confirmed “sellin” method revenue recognition ensure consistency company’s policy regarding revenue recognition prospective basis product sales recognized “sellin” method medical products delivered importers distributors promotion services revenue recognize promotion services revenue designated medical products delivered distributors specified promotional contract marks period marketing promotional services rendered revenue recognition criteria met accounts receivable reserve record receivable reserve based upon specific review overdue invoices estimate reserve determined considering existing contractual payment terms payment patterns customers individual customer circumstances age outstanding receivables current customer relationships december 31 2012 recorded receivable reserve approximately 10 million related total accounts receivable one customer 35 million actual collections could range 0 35 million receivable reserve represents best estimate results though actual results may vary continue pursue full amount receivables reserve product returns maintain reserve product returns based estimates amount product returned customers may result expired product price reductions related sales based historical patterns analysis market demand andor percentage sales based industry trends management’s evaluation specific factors may increase risk product returns importing agents distributors contractual rights return except limited terms regarding product quality however expected replace products expired deemed damaged defective delivered calculation product returns reserve requires estimates involves high degree subjectivity judgment result uncertainties involved estimating product returns reserve possibility materially different amounts could reported different conditions using different assumptions december 31 2012 2011 estimated product returns reserve 01 million consolidated balance sheet related oncology products aggrastat product sales part restatement financial statements recorded adjustments correct errors product returns reserve sales aggrastat sold subsidiary novamed prior date acquisition concluded liability expired product existed time novamed acquisition related preacquisition sales december 31 2012 2011 liability aggrastat expired product 03 million 08 million respectively evaluate returns reserve quarterly adjust events indicate change estimate appropriate changes estimates could materially affect results operations financial position possible may need adjust estimates future periods inventories valued lower cost market net realizable value cost determined firstin firstout basis include amounts related materials labor overhead assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels current assumptions future production inventory levels demand change actual market conditions less favorable projected management inventory writedowns may required could negatively impact gross margins results operations obsolete items excess observed alternate uses inventory record writedown net realizable value period impairment first recognized business combinations accounted acquisition novamed april 2011 accordance asc topic 805 business combinations asc topic 805 establishes principles requirements recognizing measuring total consideration transferred assets acquired liabilities assumed acquired target business combination consideration paid acquire novamed required measured fair value included contingent consideration earnout payments paid upon successful achievement revenue earnings targets 2011 2012 fiscal years total consideration transferred calculated determining fair value contingent consideration sciclone common stock plus cash consideration assigned purchase price novamed fair value assets acquired liabilities assumed resulted recognition intangible assets related promotion distribution contract rights goodwill determination recognition consideration transferred requires management make significant estimates assumptions especially acquisition date respect fair value contingent consideration intangible assets acquired part acquisition novamed would required pay 430 million contingent consideration upon successful achievement revenue earnings targets 2011 2012 fiscal years december 31 2012 fair value earnout determined 0 fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date quoted prices observable inputs unavailable fair values based internally developed cash flow models classified level 3 valuation hierarchy september 30 2012 estimated fair value contingent consideration contingent consideration using monte carlo simulation model classified level 3 valuation hierarchy inputs used monte carlo simulation model reflected assumptions estimates including riskadjusted discount rate volatility assessment inputs used fair value measurement required judgment affected valuation contingent consideration measured earnout based upon certain financial performance metrics including revenuebased formula adjusted ebitda based formula earnout provisions subject number adjustments acceleration provisions total earnout payments described could increased 100 million exceeding total maximum contingent cash consideration 430 million reduced 100 million depending upon whether able achieve targets relating product distribution agreements required remeasure contingent consideration reporting period amount payment finalized occurred december 31 2012 change estimated fair value contingent consideration recognized adjustment operating expenses acquisition date april 18 2011 december 31 2011 year ended december 31 2012 estimated fair value contingent consideration decreased 35 million 154 million respectively primarily related decrease estimated probability achieving revenue ebitda targets reduced probability renewal relating novamed’s product distribution agreements including particular target renewing depakine services agreement sanofi fiveyear term depakine services agreement extended december 31 2013 term less five years goodwill intangible assets account goodwill intangible assets accordance asc topic 805 asc topic 350 intangibles goodwill asc topic 805 requires purchase method accounting used business combinations specifies criteria must met order intangible assets acquired business combination recognized reported apart goodwill intangible assets goodwill tested impairment least annually whenever events circumstances occur indicate impairment might occurred circumstances suggest carrying value assets may recoverable undiscounted cash flows estimated generated assets less carrying amounts assets accordance asc topic 350 judgment regarding existence impairment indicators based operating results changes manner use acquired assets overall business strategy market economic trends part acquisition novamed recorded intangible assets related promotion distribution contract rights promotion distribution contracts expire one ten years majority expiring one two years subject renewal extension estimated useful life approximately 135 years although revenues novamed business grown since acquisition overall revenue growth profitability met expectations time acquisition condition considered impairment indicator respect intangible assets related promotion distribution contract rights determined undiscounted cash flows estimated generated intangible assets less carrying amounts performed discounted cash flow analysis related intangible assets determined full impairment recorded result recognized noncash impairment loss approximately 427 million year ended december 31 2012 related intangible assets contingent liabilities record liabilities estimated amounts litigation claims legal actions probable reasonably estimated likelihood material change estimated reserves dependent possible outcome settlement negotiations regulatory judicial review development facts circumstances extended litigation could change claims assessments amount range loss outstanding litigation uncertain disclose footnotes financial statements unable make reasonable estimate material liability could result unfavorable outcomes events occur assess potential liability related pending litigation claims legal actions adjust estimates accordingly adjustments could materially impact financial statements stockbased compensation record stockbased compensation costs relating sharebased payment transactions including stock options restricted stock units “rsus” employee stock purchase plans stockbased compensation expense stock options employee stock purchase plan estimated date grant based fair value award using blackscholes optionpricing model stockbased compensation expense rsus estimated date grant based number shares granted quoted price company’s common stock grant date stockbased compensation expense values recognized expense straightline basis requisite service period net estimated forfeitures stockbased compensation costs ultimately expected vest recognized expense ratably awards vest requisite service period generally one four years stock options rsus three months employee stock purchase plan company estimates prevesting forfeitures time grant analyzing historical data revises estimates subsequent periods actual forfeitures differ estimates total expense recognized vesting period awards ultimately vest certain targetstockpricebased options valued using monte carlo simulation options pricing model recognized expense service periods vesting portions awards six eight years optionpricing models require use certain subjective assumptions including expected volatility market price underlying stock expected term award expected volatility based historical volatility stock expected term derived historical data employee exercises terminations contractual life award targetstockpricebased options review valuation assumptions grant date result valuation assumptions used value stockbased compensation awards granted future periods may change income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse provide valuation allowance net deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized realization deferred tax assets dependent upon generation future taxable income timing amount uncertain tax years 19952012 remain open examination major taxing jurisdictions subject although internal revenue service completed examination 2009 2008 us federal tax returns additional tax assessments proposed adjustments relating taxable income years record liabilities related uncertain tax positions accordance guidance clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribing minimum recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return believe uncertain tax positions currently pending material adverse effect consolidated financial statements although adverse resolution one uncertain tax positions period could material impact results operations period item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations read conjunction “selected financial data” consolidated financial statements related notes thereto included elsewhere annual report form 10k management’s discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see “note regarding forwardlooking statements” “risk factors” contained annual report form 10k sciclone pharmaceuticals inc nasdaq scln united states “us”headquartered chinafocused specialty pharmaceutical company substantial commercial business product portfolio therapies oncology infectious diseases cardiovascular focused continuing grow revenue profitability future business corporate strategy focused primarily people’s republic china “china” built solid reputation established strong brand many years experience marketing lead product zadaxin thymalfasin addition established product promotion business model large pharmaceutical partners focused establishing profitability collaborations believe sales marketing strengths position us benefit longterm expansion pharmaceutical market china pharmaceutical market currently ranks third among global pharmaceutical markets believe china rank second among global pharmaceutical markets 2020 seek expand presence china increase revenues growing sales profits current product portfolio launching new products development pipeline adding new profitable product services agreements leveraging strong cash position inlicense additional products operate two segments generally based nature location customers 1 china 2 rest world includes us hong kong operations two categories revenues “product sales revenues” “promotion services revenues” product sales revenues result proprietary inlicensed products including lead product zadaxin products pfizer international trading shanghai ltd “pfizer” correvio llc formerly iroko cardio llc zadaxin highest margins portfolio premium product sold exclusively sciclone aggrastat® intervention cardiology product launched china 2009 inlicensed product higher margins products promote services agreements anticipate revenues product grow significantly penetrates china market addition anticipate new marketed products introduced increase future revenues profitability pharmaceutical business china coming years “promotion services revenues” result fees receive exclusively promoting products services agreements certain pharmaceutical partners including baxter international inc “baxter” china refer agreements promotion agreements service agreements distribution contract rights agreements recognize promotion services revenues percentage collaborators’ product sales revenue exclusively promoted products time additional proprietary inlicensed products come market aim shift product mix towards products providing higher margin us promotion agreements sanofi aventis sa “sanofi” consisting individual promotional agreements certain pharmaceutical products supplementary agreements extending terms thereof renewed expired december 31 2013 received initial notification nonrenewal sanofi early october 2013 subsequent thereto believe sanofi breached obligations agreements among things failing place orders supply product fourth quarter 2013 relation sales generated failing pay promotion fees due novamed agreements december 31 2013 43 million uncollected receivables due sanofi related revenue recognized first three quarters 2013 demanded sanofi make full payment promotional fees due novamed matter resolved satisfaction intend vigorously pursue claims sanofi arbitration agreements sanofi contain provisions identical regardless individual product promotion agreement required refund portion promotion service fees received interim periods defined annual sales targets achieved consistent past practice consistent achievement excess achievement annual revenue targets prior period based method 2 accounting standards codification 60520s991 “accounting management fees based formula” recognized revenue interim periods without reduction amounts subject refund met substantially exceeded targets “pro rata” basis interim dates treatment subjecttorefund portion consistent contractual provisions provide sales targets measured prorated basis agreement hypothetically terminate given date due sanofi’s failure place orders shipment fourth quarter fully meet demand generated actual promotional fees receivable fourth quarter 2013 negatively impacted due failure achieve defined annual sales targets fiscal 2013 agreements sanofi failure reach annual sales target would result approximately 62 million subject refund related performance first three quarters 2013 however agreements required sanofi continue support sales efforts continuing provide product end terms agreements believe obligation refund amounts subject provision inability achieve defined annual sales result failure perform sanofi dispute sanofi concerning performance therefore deferred revenue recognition approximately 29 million sanofi promotion fees fourth quarter 2013 pending resolution dispute legally entitled least 29 million recorded receivable nonrecognition revenue resulted equal offsetting amount deferred revenue revenues 2013 2012 2011 sanofi approximately 250 million 308 million 197 million respectively june 2013 renewed promotion agreement baxter 5year term december 2017 significant promotion agreement pfizer international trading shanghai ltd “pfizer” expected renewed monthtomonth negotiation extended renegotiated agreement concluded revenues 2013 2012 2011 related agreement pfizer approximately 31 million 88 million 55 million respectively actively negotiating renewal extension agreement pursuing additional promotion service agreements generate additional revenue time continue assess financial performance products promote agreements overall value within entire portfolio products part process recently discontinued promotion certain products including certain oncology products pfizer revenues related discontinued products approximately 07 million 15 million 27 million 2013 2012 2011 respectively time anticipate product mix promote change may affect revenues profitability future agreements determined longer beneficial us allowed expire third parties renegotiate renew extend agreements terms acceptable us revenues would adversely affected profitability may adversely beneficially affected hand efforts renegotiate result better terms may positive impact revenues profitability zadaxin approved 30 countries may used treatment hbv hcv certain cancers vaccine adjuvant according local regulatory approvals countries china thymalfasin included treatment guidelines issued ministry health “moh” liver cancer well guidelines treatment chronic hbv issued chinese medical association asianpacific association study liver invasive fungal infections critically ill patients issued chinese medical association sales force focused increasing sales country’s largest hospitals class 3 500 beds well midsize hospitals class 2 hospitals serve tier 1 tier 2 cities located mostly eastern part china largest generally affluent populations widening market strategies targeting numerous smaller hospitals well hospitals rural areas also seeking expand indications zadaxin could used including sepsis also pursuing registration several therapeutic products china include dc bead® embolicacting bead drugloading capabilities used targeted delivery cancer chemotherapy drugs directly tumor loramyc® mucoadhesive tablet formulation miconazole lauriad treat oropharyngeal candidiasis rapinyl® sublingual tablet formulation fentanyl treat breakthrough cancer pain rapidfilm® oral film formulation ondansetron treat nausea induced chemotherapy continue seek inlicensing arrangements approved latestage branded welldifferentiated products yet approved clear regulatory approval pathway china based existing regulatory approval outside china objective inlicense products provide us higher margins augmenting product sales revenue profitability continue explore opportunities optimize promotion services revenues may 2013 entered framework agreement zensun shanghai science technology co ltd “zensun” exclusive promotion marketing distribution sale neucardintm china hong kong macau neucardin novel firstinclass therapeutic treatment patients intermediate advanced heart failure new drug application submitted accepted review china food drug administration “cfda” 2012 june 2013 entered license agreement taiwan liposome company “tlc” granted us license exclusive rights china hong kong macau promote market distribute sell proflow® treatment peripheral arterial disease “pad” indications pad serious cardiovascular condition blood flow limbs usually legs restricted due arterial plaque buildup terms agreement tlc responsible continued development including potential clinical trials regulatory activities well manufacture supply proflow responsible aspects commercialization including preand postlaunch activities proflow submitted cfda clinical trial approval expected additional clinical testing may required prior approval agreement provides principal terms arrangement sciclone tlc march 2014 companies entered supplemental collaboration license agreement believe licensing agreements neucardin proflow provide us opportunity use considerable sales marketing expertise expand product portfolio differentiated highquality products significant therapeutic advantages nearterm commercial potential contribute longterm growth zadaxin inventories sales zadaxin revenues 2013 lower compared 2012 third quarter 2012 particularly september 2012 estimated substantial increase zadaxin channel inventory levels believed sales customers importers distributors exceeded pace able sell zadaxin hospital pharmacies parties resulting lower commercial sales importer fourth quarter 2012 first half fiscal 2013 believe zadaxin channel inventory returned normalized levels also believe continue see increases hospital demand zadaxin future increased penetration market believe cash investments december 31 2013 ongoing revenue generating business operations sufficient support current operating plan least next 12 months results may fluctuate quarter may report losses future results operations revenues following table summarizes year changes product sales promotion services revenues thousands product sales 994 million 1232 million 1120 million years ended december 31 2013 2012 2011 respectively decrease 238 million 19 year ended december 31 2013 compared 2012 primarily attributable decrease zadaxin unit sales weaker demand certain oncology aggrastat products believe zadaxin product revenues fourth quarter 2012 year ended december 31 2013 adversely affected increase channel inventory experienced third quarter 2012 believe channel inventory zadaxin returned normalized levels anticipate zadaxin revenues 2014 higher 2013 increase product sales 112 million 10 year ended december 31 2012 compared 2011 primarily attributable increased unit sales zadaxin lesser extent related oncology aggrastat products zadaxin sales 963 million year ended december 31 2013 compared 1122 million 1048 million years ended december 2012 2011 respectively china pharmaceutical products imported distributed tiered method distribution proprietary product zadaxin manufacture product using us european contract manufacturers generate product sales revenue sales zadaxin product sinopharm lingyun biopharmaceutical shanghai co ltd “sinopharm” sinopharm affiliates act importer also top “tier” distribution system “tier 1” china zadaxin sales occur sinopharm purchases product us without right return except damaged product quality control issues passage title risk loss transferred sinopharm time shipment sale sinopharm clears products china import customs sells directly large hospitals holds additional product purchased inventory sale next tier distribution system secondtier distributors responsible sale distribution products purchase importer either sales product directly retail level hospitals pharmacies thirdtier local regional distributors turn sell products hospitals pharmacies promotion services revenue 276 million 331 million 206 million years ended 2013 2012 2011 respectively promotion services revenue decreased 55 million 16 year ended december 31 2013 compared 2012 mainly related nonrenewal promotion agreements sanofi wind services promotion agreements sanofi consisting individual promotional agreements certain pharmaceutical products supplementary agreements extending terms thereof renewed expired december 31 2013 received initial notification nonrenewal sanofi early october 2013 subsequent thereto believe sanofi breached obligations agreements among things failing place orders supply product fourth quarter 2013 relation sales generated failing pay promotion fees due novamed agreements december 31 2013 43 million uncollected receivables due sanofi related revenue recognized first three quarters 2013 demanded sanofi make full payment promotional fees due novamed matter resolved satisfaction intend vigorously pursue claims sanofi arbitration agreements sanofi contain provisions identical regardless individual product promotion agreement required refund portion promotion service fees received interim periods defined annual sales targets achieved consistent past practice consistent achievement excess achievement annual revenue targets prior period based method 2 accounting standards codification 60520s991 “accounting management fees based formula” recognized revenue interim periods without reduction amounts subject refund met substantially exceeded targets “pro rata” basis interim dates treatment subjecttorefund portion consistent contractual provisions provide sales targets measured prorated basis agreement hypothetically terminate given date due sanofi’s failure place orders shipment fourth quarter fully meet demand generated actual promotional fees receivable fourth quarter 2013 negatively impacted due failure achieve defined annual sales targets fiscal 2013 agreements sanofi failure reach annual sales target would result approximately 62 million subject refund related performance first three quarters 2013 however agreements required sanofi continue support sales efforts continuing provide product end terms agreements believe obligation refund amounts subject provision inability achieve defined annual sales result failure perform sanofi dispute sanofi concerning performance therefore deferred revenue recognition approximately 29 million sanofi promotion fees fourth quarter 2013 pending resolution dispute legally entitled least 29 million recorded receivable nonrecognition revenue resulted equal offsetting amount deferred revenue revenues 2013 2012 2011 sanofi approximately 250 million 308 million 197 million respectively termination agreements negatively affect promotion services revenues 2014 however due planned restructuring activities including significant reduction sales force believe modest effect profitability 2014 increase promotion services revenue 125 million 61 year ended december 31 2012 compared 2011 reflects addition promotion services revenue result novamed acquisition april 2011 also reflects increase depakine product sales year ended december 31 2012 june 2013 renewed promotion agreement baxter 5year term december 2017 significant promotion agreement pfizer international trading shanghai ltd “pfizer” expected renewed monthtomonth negotiation extended renegotiated agreement concluded revenues 2013 2012 2011 related agreement pfizer approximately 31 million 88 million 55 million respectively actively negotiating renewal extension agreement continue assess financial performance products promote agreements overall value within entire portfolio products part process recently discontinued promotion certain oncology products pfizer revenues related products approximately 07 million 15 million 27 million 2013 2012 2011 respectively time anticipate product mix promote change may affect revenues profitability future agreements determined longer beneficial us allowed expire third parties renegotiate renew extend agreements terms acceptable us revenues would adversely affected profitability may adversely beneficially affected hand successful negotiating better terms may positive impact revenues profitability promotion services revenue majority product revenues related china segment total china revenues 1226 million 1522 million 1289 million 97 sales years ended december 31 2013 2012 2011 respectively rest world segment revenues 44 million 40 million 36 million 3 years ended december 31 2013 2012 2011 respectively related sales zadaxin product year ended december 31 2013 sales two customers china accounted approximately 75 20 revenues year ended december 31 2012 sales three customers china accounted approximately 59 20 12 revenues year ended december 31 2011 sales three customers china accounted approximately 66 15 revenues experience customers good anticipate continue sell majority product cost product sales following table summarizes year changes cost product sales thousands cost product sales 177 million year ended december 31 2013 compared 220 million 194 million years ended december 31 2012 2011 respectively decrease 43 million 20 year ended december 31 2013 compared 2012 attributable 06 million decrease zadaxin cost product sales related decrease zadaxin unit sales 37 million decrease aggrastat oncology cost sales result lower sales volume aggrastat methotrexate product discontinued sales adriamycin daunoblastina increase 26 million 13 year ended december 31 2012 compared year ended december 31 2011 attributable increase 12 million zadaxin cost sales related increase zadaxin unit sales attributable increase 14 million oncology aggrastat cost sales related increase product sales deliveries zadaxin cost sales 155 million year ended december 31 2013 compared 162 million 150 million years ended december 31 2012 2011 respectively gross margin zadaxin 839 year ended december 31 2013 compared 857 years ended december 31 2012 2011 decrease gross margin zadaxin year ended december 31 2013 compared years ended december 31 2012 2011 due primarily costs incurred related planned manufacturing process improvements zadaxin costs incurred product warehousing fees related renewal zadaxin china import license higher overhead costs related lower production volume reduction list price zadaxin since october 2012 expect zadaxin cost product sales gross margins fluctuate period depending level sales price products absorption productrelated fixed costs currency exchange fluctuations charges associated excess expiring finished product inventory timing inventory period costs manufacturing process improvements goal future cost reductions overall expect gross margin percentages 2014 remain comparable 2013 although may fluctuate quarter sales marketing following table summarizes year changes sales marketing expenses thousands sales marketing expenses 558 million 703 million 489 million years ended december 31 2013 2012 2011 respectively sales marketing expenses decreased 145 million 21 year ended december 31 2013 compared 2012 2013 began expensesaving measures sales marketing activities also strategically reduced sales force 300 salespersons compared december 31 2012 sales marketing expenses increased 215 million 44 year ended december 31 2012 compared year ended december 31 2011 related increased growth support commercial efforts expand deeply widely throughout china market company anticipates reduction sales marketing expenses year ending december 31 2014 approximately 32 million related restructuring reduction workforce however anticipate total sales marketing expenses year ending december 31 2014 comparable incurred year ended december 31 2013 anticipate savings restructuring reduction sales force offset growth sales marketing efforts amortization impairment acquired intangible assets years ended december 31 2012 2011 recognized 26 million 25 million respectively amortization acquired intangible assets expense amortization acquired intangible assets reflects amortization services distribution contract intangible assets acquired part novamed acquisition april 18 2011 year ended december 31 2012 identified impairment indicator respect intangible assets related promotion distribution contract rights determined undiscounted cash flows estimated generated intangible assets less carrying amounts performed discounted cash flow analysis related intangible assets determined full impairment recorded result recognized noncash impairment loss approximately 427 million year ended december 31 2012 amortization expense recorded future periods related novamed intangible assets research development “rd” following table summarizes year changes rd expenses thousands research development “rd” expenses 75 million 51 million 123 million years ended december 31 2013 2012 2011 respectively year ended december 31 2013 company recorded 50 million research development expense related upfront payments payable recent inlicense arrangements zensun tlc addition year ended december 31 2013 rd expense included costs incurred related preparation potential sepsis clinical study zadaxin currently contemplating increase rd partially offset decreases rd expenses year ended december 31 2013 related announcement march 2012 discontinuation scv07 phase 2b clinical trial delay onset severe om based results preplanned interim analysis indicated trial would meet prespecified efficacy endpoints rd expenses decreased 72 million 58 year ended december 31 2012 compared year ended december 31 2011 also primarily related discontinuation trial major components rd expenses include salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment licenserelated fees services performed clinical research organizations research institutions outside service providers expect research development expenses increase 2014 compared 2013 related support local trials china loramyc zadaxin may also incur additional milestone payment tlc 08 million upon clinical trial application approval company anticipates may occur first half 2014 continue evaluate opportunities inlicense marketing rights proprietary products primarily china may result increased research development expenses due license fee payments local registration clinical trials expenses related inlicensing development new products future addition currently evaluating sepsis clinical study zadaxin anticipate decision trial would significantly impact 2014 rd expenses future rd expenses subsequent years general administrative following table summarizes year changes general administrative expenses thousands general administrative expenses 325 million 213 million 240 million years ended december 31 2013 2012 2011 respectively general administrative expenses year ended december 31 2013 increased 112 million 52 compared year ended december 31 2012 recorded 24 million bad debt expense related accounts receivable significantly past due one customer increase bad debt expense determined result continual negotiations indicate accounts receivable balance may recoverable additional increases general administrative expenses year ended december 31 2013 included higher professional expenses approximately 53 million related legal matters associated ongoing government investigation ongoing improvements fcpa compliance efforts approximately 11 million mainly related accounting matters associated restatement consolidated financial statements year ended december 31 2011 certain quarters 2012 2011 matters involving consultation securities exchange commission related one aspect accounting one contracts well higher general administrative personnelrelated costs higher legal costs related general corporate matters general administrative expenses year ended december 31 2012 decreased 27 million 11 compared year ended december 31 2011 decrease year ended december 31 2012 attributable 38 million lower novamed acquisitionrelated costs offset partially increased general administrative expenses related novamed result acquisition novamed april 18 2011 increased professional fees related novamed internal control issues identified third fourth quarters 2012 sec doj’s ongoing investigation expect general administrative expenses 2014 decrease compared 2013 anticipate lower legal accounting costs 2014 addition lower bad debt expense however ongoing investigations sec doj unpredictable may result higher legal costs fines penalties could affect expenses timing thereof expect incur significant acquisitionrelated costs 2014 though continue evaluate opportunities china may result increased general administrative expenses future see part item 3 “legal proceedings” restructuring charges year ended december 31 2013 recorded 12 million restructuring charges reflect planned reductions china segment related sales force onetime termination benefits approximately 175 employees result nonrenewal sanofi promotion agreement december 31 2013 year ended december 31 2012 recorded 11 million restructuring charges related rest world segment reflect reductions staffing following discontinuation company’s scv07 phase 2b clinical trial restructuring activities expenses year ended december 31 2011 anticipate restructuring plan initiated year ended december 31 2013 completed 2014 amount accrued restructuring costs december 31 2013 06 million expected paid 2014 restructuring year ended december 31 2012 completed 2012 estimated probable secdoj investigation loss december 31 2013 determined payment 20 million government penalties fines andor remedies probable accordingly recorded 20 million operating expense year ended december 31 2013 reflect estimate probable loss incurred related potential penalties fines andor remedies ongoing investigations sec doj could required pay higher lower fines penalties cannot predict outcome investigations timing resolution change fair value contingent consideration part acquisition novamed would required pay additional 430 million earnout payments successful achievement revenue earnings targets 2012 2011 fiscal years “earnout” “contingent consideration” initially recorded 189 million estimated fair value contingent consideration fair value contingent consideration remeasured quarter changes fair value recorded contingent consideration expense gain december 31 2012 fair value earnout determined 0 resulting gain 154 million year ended december 31 2012 september 30 2012 company used assistance thirdparty valuation expert estimate fair value contingent consideration using monte carlo simulation model estimated fair value contingent consideration subject fluctuations result adjustments certain performance metric projections used estimate fair value resulted gain 35 million year ended december 31 2011 fair value estimates based variety factors significantly fluctuated period including likelihood earnout targets would achieved present value factors associated timing earnout targets significant reduction valuation contingent consideration expense 2012 2011 primarily due revenue ebitda earnings interest depreciation taxes targets achieved reduced probability renewal relating novamed’s product distribution agreements including particular target renewing depakine services agreement sanofi fiveyear term depakine services agreement extended december 31 2013 term less five years income july 8 2013 representatives former stockholders novamed entered “confidential escrow settlement agreement” pursuant retained approximately 08 million cash 342300 shares common stock combined fair value approximately 26 million settlement date result recorded 26 million year ended december 31 2013 income related settlement provision benefit income tax provision benefit income tax relates foreign operations china provision income tax 22 million year ended december 31 2013 compared benefit income tax 33 million year ended december 31 2012 tax expense 07 million year ended december 31 2011 respectively tax benefit decreased 59 million year ended december 31 2013 compared 2012 increased 40 million year ended december 31 2012 compared 2011 primarily related reversal deferred tax liabilities due impairment loss approximately 427 million recorded related intangible assets partially offset impact recording full valuation allowance novamed deferred tax assets offset tax expense related growth china operations statutory tax rate china 25 2013 2012 2425 2011 statutory tax rate china 25 2014 expect provision income tax increase year ending december 31 2014 compared year ended december 31 2013 due growth china operations recorded us federal state income tax expense years ended december 31 2013 2012 2011 undistributed earnings foreign subsidiaries amounted approximately 904 million december 31 2013 earnings considered permanently reinvested accordingly deferred us income taxes provided thereon december 31 2013 net operating loss carryforwards federal income tax purposes approximately 1028 million expire years 2020 2033 december 31 2013 federal research development orphan drug investment tax credit carryforwards approximately 121 million expire years 2018 2033 “change ownership” provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities liquidity capital resources continue closely manage liquidity capital resources rely operating cash flows cash equivalents shortterm investments shortterm loan arrangement provide liquidity requirements continue believe ability meet liquidity needs least next 12 months fund working capital requirements operations including investments business share repurchases pay shortterm borrowing arrangements fund business development activities following tables summarize cash investments cash flow activities end years presented thousands december 31 2013 858 million cash equivalents investments 779 million located subsidiaries company outside us cash equivalents held subsidiaries outside us held primarily us dollars cash equivalents used fund operating activities foreign subsidiaries investment foreign operations may include inlicensing new products particularly china potential acquisitions december 31 2013 determined remaining 904 million accumulated undistributed earnings foreign subsidiaries continues indefinitely reinvested outside us making determination following attributes considered expected future needs foreign subsidiaries including working capital debt service capital expenditures well additional investments support infrastructure china subsidiaries ii additional investments support expansion china market well planned business acquisitions andor product licensing transactions iii foreseeable need repatriate additional undistributed earnings fund limited us operations circumstances change becomes apparent undistributed earnings remitted accrue income taxes previously recognized upon distribution earnings may subject us federal state income taxes determination additional tax practicable dependent several future uncertainties including amount us tax losses available net operating losses potentially foreign tax credits available time repatriation based current operating plan anticipate need repatriate cash equivalents held foreign subsidiaries foreseeable future net cash provided operating activities 95 million year ended december 31 2013 primarily reflected net income period adjusted noncash items stockbased compensation expense depreciation amortization expense noncash escrow share settlement loss maturity availableforsale investments provision losses accounts receivable changes operating assets liabilities december 31 2013 accounts receivable totaling approximately 35 million substantially delinquent actively trying collect recorded reserve 35 million customer binding obligation pay us may pursue legal remedies assurance paid pursue legal action timing result action would accounts receivable increased 42 million related increase zadaxin sales fourth quarter 2013 compared quarter 2012 excess inventory zadaxin channel inventory increased 47 million completed new manufacturing process processed new batches deferred revenue increased 29 million related sanofi promotion fees fourth quarter 2013 due uncertainty surrounding collection related accounts receivable pending outcome dispute sanofi net cash provided operating activities 435 million year ended december 31 2012 primarily reflected net income period adjusted noncash items intangible asset impairment change fair value contingent consideration stockbased compensation expense depreciation amortization expense changes operating assets liabilities changes included 22 million increase accounts payable mainly related professional manufacturing services 30 million increase accrued liabilities mainly related increases sales marketing tax accruals net cash provided used investing activities 01 million 12 million 188 million years ended december 31 2013 2012 2011 respectively years ended december 31 2013 2012 2011 purchases property equipment 03 million 11 million 07 million respectively addition years ended december 31 2013 2011 received proceeds 04 million 31 million sale maturity availableforsale securities net purchases 2012 used 01 million cash purchase availableforsale securities cash used investing activities year ended december 31 2011 also included cash used approximately 213 million related acquisition novamed net cash used provided financing activities 84 million 247 million 28 million years ended december 31 2013 2012 2011 respectively years ended december 31 2013 2012 2011 used 125 million 248 million 35 million respectively repurchase retire approximately 24 million 47 million 781000 shares common stock repurchase program years ended december 31 2013 2012 2011 also received 17 million 35 million 63 million proceeds respectively issuances common stock made stock award plans year ended december 31 2013 subsidiary borrowed 06 million repaid 20 million loan agreement shanghai pudong development bank co ltd expired august 29 2013 amounts borrowed repaid expiration date restricted cash used 23 million year ended december 31 2012 secure letter credit related loan agreement released year ended december 31 2013 letter credit cancelled december 2013 subsidiary novamed pharmaceuticals shanghai co ltd entered 100 million renminbi revolving line credit facility approximately 17 million usd maximum 150 million renminbi loan facility approximately 25 million usd secured accounts receivable shanghai pudong development bank co ltd “credit facility” december 31 2013 100 million renminbi approximately 17 million usd borrowings outstanding revolving line credit facility must repaid june 4 2014 early repayment allowed credit facility bears interest borrowed funds people’s bank china 6month base rate plus 15 644 december 31 2013 credit facility expires november 30 2014 amounts borrowed must repaid expiration date following summarizes future contractual obligations december 31 2013 thousands 1 short term debt obligations include expected principal interest obligations related credit facility shanghai pudong development bank co ltd calculations expected principal interest payments incorporate current period assumptions interest rates borrowings 2 future minimum rental commitments office space copiers leased noncancelable operating lease arrangements 3 consist purchase obligations manufacturers distributors 4 able reasonably estimate timing payments amount obligations unrecognized tax benefits increase decrease time related balances reflected “payments due period” section table promotion agreements sanofi consisting individual promotional agreements certain pharmaceutical products supplementary agreements extending terms thereof renewed expired december 31 2013 received initial notification nonrenewal sanofi early october 2013 subsequent thereto believe sanofi breached obligations agreements among things failing place orders supply product fourth quarter 2013 relation sales generated failing pay promotion fees due novamed agreements december 31 2013 43 million uncollected receivables due sanofi related revenue recognized first three quarters 2013 demanded sanofi make full payment promotional fees due novamed matter resolved satisfaction intend vigorously pursue claims sanofi arbitration agreements sanofi contain provisions identical regardless individual product promotion agreement required refund portion promotion service fees received interim periods defined annual sales targets achieved consistent past practice consistent achievement excess achievement annual revenue targets prior period based method 2 accounting standards codification 60520s991 “accounting management fees based formula” recognized revenue interim periods without reduction amounts subject refund met substantially exceeded targets “pro rata” basis interim dates treatment subjecttorefund portion consistent contractual provisions provide sales targets measured prorated basis agreement hypothetically terminate given date due sanofi’s failure place orders shipment fourth quarter fully meet demand generated actual promotional fees receivable fourth quarter 2013 negatively impacted due failure achieve defined annual sales targets fiscal 2013 agreements sanofi failure reach annual sales target would result approximately 62 million subject refund related performance first three quarters 2013 however agreements required sanofi continue support sales efforts continuing provide product end terms agreements believe obligation refund amounts subject provision inability achieve defined annual sales result failure perform sanofi pending resolution dispute sanofi regarding amount 62 million subject refund also reorganized business result nonrenewal agreement incurred restructuring charges amount approximately 12 million approximately 06 million expected paid fiscal 2014 march 15 2012 filed shelf registration sec may offer sell 1000 million securities assuming continue meet sec’s eligibility requirements primary offerings form s3 subsequently affiliates sigmatau sold approximately 63 million shares aggregate price approximately 331 million registration statement approximately 669 million available future use august 2013 board directors approved increase 100 million company’s stock repurchase program bringing total authorized since program’s inception october 2011 505 million board directors extended program december 31 2014 program repurchased retired 24 million shares cost 125 million year december 31 2013 bringing total repurchases since program’s inception approximately 79 million shares cost 408 million december 31 2013 consider several factors determining make share repurchases including among things cash needs availability funding market price stock expect cash provided future operating activities well available cash equivalents shortterm investments sources funding share repurchase program may 2013 part framework agreement zensun agreed enter 120 million loan facility zensun anticipate finalization licensing agreement funding approximately 23 million loan first half 2014 believe existing cash equivalents investments ongoing revenue generating business operations sufficient support current operating plan least next 12 months current commitments offer sell securities may offered sold pursuant registration statement extent raise additional capital issuing equity securities stockholders may experience dilution debt financing available may subject us restrictive covenants significant interest costs extent raise additional funds collaboration licensing arrangements would required relinquish rights technologies product candidates marketing territories additional financing collaboration licensing arrangements may available needed either favorable terms intend continue explore alternatives financing provide additional flexibility managing operations inlicensing new products particularly china potential acquisitions may required unavailability inopportune timing financing could prevent delay longterm product development commercialization programs either could hurt business cannot assure funds financings sufficient inlicense additional products need timing amount financing would depend upon numerous factors including status pending regulatory investigations pending litigations level price products timing amount manufacturing costs related products availability complementary products technologies businesses initiation continuation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative parties status competitive products various alternatives financing determined timing structure transaction offbalance sheet arrangements offsheet balance sheet arrangements critical accounting policies significant judgments estimates general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout “management’s discussion analysis financial condition results operations” policies affect reported expected financial results detailed discussion application accounting policies see note 1 “notes consolidated financial statements” part ii item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united sates require us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates judgments base estimates historical experience various marketspecific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition recognize revenue persuasive evidence arrangement exists services rendered delivery occurred price buyer fixed determinable collectability reasonably assured product revenue recognize product revenue selling zadaxin product time delivery sales zadaxin sinopharm affiliates recognized time shipment title product transferred also earn product revenue purchasing medical products pharmaceutical companies selling directly importers distributors sales pfizer products date acquisition novamed october 2012 based “sellthrough” method distribution arrangement products allowed payment terms dependent distributor sold product maintain information timing “sellthrough” pfizer products distributor period therefore applied cash receipts approach application “sellthrough” method reliable information available accordingly period time revenue sales pfizer products recognized receipt cash distributor october 21 2012 amended agreement distributor amendment removed contingent payment terms prior amendment agreement allowed delayed payment based timing sales distributor next tier customer amendment changed payment terms 60 days thus ensuring distributor could withhold payment distributor received payment sale product next tier customer combination revised payment terms together contractual restrictions distributor eg return rights terms may raise question whether taken title assumed “risk loss” permitted revenue recognized “sellin” basis upon amendment therefore october 21 2012 onward used “sellin” method recognition related revenue product sales also recognized “sellin” method medical products delivered importers distributors promotion services revenue recognize promotion services revenue designated medical products delivered distributors specified promotion services contract marks period marketing promotion services rendered revenue recognition criteria met certain arrangements required return refund portion promotion services fees received interim periods pharmaceutical customers defined annual sales targets achieved agreements customers agreement terminated provided targets met “pro rata” basis date contract termination entitled retain amounts paid due contractual provisions recognize revenue interim periods without reduction amounts subject refund based method 2 accounting standards codification 60520s991 “accounting management fees based formula” accounts receivable reserve record receivable reserve based specific review overdue invoices estimate reserve determined considering existing contractual payment terms payment patterns customers individual customer circumstances age outstanding receivables current customer relationships accounts receivable charged point considered uncollectible december 31 2013 37 million accounts receivable past due ninety days december 31 2013 2012 recorded receivable reserve approximately 35 million 10 million respectively related accounts receivable december 31 2013 one year past due one customer actual collections could range 0 35 million receivable reserve determined result continual negotiations indicate accounts receivable balance may recoverable represents best estimate results though actual results may vary continue pursue full amount receivables also additional receivable reserve 01 million december 31 2013 related another customer due uncertainty collecting portion outstanding accounts receivable balance reserve product returns maintain reserve product returns based estimates amount product returned customers may result expired damaged product delivery price reductions related sales based historical patterns analysis market demand andor percentage sales based industry trends management’s evaluation specific factors may increase risk product returns importing agents distributors contractual rights return except limited terms regarding product quality however expected replace products expired delivery deemed damaged defective delivered calculation product returns reserve requires estimates involves high degree subjectivity judgment result uncertainties involved estimating product returns reserve possibility materially different amounts could reported different conditions using different assumptions december 31 2013 2012 estimated product returns reserve 0 01 million consolidated balance sheet related oncology products aggrastat product sales part restatement financial statements year ended december 31 2011 recorded adjustments correct errors product returns reserve sales aggrastat sold subsidiary novamed prior date acquisition time novamed acquisition liability expired aggrastat product existed related preacquisition sales december 31 2013 2012 liability aggrastat expired product zero 03 million respectively evaluate returns reserve quarterly adjust events indicate change estimate appropriate changes estimates could materially affect results operations financial position possible may need adjust estimates future periods inventories valued lower cost market net realizable value cost determined firstin firstout basis include amounts related materials labor overhead assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels current assumptions future production inventory levels demand change actual market conditions less favorable projected management inventory writedowns may required could negatively impact gross margins results operations obsolete items excess observed alternate uses inventory record writedown net realizable value period impairment first recognized business combinations accounted acquisition novamed april 2011 accordance asc topic 805 business combinations asc topic 805 establishes principles requirements recognizing measuring total consideration transferred assets acquired liabilities assumed acquired target business combination consideration paid acquire novamed required measured fair value included contingent consideration earnout payments would paid successful achievement revenue earnings targets 2011 2012 fiscal years total consideration transferred calculated determining fair value contingent consideration sciclone common stock plus cash consideration assigned purchase price novamed fair value assets acquired liabilities assumed resulted recognition intangible assets related promotion distribution contract rights goodwill determination recognition consideration transferred required management make significant estimates assumptions especially acquisition date respect fair value contingent consideration intangible assets acquired part acquisition novamed would required pay 430 million contingent consideration successful achievement revenue earnings targets 2011 2012 fiscal years december 31 2012 fair value earnout determined 0 fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date quoted prices observable inputs unavailable fair values based internally developed cash flow models classified level 3 valuation hierarchy september 30 2012 estimated fair value contingent consideration using monte carlo simulation model classified level 3 valuation hierarchy inputs used monte carlo simulation model reflected assumptions estimates including riskadjusted discount rate volatility assessment inputs used fair value measurement required judgment affected valuation contingent consideration measured earnout based upon certain financial performance metrics including revenuebased formula adjusted ebitda based formula earnout provisions subject number adjustments acceleration provisions total earnout payments described could increased 100 million exceeding total maximum contingent cash consideration 430 million reduced 100 million depending whether able achieve targets relating product distribution agreements required remeasure contingent consideration reporting period amount payment finalized occurred december 31 2012 change estimated fair value contingent consideration recognized adjustment operating expenses acquisition date april 18 2011 december 31 2011 year ended december 31 2012 estimated fair value contingent consideration decreased 35 million 154 million respectively primarily related decrease estimated probability achieving revenue ebitda targets reduced probability renewal relating novamed’s product distribution agreements including particular target renewing depakine services agreement sanofi fiveyear term depakine services agreement extended december 31 2013 term less five years goodwill intangible assets account goodwill intangible assets accordance asc topic 805 asc topic 350 intangibles goodwill asc topic 805 requires acquisition method accounting used business combinations specifies criteria must met order intangible assets acquired business combination recognized reported apart goodwill intangible assets goodwill tested impairment least annually whenever events circumstances occur indicate impairment might occurred circumstances suggest carrying value assets may recoverable undiscounted cash flows estimated generated assets less carrying amounts assets accordance asc topic 350 judgment regarding existence impairment indicators based operating results changes manner use acquired assets overall business strategy market economic trends goodwill assigned china segment focuses primary pharmaceutical distribution market consisting acquired novamed business legacy china business company determined represent single reporting unit years ended december 31 2013 2012 2011 tested goodwill impairment quantitatively comparing fair value reporting unit carrying amountsstep one twostep impairment test estimated fair value china reporting unit using discounted cash flow model valuation approach considers number factors include limited expected future cash flows growth rates discount rates requires us make certain assumptions estimates regarding industry economic factors future profitability business although believe assumptions reasonable actual results may vary significantly may expose us impairment charges future methodology determining fair value remained consistent periods presented determine carrying value reporting unit exceeds fair value would calculate implied fair value reporting unit goodwill compared carrying value determine appropriate impairment charge completing annual impairment review reporting unit fourth quarters 2013 2012 2011 interim impairment review third quarter 2013 result notification sanofi nonrenewal distribution agreement end term december 31 2013 concluded goodwill impaired 2013 2012 2011 part acquisition novamed recorded intangible assets related promotion distribution contract rights promotion distribution contracts expire one ten years majority expiring one two years subject renewal extension estimated useful life approximately 135 years although revenues novamed business grown since acquisition overall revenue growth profitability met expectations time acquisition condition considered impairment indicator respect intangible assets related promotion distribution contract rights determined undiscounted cash flows estimated generated intangible assets less carrying amounts performed discounted cash flow analysis related intangible assets determined full impairment recorded result recognized noncash impairment loss approximately 427 million year ended december 31 2012 related intangible assets contingent liabilities record liabilities estimated amounts litigation claims legal actions probable reasonably estimated likelihood material change estimated reserves dependent possible outcome settlement negotiations regulatory judicial review development facts circumstances extended litigation could change claims assessments amount range loss outstanding litigation uncertain disclose footnotes financial statements unable make reasonable estimate material liability could result unfavorable outcomes events occur assess potential liability related pending litigation claims legal actions adjust estimates accordingly december 31 2013 determined payment 20 million government penalties fines andor remedies probable related sec doj ongoing investigations accordingly recorded 20 million operating expense year ended december 31 2013 reflect estimate probable loss incurred related potential penalties fines andor remedies ongoing investigations sec doj fines penalties may imposed losses may realized related investigations could vary amount accrued adjustments could materially impact financial statements stockbased compensation record stockbased compensation costs relating sharebased payment transactions including stock options restricted stock units “rsus” employee stock purchase plans stockbased compensation expense stock options employee stock purchase plan estimated date grant based fair value award using blackscholes optionpricing model stockbased compensation expense rsus estimated date grant based number shares granted quoted price company’s common stock grant date stockbased compensation expense values recognized expense straightline basis requisite service period net estimated forfeitures stockbased compensation costs ultimately expected vest recognized expense ratably awards vest requisite service period generally one four years stock options rsus three months employee stock purchase plan company estimates prevesting forfeitures time grant analyzing historical data revises estimates subsequent periods actual forfeitures differ estimates total expense recognized vesting period awards ultimately vest optionpricing models require use certain subjective assumptions including expected volatility market price underlying stock expected term award expected volatility based historical volatility stock expected term derived historical data employee exercises terminations contractual life award targetstockpricebased options review valuation assumptions grant date result valuation assumptions used value stockbased compensation awards granted future periods may change income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse provide valuation allowance net deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized realization deferred tax assets dependent upon generation future taxable income timing amount uncertain tax years 19952013 remain open examination major taxing jurisdictions subject furthermore notified internal revenue service 2011 us federal income tax return selected examination internal revenue service completed examination 2009 2008 us federal tax returns additional tax assessments proposed adjustments relating taxable income years record liabilities related uncertain tax positions accordance guidance clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribing minimum recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return believe uncertain tax positions currently pending material adverse effect consolidated financial statements although adverse resolution one uncertain tax positions period could material impact results operations period restructuring costs necessary record expense estimated costs restructuring activities liability recorded restructuring costs contains uncertainties management required make assumptions apply judgment estimate amounts timing future settlement payments timing payments making assumptions management considers number factors including number employees involved related benefits included restructuring plan historical settlement experience believe reasonable likelihood material change estimates assumptions use calculate restructuring liability however actual results consistent estimates assumptions may exposed losses gains would impact results operations period new accounting standards february 2013 financial accounting standards board “fasb” issued accounting standard update require reclassification adjustments comprehensive income presented either financial statements notes financial statements accounting standard update effective first quarter fiscal 2014 time include required disclosures march 2013 fasb issued accounting standards update requiring entity release net income entire amount cumulative translation adjustment related investment foreign entity parent either sells part investment foreign entity longer holds controlling financial interest subsidiary group assets within foreign entity accounting standard update effective fiscal year beginning december 15 2013 currently evaluating impact accounting standard update financial statements july 2013 fasb issued accounting standards update 201311 income taxes topic 740 presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists “asu 201311” certain exceptions asu 201311 requires entities present unrecognized tax benefit portion unrecognized tax benefit reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward guidance effective interim annual periods beginning december 15 2013 either prospective retrospective basis early adoption permitted plan adopting guidance commencing 2014 prospective basis expect adoption guidance material impact consolidated results operations financial condition item 7aitem 7management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations read conjunction “selected financial data” consolidated financial statements related notes thereto included elsewhere annual report form 10k management’s discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see “note regarding forwardlooking statements” “risk factors” contained annual report form 10k sciclone pharmaceuticals inc nasdaq scln united states “us”headquartered chinafocused specialty pharmaceutical company substantial commercial business product portfolio therapies oncology infectious diseases cardiovascular disorders focused continuing grow revenue profitability future business corporate strategy focused primarily people’s republic china “china” built solid reputation established strong brand many years experience marketing lead product zadaxin thymalfasin addition established product promotion business model large pharmaceutical partners focused establishing profitability collaborations believe sales marketing strengths position us benefit longterm expansion pharmaceutical market china pharmaceutical market currently ranks third among global pharmaceutical markets believe china rank second among global pharmaceutical markets 2020 seek expand presence china increase revenues growing sales profits current product portfolio launching new products development pipeline adding new profitable product services agreements leveraging strong cash position inlicense additional products operate two segments generally based nature location customers 1 china 2 rest world includes us hong kong operations two categories revenues “product sales revenues” “promotion services revenues” product sales revenues result proprietary inlicensed products including lead product zadaxin aggrastat® intervention cardiology product launched china 2009 inlicensed cardiome pharma corp products pfizer international trading shanghai ltd “pfizer” zadaxin highest margins portfolio premium product sold exclusively sciclone addition anticipate new marketed products introduced increase future revenues profitability pharmaceutical business china coming years “promotion services revenues” result fees receive exclusively promoting products services agreements certain pharmaceutical partners including baxter international inc “baxter” china refer agreements promotion agreements service agreements distribution contract rights agreements recognize promotion services revenues percentage collaborators’ product sales revenue exclusively promoted products time additional proprietary inlicensed products come market aim shift product mix towards products providing higher margin us promotion agreements sanofi aventis sa “sanofi” consisting individual promotional agreements certain pharmaceutical products supplementary agreements extending terms thereof renewed expired december 31 2013 revenues years ended 2014 2013 2012 sanofi approximately 02 million 250 million 308 million respectively effective july 14 2014 entered settlement agreement sanofi related promotion fees due subsidiary novamed pharmaceuticals shanghai co ltd “novamed shanghai” august 2014 novamed shanghai received approximately 22 million chinese yuan renminbi “rmb” approximately 35 million final payment sanofi information related matter refer “results operations” “revenues” zadaxin approved 30 countries may used treatment hbv hcv certain cancers vaccine adjuvant according local regulatory approvals countries china thymalfasin included treatment guidelines issued ministry health “moh” liver cancer well guidelines treatment chronic hbv issued chinese medical association asianpacific association study liver invasive fungal infections critically ill patients issued chinese medical association sales force focused increasing sales country’s largest hospitals class 3a 500 beds well midsize hospitals class 2a hospitals serve tier 1 tier 2 cities located mostly eastern part china largest generally affluent populations widening market strategies targeting numerous smaller hospitals well hospitals rural areas also seeking expand indications zadaxin could used including sepsis august 2014 along partner btg plc “btg” announced china food drug administration approved registration dc bead® embolization malignant hypervascularized tumors dc bead may used treat liver cancer large growing indication china believe oncology sales team academic marketing liaisons established high quality relationships medical professionals institutions specialize cancer treatment believe valuable asset prepare commercial launch dc bead anticipated first half 2015 btg sciclone previously entered agreement granting sciclone exclusive licensing distribution rights dc bead china agreement purchase product btg specified price sale china also pursuing registration several therapeutic products china include loramyc® mucoadhesive tablet formulation miconazole lauriad treat oropharyngeal candidiasis rapidfilm® oral film formulation ondansetron treat nausea induced chemotherapy june 2013 renewed promotion agreement baxter 5year term december 2017 july 2014 renewed product distribution agreement pfizer 5year term june 2019 pursuing additional agreements generate additional revenue continue seek inlicensing arrangements welldifferentiated products various stages development yet approved defined regulatory approval pathway china objective inlicense products provide us higher margins augmenting product sales revenue profitability continue explore opportunities optimize promotion services revenues december 2014 entered strategic partnership two cardiovascular products china partnership includes agreement granting us license exclusive rights china promote two products medicines company including 1 angiomax® bivalirudin injection anticoagulant indicated patients undergoing percutaneous coronary intervention pci provisional use glycoprotein iibiiia inhibitor gpi patients risk heparininduced thrombocytopenia thrombosis syndrome undergoing pci phase 3 registration trial completed china currently review china food drug administration marketing approval 2 cleviprex® clevidipine injectable emulsion thirdgeneration dihydropyridine calcium channel blocker indicated reduction blood pressure oral therapy feasible desirable clinical trial application cta china filed 2013 terms agreement responsible aspects commercialization including preand postlaunch activities products china market excluding hong kong macao also agreed participate china registration process products financial terms agreement addition net sales royalties payable medicines company include following additional payments medicines company upfront payment project support services fee regulatorycommercial success milestone payments aggregate 505 million may 2013 entered framework agreement zensun shanghai science technology co ltd “zensun” exclusive promotion marketing distribution sale neucardintm china hong kong macao neucardin novel firstinclass therapeutic treatment patients intermediate advanced heart failure new drug application “nda” submitted accepted review china food drug administration “cfda” 2012 cfda subsequently informed zensun phase 2 data insufficient asked zensun submit new nda ongoing phase 3 study reached endpoints 2014 loaned zensun total approximately 475 million two separate loan agreements pursuant terms framework agreement refer note 6 consolidated financial statements appearing part ii item 8 june 2013 entered license agreement taiwan liposome company “tlc” granted us license exclusive rights china hong kong macao promote market distribute sell proflow® treatment peripheral arterial disease “pad” indications pad serious cardiovascular condition blood flow limbs usually legs restricted due arterial plaque buildup terms agreement tlc responsible continued development including potential clinical trials regulatory activities well manufacture supply proflow responsible aspects commercialization including preand postlaunch activities agreement provides principal terms arrangement sciclone tlc march 2014 companies entered supplemental collaboration license agreement tlc recently notified cfda proflow receive clinical trial approval tlc process appealing decision believe cash investments december 31 2014 ongoing revenue generating business operations sufficient support current operating plan least next 12 months results may fluctuate quarter may report losses future results operations revenues following table summarizes year changes product sales promotion services revenues thousands product sales 1320 million 994 million 1232 million years ended december 31 2014 2013 2012 respectively increase 326 million 33 year ended december 31 2014 compared 2013 primarily attributable increase zadaxin unit sales stronger demand certain oncology products zadaxin sales 1261 million year ended december 31 2014 compared 963 million prior year increase 298 million 31 mainly related increase volume sold lesser extent related increase selling price believe zadaxin product revenues first half fiscal 2013 adversely affected increase channel inventory experienced third quarter 2012 believe channel inventory zadaxin returned normalized levels anticipate zadaxin revenues 2015 higher 2014 deferred approximately 06 million revenue third fourth quarters 2014 related aggrastat product delivered year ended december 31 2014 may returned time shipping product within six months expiration date decrease 238 million product sales 19 year ended december 31 2013 compared 2012 primarily attributable decrease zadaxin unit sales weaker demand certain oncology aggrastat products china pharmaceutical products imported distributed tiered method distribution proprietary product zadaxin manufacture product using us european contract manufacturers generate product sales revenue sales zadaxin product sinopharm holding hong kong co limited “sinopharm” sinopharm affiliate acts importer also top “tier” distribution system “tier 1” china zadaxin sales occur sinopharm purchases product us without right return except damaged product quality control issues passage title risk loss transferred sinopharm time shipment sale sinopharm clears products china import customs sells directly large hospitals holds additional product purchased inventory sale next tier distribution system secondtier distributors responsible sale distribution products purchase importer either sales product directly retail level hospitals pharmacies thirdtier local regional distributors turn sell products hospitals pharmacies promotion services revenue 28 million 276 million 331 million years ended december 31 2014 2013 2012 respectively related products promoted agreements baxter sanofi promotion services revenue decreased 248 million 90 year ended december 31 2014 compared 2013 related expiration promotional agreements sanofi december 31 2013 promotion services revenue decreased 55 million 16 year ended december 31 2013 compared 2012 related nonrenewal promotional agreements sanofi wind services promotion agreements sanofi consisting individual promotional agreements certain pharmaceutical products supplementary agreements extending terms thereof renewed expired december 31 2013 novamed shanghai sanofi negotiated settlement certain amounts dispute effective july 14 2014 novamed received approximately 22 million rmb approximately 35 million august 2014 final payment sanofi terms settlement resulted recognition promotion services revenue second quarter 2014 approximately 02 million sanofi revenue deferred fourth quarter 2013 remaining approximately 26 million deferred revenue deferred fourth quarter 2013 reversed equivalent writedown accounts receivable contemporaneous writedown accounts receivable deferred revenue impact net income second quarter 2014 year ended december 31 2014 revenues years ended december 31 2014 2013 2012 sanofi approximately 02 million 250 million 308 million respectively june 2013 renewed promotion agreement baxter 5year term december 2017 renewing product distribution agreement pfizer monthtomonth negotiating extended renegotiated agreement july 2014 renewed product distribution agreement pfizer 5year term june 2019 continue assess financial performance products promote agreements overall value within entire portfolio products time anticipate product mix promote change may affect revenues profitability future agreements determined longer beneficial us allowed expire third parties renegotiate renew extend agreements terms acceptable us revenues would adversely affected profitability may adversely beneficially affected hand successful negotiating better terms may positive impact revenues profitability promotion services revenue majority product revenues related china segment total china revenues 1303 million 1226 million 1522 million 97 sales years ended december 31 2014 2013 2012 rest world segment revenues 45 million 44 million 40 million 3 years ended december 31 2014 2013 2012 related sales zadaxin product year ended december 31 2014 sales one customer china accounted approximately 94 revenues year ended december 31 2013 sales two customers china accounted approximately 75 20 revenues prior expiration promotion agreements sanofi year ended december 31 2012 sales three customers china accounted approximately 59 20 12 revenues experience largest customer good anticipate continue sell majority product cost product sales following table summarizes year changes cost product sales thousands cost product sales 230 million year ended december 31 2014 compared 177 million 220 million years ended december 31 2013 2012 respectively increase 53 million 30 decrease 43 million 20 respectively increase 53 million 30 year ended december 31 2014 compared 2013 attributable 20 million increase zadaxin cost product sales related primarily increase zadaxin unit sales 33 million increase aggrastat oncology cost sales result higher sales volume aggrastat certain oncology products cost sales aggrastat product also increased year ended december 31 2014 related provision 16 million excess aggrastat inventory expected expire 02 million associated aggrastat inventory shipped within six months expiration decrease 43 million 20 year ended december 31 2013 compared 2012 attributable 06 million decrease zadaxin cost product sales related decrease zadaxin unit sales 37 million decrease aggrastat oncology cost sales result lower sales volume aggrastat methotrexate product discontinued sales adriamycin daunoblastina zadaxin cost sales 175 million year ended december 31 2014 compared 155 million 162 million years ended december 31 2013 2012 respectively gross margin zadaxin 861 year ended december 31 2014 compared 839 857 years ended december 31 2013 2012 respectively increase gross margin zadaxin year ended december 31 2014 compared year ended december 31 2013 due primarily higher production volume lowering per unit overhead costs manufacturing efficiencies decrease gross margin zadaxin year ended december 31 2013 compared year ended december 31 2012 due primarily costs incurred related planned manufacturing process improvements zadaxin costs incurred product warehousing fees related renewal zadaxin china import license higher overhead costs related lower production volume reduction list price zadaxin since october 2012 expect zadaxin cost product sales gross margins fluctuate period depending level sales price products absorption productrelated fixed costs currency exchange fluctuations charges associated excess expiring finished product inventory timing inventory period costs manufacturing process improvements goal future cost reductions overall expect gross margin percentages 2015 remain comparable 2014 although may fluctuate quarter sales marketing following table summarizes year changes sales marketing expenses thousands sales marketing expenses 485 million 552 million 703 million years ended december 31 2014 2013 2012 respectively decrease 68 million 12 year ended december 31 2014 compared 2013 decrease 151 million 21 year ended december 31 2013 compared 2012 sales marketing expenses decreased years ended december 31 2014 2013 related expiration sanofi distribution agreements reduction costs associated marketing products sanofi agreements result restructuring fourth quarter 2013 connection expiration sanofi distribution agreements expensesaving measures reduced sales force 300 salespersons since 2012 reductions sales marketing expenses years ended december 31 2014 compared 2013 2012 partially offset increases sales marketing efforts zadaxin 2014 anticipate total sales marketing expenses year ending december 31 2015 higher incurred year ended december 31 2014 related growth sales marketing efforts zadaxin research development “rd” following table summarizes year changes rd expenses thousands research development “rd” expenses 146 million 80 million 51 million years ended december 31 2014 2013 2012 respectively years ended december 31 2014 2013 recorded 110 million 50 million respectively research development expenses related upfront costs inlicense arrangements addition years ended december 31 2014 2013 rd expenses included costs incurred related preparation potential sepsis clinical study zadaxin contemplating increase rd year ended december 31 2013 compared 2012 partially offset decreases rd expenses year ended december 31 2013 related announcement march 2012 discontinuation scv07 phase 2b clinical trial delay onset severe oral mucositis based results preplanned interim analysis indicated trial would meet prespecified efficacy endpoints major components rd expenses include salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment licenserelated fees services performed clinical research organizations research institutions outside service providers anticipate research development expenses increase 2015 compared 2014 related potential license fee payments milestone payments expected occur license arrangements related research development activities china general administrative following table summarizes year changes general administrative expenses thousands general administrative expenses 227 million 325 million 213 million years ended december 31 2014 2013 2012 respectively general administrative expenses year ended december 31 2014 decreased 98 million 30 compared year ended december 31 2013 mainly related decrease legal fees associated ongoing government investigation meda pharma gmbh co kg “meda” arbitration corporate matters year ended december 31 2014 general administrative expenses also reflected credits bad debt expense 15 million recovery previously fully reserved substantially delinquent accounts receivable balances particular customer fully reserved prior 2014 general administrative expenses year ended december 31 2013 increased 112 million 52 compared year ended december 31 2012 year ended december 31 2013 recorded additional 24 million bad debt expense related significantly past due accounts receivable customer noted order fully reserve receivables increase bad debt expense determined result continual negotiations indicated accounts receivable balance may recoverable additional increases general administrative expenses year ended december 31 2013 included higher professional expenses approximately 53 million related legal matters associated ongoing government investigation ongoing improvements fcpa compliance efforts approximately 11 million mainly related accounting matters associated restatement consolidated financial statements year ended december 31 2011 certain quarters 2012 2011 matters involving consultation securities exchange commission related one aspect accounting one contracts well higher general administrative personnelrelated costs higher legal costs related general corporate matters expect general administrative expenses 2015 increase compared 2014 related growth business ongoing investigations sec doj unpredictable may result higher legal costs fines penalties could affect expenses timing thereof expect incur significant acquisitionrelated costs 2015 though continue evaluate opportunities china may result increased general administrative expenses future see part item 3 “legal proceedings” restructuring charges restructuring expenses year ended december 31 2014 year ended december 31 2013 recorded 12 million restructuring charges reflect planned reductions china segment related sales force onetime termination benefits approximately 175 employees result nonrenewal sanofi promotion agreement december 31 2013 amounts provided paid 2014 year ended december 31 2012 recorded 11 million restructuring charges related rest world segment reflect reductions staffing following discontinuation company’s scv07 phase 2b clinical trial estimated secdoj investigation loss december 31 2013 determined payment 20 million government penalties fines andor remedies probable accordingly recorded 20 million operating expense quarter ended december 31 2013 reflect estimate probable loss incurred related potential penalties fines andor remedies ongoing investigations sec doj since time monitored developments investigations facts circumstances yet indicated loss probable reasonably estimable could required pay higher lower fines penalties cannot predict outcome investigations timing resolution amortization impairment acquired intangible assets year ended december 31 2012 recognized 26 million amortization acquired intangible assets amortization acquired intangible assets reflects amortization services distribution contract intangible assets acquired part novamed acquisition april 18 2011 year ended december 31 2012 identified impairment indicator respect intangible assets related promotion distribution contract rights determined undiscounted cash flows estimated generated intangible assets less carrying amounts performed discounted cash flow analysis related intangible assets determined full impairment recorded result recognized noncash impairment loss approximately 427 million year ended december 31 2012 amortization expense recorded future periods related novamed intangible assets change fair value contingent consideration part acquisition novamed would required pay additional 430 million earnout payments successful achievement revenue earnings targets 2012 2011 fiscal years “earnout” “contingent consideration” initially recorded 189 million estimated fair value contingent consideration fair value contingent consideration remeasured quarter changes fair value recorded contingent consideration expense gain december 31 2012 fair value earnout determined 0 resulting gain 154 million year ended december 31 2012 significant reduction valuation contingent consideration expense 2012 primarily due revenue ebitda earnings interest depreciation taxes targets achieved reduced probability renewal relating novamed’s product distribution agreements including particular target renewing depakine services agreement sanofi fiveyear term depakine services agreement extended december 31 2013 term less five years income july 8 2013 representatives former stockholders novamed entered “confidential escrow settlement agreement” pursuant retained approximately 08 million cash 342300 shares common stock combined fair value approximately 26 million settlement date result recorded 26 million year ended december 31 2013 income related settlement provision benefit income tax provision benefit income tax relates foreign operations china provision income tax 12 million 22 million years ended december 31 2014 2013 respectively compared benefit 33 million year ended december 31 2012 tax provision decreased 10 million year ended december 31 2014 compared year ended december 31 2013 principally due reduction approximately 02 million liabilities uncertain tax positions associated accrued interest due certain tax years becoming closed assessment due statute limitations tax expense also lower year ended december 31 2014 compared 2013 result lower taxable income related china operations tax benefit decreased 59 million year ended december 31 2013 compared 2012 primarily related reversal deferred tax liabilities due impairment loss 427 million recorded intangible assets partially offset impact recording full valuation allowance novamed deferred tax assets offset tax expense related growth china operations statutory tax rate china 25 2014 2013 2012 statutory tax rate china 25 2015we expect provision income tax increase year ending december 31 2015 compared year ended december 31 2014 due growth china operations recorded us federal state income tax expense years ended december 31 2014 2013 2012 undistributed earnings foreign subsidiaries amounted approximately 1383 million december 31 2014 earnings considered indefinitely reinvested accordingly us income taxes provided thereon december 31 2014 net operating loss carryforwards federal income tax purposes approximately 1103 million expire years 2020 2034 december 31 2014 federal research development orphan drug investment tax credit carryforwards approximately 122 million expire years 2018 2034 “change ownership” provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities liquidity capital resources continue closely manage liquidity capital resources rely operating cash flows cash equivalents shortterm investments provide liquidity requirements continue believe ability meet liquidity needs least next 12 months fund working capital requirements operations including investments business share repurchases fund business development activities following tables summarize cash investments cash flow activities end years presented thousands december 31 2014 862 million cash equivalents investments 788 million located subsidiaries company outside us cash equivalents held subsidiaries outside us held primarily us dollars cash equivalents used fund operating activities foreign subsidiaries investment foreign operations may include inlicensing new products particularly china potential acquisitions december 31 2014 determined remaining 1383 million accumulated undistributed earnings foreign subsidiaries continues indefinitely reinvested outside us making determination following attributes considered expected future needs foreign subsidiaries including working capital debt service capital expenditures well additional investments support infrastructure china subsidiaries ii additional investments support expansion china market well planned business acquisitions andor product licensing transactions iii foreseeable need repatriate additional undistributed earnings fund limited us operations circumstances change becomes apparent undistributed earnings remitted accrue income taxes previously recognized upon distribution earnings may subject us federal state income taxes determination additional tax practicable dependent several future uncertainties including amount us tax losses available net operating losses potentially foreign tax credits available time repatriation based current operating plan anticipate need repatriate cash equivalents held foreign subsidiaries foreseeable future net cash provided operating activities 276 million year ended december 31 2014 primarily reflected net income period adjusted noncash items stockbased compensation expense provisions expiring inventory depreciation amortization expense changes operating assets liabilities december 31 2014 accounts receivable totaling approximately 09 million single customer substantially delinquent actively trying collect recorded reserve 09 million recently entered settlement agreement customer october 2014 collect remaining balance refer note 1 consolidated financial statements appearing part ii item 8 accounts receivable increased 33 million mainly related increase zadaxin sales inventory decreased 59 million mainly related zadaxin inventory sales first half 2014 exceeding purchase levels excluding approximately 29 million pfizer aggrastat inventory yet paid december 31 2014 accounts payable accrued liabilities decreased 59 million mainly related sales marketing manufacturing expense payments made year ended december 31 2014 net cash provided operating activities 95 million year ended december 31 2013 primarily reflected net income period adjusted noncash items stockbased compensation expense depreciation amortization expense noncash escrow share settlement loss maturity availableforsale investments provision losses accounts receivable changes operating assets liabilities accounts receivable increased 40 million related increase zadaxin sales fourth quarter 2013 compared quarter 2012 excess inventory zadaxin channel inventory increased 47 million due completion new manufacturing process processing new batches net cash provided operating activities 435 million year ended december 31 2012 primarily reflected net income period adjusted noncash items intangible asset impairment change fair value contingent consideration stockbased compensation expense depreciation amortization expense changes operating assets liabilities changes included 22 million increase accounts payable mainly related professional manufacturing services 30 million increase accrued liabilities mainly related increases sales marketing tax accruals net cash provided used investing activities 62 million 01 million 12 million years ended december 31 2014 2013 2012 respectively years ended december 31 2014 2013 2012 purchases property equipment 15 million 03 million 11 million respectively addition year ended december 31 2013 received proceeds 04 million sale maturity availableforsale securities net purchases 2012 used 01 million cash purchase availableforsale securities addition part license supply agreement zensun agreed loan 12 million total zensun two separate loan agreements pursuant agreements loaned 475 million zensun second half 2014 lendings described note 6 consolidated financial statements appearing part ii item 8 reflected 62 million net cash used investing activities 2014 proceeds loans used working capital general corporate purposes zensun secure loans zensun pledged entire equity interest subsidiary shanghai dongxin biochemical technology co ltd whose assets include real property spil china net cash used financing activities 208 million 84 million 247 million years ended december 31 2014 2013 2012 respectively years ended december 31 2014 2013 2012 used 244 million 125 million 248 million respectively repurchase retire approximately 38 million 24 million 47 million shares common stock repurchase program years ended december 31 2014 2013 2012 also received 52 million 17 million 35 million proceeds respectively issuances common stock made stock award plans year ended december 31 2013 subsidiary borrowed 06 million repaid 20 million loan agreement shanghai pudong development bank co ltd expired august 29 2013 amounts borrowed repaid expiration date restricted cash used 23 million year ended december 31 2012 secure letter credit related loan agreement released year ended december 31 2013 letter credit cancelled december 2013 subsidiary novamed shanghai entered 100 million rmb revolving line credit facility approximately 16 million usd maximum 150 million rmb loan facility approximately 24 million usd secured accounts receivable shanghai pudong development bank co ltd “credit facility” june 2014 novamed shanghai repaid 100 million rmb approximately 16 million usd credit facility credit facility expired november 30 2014 amounts borrowed repaid expiration date following summarizes future contractual obligations december 31 2014 thousands 1 future minimum rental commitments office space copiers leased noncancelable operating lease arrangements 2 consist purchase obligations manufacturers distributors 3 able reasonably estimate timing payments amount obligations unrecognized tax benefits increase decrease time related balances reflected ”payments due period” section table july 2014 board directors approved increase 15 million company’s stock repurchase program bringing total authorized since program’s inception october 2011 655 million board directors extended program december 31 2015 program repurchased retired 38 million shares cost 244 million year ended december 31 2014 bringing total repurchases since program’s inception approximately 117 million shares cost 652 million december 31 2014 subsequent december 31 2014 board directors approved additional increase 15 million company’s stock repurchase program bringing total authorized 805 million consider several factors determining make share repurchases including among things cash needs availability funding market price stock expect cash provided future operating activities well available cash equivalents shortterm investments sources funding share repurchase program recorded 20 million operating expense fourth quarter 2013 results operations reflect estimate probable loss incurred related potential penalties fines andor remedies ongoing investigations sec doj monitored developments ongoing investigations since time determined adjustments estimated loss warranted however cannot predict outcome secdoj investigations timing resolution actual fines penalties may imposed losses may realized related investigations could materially higher amount recorded could impact cash financing needs license agreements third parties agreed various milestone payments related regulatory commercial success achievements may require substantial payments future anticipate making milestone payment approximately 2 million 2015 related one agreements believe existing cash equivalents investments ongoing revenue generating business operations sufficient support current operating plan least next 12 months extent raise additional capital issuing equity securities stockholders may experience dilution debt financing available may subject us restrictive covenants significant interest costs extent raise additional funds collaboration licensing arrangements would required relinquish rights technologies product candidates marketing territories additional financing collaboration licensing arrangements may available needed either favorable terms intend continue explore alternatives financing provide additional flexibility managing operations inlicensing new products particularly china potential acquisitions may required unavailability inopportune timing financing could prevent delay longterm product development commercialization programs either could hurt business cannot assure funds financings sufficient inlicense additional products need timing amount financing would depend upon numerous factors including status pending regulatory investigations pending litigations level price products timing amount manufacturing costs related products availability complementary products technologies businesses initiation continuation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative parties status competitive products various alternatives financing determined timing structure transaction offbalance sheet arrangements offsheet balance sheet arrangements critical accounting policies significant judgments estimates general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout “management’s discussion analysis financial condition results operations” policies affect reported expected financial results detailed discussion application accounting policies see note 1 “notes consolidated financial statements” part ii item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates judgments base estimates historical experience various marketspecific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition recognize revenue persuasive evidence arrangement exists services rendered delivery occurred price buyer fixed determinable collectability reasonably assured product revenue recognize product revenue selling zadaxin product time delivery sales zadaxin sinopharm affiliates recognized time shipment title product transferred also earn product revenue purchasing medical products pharmaceutical companies selling directly importers distributors sales pfizer products date acquisition novamed october 2012 based “sellthrough” method distribution arrangement products allowed payment terms dependent distributor sold product maintain information timing “sellthrough” pfizer products distributor period therefore applied cash receipts approach application “sellthrough” method reliable information available accordingly period time revenue sales pfizer products recognized receipt cash distributor october 21 2012 amended agreement distributor amendment removed contingent payment terms prior amendment agreement allowed delayed payment based timing sales distributor next tier customer amendment changed payment terms 60 days thus ensuring distributor could withhold payment distributor received payment sale product next tier customer combination revised payment terms together contractual restrictions distributor eg return rights terms may raise question whether taken title assumed “risk loss” permitted revenue recognized “sellin” basis upon amendment therefore october 21 2012 onward used “sellin” method recognition related revenue product sales also recognized “sellin” method medical products delivered importers distributors promotion services revenue recognize promotion services revenue designated medical products delivered distributors specified promotion services contracts marks period marketing promotion services rendered revenue recognition criteria met certain arrangements required return refund portion promotion services fees received interim periods pharmaceutical customers defined annual sales targets achieved agreements customers agreement terminated provided targets met “pro rata” basis date contract termination entitled retain amounts paid due contractual provisions recognized revenue interim periods without reduction amounts subject refund based method 2 accounting standards codification 60520s991 “accounting management fees based formula” revenue reserve generally maintain revenue reserve product returns based estimates amount product returned customers may result expired damaged product delivery price reductions related sales based historical patterns analysis market demand andor percentage sales based industry trends management’s evaluation specific factors may increase risk product returns importing agents distributors contractual rights return except limited terms regarding product quality however expected replace products expired delivery deemed damaged defective delivered calculation product returns reserve requires estimates involves high degree subjectivity judgment result uncertainties involved estimating product returns reserve possibility materially different amounts could reported different conditions using different assumptions december 31 2014 2013 revenue reserves approximately 01 million 0 respectively reserves recorded accrued liabilities consolidated balances sheets evaluate returns reserve quarterly adjust events indicate change estimate appropriate changes estimates could materially affect results operations financial position possible may need adjust estimates future periods accounts receivable reserve record receivable reserve based specific review overdue invoices estimate reserve determined considering existing contractual payment terms payment patterns customers individual customer circumstances age outstanding receivables current customer relationships accounts receivable charged point considered uncollectible december 31 2013 35 million fully reserved accounts receivable one customer one year past due result negotiations customer collected 05 million july 2014 october 2014 subsidiary sciclone pharmaceuticals international china holding ltd “spil china” executed agreement customer providing settlement 19 million remaining outstanding 30 million installments settlement agreement provided customer pay spil china 19 million installment payments made follows 500000 october 31 2014 500000 november 30 2014 400000 may 31 2015 remaining balance 500000 made december 31 2015 terms settlement agreement resulted writeoff 11 million previously fully reserved accounts receivable equivalent chargeoff allowance bad debt impact net income 2014 subsequent agreement provided direct evidence 11 million previously reserved collected future received first second payments terms settlement agreement october december 2014 totaling 10 million gains recovery well 05 million payment received july 2014 recorded reductions general administrative expense year ended december 31 2014 continue maintain full reserve remaining outstanding accounts receivable balance 09 million customer payments received inventories valued lower cost market net realizable value cost determined firstin firstout basis include amounts related materials labor overhead assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels current assumptions future production inventory levels demand change actual market conditions less favorable projected management inventory writedowns may required could negatively impact gross margins results operations obsolete excess items observed alternate uses inventory record writedown net realizable value period impairment first recognized years ended december 31 2014 2013 2012 recorded inventory writedowns 16 million 0 respectively principally related carrying value reductions excess aggrastat product contingent consideration part acquisition novamed would required pay 430 million contingent consideration successful achievement revenue earnings targets 2011 2012 fiscal years december 31 2012 fair value earnout determined 0 fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date quoted prices observable inputs unavailable fair values based internally developed cash flow models classified level 3 valuation hierarchy september 30 2012 estimated fair value contingent consideration using monte carlo simulation model classified level 3 valuation hierarchy inputs used monte carlo simulation model reflected assumptions estimates including riskadjusted discount rate volatility assessment inputs used fair value measurement required judgment affected valuation contingent consideration measured earnout based upon certain financial performance metrics including revenuebased formula adjusted ebitda based formula earnout provisions subject number adjustments acceleration provisions total earnout payments described could increased 100 million exceeding total maximum contingent cash consideration 430 million reduced 100 million depending whether able achieve targets relating product distribution agreements required remeasure contingent consideration reporting period amount payment finalized occurred december 31 2012 change estimated fair value contingent consideration recognized adjustment operating expenses year ended december 31 2012 estimated fair value contingent consideration decreased 154 million primarily related decrease estimated probability achieving revenue ebitda targets reduced probability renewal relating novamed’s product distribution agreements including particular target renewing depakine services agreement sanofi fiveyear term depakine services agreement extended december 31 2013 term less five years goodwill intangible assets account goodwill intangible assets accordance asc topic 805 asc topic 350 intangibles goodwill asc topic 805 requires acquisition method accounting used business combinations specifies criteria must met order intangible assets acquired business combination recognized reported apart goodwill intangible assets goodwill tested impairment least annually whenever events circumstances occur indicate impairment might occurred circumstances suggest carrying value assets may recoverable undiscounted cash flows estimated generated assets less carrying amounts assets accordance asc topic 350 judgment regarding existence impairment indicators based operating results changes manner use acquired assets overall business strategy market economic trends goodwill relates china segment focuses primary pharmaceutical distribution market consisting novamed business legacy china business company represent single reporting unit years ended december 31 2014 2013 2012 tested goodwill impairment quantitatively comparing fair value reporting unit carrying amounts step one twostep impairment test estimated fair value china reporting unit using discounted cash flow model valuation approach considers number factors include limited expected future cash flows growth rates discount rates requires us make certain assumptions estimates regarding industry economic factors future profitability business although believe assumptions reasonable actual results may vary significantly may expose us impairment charges future methodology determining fair value remained consistent periods presented determine carrying value reporting unit exceeds fair value would calculate implied fair value reporting unit goodwill compared carrying value determine appropriate impairment charge completing annual impairment review reporting unit december 31 2014 2013 2012 interim impairment review third quarter 2013 result notification sanofi nonrenewal promotional agreements end terms december 31 2013 concluded goodwill impaired 2014 2013 2012 part acquisition novamed recorded intangible assets related promotion distribution contract rights promotion distribution contracts expire one ten years majority expiring one two years subject renewal extension estimated useful life approximately 135 years although revenues novamed business grew 2012 acquisition april 2011 novamed’s overall revenue growth profitability meet expectations condition considered impairment indicator respect intangible assets related promotion distribution contract rights determined undiscounted cash flows estimated generated intangible assets less carrying amounts performed discounted cash flow analysis related intangible assets recognized noncash impairment loss approximately 427 million year ended december 31 2012 represented entire amount intangible assets loans receivable loans receivable consist two loans one third party see note 6 loans initially recorded continue carried unpaid principal balances “other assets” consolidated balance sheet december 31 2014 carried balances subsequently adjusted payments principal adjustments allowance loan losses account impairment interest income recognized term loans calculated using simpleinterest method loans associated premium discount loans experience impairment interest income would recognized unless likelihood loss remote management considers impairment exist based current information factors payment history value collateral assessment counterparty’s current creditworthiness probable principal interest payments collected according contractual agreements management considers loan payment delinquent received due date management assessed credit worthiness counterparty reviewing available borrower financial information substantiation value pledged security interest course preparing consolidated financial statements management also considered analysis borrower compliant terms loans interest payments timely made december 31 2014 management concluded loans receivable impaired allowance loan losses contingent liabilities record liabilities estimated amounts litigation claims legal actions probable reasonably estimated likelihood material change estimated reserves dependent possible outcome settlement negotiations regulatory judicial review development facts circumstances extended litigation could change claims assessments amount range loss outstanding litigation uncertain disclose footnotes financial statements unable make reasonable estimate material liability could result unfavorable outcomes events occur assess potential liability related pending litigation claims legal actions adjust estimates accordingly december 31 2014 2013 determined payment 20 million government penalties fines andor remedies probable related sec doj ongoing investigations recorded 20 million operating expense quarter ended december 31 2013 reflect estimate probable loss incurred related potential penalties fines andor remedies ongoing investigations sec doj monitored developments ongoing investigations since time determined adjustments estimated loss warranted however cannot predict outcome secdoj investigation timing resolution fines penalties may imposed losses may realized related investigations could vary amount accrued adjustments could materially impact financial statements stockbased compensation record stockbased compensation costs relating sharebased payment transactions including stock options restricted stock units “rsus” employee stock purchase plans stockbased compensation expense stock options employee stock purchase plan estimated date grant based fair value award using blackscholes optionpricing model stockbased compensation expense rsus estimated date grant based number shares granted quoted price company’s common stock grant date stockbased compensation expense values recognized expense straightline basis requisite service period net estimated forfeitures sharebased payment awards ultimately expected vest recognized expense ratably awards vest requisite service period generally one four years stock options rsus three months employee stock purchase plan company estimates prevesting forfeitures time grant analyzing historical data revises estimates subsequent periods actual forfeitures differ estimates total expense recognized vesting period awards ultimately vest optionpricing models require use certain subjective assumptions including expected volatility market price underlying stock expected term award expected volatility based historical volatility stock expected term derived historical data employee exercises terminations review valuation assumptions grant date result valuation assumptions used value stockbased compensation awards granted future periods may change income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse provide valuation allowance deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized realization deferred tax assets dependent upon generation future taxable income timing amount uncertain tax years 19952014 remain open examination major us taxing jurisdictions subject internal revenue service completed examinations 2008 2009 2011 us federal tax returns additional tax assessments proposed adjustments relating taxable income years china income tax returns generally subject examination period five years remain open examination record liabilities related uncertain tax positions accordance guidance clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribing minimum recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return believe uncertain tax positions currently pending material adverse effect consolidated financial statements although adverse resolution one uncertain tax positions period could material impact results operations period restructuring costs necessary record expense estimated costs restructuring activities liability recorded restructuring costs contains uncertainties management required make assumptions apply judgment estimate amounts timing future settlement payments timing payments making assumptions management considers number factors including number employees involved related benefits included restructuring plan historical settlement experience believe reasonable likelihood material change estimates assumptions use calculate restructuring liabilities 0 06 million december 31 2014 2013 respectively however actual results consistent estimates assumptions may exposed losses gains would impact results operations period new accounting standards recently effective accounting standards march 2013 financial accounting standards board “fasb” issued accounting standards update “asu” 201311 “income taxes topic 740 presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists” amendments asu clarify unrecognized tax benefit portion unrecognized tax benefit generally presented financial statements reduction deferred tax asset net operating loss similar tax loss tax credit carryforward certain limited exceptions amendments effective us beginning january 1 2014 applied since first quarter 2014 also retrospectively applied guidance deferred tax unrecognized tax benefit amounts december 31 2013 retrospective application optional required leading reclassifications insignificant amount date adoption asu immaterial impact consolidated deferred tax balances december 31 2014 2013 accounting standards issued yet effective may 2014 fasb issued asu 201409 revenue contracts customers asu 201409 contains new accounting literature relating company recognizes revenue asu 201409 company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services asu 201409 effective fiscal year beginning january 1 2017 early application permitted process determining impact adoption asu 201409 financial statements related disclosures standard permits use either full retrospective modified retrospective transition method yet selected transition method determined effect standard ongoing financial reporting item 7aitem 7management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations read conjunction “selected financial data” consolidated financial statements related notes thereto included elsewhere annual report form 10k management’s discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see “note regarding forwardlooking statements” “risk factors” contained annual report form 10k sciclone pharmaceuticals inc nasdaq scln united states “us”headquartered chinafocused specialty pharmaceutical company substantial commercial business product portfolio therapies oncology infectious diseases cardiovascular disorders focused continuing grow revenue profitability business corporate strategy focused primarily people’s republic china “china” “prc” built solid reputation established strong brand many years experience marketing lead product zadaxin® thymalfasin addition established product promotion business model large pharmaceutical partners focused establishing profitability collaborations believe sales marketing strengths position us benefit longterm expansion pharmaceutical market china chinese pharmaceutical market currently ranks second among global pharmaceutical markets estimated worth 105 billion 2014 forecasted increase significantly 200 billion 2020 seek expand presence china increase revenues growing sales profits current product portfolio launching new products development pipeline adding new profitable product services agreements leveraging strong cash position inlicense additional products operate two segments generally based nature location customers 1 china 2 rest world includes us hong kong operations two categories revenues “product sales revenues” “promotion services revenues” product sales revenues result proprietary inlicensed products including lead product zadaxin dc bead® product embolization malignant hypervascularized tumors initiated sales recorded product revenue beginning third quarter 2015 products pfizer international trading shanghai ltd “pfizer” june 30 2015 product sales revenues also included aggrastat® intervention cardiology product launched china 2009 inlicensed cardiome pharma corp “cardiome” august 2015 cardiome mutually agreed end collaboration aggrastat thereby terminating exclusive distribution rights china returning rights product cardiome recorded aggrastat revenues 18 million 11 million 0 million years ended december 31 2015 2014 2013 respectively expect generate aggrastat revenues anticipate termination agreement adversely affect profitability zadaxin highest margins portfolio premium product sold exclusively sciclone addition anticipate new marketed products introduced increase future revenues profitability pharmaceutical business china coming years “promotion services revenues” result primarily fees receive exclusively promoting products china baxter international inc “baxter” recognize promotion services revenues percentage collaborators’ product sales revenue exclusively promoted products time additional proprietary inlicensed products come market aim shift product mix towards products providing higher margins us zadaxin approved 30 countries may used treatment hbv hcv certain cancers immune system enhancer according local regulatory approvals countries china thymalfasin included treatment guidelines issued ministry health “moh” liver cancer well guidelines treatment chronic hbv issued chinese medical association asianpacific association study liver invasive fungal infections critically ill patients issued chinese medical association sales force focused increasing sales country’s largest hospitals class 3a 500 beds well midsize hospitals class 2a hospitals serve tier 1 tier 2 cities located mostly eastern part china largest generally affluent populations widening market strategies piloting ecommerce approaches reach customers also seeking expand indications zadaxin could used including sepsis initiated sales recorded first product revenue dc bead third quarter fiscal 2015 china food drug administration approved registration dc bead embolization malignant hypervascularized tumors august 2014 dc bead may used treat liver cancer large growing indication china believe oncology sales team academic marketing liaisons established high quality relationships medical professionals institutions specialize cancer treatment believe valuable asset continue commercial sales dc bead biocompatibles uk ltd “btg” sciclone previously entered agreement granting sciclone exclusive licensing distribution rights dc bead china agreement purchasing dc bead product btg also pursuing registration several therapeutic products china include loramyc® mucoadhesive tablet formulation miconazole lauriad treat oropharyngeal candidiasis rapidfilm® oral film formulation ondansetron treat nausea induced chemotherapy agreement baxter 5year term december 2017 agreement pfizer 5year term june 2019 pursuing additional agreements generate additional revenue continue seek inlicensing arrangements welldifferentiated products various stages development yet approved defined regulatory approval pathway china objective inlicense products provide us higher margins augmenting product sales revenue profitability continue explore opportunities optimize promotion services revenues may 2015 theravance biopharma inc “theravance biopharma” granted sciclone exclusive development commercialization rights vibativ® telavancin china well hong kong sar macau sar taiwan vietnam exchange upfront regulatory milestone payments totaling 6 million sciclone responsible aspects development commercialization partnered regions including pre postlaunch activities product registration sciclone initially develop vibativ hospitalacquired bacterial pneumonia ventilatorassociated bacterial pneumonia additional indications may include complicated skin structure infections potentially bacteremia theravance biopharma sell sciclone clinical commercial product required develop commercialize vibativ china licensed territories december 2014 entered strategic partnership medicines company two cardiovascular products china partnership includes agreement granting us license exclusive rights china promote two products including 1 angiomax® bivalirudin injection anticoagulant indicated patients undergoing percutaneous coronary intervention pci provisional use glycoprotein iibiiia inhibitor gpi patients risk heparininduced thrombocytopenia thrombosis syndrome undergoing pci phase 3 registration trial completed china currently review china food drug administration marketing approval 2 cleviprex® clevidipine injectable emulsion thirdgeneration dihydropyridine calcium channel blocker indicated reduction blood pressure oral therapy feasible desirable clinical trial application cta china filed 2013 received cta approval china food drug administration “cfda” early 2016 preparing clinical study terms agreement responsible aspects commercialization including preand postlaunch activities products china market excluding hong kong macao also agreed participate china registration process products financial terms agreement addition net sales royalties payable medicines company include following additional payments medicines company upfront payment made fourth quarter 2014 project support services fee regulatorycommercial success milestone payments aggregate 505 million june 2013 entered license agreement taiwan liposome company “tlc” granted us license exclusive rights china hong kong macao promote market distribute sell proflow® treatment peripheral arterial disease “pad” indications pad serious cardiovascular condition blood flow limbs usually legs restricted due arterial plaque buildup terms agreement tlc responsible continued development including potential clinical trials regulatory activities well manufacture supply proflow responsible aspects commercialization including preand postlaunch activities agreement provides principal terms arrangement sciclone tlc march 2014 companies entered supplemental collaboration license agreement november 2014 tlc notified cfda proflow receive clinical trial approval tlc process appealing decision may 2013 entered framework agreement zensun shanghai science technology co ltd “zensun” exclusive promotion marketing distribution sale neucardintm china hong kong macao neucardin novel firstinclass therapeutic treatment patients intermediate advanced heart failure new drug application “nda” submitted accepted review cfda 2012 december 2013 cfda informed zensun phase 2 data insufficient asked zensun submit new nda ongoing phase 3 study reached endpoints part agreement zensun agreed loan 12 million zensun 12 million loaned december 31 2015 refer note 6 consolidated financial statements appearing part ii item 8 information regarding zensun loans years ended december 31 2015 2014 2013 recognized 75 million 11 million 50 million respectively research development expenses related inlicense arrangements recent governmental policy changes china eliminated national regulation maximum retail drug prices drugs effective june 1 2015 decisions provincial authorities appear emerging primary governmental mechanism price controls example zhejiang provincial authority announced price limitation sales zadaxin province april 2015 became effective may 2015 able mitigate impact price limitation shifting equitable portion burden price reduction distributor sales channel accordingly impact price reduction year ended december 31 2015 28 million anticipate provincial pricing decisions continue significant factor china pharmaceutical market foreseeable future impact decisions future results unpredictable expect pricing pressures revenue 2016 offset least significant part sharing burden china distributor potentially volume increases however future prices could reduced levels significantly would prevail unregulated market may limit growth revenues cause decline addition new contractual arrangement sinopharm holding lingyun biopharmaceutical shanghai co ltd sinopharm china distributor zadaxin commenced january 1 2016 result later recognition relative practices prevailing december 31 2015 portion revenue invoiced sinopharm situations provincial tender price greater relative referenced baseline tender price due mechanism new contractual arrangement whereby customer invoiced lower base price relative prevailing previous agreement lower base price well estimated price compensation payable due distributor situations provincial tender price lower referenced baseline tender price recorded revenue sale completed distributor invoiced portion price may result situations provincial tender price greater referenced baseline tender price later time amount recognized revenue amount agreed distributor although expect new arrangement significant impact annual revenue amount recognized annual basis may impact quarterly revenue amounts timing especially first quarter 2016 previously disclosed since 2010 us securities exchange commission “sec” us department justice “doj” conducting formal investigations us regarding range matters including possibility violations foreign corrupt practices act “fcpa” february 4 2016 announced entered settlement agreement sec fully resolving sec’s investigation possible violations fcpa terms settlement agreement february 2016 paid total 128 million including disgorgement prejudgment interest penalty final settlement released restricted escrow account funded fourth quarter 2015 payment line charges previously recorded disclosed form 10q filed sec august 10 2015 part agreement neither admitted denied engagement wrongdoing agreed give status reports sec next three years continued remediation implementation anticorruption compliance measures doj also completed related investigation declined pursue action refer notes 18 22 consolidated financial statements appearing part ii item 8 “legal proceedings” part item 3 information regarding sec doj investigations believe cash equivalents december 31 2015 ongoing revenue generating business operations sufficient support current operating plan least next 12 months results may fluctuate quarter may report losses future results operations revenues following table summarizes year changes product sales promotion services revenues thousands product sales 1543 million 1320 million 994 million years ended december 31 2015 2014 2013 respectively increase 224 million 17 year ended december 31 2015 compared 2014 primarily attributable increase zadaxin unit sales stronger demand certain oncology products zadaxin sales 1461 million year ended december 31 2015 compared 1261 million prior year increase 200 million 16 mainly related 21 increase volume sold offset partially 5 decrease selling price mainly related decrease list price zadaxin zhejiang province since may 2015 product sales year ended december 31 2015 also included pfizer product sales initial immaterial dc bead revenue increase product sales 326 million 33 year ended december 31 2014 compared 2013 primarily attributable increase zadaxin unit sales stronger demand certain oncology products zadaxin sales 1261 million year ended december 31 2014 compared 963 million prior year increase 298 million 31 mainly related increase volume sold lesser extent related increase selling price believe zadaxin product revenues first half fiscal 2013 adversely affected increase channel inventory experienced third quarter 2012 believe channel inventory zadaxin returned normalized levels anticipate zadaxin revenues 2016 higher 2015 although revenues subject exchange rate fluctuations provincial adjustments tender retail level government approved prices cannot predict majority sales us dollars although portion sales denominated rmb per previous contractual arrangement sinopharm december 31 2015 renewed contractual arrangement sinopharm sole importer distributor zadaxin china took effect january 1 2016 sales zadaxin sinopharm continue denominated us dollars however established importer price may adjusted quarterly based upon exchange rate fluctuations us dollar rmb china zadaxin sales revenues subject exchange rate risk recent months rmb experienced devaluation addition per previous contractual arrangement sinopharm year ended december 31 2015 renewed contractual arrangement sinopharm took effect january 1 2016 contracted sales prices sinopharm subject adjustment based changes tender prices within province territories addition new contractual arrangement sinopharm commenced january 1 2016 result later recognition relative practices prevailing december 31 2015 portion revenue invoiced sinopharm situations provincial tender price greater relative referenced baseline tender price due mechanism new contractual arrangement whereby customer invoiced lower base price relative prevailing previous agreement lower base price well estimated price compensation payable due distributor situations provincial tender price lower referenced baseline tender price recorded revenue sale completed distributor invoiced portion price may result situations provincial tender price greater referenced baseline tender price later time amount recognized revenue amount agreed distributor although expect new arrangement significant impact annual revenue amount recognized annual basis may impact quarterly revenue amounts timing especially first quarter 2016 recent governmental policy changes china eliminated national regulation maximum retail drug prices drugs effective june 1 2015 decisions provincial authorities appear emerging primary governmental mechanism price controls example zhejiang provincial authority announced price limitation sales zadaxin province april 2015 became effective may 2015 changes provincial drug prices zadaxin provinces could impact future sales revenues china pharmaceutical products imported distributed tiered method distribution proprietary product zadaxin manufacture product using us european contract manufacturers generate product sales revenue sales zadaxin product sinopharm acts importer also top “tier” distribution system “tier 1” china zadaxin sales occur sinopharm purchases product us without right return except replacement product event damaged product quality control issues passage title risk loss transferred sinopharm time arrival shipment destination sale sinopharm clears products china import customs sells directly large hospitals holds additional product purchased inventory sale next tier distribution system secondtier “tier 2” distributors responsible sale distribution products purchase importer either sales product directly retail level hospitals pharmacies thirdtier “tier 3” local regional distributors turn sell products hospitals pharmacies promotion services revenue 29 million 28 million 276 million years ended december 31 2015 2014 2013 respectively related products promoted agreements baxter sanofi aventis sa “sanofi” promotion services revenue increased 01 million 4 year ended december 31 2015 compared 2014 related increase endoxantm baxter product sales promotion services revenue decreased 248 million 90 year ended december 31 2014 compared 2013 related expiration promotional agreements sanofi december 31 2013 promotion agreements sanofi consisting individual promotional agreements certain pharmaceutical products supplementary agreements extending terms thereof renewed expired december 31 2013 novamed pharmaceuticals shanghai co ltd “novamed shanghai” sanofi negotiated settlement certain amounts dispute effective july 14 2014 novamed shanghai received approximately 22 million rmb approximately 35 million august 2014 final payment sanofi terms settlement resulted recognition promotion services revenue second quarter 2014 approximately 02 million sanofi revenue deferred fourth quarter 2013 remaining approximately 26 million deferred revenue deferred fourth quarter 2013 reversed equivalent writedown accounts receivable contemporaneous writedown accounts receivable deferred revenue impact net income second quarter 2014 year ended december 31 2014 revenues years ended december 31 2015 2014 2013 sanofi 0 02 million 250 million respectively baxter promotion agreement 5year term december 2017 pfizer product distribution agreement 5year term june 2019 august 2015 cardiome licensed aggrastat® mutually agreed end collaboration aggrastat return rights product cardiome recorded aggrastat revenues 18 million 11 million 0 million years ended december 31 2015 2014 2013 respectively expect generate aggrastat revenues anticipate termination agreement adversely affect profitability continue assess financial performance products promote distribute agreements overall value within entire portfolio products time anticipate product mix promote change may affect revenues profitability future agreements determined longer beneficial us allowed expire third parties renegotiate renew extend agreements terms acceptable us revenues would adversely affected profitability may adversely beneficially affected hand successful negotiating better terms may positive impact revenues profitability promotion services revenue majority product revenues related china segment total china revenues 1516 million 1303 million 1226 million 96 97 sales years ended december 31 2015 2014 2013 respectively rest world segment revenues 57 million 45 million 44 million 4 3 years ended december 31 2015 2014 2013 respectively related sales zadaxin product years ended december 31 2015 2014 sales sinopharm china accounted approximately 97 94 revenues respectively year ended december 31 2013 sales sinopharm sanofi china accounted approximately 75 20 revenues respectively prior expiration promotion agreements sanofi experience largest customer good anticipate continue sell majority product cost product sales following table summarizes year changes cost product sales thousands cost product sales 223 million year ended december 31 2015 compared 230 million year ended december 31 2014 decrease 07 million decrease cost sales 07 million 3 year ended december 31 2015 compared 2014 primarily attributable 29 million decrease cost product sales aggrastat recorded provision 21 million excess aggrastat inventory year ended december 31 2014 didn’t recur year ended december 31 2015 also attributable receipt fourth quarter 2015 11 million reimbursement aggrastat inventory returned previously fully written 2014 recorded reduction cost product sales decreases cost product sales partially offset increases cost product sales related zadaxin certain oncology product sales due increased volume sold cost product sales also increased related initial dc bead sales second half 2015 increase cost sales 53 million 30 year ended december 31 2014 compared 2013 attributable 20 million increase zadaxin cost product sales related primarily increase zadaxin unit sales 33 million increase aggrastat oncology cost sales result higher sales volume aggrastat certain oncology products cost sales aggrastat product also increased year ended december 31 2014 related provision 21 million excess aggrastat inventory expected expire 02 million associated aggrastat inventory shipped within six months expiration zadaxin cost sales 186 million year ended december 31 2015 compared 175 million 155 million years ended december 31 2014 2013 respectively gross margin zadaxin 873 year ended december 31 2015 compared 861 839 years ended december 31 2014 2013 respectively increase gross margin zadaxin years ended december 31 2015 2014 compared year ended december 31 2013 due primarily higher production volume lowering per unit overhead costs manufacturing efficiencies expect zadaxin cost product sales gross margins fluctuate period depending level sales price products absorption productrelated fixed costs currency exchange fluctuations charges associated excess expiring finished product inventory timing inventory period costs manufacturing process improvements goal future cost reductions overall expect gross margin percentages 2016 lower 2015 based lower selling prices set one province indications others follow well unfavorable impact currency exchange fluctuations sales marketing “sm” following table summarizes year changes sales marketing expenses thousands sm expenses 540 million 485 million 552 million years ended december 31 2015 2014 2013 respectively sm expenses increased 55 million 11 year ended december 31 2015 compared 2014 related growth sm efforts zadaxin dc bead sm expenses decreased 68 million 12 year ended december 31 2014 compared 2013 related expiration sanofi distribution agreements reduction costs associated marketing products sanofi agreements reductions sm expenses year ended december 31 2014 compared 2013 partially offset increases sm efforts zadaxin 2014 anticipate total sm expenses year ending december 31 2016 higher incurred year ended december 31 2015 related growth sm efforts zadaxin research development “rd” following table summarizes year changes rd expenses thousands rd expenses 123 million 146 million 80 million years ended december 31 2015 2014 2013 respectively years ended december 31 2015 2014 2013 recorded 75 million 110 million 50 million respectively rd expenses related upfront milestone costs inlicense arrangements addition year ended december 31 2015 rd expenditures included rd expenditures related inlicensing agreements certain business partners rd activities china years ended december 31 2014 2013 rd expenses also included costs incurred related preparation potential sepsis clinical study zadaxin contemplating continued major components rd expenses include salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment licenserelated fees services performed clinical research organizations research institutions outside service providers anticipate rd expenses increase 2016 compared 2015 related potential license fee payments milestone payments expected occur license arrangements related research development activities china general administrative “ga” following table summarizes year changes ga expenses thousands ga expenses 279 million 227 million 325 million years ended december 31 2015 2014 2013 respectively ga expenses year ended december 31 2015 increased 52 million 23 compared year ended december 31 2014 mainly related china legalentity restructuring plan process implementing higher professional consulting fees business development strategy higher stockbased compensation expense lower credits bad debt expense recovery previously written accounts receivable offset lower legal expenses related investigations sec doj lower accounting fees ga expenses year ended december 31 2014 decreased 98 million 30 compared year ended december 31 2013 mainly related decrease legal fees associated government investigations meda pharma gmbh co kg “meda” arbitration corporate matters year ended december 31 2014 ga expenses also reflected credits bad debt expense 15 million recovery previously fully reserved substantially delinquent accounts receivable balances particular customer fully reserved prior 2014 year ended december 31 2013 recorded additional 24 million bad debt expense related significantly past due accounts receivable customer noted order fully reserve receivables increase bad debt expense determined result continual negotiations indicated accounts receivable balance may recoverable additional increases ga expenses year ended december 31 2013 included higher professional expenses approximately 53 million related legal matters associated government investigations ongoing improvements fcpa compliance efforts approximately 11 million mainly related accounting matters associated restatement consolidated financial statements year ended december 31 2011 certain quarters 2012 2011 matters involving consultation securities exchange commission related one aspect accounting one contracts well higher general administrative personnelrelated costs higher legal costs related general corporate matters expect ga expenses 2016 increase compared 2015 related growth business previously disclosed form 8k issued early february 2016 board evaluating range strategic transactions view enhancing shareholder value may incur certain ga expenses connection evaluation restructuring charges year ended december 31 2013 recorded 12 million restructuring charges reflect planned reductions china segment related sales force onetime termination benefits approximately 175 employees result nonrenewal sanofi promotion agreement december 31 2013 amounts provided paid 2014 sec settlement expense recorded charge 20 million fourth quarter 2013 related possibility settlement sec doj regarding investigation possible violations fcpa us recorded additional charges totaling 108 million associated sec settlement 2015 february 2016 entered settlement agreement sec fully resolving sec’s investigation possible violations fcpa terms settlement agreement february 2016 paid 128 million including disgorgement prejudgement interest penalty final settlement part agreement neither admitted denied engagement wrongdoing agreed give status reports sec next three years continued remediation implementation anticorruption compliance measures doj also completed related investigation declined pursue actions refer part item 3 “legal proceedings” part ii item 8 note 18 “contingencies” note 22 “subsequent events” information matter income july 8 2013 representatives former stockholders novamed entered “confidential escrow settlement agreement” pursuant retained approximately 08 million cash 342300 shares common stock combined fair value approximately 26 million settlement date result recorded 26 million year ended december 31 2013 income related settlement provision income tax provision income tax relates foreign operations china provision income tax 08 million 12 million 22 million years ended december 31 2015 2014 2013 respectively tax expense decreased 04 million year ended december 31 2015 compared 2014 mainly related reduction liabilities uncertain tax positions associated accrued interest china due certain tax years becoming closed assessment due statute limitations tax provision decreased 10 million year ended december 31 2014 compared year ended december 31 2013 principally due reduction approximately 02 million liabilities uncertain tax positions associated accrued interest due certain tax years becoming closed assessment due statute limitations tax expense also lower year ended december 31 2014 compared 2013 result lower taxable income related china operations statutory tax rate china 25 2015 2014 2013 expect provision income tax increase year ending december 31 2016 compared year ended december 31 2015 due growth china operations december 31 2015 net operating loss carryforwards us federal income tax purposes approximately 1142 million expire years 2020 2035 approximately 52 million net operating loss carryforwards related novamed shanghai subsidiary expire years 20162020 december 31 2015 us federal research development orphan drug investment tax credit carryforwards approximately 122 million expire years 2018 2035 “change ownership” provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities liquidity capital resources continue closely manage liquidity capital resources rely operating cash flows cash equivalents provide liquidity requirements believe ability meet liquidity needs least next 12 months fund working capital requirements operations including investments business fund business development activities following tables summarize cash investments cash flow activities end years presented thousands december 31 2015 1014 million cash equivalents addition 128 million restricted cash held escrow sec settlement 985 million located subsidiaries company outside us cash equivalents held subsidiaries outside us held primarily us dollars cash equivalents used fund operating activities foreign subsidiaries investment foreign operations may include inlicensing new products particularly china potential acquisitions fourth quarter 2015 repatriated 128 million funds via special dividend distribution foreign subsidiary result need fund escrow facility sec settlement previously described dividend distribution made current year earnings profits foreign subsidiary part cumulative pool undistributed earnings foreign subsidiaries december 31 2014 determined december 31 2015 1762 million accumulated undistributed earnings foreign subsidiaries payment dividend satisfied entirely current year earnings profits continues indefinitely reinvested outside us making determination following attributes considered expected future needs foreign subsidiaries including working capital expenditures well additional investments support infrastructure china subsidiaries ii additional investments support expansion china market well planned product licensing transactions upon distribution foreign undistributed earnings may subject us federal state income taxes based current operating plan anticipate need repatriate undistributed earnings cash equivalents held foreign subsidiaries accumulated december 31 2015 anticipate need repatriate portion future foreign earnings fund us operations accrue us income taxes future foreign earnings anticipate repatriating foreign subsidiaries net cash provided operating activities 325 million year ended december 31 2015 primarily reflected net income period adjusted noncash items stockbased compensation expense provisions doubtful accounts depreciation amortization expense changes operating assets liabilities reserved amount 05 million first quarter 2015 bad debt charge recorded general administrative expense related customer whose receivable balance past due subsequently wrote determined uncollectible fourth quarter 2015 accounts payable accrued liabilities increased 97 million year ended december 31 2015 compared prior year’s period mainly related additional 108 million sec settlement expense recorded operating expense related settlement sec restricted cash escrow sec settlement increased 128 million related 128 million sec settlement amount deposited escrow fourth quarter 2015 net cash provided operating activities 276 million year ended december 31 2014 primarily reflected net income period adjusted noncash items stockbased compensation expense provisions expiring inventory depreciation amortization expense changes operating assets liabilities december 31 2014 accounts receivable totaling approximately 09 million single customer substantially delinquent actively trying collect recorded reserve 09 million entered settlement agreement customer october 2014 collect remaining balance refer note 1 consolidated financial statements appearing part ii item 8 accounts receivable increased 33 million mainly related increase zadaxin sales inventory decreased 59 million mainly related zadaxin inventory sales first half 2014 exceeding purchase levels excluding approximately 29 million pfizer aggrastat inventory yet paid december 31 2014 accounts payable accrued liabilities decreased 59 million mainly related sales marketing manufacturing expense payments made year ended december 31 2014 net cash provided operating activities 95 million year ended december 31 2013 primarily reflected net income period adjusted noncash items stockbased compensation expense depreciation amortization expense noncash escrow share settlement loss maturity availableforsale investments provision losses accounts receivable changes operating assets liabilities accounts receivable increased 40 million related increase zadaxin sales fourth quarter 2013 compared quarter 2012 excess inventory zadaxin channel inventory increased 47 million due completion new manufacturing process processing new batches net cash used provided investing activities 90 million 62 million 01 million years ended december 31 2015 2014 2013 respectively years ended december 31 2015 2014 2013 purchases property equipment 18 million 15 million 03 million respectively addition years ended december 31 2015 2013 received proceeds 01 million 04 million sale maturity shortterm investments availableforsale securities net purchases addition part license supply agreement zensun agreed loan 12 million total zensun two separate loan agreements pursuant agreements loaned 725 million first half 2015 475 million zensun second half 2014 lendings described note 6 consolidated financial statements appearing part ii item 8 reflected 90 million 62 million net cash used investing activities 2015 2014 respectively proceeds loans used working capital general corporate purposes zensun secure loans zensun pledged entire equity interest subsidiary shanghai dongxin biochemical technology co ltd whose assets include real property sciclone pharmaceuticals international china holding ltd “spil china” net cash used financing activities 84 million 208 million 84 million years ended december 31 2015 2014 2013 respectively years ended december 31 2015 2014 2013 used 128 million 244 million 125 million respectively repurchase retire approximately 15 million 38 million 24 million shares common stock repurchase program years ended december 31 2015 2014 2013 also received 44 million 52 million 17 million proceeds respectively issuances common stock made stock award plans year ended december 31 2013 subsidiary borrowed 06 million repaid 20 million loan agreement shanghai pudong development bank co ltd expired august 29 2013 amounts borrowed repaid expiration date restricted cash 23 million released year ended december 31 2013 used secure letter credit related loan agreement december 2013 subsidiary novamed shanghai entered 100 million rmb revolving line credit facility approximately 16 million usd maximum 150 million rmb loan facility approximately 24 million usd secured accounts receivable shanghai pudong development bank co ltd “credit facility” june 2014 novamed shanghai repaid 100 million rmb approximately 16 million usd credit facility credit facility expired november 30 2014 amounts borrowed repaid expiration date following summarizes future contractual obligations december 31 2015 thousands 1 future minimum rental commitments office space copiers leased noncancelable operating lease arrangements 2 consist purchase obligations manufacturers distributors 3 able reasonably estimate timing payments amount obligations unrecognized tax benefits increase decrease time related balances reflected ”payments due period” section table 805 million stock repurchase program repurchased retired 1526306 shares cost 128 million year ended december 31 2015 bringing total repurchases since program’s inception approximately 132 million shares cost 781 million december 31 2015 stock repurchase program expired december 31 2015 currently strategic review board recorded charge 20 million fourth quarter 2013 related possibility settlement sec doj regarding investigation possible violations fcpa us based discussions sec recorded additional 108 million sec settlement operating expense year ended december 31 2015 bringing total loss government penalties fines andor remedies 128 million february 2016 entered settlement agreement sec fully resolving sec’s investigation possible violations fcpa terms agreement february 2016 paid 128 million including disgorgement prejudgement interest penalty restricted escrow account funded fourth quarter 2015 part agreement neither admitted denied engagement wrongdoing agreed give status reports sec next three years continued remediation implementation anticorruption compliance measures doj also completed related investigation declined pursue action refer part item 3 “legal proceedings” part ii item 8 notes 18 22 information matter license agreements third parties agreed various milestone payments related regulatory commercial success achievements may require substantial payments future believe existing cash equivalents ongoing revenue generating business operations sufficient support current operating plan least next 12 months current commitments offer sell securities may offered sold pursuant registration statement extent raise additional capital issuing equity securities stockholders may experience dilution debt financing available may subject us restrictive covenants significant interest costs extent raise additional funds collaboration licensing arrangements would required relinquish rights technologies product candidates marketing territories additional financing collaboration licensing arrangements may available needed either favorable terms intend continue explore alternatives financing provide additional flexibility managing operations inlicensing new products particularly china potential acquisitions may required addition previously disclosed board evaluating range strategic transactions view enhancing stockholder value unavailability inopportune timing financing could prevent delay longterm product development commercialization programs either could hurt business cannot assure funds financings sufficient inlicense additional products need timing amount financing would depend upon numerous factors including status pending regulatory investigations pending litigations level price products timing amount manufacturing costs related products availability complementary products technologies businesses initiation continuation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative parties status competitive products various alternatives financing determined timing structure transaction offbalance sheet arrangements offsheet balance sheet arrangements critical accounting policies significant judgments estimates general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout “management’s discussion analysis financial condition results operations” policies affect reported expected financial results detailed discussion application accounting policies see note 1 “notes consolidated financial statements” part ii item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates judgments base estimates historical experience various marketspecific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition recognize revenue persuasive evidence arrangement exists services rendered delivery occurred price buyer fixed determinable collectability reasonably assured product revenue recognize product revenue selling manufactured zadaxin product time delivery sales zadaxin sinopharm recognized upon arrival shipment destination title risk loss product transferred also earn product revenue purchasing medical products pharmaceutical companies selling directly importers distributors recognize revenue related products based “sellin” method medical products delivered importers distributors payments importing agents distributors contingent upon sale end user importing agents distributors promotion services revenue recognize promotion services revenue designated medical products delivered distributors specified promotion services contracts marks period marketing promotion services rendered revenue recognition criteria met certain arrangements required return refund portion promotion services fees received interim periods pharmaceutical customers defined annual sales targets achieved agreements customers agreement terminated provided targets met “pro rata” basis date contract termination entitled retain amounts paid due contractual provisions recognized revenue interim periods without reduction amounts subject refund based method 2 accounting standards codification 60520s991 “accounting management fees based formula” revenue reserve maintain revenue reserve product returns based estimates amount product returned customers based historical patterns analysis market demand andor percentage sales based industry trends management’s evaluation specific factors may increase risk product returns importing agents distributors contractual rights return except limited terms regarding product quality however expected replace products expired deemed damaged defective delivered calculation product returns reserve requires estimates involves high degree subjectivity judgment result uncertainties involved estimating product returns reserve possibility materially different amounts could reported different conditions using different assumptions december 31 2015 2014 revenue reserves approximately 01 million reserves recorded accrued liabilities consolidated balances sheets evaluate returns reserve quarterly adjust events indicate change estimate appropriate changes estimates could materially affect results operations financial position possible may need adjust estimates future periods accounts receivable reserve record receivable reserve based specific review overdue invoices estimate reserve determined considering existing contractual payment terms payment patterns customers individual customer circumstances age outstanding receivables current customer relationships accounts receivable charged point considered uncollectible december 31 2015 receivable reserve 06 million october 2014 subsidiary spil china executed agreement particular customer providing settlement 30 million receivable balance terms settlement agreement resulted writeoff 11 million previously fully reserved accounts receivable equivalent chargeoff allowance bad debt impact net income 2014 subsequent agreement provided direct evidence 11 million previously reserved collected future remaining 19 million receivable balance 04 million 10 million collected 2015 2014 respectively per terms settlement agreement gains recovery recorded reductions general administrative expense years ended december 31 2015 2014 respectively december 31 2015 balance 05 million remained uncollected customer remained fully reserved recognized 05 million bad debt expense general administrative expense first quarter 2015 related past due receivables another customer due uncertainty regarding collectability customer’s outstanding receivable balance wroteoff 05 million past due accounts receivable customer fourth quarter 2015 uncollectible inventories valued lower cost market net realizable value cost determined firstin firstout basis include amounts related materials labor overhead assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels current assumptions future production inventory levels demand change actual market conditions less favorable projected management inventory writedowns may required could negatively impact gross margins results operations obsolete excess items observed alternate uses inventory record writedown net realizable value period impairment first recognized years ended december 31 2015 2014 2013 recorded inventory writedowns 0 21 million 0 respectively principally related carrying value reductions excess aggrastat product discontinued product remaining inventory zero december 31 2015 goodwill account goodwill accordance asc topic 805 asc topic 350 intangibles goodwill asc topic 805 requires acquisition method accounting used business combinations specifies criteria must met order intangible assets acquired business combination recognized reported apart goodwill tested impairment least annually whenever events circumstances occur indicate impairment might occurred circumstances suggest carrying value assets may recoverable undiscounted cash flows estimated generated assets less carrying amounts assets accordance asc topic 350 judgment regarding existence impairment indicators based operating results changes manner use acquired assets overall business strategy market economic trends goodwill relates china segment focuses primary pharmaceutical distribution market consisting novamed business legacy china business company represent single reporting unit years ended december 31 2015 2014 2013 tested goodwill impairment quantitatively comparing fair value reporting unit carrying amounts step one twostep impairment test estimated fair value china reporting unit using discounted cash flow model valuation approach considers number factors include limited expected future cash flows growth rates discount rates requires us make certain assumptions estimates regarding industry economic factors future profitability business although believe assumptions reasonable actual results may vary significantly may expose us impairment charges future methodology determining fair value remained consistent periods presented determine carrying value reporting unit exceeds fair value would calculate implied fair value reporting unit goodwill compared carrying value determine appropriate impairment charge completing annual impairment review reporting unit december 31 2015 2014 2013 interim impairment review third quarter 2013 result notification sanofi nonrenewal promotional agreements end terms december 31 2013 concluded goodwill impaired 2015 2014 2013 loans receivable loans receivable consist two loans one third party see note 6 loans initially recorded continue carried unpaid principal balances “other assets” consolidated balance sheet december 31 2015 2014 carried balances subsequently adjusted payments principal adjustments allowance loan losses account impairment interest income recognized term loans calculated using simpleinterest method loans associated premium discount loans experience impairment interest income would recognized unless likelihood loss remote management considers impairment exist based current information factors payment history value collateral assessment counterparty’s current creditworthiness probable principal interest payments collected according contractual agreements management considers loan payment delinquent received due date management assessed credit worthiness counterparty reviewing available borrower financial information substantiation value pledged security interest course preparing consolidated financial statements management also considered analysis borrower compliant terms loans interest payments timely made available reliable evidence indicated market value pledged security greater loan receivable balance december 31 2015 2014 management concluded loans receivable impaired allowance loan losses contingent liabilities record liabilities estimated amounts litigation claims legal actions probable reasonably estimated likelihood material change estimated reserves dependent possible outcome settlement negotiations regulatory judicial review development facts circumstances extended litigation could change claims assessments amount range loss outstanding litigation uncertain disclose footnotes financial statements unable make reasonable estimate material liability could result unfavorable outcomes events occur assess potential liability related pending litigation claims legal actions adjust estimates accordingly stockbased compensation record stockbased compensation costs relating sharebased payment transactions including stock options restricted stock units “rsus” performance restricted stock units “psus” employee stock purchase plans “espp” stockbased compensation expense stock options employee stock purchase plan estimated date grant based fair value award using blackscholes optionpricing model stockbased compensation expense rsus psus estimated date grant based number shares granted quoted price company’s common stock grant date stockbased compensation expense values stock options rsus espp plan recognized expense straightline basis requisite service period net estimated forfeitures recognize expense related performance stock options psus implicit service period probable performance goals achieved subsequently determined performance goals probable achievement expense related performance stock options psus reversed sharebased payment awards ultimately expected vest recognized expense ratably awards vest requisite service period generally one four years stock options rsus three months espp estimate prevesting forfeitures time grant analyzing historical data revise estimates subsequent periods actual forfeitures differ estimates total expense recognized vesting period awards ultimately vest optionpricing models require use certain subjective assumptions including expected volatility market price underlying stock expected term award expected volatility based historical volatility stock expected term derived historical data employee exercises terminations review valuation assumptions grant date result valuation assumptions used value stockbased compensation awards granted future periods may change income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse provide valuation allowance deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized realization deferred tax assets dependent upon generation future taxable income timing amount uncertain tax years 19952015 remain open examination major us taxing jurisdictions subject internal revenue service completed examinations 2008 2009 2011 us federal tax returns additional tax assessments proposed adjustments relating taxable income years china income tax returns generally subject examination period five years remain open examination record liabilities related uncertain tax positions accordance guidance clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribing minimum recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return believe uncertain tax positions currently pending material adverse effect consolidated financial statements although adverse resolution one uncertain tax positions period could material impact results operations period restructuring costs necessary record expense estimated costs restructuring activities liability recorded restructuring costs contains uncertainties management required make assumptions apply judgment estimate amounts timing future settlement payments timing payments making assumptions management considers number factors including number employees involved related benefits included restructuring plan historical settlement experience believe reasonable likelihood material change estimates assumptions use calculate restructuring liabilities however actual results consistent estimates assumptions may exposed losses gains would impact results operations period new accounting standards updates may 2014 financial accounting standards board “fasb” issued accounting standards update “asu” 201409 revenue contracts customers “asu 201409” contains new accounting literature relating company recognizes revenue asu 201409 company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services asu 201409 effective fiscal year beginning january 1 2018 reflects one year deferral approved fasb july 2015 early application permitted provided effective date earlier original effective date process determining impact adoption asu 201409 financial statements related disclosures standard permits use either full retrospective modified retrospective transition method yet selected transition method determined effect standard ongoing financial reporting july 2015 fasb issued asu 201511 inventory topic 330 simplifying measurement inventory “asu 201511” applies inventory measured using firstin firstout fifo average cost updated guidance entity measure inventory within scope lower cost net realizable value estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation subsequent measurement unchanged inventory measured using lastin firstout lifo asu effective annual interim periods beginning december 15 2016 applied prospectively early adoption permitted beginning interim annual reporting period evaluated impact adopting guidance concluded likely effect financial statements adjustments already reflect concept net realizable value inventory provisions generally full writedowns affected inventory november 2015 fasb issued asu 201517 balance sheet classification deferred taxes asu amends existing guidance require deferred income tax liabilities assets classified noncurrent classified balance sheet eliminates prior guidance required entity separate deferred tax liabilities assets current amount noncurrent amount classified balance sheet amendments asu effective annual reporting periods beginning december 15 2016 interim periods within annual periods earlier application permitted beginning interim annual period additionally new guidance may applied either prospectively deferred tax liabilities assets retrospectively periods presented yet selected adoption method impact adopting guidance expected material consolidated financial statements given deferred tax amounts february 2016 fasb issued asu 201602 “leases” new guidance lessees required recognize lease liability lease asset leases including operating leases term greater 12 months balance sheet update also expands required quantitative qualitative disclosures surrounding leases update effective fiscal years beginning december 15 2018 interim periods within fiscal years earlier application permitted evaluating impact adoption update consolidated financial statements related disclosures item 7aitem 7management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations read conjunction “selected financial data” consolidated financial statements related notes thereto included elsewhere annual report form 10k management’s discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see “note regarding forwardlooking statements” “risk factors” contained annual report form 10k sciclone pharmaceuticals inc nasdaq scln united states “us”headquartered chinafocused specialty pharmaceutical company substantial commercial business product portfolio therapies oncology infectious diseases cardiovascular disorders focused continuing grow revenue profitability business corporate strategy focused primarily people’s republic china “china” “prc” built solid reputation established strong brand many years experience marketing lead product zadaxin® thymalfasin addition established business model large pharmaceutical partners promote sell products focused establishing profitability collaborations believe sales marketing strengths position us benefit longterm expansion pharmaceutical market china seek expand presence china increase revenues growing sales profits current product portfolio launching new products development pipeline adding new profitable product services agreements leveraging strong cash position inlicense additional products operate two segments generally based nature location customers 1 china 2 rest world includes us hong kong operations two categories revenues “product sales revenues” “promotion services revenues” product sales revenues result proprietary inlicensed products including lead product zadaxin dc bead® product embolization malignant hypervascularized tumors products pfizer international trading shanghai ltd “pfizer” zadaxin highest margins portfolio premium product sold exclusively sciclone “promotion services revenues” result fees receive exclusively promoting oncology cancer supportive care products china baxter international inc “baxter” recognize promotion services revenues percentage collaborator’s product sales revenue exclusively promoted products zadaxin approved 30 countries may used treatment hbv hcv certain cancers immune system enhancer according local regulatory approvals countries china thymalfasin included treatment guidelines issued ministry health “moh” liver cancer well guidelines treatment chronic hbv issued chinese medical association asianpacific association study liver invasive fungal infections critically ill patients issued chinese medical association also seeking expand indications zadaxin could used including sepsis september 26 2016 announced first patient treated clinical trial sepsis using zadaxin china initiated sales recorded first product revenue dc bead third quarter fiscal 2015 china food drug administration approved registration dc bead embolization malignant hypervascularized tumors august 2014 dc bead may used treat liver cancer large growing indication china also pursuing registration loramyc® mucoadhesive tablet formulation miconazole lauriad treat oropharyngeal candidiasis agreement baxter 5year term december 2017 agreement pfizer 5year term june 2019 continue seek inlicensing arrangements welldifferentiated products various stages development yet approved defined regulatory approval pathway china increase revenues profitability license agreements following products licensed drug candidates clinical development include following pt112 september 26 2016 also announced first patient treated phase 1 proofofconcept trial pt112 multitargeted platinumpyrophosphate anticancer agent developed patients advanced solid tumors taiwan pt112 key earlystage asset supporting strategy expand oncology portfolio drive longterm growth obtained 2015 exclusive development commercialization rights phosplatin therapeutics pt112 greater china mainland china hong kong macau vietnam along exclusive option expand territory include south korea taiwan sgx942 september 12 2016 soligenix inc announced entered exclusive license agreement granting rights sciclone develop promote market distribute sell sgx942 dusquetide novel firstinclass therapy developed treatment oral mucositis patients head neck cancer licensing agreement includes people’s republic china hong kong macau taiwan south korea vietnam “territory” exclusive agreement builds existing collaboration provided complete oral mucositis clinical regulatory data library soligenix exchange certain previously undisclosed commercialization rights sgx942 greater china market “2013 exchange” phase 2 results reported soligenix inc showed significant reduction duration severe oral mucositis patients receiving chemoradiation therapy treatment head neck cancer terms agreement transferred cash consideration 3 million soligenix 3529412 shares soligenix common stock expanded rights sgx942 taiwan south korea vietnam previously obtained rights greater china 2013 exchange october 2016 soligenix announced 1 10 reverse stock split resulting company’s ownership 352942 shares addition responsible aspects development product registration commercialization territory access data generated soligenix future pay soligenix royalties net sales soligenix supply commercial drug product us costplus basis maintaining worldwide manufacturing rights vibativ® telavancin may 2015 theravance biopharma inc “theravance biopharma” granted sciclone exclusive development commercialization rights vibativ telavancin china hong kong macao taiwan vietnam exchange upfront regulatory milestone payments totaling 6 million sciclone responsible aspects development commercialization partnered regions including pre postlaunch activities product registration sciclone initially develop vibativ hospitalacquired bacterial pneumonia ventilatorassociated bacterial pneumonia additional indications may include complicated skin structure infections potentially bacteremia theravance biopharma sell sciclone clinical commercial product required develop commercialize vibativ china licensed territories anticipate commencing bridging trial vibativ angiomax® bivalirudin cleviprex® clevidipine december 2014 entered strategic partnership medicines company partnership includes agreement granting us license exclusive rights china promote two cardiovascular products including 1 angiomax bivalirudin injection anticoagulant indicated patients undergoing percutaneous coronary intervention pci provisional use glycoprotein iibiiia inhibitor gpi patients risk heparininduced thrombocytopenia thrombosis syndrome undergoing pci phase 3 registration trial completed china received clinical trial application “cta” approval clinical trial waiver china food drug administration “cfda” december 2016 process preparing new drug application “nda” 2 cleviprex clevidipine injectable emulsion thirdgeneration dihydropyridine calcium channel blocker indicated reduction blood pressure oral therapy feasible desirable cta china filed 2013 received cta approval cfda early 2016 preparing clinical study chiesi usa inc parent company chiesi farmaceutici spa “chiesi” acquired rights cleviprex june 2016 medicines company sciclone working together chiesi medicines company progress cleviprex clinical study going forward terms agreement apply chiesi cleviprex responsible aspects commercialization including preand postlaunch activities products cleviprex angiomax china market excluding hong kong macao also agreed participate china registration process products financial terms agreements two products addition net sales royalties payable medicines company andor chiesi include following additional payments medicines company andor chiesi upfront payment made fourth quarter 2014 project support services fee regulatorycommercial success milestone payments aggregate 505 million neucardintm may 2013 entered framework agreement zensun shanghai science technology co ltd “zensun” exclusive promotion marketing distribution sale neucardin china hong kong macao neucardin novel firstinclass therapeutic treatment patients intermediate advanced heart failure nda submitted accepted review cfda 2012 december 2013 cfda informed zensun phase 2 data insufficient asked zensun submit new nda ongoing phase 3 study reached endpoints part agreement zensun agreed loan 12 million zensun 12 million loaned december 31 2016 refer note 6 consolidated financial statements appearing part ii item 8 information regarding zensun loans abtl0812 license agreement ability pharmaceuticals sl grants us license exclusive rights develop manufacture commercialize abtl0812 china macau hong kong taiwan vietnam abtl0812 firstinclass p13kaktmtor signaling pathway inhibitor solid tumors important regulating cell cycle currently preparing phase 1 proofofconcept trial taiwan mainland china governmental policy changes china governmental policy changes china eliminated national regulation maximum retail drug prices drugs effective june 1 2015 decisions provincial authorities appear emerging primary governmental mechanism price controls example zhejiang provincial authority announced price limitation sales zadaxin province april 2015 became effective may 2015 able mitigate impact price limitation shifting equitable portion burden price reduction distributor sales channel accordingly impact price reduction year ended december 31 2015 28 million new contractual arrangement sinopharm effective january 1 2016 lower tender price reflected lower base invoice price sinopharm described following section “results operations revenues” anticipate provincial pricing decisions continue significant factor china pharmaceutical market foreseeable future impact decisions future results unpredictable expect pricing pressures revenue 2017 offset least significant part sharing burden china distributor potentially volume increases however future prices could reduced levels significantly would prevail unregulated market may limit growth revenues cause decline believe cash equivalents december 31 2016 ongoing revenue generating business operations sufficient support current operating plan least next 12 months results may fluctuate quarter may report losses future results operations revenues following table summarizes year changes product sales promotion services revenues thousands ﻿ product sales 1559 million 1543 million 1320 million years ended december 31 2016 2015 2014 respectively increase 16 million 1 year ended december 31 2016 compared 2015 primarily attributable increase zadaxin unit sales stronger demand certain oncology products zadaxin sales 1501 million year ended december 31 2016 compared 1461 million 2015 increase 40 million 3 mainly related 13 increase volume sold offset partially 10 decrease revenue realized primarily result unfavorable exchange rate impact oncology product sales increased 03 million year ended december 31 2016 compared corresponding period 2015 related greater market penetration aggrastat® product sales zero 18 million years ended december 31 2016 2015 respectively due termination agreement cardiome discussed product sales year ended december 31 2015 also included initial immaterial dc bead revenue increase product sales 224 million 17 year ended december 31 2015 compared 2014 primarily attributable increase zadaxin unit sales stronger demand certain oncology products zadaxin sales 1461 million year ended december 31 2015 compared 1261 million prior year increase 200 million 16 mainly related 21 increase volume sold offset partially 5 decrease selling price mainly related decrease list price zadaxin zhejiang province since may 2015 product sales year ended december 31 2015 also increased compared 2014 related pfizer product sales initial immaterial dc bead revenue aggrastat product sales june 30 2015 product sales revenues included aggrastat intervention cardiology product launched china 2009 inlicensed cardiome pharma corp “cardiome” august 2015 cardiome mutually agreed end collaboration aggrastat thereby terminating exclusive distribution rights china returning rights product cardiome recorded aggrastat revenues 18 million 11 million years ended december 31 2015 2014 respectively none thereafter expect generate aggrastat revenues new contractual arrangement sinopharm commenced january 1 2016 resulting later recognition relative practices prevailing december 31 2015 portion revenue invoiced sinopharm situations provincial tender price greater relative reference baseline tender price due price adjustment mechanism new contractual arrangement whereby sinopharm invoiced lower base price relative prevailing previous agreement lower base price reduced estimated price compensation payable distributor situations provincial tender price lower reference baseline tender price recorded revenue time sale completed arrived destination presently provinces tender prices reference baseline tender price therefore price compensation payable situations sinopharm invoiced portion price may result situations provincial tender price greater reference baseline tender price later time amount recognized revenue amount agreed upon although expect new arrangement significant impact annual revenue amount recognized annual basis may continue impact current future quarterly revenue amounts timing example price compensation receivable due us sinopharm abovereference tender price provinces products originally sold first quarter 2016 recognized third quarter 2016 amount price compensation receivable products originally sold second third quarters 2016 recognized fourth quarter 2016 expect price compensation receivable due us sinopharm abovereference tender price provinces quarter recognized onetotwo quarter delayed basis relative originating sales quarter going forward per previous contractual arrangement sinopharm december 31 2015 aforementioned renewed contractual arrangement sinopharm sole importer distributor zadaxin china took effect january 1 2016 sales zadaxin sinopharm denominated us dollars june 30 2016 however established importer price adjusted quarterly based upon exchange rate fluctuations us dollar rmb effective july 1 2016 sales zadaxin sinopharm denominated rmb going forward china zadaxin sales revenues prior adjustment mechanism operated lag basis future invoiced directly rmb subject exchange rate risk recent months rmb experienced devaluation anticipate zadaxin revenues 2017 higher 2016 although revenues subject exchange rate fluctuations provincial adjustments tender retail level government approved prices cannot predict recent governmental policy changes china eliminated national regulation maximum retail drug prices drugs effective june 1 2015 decisions provincial authorities appear emerging primary governmental mechanism price controls example zhejiang provincial authority announced price limitation sales zadaxin province april 2015 became effective may 2015 changes provincial drug prices zadaxin provinces could impact future sales revenues china pharmaceutical products imported distributed tiered method distribution proprietary product zadaxin manufacture product using us european contract manufacturers generate product sales revenue sales zadaxin product sinopharm acts importer also top “tier” distribution system “tier 1” china zadaxin sales occur sinopharm purchases product us without right return except replacement product event damaged product quality control issues passage title risk loss transferred sinopharm time arrival shipment destination sale sinopharm clears products china import customs sells directly large hospitals holds additional product purchased inventory sale next tier distribution system secondtier “tier 2” distributors responsible sale distribution products purchase importer either sales product directly retail level hospitals pharmacies thirdtier “tier 3” local regional distributors turn sell products hospitals pharmacies promotion services revenue 42 million 29 million 28 million years ended december 31 2016 2015 2014 respectively related products promoted agreements baxter promotion services revenue increased 13 million 42 year ended december 31 2016 compared 2015 mainly related increase endoxantm holoxantm sales promotion services revenue increased 01 million 4 year ended december 31 2015 compared 2014 related increase endoxan sales continue assess financial performance products promote distribute agreements overall value within entire portfolio products time anticipate product mix promote change may affect revenues profitability future agreements determined longer beneficial us allowed expire third parties renegotiate renew extend agreements terms acceptable us revenues would adversely affected profitability may adversely beneficially affected hand successful negotiating better terms may positive impact revenues profitability promotion services revenue majority product revenues relate china segment total china revenues 1526 million 1516 million 1303 million 95 96 97 sales years ended december 31 2016 2015 2014 respectively rest world segment revenues 75 million 57 million 45 million 5 4 3 years ended december 31 2016 2015 2014 respectively related sales zadaxin product years ended december 31 2016 2015 2014 sales sinopharm china accounted approximately 93 97 94 revenues respectively experience largest customer good anticipate continue sell majority product cost product sales following table summarizes year changes cost product sales thousands ﻿ cost product sales 229 million year ended december 31 2016 compared 223 million year ended december 31 2015 increase 06 million increase cost sales 06 million 2 year ended december 31 2016 compared 2015 primarily attributable increase volume sales zadaxin cost product sales 223 million year ended december 31 2015 compared 230 million year ended december 31 2014 decrease 07 million decrease cost sales 07 million 3 year ended december 31 2015 compared 2014 primarily attributable 29 million decrease cost product sales aggrastat recorded provision 21 million excess aggrastat inventory year ended december 31 2014 didn’t recur year ended december 31 2015 also attributable receipt fourth quarter 2015 11 million reimbursement aggrastat inventory returned previously fully written 2014 recorded reduction cost product sales decreases cost product sales partially offset increases cost product sales related zadaxin certain oncology product sales due increased volume sold cost product sales also increased related initial dc bead sales second half 2015 expect zadaxin cost product sales gross margins fluctuate period depending level sales price products absorption productrelated fixed costs currency exchange fluctuations charges associated excess expiring finished product inventory timing inventory period costs manufacturing process improvements goal future cost reductions overall expect gross margin percentages 2017 lower 2016 based lower selling prices certain provinces indications others follow well unfavorable impact currency exchange fluctuations sales marketing “sm” following table summarizes year changes sales marketing expenses thousands ﻿ sm expenses 547 million 540 million 485 million years ended december 31 2016 2015 2014 respectively sm expenses increased 07 million 1 year ended december 31 2016 compared 2015 related growth sm efforts zadaxin including sales force efforts increasing sales china’s largest hospitals well midsized hospitals related postmarketing clinical trial expenses sm expenses increased 55 million 11 year ended december 31 2015 compared 2014 related growth sm efforts zadaxin launch costs related dc bead anticipate total sm expenses year ending december 31 2017 higher incurred year ended december 31 2016 related growth sm efforts zadaxin products including higher postmarketing clinical trial expenses higher expenses related ecommerce strategies widen market research development “rd” following table summarizes year changes rd expenses thousands ﻿ rd expenses 151 million 123 million 146 million years ended december 31 2016 2015 2014 respectively years ended december 31 2016 2015 2014 recorded 45 million 75 million 110 million respectively rd expenses related upfront milestone costs inlicense arrangements remaining 58 million increase rd expense year ended december 31 2016 compared 2015 related increased clinical preclinical activities certain licensors remaining 12 million increase rd expense year ended december 31 2015 compared 2014 related hiring additional rd personnel increase clinical preclinical activities certain licensors major components rd expenses include salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment licenserelated fees services performed clinical research organizations research institutions outside service providers anticipate rd expenses increase 2017 compared 2016 related potential license fee payments milestone payments expected occur license arrangements related research development activities china general administrative “ga” following table summarizes year changes ga expenses thousands ﻿ ga expenses 342 million 279 million 227 million years ended december 31 2016 2015 2014 respectively ga expenses year ended december 31 2016 increased 63 million 23 compared year ended december 31 2015 related increased costs company’s strategic review maximize stockholder value higher transaction losses related sales zadaxin sinopharm denominated rmb since july 1 2016 higher stockbased compensation expense ga expenses year ended december 31 2015 increased 52 million 23 compared year ended december 31 2014 mainly related china legalentity restructuring plan higher professional consulting fees business development strategy higher stockbased compensation expense lower credits bad debt expense recovery previously written accounts receivable offset lower legal expenses related investigations sec doj lower accounting fees expect ga expenses 2017 increase compared 2016 related growth business sec settlement expense recorded charge 20 million fourth quarter 2013 related possibility settlement sec doj regarding investigation possible violations fcpa us recorded additional charges totaling 108 million associated sec settlement 2015 february 2016 entered settlement agreement sec fully resolving sec’s investigation possible violations fcpa terms settlement agreement february 2016 paid 128 million including disgorgement prejudgement interest penalty final settlement part agreement neither admitted denied engagement wrongdoing agreed give status reports sec next three years continued remediation implementation anticorruption compliance measures doj also completed related investigation declined pursue actions refer part ii item 8 note 15 “contingencies” information matter provision income tax provision income tax relates foreign operations china provision income tax 34 million 08 million 12 million years ended december 31 2016 2015 2014 respectively tax expense increased 26 million year ended december 31 2016 compared 2015 year ended december 31 2016 tax provision included 13 million additional tax expense representing correction error related previously unrecognized liability uncertain tax positions china refer also note 1 “error correction” appearing part ii item 8 within footnotes consolidated financial statements contained elsewhere report addition tax provision year ended december 31 2016 higher relative prior year result higher sales marketing activities china business tax expense decreased 04 million year ended december 31 2015 compared 2014 mainly related reduction liabilities uncertain tax positions associated accrued interest china due certain tax years becoming closed assessment due statute limitations statutory tax rate china 25 2016 2015 2014 expect provision income tax decrease year ending december 31 2017 compared year ended december 31 2016 result tax expense uncertain tax positions recorded 2016 expect recur 2017 december 31 2016 net operating loss carryforwards us federal income tax purposes approximately 1129 million expire years 2020 2035 approximately rmb 408 million net operating loss carryforwards related novamed shanghai subsidiary expire years 2019 2021 december 31 2016 us federal research development orphan drug investment tax credit carryforwards approximately 123 million expire years 2018 2036 “change ownership” provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities liquidity capital resources continue closely manage liquidity capital resources rely operating cash flows cash equivalents provide liquidity requirements believe ability meet liquidity needs least next 12 months fund working capital requirements operations including investments business fund business development activities following tables summarize cash equivalents cash flow activities end years presented thousands ﻿ ﻿ ﻿ december 31 2016 1344 million cash equivalents 1248 million located subsidiaries company outside us cash equivalents held subsidiaries outside us held primarily us dollars cash equivalents used fund operating activities foreign subsidiaries investment foreign operations may include inlicensing new products particularly china potential acquisitions 2016 2015 repatriated 10 million 128 million respectively funds via special dividend distributions foreign subsidiary result need fund us operations fund escrow facility sec settlement previously described respectively dividend distributions made respective current year earnings years profits foreign subsidiary part cumulative pools undistributed earnings foreign subsidiaries december 31 2016 2015 ﻿ determined december 31 2016 211 million accumulated undistributed earnings foreign subsidiaries payment 2016 dividend amount 10 million 2015 dividend amount 128 million satisfied entirely respective years’ current earnings profits continues indefinitely reinvested outside us making determination following attributes considered expected future needs foreign subsidiaries including working capital expenditures well additional investments support infrastructure china subsidiaries ii additional investments support expansion china market well planned product licensing transactions upon distribution foreign undistributed earnings may subject us federal state income taxes based current operating plan anticipate need repatriate undistributed earnings accumulated december 31 2016 anticipate need repatriate portion future foreign earnings fund us operations current expectation amounts repatriated supplement parent company’s liquidity offset taxdeductible expenses available tax benefits accumulated net operating losses accrue us income taxes future foreign earnings anticipate repatriating foreign subsidiaries ﻿ net cash provided operating activities 345 million year ended december 31 2016 primarily reflected net income period adjusted noncash items stockbased compensation expense depreciation amortization expense deferred income taxes unrealized loss measurement monetary asset changes operating assets liabilities accounts receivable inventory levels increased year ended december 31 2016 related higher sales volume higher finished goods inventory net cash provided operating activities 325 million year ended december 31 2015 primarily reflected net income period adjusted noncash items stockbased compensation expense provisions doubtful accounts depreciation amortization expense changes operating assets liabilities reserved amount 05 million first quarter 2015 bad debt charge recorded general administrative expense related customer whose receivable balance past due subsequently wrote determined uncollectible fourth quarter 2015 accounts payable accrued liabilities increased 97 million year ended december 31 2015 compared prior year’s period mainly related additional 108 million sec settlement expense recorded operating expense related settlement sec restricted cash escrow sec settlement increased 128 million related 128 million sec settlement amount deposited escrow fourth quarter 2015 net cash provided operating activities 276 million year ended december 31 2014 primarily reflected net income period adjusted noncash items stockbased compensation expense provisions expiring inventory depreciation amortization expense changes operating assets liabilities december 31 2014 accounts receivable totaling approximately 09 million single customer substantially delinquent actively trying collect recorded reserve 09 million entered settlement agreement customer october 2014 collect remaining balance refer note 1 consolidated financial statements appearing part ii item 8 accounts receivable increased 33 million mainly related increase zadaxin sales inventory decreased 59 million mainly related zadaxin inventory sales first half 2014 exceeding purchase levels excluding approximately 29 million pfizer aggrastat inventory yet paid december 31 2014 accounts payable accrued liabilities decreased 59 million mainly related sales marketing manufacturing expense payments made year ended december 31 2014 net cash used investing activities 34 million 90 million 62 million years ended december 31 2016 2015 2014 respectively discussed note 5 notes consolidated financial statements appearing part ii item 8 september 9 2016 soligenix entered exclusive license agreement “license agreement” pursuant soligenix granted rights company develop promote market distribute sell sgx9412 people’s republic china hong kong macau taiwan south korea vietnam connection execution license agreement entered common stock purchase agreement soligenix pursuant bought 3529412 shares soligenix common stock 27 million october 2016 soligenix declared 1 10 reverse stock split converting soligenix ownership 3529412 shares 352942 shares years ended december 31 2016 2015 2014 purchases property equipment 06 million 18 million 15 million respectively addition years ended december 31 2015 received proceeds 01 million sale maturity shortterm investments availableforsale securities addition part license supply agreement zensun agreed loan 12 million total zensun two separate loan agreements pursuant agreements loaned 725 million first half 2015 475 million zensun second half 2014 lendings described note 6 consolidated financial statements appearing part ii item 8 reflected 90 million 62 million net cash used investing activities 2015 2014 respectively proceeds loans used working capital general corporate purposes zensun secure loans zensun pledged entire equity interest subsidiary shanghai dongxin biochemical technology co ltd whose assets include real property sciclone pharmaceuticals international china holding ltd “spil china” net cash provided used financing activities 19 million 84 million 208 million years ended december 31 2016 2015 2014 respectively years ended december 31 2016 2015 2014 received 19 million 44 million 52 million proceeds respectively issuances common stock made stock award plans years ended december 31 2016 2015 2014 used 128 million 244 million respectively repurchase retire approximately 15 million 38 million shares common stock repurchase program december 2013 subsidiary novamed shanghai entered 100 million rmb revolving line credit facility approximately 16 million usd maximum 150 million rmb loan facility approximately 24 million usd secured accounts receivable shanghai pudong development bank co ltd “credit facility” june 2014 novamed shanghai repaid 100 million rmb approximately 16 million usd credit facility credit facility expired november 30 2014 amounts borrowed repaid expiration date following summarizes future contractual obligations december 31 2016 thousands ﻿ ﻿ ﻿ 1 future minimum rental commitments office space copiers leased noncancelable operating lease arrangements 2 consist purchase obligations manufacturers distributors 3 able reasonably estimate timing payments amount obligations unrecognized tax benefits increase decrease time related balances reflected ”payments due period” section table license agreements third parties agreed various milestone payments related regulatory commercial success achievements may require substantial payments future believe existing cash equivalents ongoing revenue generating business operations sufficient support current operating plan least next 12 months issuance financial statements current commitments offer sell securities may offered sold pursuant registration statement extent raise additional capital issuing equity securities stockholders may experience dilution debt financing available may subject us restrictive covenants significant interest costs extent raise additional funds collaboration licensing arrangements would required relinquish rights technologies product candidates marketing territories additional financing collaboration licensing arrangements may available needed either favorable terms intend continue explore alternatives financing provide additional flexibility managing operations inlicensing new products particularly china potential acquisitions may required addition previously disclosed board evaluating range strategic transactions view enhancing stockholder value unavailability inopportune timing financing could prevent delay longterm product development commercialization programs either could hurt business cannot assure funds financings sufficient inlicense additional products need timing amount financing would depend upon numerous factors including status pending regulatory investigations pending litigations level price products timing amount manufacturing costs related products availability complementary products technologies businesses initiation continuation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative parties status competitive products various alternatives financing determined timing structure transaction offbalance sheet arrangements offbalance sheet arrangements critical accounting policies significant judgments estimates general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout “management’s discussion analysis financial condition results operations” policies affect reported expected financial results detailed discussion application accounting policies see note 1 “notes consolidated financial statements” part ii item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united states require us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates judgments base estimates historical experience various marketspecific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition recognize revenue persuasive evidence arrangement exists services rendered delivery occurred price buyer fixed determinable collectability reasonably assured product revenue recognize product revenue selling manufactured zadaxin product time delivery sales zadaxin sinopharm recognized upon arrival shipment destination marks point title risk loss product transferred also earn product revenue purchasing medical products pharmaceutical companies selling directly importers distributors recognize revenue related products based “sellin” method medical products delivered importers distributors payments importing agents distributors contingent upon sale end user importing agents distributors effective january 1 2016 new contractual arrangement china importer distributor zadaxin sinopharm resulting later recognition relative practices prevailing old contractual arrangement december 31 2015 portion revenue due sinopharm related situations provincial tender price greater relative reference baseline tender price tender price ultimate retail end price approved provincial authorities price mechanism new contractual arrangement whereby sinopharm invoiced lower base price relative prevailing previous agreement lower base price reduced estimated price compensation payable sinopharm situations provincial tender price lower reference baseline tender price recorded revenue time sale completed upon arrival destination date situations provincial tender price less reference baseline tender price sinopharm invoiced portion price results situations provincial tender price greater reference baseline tender price later time amount recognized revenue amount agreed expected price compensation due us related sales quarter price adjustment mechanism provinces tender prices reference baseline tender price recognized rolling onetotwo quarter delayed basis relative originating sales quarter promotion services revenue recognize promotion services revenue designated medical products delivered distributors specified promotion services contracts marks period marketing promotion services rendered revenue recognition criteria met revenue reserve maintain revenue reserve product returns based estimates amount product returned customers based historical patterns analysis market demand andor percentage sales based industry trends management’s evaluation specific factors may increase risk product returns importing agents distributors contractual rights return except limited terms regarding product quality however expected replace products expired deemed damaged defective delivered calculation product returns reserve requires estimates involves high degree subjectivity judgment result uncertainties involved estimating product returns reserve possibility materially different amounts could reported different conditions using different assumptions december 31 2016 2015 revenue reserves approximately 03 million 01 million respectively reserves recorded accrued liabilities consolidated balances sheet evaluate returns reserve quarterly adjust events indicate change estimate appropriate changes estimates could materially affect results operations financial position possible may need adjust estimates future periods accounts receivable reserve record receivable reserve based specific review overdue invoices estimate reserve determined considering existing contractual payment terms payment patterns customers individual customer circumstances age outstanding receivables current customer relationships accounts receivable charged point considered uncollectible december 31 2016 determined receivable reserve needed december 31 2015 receivable reserve 06 million october 2014 subsidiary spil china executed agreement particular customer providing settlement 30 million receivable balance terms settlement agreement resulted writeoff 11 million previously fully reserved accounts receivable equivalent chargeoff allowance bad debt impact net income 2014 subsequent agreement provided direct evidence 11 million previously reserved collected future remaining 19 million receivable balance 05 million 04 million 10 million collected 2016 2015 2014 respectively per terms settlement agreement gains recovery recorded reductions general administrative expense years ended december 31 2016 2015 2014 respectively recognized 05 million bad debt expense general administrative expense first quarter 2015 related past due receivables another customer due uncertainty regarding collectability customer’s outstanding receivable balance wroteoff 05 million past due accounts receivable customer fourth quarter 2015 uncollectible inventories valued lower cost market net realizable value cost determined firstin firstout basis include amounts related materials labor overhead assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels current assumptions future production inventory levels demand change actual market conditions less favorable projected management inventory writedowns may required could negatively impact gross margins results operations obsolete excess items observed alternate uses inventory record writedown net realizable value period impairment first recognized years ended december 31 2016 2015 2014 recorded inventory writedowns 34000 0 21 million respectively principally related carrying value reductions excess aggrastat product year 2014 discontinued product remaining aggrastat inventory zero december 31 2016 goodwill account goodwill accordance asc topic 805 asc topic 350 intangibles goodwill asc topic 805 requires acquisition method accounting used business combinations specifies criteria must met order intangible assets acquired business combination recognized reported apart goodwill tested impairment least annually whenever events circumstances occur indicate impairment might occurred circumstances suggest carrying value assets may recoverable undiscounted cash flows estimated generated assets less carrying amounts assets accordance asc topic 350 judgment regarding existence impairment indicators based operating results changes manner use acquired assets overall business strategy market economic trends goodwill relates china segment focuses primary pharmaceutical distribution market consisting novamed pharmaceuticals inc “novamed” business legacy china business company represent single reporting unit years ended december 31 2016 2015 2014 tested goodwill impairment quantitatively comparing fair value reporting unit carrying amounts step one twostep impairment test estimated fair value china reporting unit using discounted cash flow model valuation approach considers number factors include limited expected future cash flows growth rates discount rates requires us make certain assumptions estimates regarding industry economic factors future profitability business although believe assumptions reasonable actual results may vary significantly may expose us impairment charges future methodology determining fair value remained consistent periods presented determine carrying value reporting unit exceeds fair value would calculate implied fair value reporting unit goodwill compared carrying value determine appropriate impairment charge completing annual impairment review reporting unit december 31 2016 2015 2014 concluded goodwill impaired 2016 2015 2014 investments record unrealized gains losses availableforsale equity investments comprehensive income loss realized gains losses declines value judged otherthan temporary availableforsale equity investments included earnings availableforsale equity investments evaluated impairment reporting period investment considered impaired fair value investment less cost consideration available evidence evaluate realizable value investment impairment determined otherthantemporary impairment loss recognized consolidated statement operations determine impairment otherthan temporary inability recover carrying value investment loans receivable loans receivable consist two loans one third party see note 6 consolidated financial statements appearing part ii item 8 loans initially recorded continue carried unpaid principal balances “other assets” consolidated balance sheet december 31 2016 2015 carried balances subsequently adjusted payments principal adjustments allowance loan losses account impairment interest income recognized term loans calculated using simpleinterest method loans associated premium discount loans experience impairment interest income would recognized unless likelihood loss remote management considers impairment exist based current information factors payment history value collateral assessment counterparty’s current creditworthiness probable principal interest payments collected according contractual agreements management considers loan payment delinquent received due date management assessed credit worthiness counterparty reviewing available borrower financial information substantiation value pledged security interest course preparing consolidated financial statements management also considered analysis borrower compliant terms loans interest payments timely made available reliable evidence indicated market value pledged security greater loan receivable balance december 31 2016 2015 management concluded loans receivable impaired allowance loan losses contingent liabilities record liabilities estimated amounts litigation claims legal actions probable reasonably estimated likelihood material change estimated reserves dependent possible outcome settlement negotiations regulatory judicial review development facts circumstances extended litigation could change claims assessments amount range loss outstanding litigation uncertain disclose footnotes financial statements unable make reasonable estimate material liability could result unfavorable outcomes events occur assess potential liability related pending litigation claims legal actions adjust estimates accordingly stockbased compensation record stockbased compensation costs relating sharebased payment transactions including stock options restricted stock units “rsus” performance restricted stock units “psus” employee stock purchase plans “espp” stockbased compensation expense stock options employee stock purchase plan estimated date grant based fair value award using blackscholes optionpricing model stockbased compensation expense rsus psus estimated date grant based number shares granted quoted price company’s common stock grant date stockbased compensation expense values stock options rsus espp plan recognized expense straightline basis requisite service period net estimated forfeitures recognize expense related performance stock options psus implicit service period probable performance goals achieved subsequently determined performance goals probable achievement expense related performance stock options psus reversed sharebased payment awards ultimately expected vest recognized expense ratably awards vest requisite service period generally one four years stock options rsus three months espp estimate pre vesting forfeitures time grant analyzing historical data revise estimates subsequent periods actual forfeitures differ estimates total expense recognized vesting period awards ultimately vest optionpricing models require use certain subjective assumptions including expected volatility market price underlying stock expected term award expected volatility based historical volatility stock expected term derived historical data employee exercises terminations review valuation assumptions grant date result valuation assumptions used value stockbased compensation awards granted future periods may change income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse provide valuation allowance deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized realization deferred tax assets dependent upon generation future taxable income timing amount uncertain tax years 19952016 remain open examination major us taxing jurisdictions subject internal revenue service completed examinations 2008 2009 2011 us federal tax returns additional tax assessments proposed adjustments relating taxable income years china income tax returns generally subject examination period five years remain open examination record liabilities related uncertain tax positions accordance guidance clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribing minimum recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return believe uncertain tax positions currently pending material adverse effect consolidated financial statements although adverse resolution one uncertain tax positions period could material impact results operations period new accounting standards updates please refer note 1 consolidated financial statements appearing part ii item 8 discussion new accounting standards updates may impact company item 7aitem 7 managements discussion analysis financial condition results operations company international biopharmaceutical company acquires develops commercializes specialistoriented proprietary drugs treating chronic lifethreatening diseases including hepatitis b hepatitis c cancer immune system disorders cystic fibrosis currently company two drugs clinical development zadaxin hepatitis b hepatitis c cancer immune system disorders cpx cystic fibrosis company also drug candidates preclinical development date companys principal focus development commercialization zadaxin development cpx commencement operations december 31 1997 company incurred cumulative net loss approximately 853 million company expects operating expenses increase next several years expands research development clinical testing marketing capabilities companys ability achieve profitable operations primarily dependent increasing zadaxin sales approved markets securing regulatory approvals zadaxin additional countries successfully launching zadaxin approved countries addition factors may also impact companys ability achieve profitable level operations spending associated successful development cpx acquiring rights additional drugs entering extending agreements product development commercialization appropriate assurance company able attain objectives company ever achieve profitable level operations companys operating results may fluctuate period result among things market acceptance zadaxin timing costs associated preclinical clinical development companys products regulatory approval process acquisition additional product rights company participates highly dynamic industry often results significant volatility companys common stock price setbacks launch sale distribution zadaxin preclinical clinical development companys products regulatory approval process relationships collaborative partners shortfalls revenue earnings levels expected securities analysts among developments past could future immediate significant adverse effect trading price companys common stock given period results operations product sales approximately 2223000 703000 273000 years ended december 31 1997 1996 1995 respectively currently company received approval market zadaxin argentina kuwait peoples republic china peru philippines singapore year ended december 31 1997 first fullyear zadaxin sales one customer china accounted 66 companys product sales companys accounts receivable collections china typically 180 days longer customer represents 86 accounts receivable balance december 31 1997 collections date slower anticipated company currently monitoring situation end 1997 company allowances bad debts 250000 collection outstanding accounts receivable improve may become necessary increase related allowances bad debts addition company filed approval market zadaxin several countries anticipates additional filings countries result company expects product sales increase existing approved markets 1998 beyond upon commencement commercial launch zadaxin additional markets regulatory approvals secured level product sales increase dependent upon increased zadaxin market penetration companys existing approved markets additional zadaxin marketing approvals successful launch zadaxin new markets although company remains optimistic regarding prospects zadaxin assurance company ever achieve significant levels product sales company receive additional zadaxin market approvals cost product sales approximately 990000 740000 737000 years ended december 31 1997 1996 1995 respectively increase attributable increased product sales company expects cost product sales vary quarter dependent upon level product sales absorption fixed productrelated costs charges associated excess expiring finished product research development expenses approximately 8642000 9904000 10386000 years ended december 31 1997 1996 1995 respectively year ended december 31 1997 decrease research development expenses compared 1996 due decreased professional fees partially offset increased clinical trial expenses clinical trial expenses 1997 impacted additional clinical trial expenses clinical development cpx synthetic compound licensed april 1996 nih potential treatment cystic fibrosis april 1997 company commenced cpx clinical trial program us addition company pursuing corporate partnering arrangement major pharmaceutical company pivotal phase 3 development combination zadaxin plus interferon hepatitis c us europe initiation continuation programs company continue significant effect companys research development expenses future require company seek additional capital resources year ended december 31 1996 decrease research development expenses compared 1995 primarily attributable decreases regulatory expenses costs associated decreased zadaxin clinical trials essentially due completion zadaxin taiwan phase 3 hepatitis b trial first half 1996 offset increased preclinical development expenses associated cpx general company expects product research development expenses increase next several years vary quarter company pursues strategy initiating additional clinical trials testing entering one corporate partnering arrangements acquiring product rights expanding regulatory activities marketing expenses approximately 4144000 4240000 4323000 years ended december 31 1997 1996 1995 respectively decrease 1997 compared 1996 due decreased professional services travel expenses partially offset increased publications promotional material expenses associated launch zadaxin approved markets decrease 1996 compared 1995 primarily attributable decreased payroll costs related executive officer left company 1995 offset increased professional services primarily consulting services expenses regarding preparations launch zadaxin approved markets early 1997 company expects marketing expenses increase significantly next several quarters years anticipates expanding commercialization marketing efforts pursuing strategic relationships general administrative expenses approximately 3662000 3183000 2904000 years ended december 31 1997 1996 1995 respectively increase 1997 compared 1996 due increased general office expenses associated increased rent office relocation expenses investment banking fees professional services primarily legal accounting fees associated companys adoption shareholder rights plan proposed public offering increase 1996 compared 1995 primarily attributable increased payroll costs offset decreased expenses professional services primarily legal services consulting fees near term company expects general administrative expenses vary quarter company augments general administrative activities resources support increased expenditures clinical trials testing regulatory precommercialization marketing activities net interest investment income approximately 1218000 2618000 3302000 years ended december 31 1997 1996 1995 respectively decrease 1997 compared 1996 compared 1995 resulted decreased interest investment income due lower average invested cash balances liquidity capital resources april 1998 company received 4000000 deducting expenses sale 661157 shares series c convertible preferred stock private placement march 1998 company also received approximately 754000 one executive officers partial payment outstanding loan see note 1 notes receivable officers july 1997 company loaned thomas e moore former chairman one founders company 5944 million secured approximately 19 million shares sciclone common stock owned mr moore loan carries interest 7 period mr moores loan outstanding immediately prior closing offering companys common stock company may convert loan noncash exchange mr moores sciclone common stock retiring shares sciclone common stock fixed discount rate offering price date company retired mr moores sciclone common stock connection transaction mr moore resigned company december 31 1997 principal balance loan 5944 million classified offset shareholders equity december 31 1997 1996 company approximately 12900000 35106000 respectively cash equivalents marketable securities marketable securities consist primarily highly liquid shortterm longterm investments net cash used company operating activities amounted approximately 14056000 14641000 17098000 years ended december 31 1997 1996 1995 respectively net cash used operating activities year ended december 31 1997 greater companys net loss period primarily due increases accounts receivable associated sales companys launch zadaxin approved markets increases payments third parties goods services employees compensation benefits amounts partially offset noncash charges associated depreciation amortization decreases prepayments certain future expenses increases amounts owed third parties clinical trials net cash used operating activities year ended december 31 1996 less companys net loss period primarily due noncash charges associated depreciation furniture equipment amortization deferred compensation addition increases amounts owed third parties goods services amounts partially offset cash used inventory purchases increases prepayments certain future period expenses payments amounts owed third parties related clinical trial expenses compensation benefits net cash used operating activities year ended december 31 1995 greater companys net loss period primarily due cash used inventory purchases prepayment certain future period expenses increases accounts receivable cash uses partially offset increases amounts owed third parties goods services related clinical trial expenses addition noncash charges associated depreciation amortization net cash provided investing activities year ended december 31 1997 primarily related net sale approximately 21335000 marketable securities offset purchase approximately 404000 equipment furniture net cash provided investing activities year ended december 31 1996 primarily related net sale approximately 12319000 marketable securities offset purchase approximately 94000 equipment furniture net cash provided investing activities year ended december 31 1995 primarily related net sale approximately 14729000 marketable securities offset purchase approximately 204000 equipment furniture net cash used financing activities year ended december 31 1997 consisted approximately 4267000 related companys repurchase common stock companys approved stock repurchase plan amounts loaned mr thomas e moore referred 5944000 offset approximately 2313000 proceeds received issuance common stock exercise outstanding warrants issuance common stock companys stock option plan employee stock purchase plan net cash provided financing activities year ended december 31 1996 related approximately 3731000 proceeds received issuance common stock companys stock option plan offset approximately 659000 related companys repurchase common stock net cash used financing activities year ended december 31 1995 related companys repurchase approximately 1925000 common stock offset approximately 192000 proceeds received issuance common stock companys stock option plan management believes existing capital resources interest funds available adequate maintain current planned operations 1998 december 1997 company filed registration statement securities exchange commission respect proposed registered direct placement common stock decided proceed offering due market conditions factors company subsequently concluded offering convertible preferred stock proceeds 4000000 deducting expenses actively pursuing additional financings including private placement common stock equity line company believes conclude one additional financings next three six months although assurance given financing occur time frame expected company terms favorable company considering corporate partnering opportunities increase capital resources one opportunities occurred company would consider accelerating drug development activities including clinical trials companys capital requirements may change depending upon numerous factors including level zadaxin product sales availability complementary products technologies businesses initiation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative partners status competitive products company continues pursue corporate partnering public private financing alternatives company cannot eventually generate sufficient funds operations need raise additional financing near future assurance financing available acceptable terms timely basis impact year 2000 year 2000 approaches issue impacting companies emerged regarding existing application software programs operating systems accommodate date value brief many existing application software products marketplace designed accommodate two digit date position represents year eg 95 stored system represents year 1995 result year 1999 ie 99 could maximum date value systems able accurately process management process working software vendors assure company prepared year 2000 management anticipate company incur significant operating expenses required invest heavily computer system improvements year 2000 compliant factors may affect future operating results dependence zadaxin cpx companys principal drug development efforts currently focused primarily zadaxin cpx clinical trials zadaxin sponsored company andor parties currently progress planned favorable results trials necessary gain regulatory approval significant markets sales zadaxin commenced 1997 material time zadaxin approved commercial sale treatment hepatitis b peoples republic china kuwait peru philippines singapore assurance given zadaxin approvals obtained additional countries treatment additional indications hepatitis c cancer timely fashion companys launch zadaxin peoples republic china philippines singapore first commercial introduction zadaxin company assurance given commercialization zadaxin prove successful company yet launched zadaxin argentina kuwait peru assurance given future launch zadaxin prove successful future sales zadaxin depend market acceptance successful distribution particular although peoples republic china highest hepatitis b prevalence rate world low average income poorly developed distribution infrastructure present ongoing challenges successful commercialization zadaxin market company currently relies zadaxin sole source revenue failure demonstrate drugs efficacy future clinical trials obtain additional marketing approvals commercialize drug successfully would material adverse effect company may experience delays encounter difficulties clinical trials cpx addition assurance clinical trial provide statistically significant evidence efficacy cpx treating cf failure demonstrate efficacy cpx cf clinical trial obtain regulatory approval cpx cf successfully commercialize cpx would material adverse effect company history significant revenues continuing operating losses company recently generated revenues commercialization products substantial uncertainty regarding timing amount future revenues whether future revenues material company cannot predict marketing approvals cpx obtained additional marketing approvals zadaxin obtained even approvals obtained assurance zadaxin cpx commercialized successfully company experienced significant operating losses since inception december 31 1997 accumulated deficit approximately 853 million company expects operating expenses increase next several years expands development clinical testing marketing capabilities companys ability achieve profitable level operations dependent large part successful expansion market zadaxin asia latin america middle east obtaining additional regulatory approvals zadaxin andor future products entering corporate partnering arrangement pivotal phase 3 development combination zadaxin plus interferon hepatitis c us europe entering agreements product development commercialization appropriate continuing expand development successful marketing assurance company ever achieve profitable level operations future capital needs uncertainty additional financing company need additional financing support longterm product development commercialization programs companys future capital requirements depend many factors including progress preclinical testing clinical trials time cost involved obtaining regulatory approvals patent costs competing technological market developments nature existing future collaborative relationships companys ability establish development sales manufacturing marketing arrangements assurance given adequate financing available company acceptable terms timely basis dependence third parties companys strategy contemplates enter various arrangements entities date company acquired rights zadaxin cpx certain drugs actively pursuing clinical development zadaxin cpx failure license otherwise acquire rights additional drugs would result shortage products development addition company licensed exclusive rights develop market zadaxin japan spkk substantial commitment alpha interferon approved therapy hepatitis b hepatitis c japan assurance relationship prove successful company able negotiate additional arrangements future amount timing resources collaborators devote activities company within control company may affected financial difficulties factors affecting third parties assurance parties perform obligations expected moreover companys ability obtain regulatory approval one country may delayed adversely affected timing regulatory activities approvals one countries particularly company participate regulatory approval process countries see business manufacturing marketing sales foreign sales operations companys financial condition near term highly dependent zadaxin sales foreign jurisdictions sales operations subject inherent risks including difficulties delays obtaining pricing approvals reimbursement unexpected changes regulatory requirements tariffs barriers political instability difficulties staffing managing foreign operations longer payment cycles greater difficulty accounts receivable collection currency fluctuations potential adverse tax consequences certain foreign countries regulate pricing pharmaceuticals regulation may result prices significantly would prevail free market majority companys current sales customers peoples republic china companys accounts receivable collections typically 180 days greater collections date slower anticipated company currently monitoring situation collection outstanding accounts receivable continue improve may become necessary increase related allowances bad debts slow rate sales market patents proprietary rights european composition matter patents thymosin alpha 1 expired october 1997 company future limited composition matter patents thymosin alpha 1 products could adversely affect companys proprietary rights however company owns exclusive licenses use process patents patent applications us jurisdictions thymosin alpha 1 cpx seek protect products competition patent protection means see business patents proprietary rights companys success significantly dependent ability obtain patent protection products technologies preserve trade secrets operate without infringing proprietary rights third parties assurance given companys pending patent applications result issuance patents provide competitive advantages invalidated circumvented competitors moreover assurance given patents issued patent applications filed companies would adverse effect companys ability use manufacture market products maintain competitive position respect products numerous patents patent applications relating thymosin alpha 1 held exclusive license breach company terms license could result loss companys rights patents patent applications companies obtaining patents claiming products processes useful company may bring infringement actions company litigation typically costly timeconsuming result company may required obtain licenses others able use manufacture market products licenses may available commercially reasonable terms patent positions biotechnology firms generally highly uncertain involve complex legal factual questions consistent policy emerged regarding validity scope claims biotechnology patents courts issued varying interpretations recent past legal standards concerning validity scope interpretations claims biotechnology patents may continue evolve even issued patents may later modified revoked us patent trademark office european patent office courts proceedings instituted third parties moreover issuance patent one country assure issuance patent similar claims another country claim interpretation infringement laws vary among countries extent patent protection uncertain may vary different countries pharmaceuticals patentable certain countries sciclones zadaxin territory recently become patentable enforcement intellectual property rights many countries territory limited nonexistent future enforcement patents proprietary rights many countries sciclones zadaxin territory expected problematic unpredictable assurance patents issued licensed company provide competitive advantages challenged others assurance given holders patents licensed company file prosecute extend maintain patents countries company rights furthermore assurance others independently develop similar products design around patents issued licensed company government regulation product approvals research preclinical clinical development manufacturing marketing sales pharmaceuticals including zadaxin cpx companys drug candidates subject extensive regulation governmental authorities products developed company cannot marketed commercially jurisdiction approved process obtaining regulatory approvals lengthy requires expenditure substantial resources countries company contemplates marketing zadaxin regulatory approval process drugs previously approved countries established clinical trial review procedures uncertain uncertainty may result delays granting regulatory approvals addition certain countries japan process obtaining regulatory approval time consuming costly clinical trials preclinical studies must conducted company currently sponsoring clinical trials pursuing regulatory approvals zadaxin number countries cpx us assurance company able complete trials completed fulfill regulatory approval criteria company ultimately obtain approvals countries adverse results companys development programs also could result placement restrictions use zadaxin cpx revocation approval marketing approval zadaxin singapore requires patient surveillance program continue study drugs safety efficacy adverse results program could result placement restrictions use zadaxin revocation approval singapore failure comply applicable us foreign regulatory requirements among things result warning letters fines suspensions regulatory approvals product recalls seizures operating restrictions injunctions criminal prosecutions additional government regulation may established imposed could prevent delay regulatory approval zadaxin cpx future products company manufacturing company entered contract manufacturing supply agreements source zadaxin cpx company experienced delays supply thymosin alpha 1 bulk drug past could future successful companys products must manufactured commercial quantities compliance regulatory requirements acceptable cost company believes able future establish manufacturing relationships experienced suppliers capable meeting companys needs assurance company establish long term manufacturing relationships suppliers prove satisfactory company currently vialing packaging supply agreements effect sufficient supply finished thymosin alpha 1 near term currently negotiating new vialing packaging supply agreement assurances given new agreement reached production interruptions occur could significantly delay clinical development potential products reduce third party clinical researcher interest support proposed clinical trials interruptions could also delay commercialization companys products impair competitive position would material adverse effect business financial condition company see business manufacturing marketing sales company established distribution arrangements local pharmaceutical distribution companies covering 31 countries asia latin america middle east however assurance given distribution arrangements remain place prove successful see business marketing sales technological change competition rapid technological development may result companys products becoming obsolete marketed company recovers significant portion related development commercialization expenses competition pharmaceutical field intense company expects competition increase companys competitors include major pharmaceutical companies biotechnology firms universities research institutions us abroad actively engaged research development products therapeutic areas pursued company many companies institutions substantially greater financial technical manufacturing marketing human resource capabilities company extensive experience undertaking clinical testing obtaining regulatory approvals necessary market drugs principal competitive factors pharmaceutical field include efficacy safety therapeutic regimen comparable products marketed companies price also competitive factor uncertainty third party reimbursement resources patient populations companys ability successfully commercialize products may depend part extent reimbursement cost products available government health administration authorities private health insurers organizations significant uncertainty exists reimbursement status new therapeutic products assurance third party reimbursement available therapeutic products company might develop many foreign countries company intends operate reimbursement zadaxin government private health insurance programs available us health care reform area increasing national attention priority many governmental officials certain reform proposals adopted could impose limitations prices company able charge us products amount reimbursement companys products governmental agencies third party payors many countries company marketing rights zadaxin government resources per capita income levels may low companys products prohibitively expensive large percentage population countries assurance company successful marketing products economically favorable terms dependence qualified personnel key individuals specialized scientific nature companys business company highly dependent upon ability continue attract retain qualified management scientific technical personnel intense competition qualified personnel areas companys activities assurance company able continue attract retain qualified personnel necessary development business addition many key responsibilities within company assigned relatively small number individuals loss services individuals unless promptly replaced could significantly detrimental companys development company maintain key person life insurance lives key personnel product liability absence insurance companys business expose potential product liability risks inherent testing manufacturing marketing sale pharmaceutical products assurance product liability claims asserted company product liability insurance pharmaceutical industry generally expensive extent available company product liability insurance coverage clinical trials commercial sales however assurance product liability claim would adversely affect business financial condition company blank check preferred stock company recently issued shares series c preferred stock 4000000 financing see business recent developments companys board directors authority issue additional series preferred stock determine price rights preferences privileges restrictions including voting rights without vote action companys shareholders rights holders common stock subject may adversely affected rights holders preferred stock may issued future issuance preferred stock providing desirable flexibility connection possible acquisitions corporate purposes could effect making difficult third party acquire majority outstanding voting stock company series c preferred stock certain conditions share companys outstanding series c preferred stock may convert one share common stock events occur conversion preferred stock could dilutive effect common shareholders see business recent developments item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operation read conjunction selected consolidated financial data financial statements related notes thereto included elsewhere annual report form 10k managements discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties actual results may differ materially results discussed forwardlooking statements factors might cause difference include limited discussed risk factors overview periods encompassed annual report form 10k devoted substantially resources zadaxin cpx product development programs zadaxin commercialization activities conduct research product development efforts combination internal collaborative programs addition internal management staff rely upon arrangements universities clinical research sites contract research organizations significant portion product development efforts oversight external collaborative programs conducted executive officers staff headquarters located san mateo california commencement operations december 31 2000 incurred cumulative net loss approximately 117 million expect sales gross margin operating expenses increase next several years expand sales research development clinical testing marketing capabilities ability achieve sustain operating profitability primarily dependent initiation execution completion new zadaxin clinical trials thereby securing regulatory approvals zadaxin additional countries particularly us europe japan successfully launching zadaxin approved countries increasing zadaxin sales approved markets developing zadaxin corporate partnering arrangements us europe japan addition factors may also impact ability achieve sustain operating profitability including manufacturing costs zadaxin ability obtain additional financing support operations longterm product development commercialization programs spending associated successful development cpx acquiring rights additional drugs entering extending agreements product development commercialization appropriate operating results may fluctuate quarter fluctuations may substantial result among factors number timing costs results preclinical clinical trials products market acceptance zadaxin regulatory approval process timing fda international regulatory approvals acquisition additional product rights funding provided result corporate partnering arrangements setbacks launch sale distribution zadaxin preclinical clinical development products regulatory approval process relationships collaborative partners shortfalls revenue earnings levels expected securities analysts among developments past could future immediate significant adverse effect trading price common stock given period results operations product sales 15357000 9091000 3625000 years ended december 31 2000 1999 1998 respectively 1998 1999 2000 unit us dollar sales grew awareness use zadaxin expanded march 2001 approval zadaxin india received approval market zadaxin 21 countries peoples republic china currently zadaxins largest market like japan certain asian markets uses tiered method import distribute products distributors make sales country product imported licensed importers sell principal importeragents resell distributors inside peoples republic china year ended december 31 2000 distributors china accounted 86 product sales emphasis concentrated china one developed markets marketing expenditures result rapid benefits sales profits compared newer markets require investment development spending addition filed approval market zadaxin 19 additional countries anticipate additional filings countries expect zadaxin sales increase existing approved markets new markets regulatory approvals secured zadaxin launched level sales increase dependent upon increased zadaxin market penetration existing approved markets additional zadaxin marketing approvals successful launch zadaxin new markets although remain optimistic regarding prospects zadaxin cannot assure ever achieve significant levels sales receive additional zadaxin market approvals cost product sales 3113000 1761000 1036000 years ended december 31 2000 1999 1998 respectively increase attributable increased zadaxin sales expect cost product sales vary quarter depending upon level zadaxin sales absorption fixed productrelated costs charges associated excess expiring finished product gross margin 12244000 7637000 2689000 years ended december 31 2000 1999 1998 respectively gross profit margin 71 1998 81 1999 80 2000 research development expenses 4182000 4604000 9293000 years ended december 31 2000 1999 1998 respectively decrease 2000 1999 primarily attributable decreased clinical trial expenses consulting fees decrease 1999 1998 primarily attributable decreased clinical trial expenses decreased license fees expense associated acquisition rights zadaxin decreased consulting fees partially offset increased payroll expenses related restructuring program initiation continuation zadaxin cpx product clinical development programs continue significant effect research development expenses may require us seek additional capital resources general expect product research development expenses increase significantly next several years vary quarter pursue strategy initiating additional preclinical clinical trials testing acquiring product rights expanding regulatory activities marketing expenses 8328000 5911000 5391000 years ended december 31 2000 1999 1998 respectively increase years related increased payroll expenses advertising conferences associated expansion zadaxin markets expect marketing expenses increase next several quarters years expand commercialization marketing efforts pursue additional strategic collaborations general administrative expenses 2930000 2978000 3714000 years ended december 31 2000 1999 1998 respectively decrease years attributable decreased payroll administrative expenses partially offset increased amortization expense relation intangible product rights acquired 1998 near term expect general administrative expenses vary quarter augment general administrative activities resources support increased expenditures preclinical clinical trials testing regulatory precommercialization marketing activities noncash charge earnings recorded april 1998 3143000 representing deemed dividend associated issuance series c preferred stock net interest investment income approximately 1479000 389000 582000 years ended december 31 2000 1999 1998 respectively increase 2000 1999 primarily resulted increased interest investment income due higher average invested cash balances addition recognized income approximately 400000 based repayment loan former officer decrease 1999 compared 1998 resulted lower average invested cash balances liquidity capital resources december 31 2000 1999 1998 22497000 3621000 5410000 respectively cash equivalents shortterm investments marketable securities marketable securities consist primarily highly liquid shortterm investments lease agreement required line credit amount 317000 line credit secured certificate deposit total 317000 net cash used us operating activities amounted 5517000 8909000 13353000 years ended december 31 2000 1999 1998 respectively net cash used operating activities year ended december 31 2000 greater net loss primarily due increases accounts receivable inventory decreases accrued professional fees amounts partially offset increases accounts payable decreases prepaid expenses net cash used operating activities year ended december 31 1999 greater net loss due increases accounts receivable decreases amounts owed third parties clinical trials amounts partially offset noncash charges associated depreciation amortization decreases prepayments certain future expenses inventory net cash used operating activities year ended december 31 1998 less net loss primarily due increases clinical trial expense accruals primarily japan inventory decreases impairment note receivable former officer amounts partially offset increases prepaid expense primarily product marketing rights acquired us europe net cash provided investing activities year ended december 31 2000 primarily related net sale 1283000 marketable securities offset net purchase approximately 99000 equipment furniture net cash provided investing activities year ended december 31 1999 primarily related net sale 120000 marketable securities offset net purchase disposal approximately 42000 equipment furniture net cash provided investing activities year ended december 31 1998 primarily related net sale 7388000 marketable securities offset purchase approximately 99000 equipment furniture net cash provided financing activities year ended december 31 2000 consisted 24486000 proceeds approximately 5326000 related net proceeds private placement common stock redeemable warrants institutional investors approximately 8606000 exercise outstanding redeemable warrants purchase common stock institutional accredited investors approximately 191000 net proceeds issuance common stock employee stock purchase plan approximately 3100000 net proceeds private placement sigmatau european zadaxin development marketing partner approximately 2363000 connection exercises outstanding options employee stock option plans 4000000 issuance convertible note 900000 granting investors right purchase approximately 5900000 senior unsecured convertible notes net cash provided financing activities year ended december 31 1999 consisted 7169000 proceeds approximately 5430000 related issuance common stock redeemable warrants institutional accredited investors two private placements payment full 235000 note receivable president chief executive officer approximately 1581000 related issuance common stock employee stock purchase plan exercise warrants issuance restricted common stock sigmatau zadaxin development marketing partner europe net cash provided financing activities year ended december 31 1998 consisted 6342000 proceeds approximately 3931000 related sale issuance 661157 shares series c preferred stock approximately 529000 related issuance common stock approximately 1882000 related payment notes receivable former current officers january 2000 completed private placement common stock redeemable common stock warrants institutional investor resulted gross proceeds approximately 6100000 warrants issued connection private placement fully exercised receive additional 5600000 march 2000 completed 3100000 private placement sigmatau consisting 198072 shares restricted common stock warrants 400000 shares common stock fully exercised result additional gross proceeds 9400000 march april 2000 aggregate 4597690 common stock warrants exercised resulting aggregate gross proceeds approximately 8606000 december 2000 completed 4 million senior unsecured convertible note investment affiliate ubs ag 4 million note convertible 407610 shares common stock fixed conversion price 98133 per share note accrue interest rate 6 per year mature december 2005 note convertible prior december 2001 also received 900000 granting investor right purchase approximately 59 million senior unsecured convertible notes due december 2005 issued notes bear interest zero coupon convertible 407610 shares common stock fixed conversion price 145066 per share capital requirements may change depending upon numerous factors including level zadaxin product sales availability complementary products technologies businesses initiation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative partners status competitive products management believes zadaxin product sales continue increase remain valuable source capital generation initiation continuation us clinical development programs could however require additional funding either collaborative partner equity debt financing timing achievement sustainability operating profitability capital requirements may change depending upon numerous factors including level zadaxin product sales timing amount manufacturing costs related zadaxin cpx availability complementary products technologies businesses initiation continuation preclinical clinical trials testing particularly us timing regulatory approvals developments relationships existing future collaborative partners status competitive products without additional financing sales growth beyond managements expectations combination thereof management believes existing capital resources interest funds available adequate maintain current planned operations least next twelve months income taxes december 31 2000 net operating loss carryforwards federal income tax purposes approximately 56485000 expire years 2006 2020 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred foreign subsidiaries december 31 2000 federal tax credit carryforwards approximately 2600000 expire years 2009 2020 change ownership provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities recent accounting pronouncements december 31 2000 company adopted staff accounting bulletin 101 revenue recognition financial statements sab 101 summarizes certain areas staffs views applying generally accepted accounting principles revenue recognition financial statements management believes company complied guidance sab 101 march 2000 fasb issued interpretation 44 fin 44 accounting certain transactions involving stock compensation interpretation opinion 25 definition employee purposes applying opinion 25 b criteria determining whether plan qualifies noncompensatory plan c accounting consequences various modifications terms previously fixed stock option award accounting exchange stock compensation awards business combination fin 44 became effective july 1 2000 certain conclusions cover specific events occur either december 15 1998 january 12 2000 adoption certain provisions fin 44 material impact companys financial position results operations june 1998 financial accounting standards board issued statement 133 accounting derivative instruments hedging activities sfas 133 required adopted year ending december 31 2001 company anticipate adoption sfas 133 significant effect results operations financial position company risk factors carefully consider risks described together information included report form 10k making investment decision risks ones face following risks actually occurs business financial condition operating results could harmed case trading price common stock could decline may lose part investment fail satisfy comply governmental regulations government regulations change business suffer new drugs including products developed development subject extensive rigorous regulation fda comparable agencies state local jurisdictions foreign countries regulations change time prior years legislation introduced us congress would restrict duration marketing exclusivity orphan drug assurances type legislation reintroduced passed law benefits existing statute remain effect failure satisfy comply regulations fda comparable agencies state local jurisdictions foreign countries delay stop approval drugs regulations govern among things development testing manufacturing labeling storage premarket approval importation advertising promotion sale distribution products satisfaction regulations typically takes several years time needed satisfy vary substantially based type complexity novelty pharmaceutical product result government regulation may cause us delay prevent us marketing existing potential products considerable period time impose costly procedures upon activities regulatory approval products granted approval may impose limitations indicated uses products may marketed fail obtain regulatory approvals countries targeted regulatory approval products revenue growth may harmed stock price may decline research preclinical clinical development manufacturing marketing sale zadaxin cpx drug candidates subject extensive regulation governmental authorities zadaxin cpx products must approved fda foreign counterparts sold jurisdiction obtaining regulatory approval timeconsuming expensive countries contemplating marketing selling zadaxin regulatory approval process drugs previously approved countries established clinical trial review procedures uncertain may delay grant regulatory approvals zadaxin addition secure regulatory approvals need favorable results additional clinical trials zadaxin need demonstrate preclinical clinical trials safety efficacy cpx treatment cystic fibrosis failure obtain required regulatory approvals develop market sell products countries currently rights may limit growth revenues assurance ultimately obtain regulatory approvals targeted countries timely costeffective manner failure comply applicable us foreign regulatory requirements among things result warning letters fines suspensions regulatory approvals product recalls seizures operating restrictions injunctions total partial suspension production civil penalties criminal prosecutions additional government regulation may established imposed legislation otherwise could prevent delay regulatory approval zadaxin cpx future products adverse events related products existing future markets could cause regulatory authorities withdraw market approval products prevent us receiving market approval future may able commence complete clinical trials sponsored planning relating zadaxin cpx timely costeffective manner even completed trials may fulfill applicable regulatory approval criteria case able obtain regulatory approvals countries failure obtain additional regulatory approvals harm operating results addition adverse results development programs also could result restrictions use zadaxin approved cpx failure one partners comply applicable us foreign regulatory requirements could among things result warning letters fines suspensions regulatory approvals product recalls seizures operating restrictions injunctions criminal prosecutions addition government regulations may established imposed prevent delay regulatory approval zadaxin cpx future products planning implement manage phase 3 program us approval us zadaxin combination pegylated interferon treatment hepatitis c scientific clinical research data relating zadaxin combination interferon treatment hepatitis c based use unpegylated form interferon results previous phase 2 phase 3 hepatitis c studies enabled us produce conservatively designed study program based use zadaxin combination unpegylated interferon however assurances results produced conservative design carryover design study program using combination zadaxin pegylated interferon pegylated form interferon may perform better anticipated comparison combination zadaxin pegylated interferon resulting underpowered study history operating losses accumulated deficit expect continue incur losses near term may never achieve profitability experienced significant operating losses since inception december 31 2000 accumulated deficit 116746000 expect operating expenses increase next several years plan dedicate substantially resources expanding development testing marketing capabilities accordingly may never achieve profitability failure achieve profitability may cause stock price decline increase amount revenue derive sales zadaxin need obtain additional capital support longterm product development commercialization programs strategy near term invest phase 2 3 clinical studies us europe japan continue maintain develop international zadaxin business ability achieve sustain operating profitability depends large part ability commence execute complete clinical programs obtain additional regulatory approvals zadaxin cpx scv07 dax andor future products particularly us europe japan increase zadaxin sales existing markets launch zadaxin new markets increase revenue derive sales zadaxin achieve operating profitability need obtain additional financing support longterm product development commercialization programs may seek additional funds public private stock offerings arrangements corporate partners borrowings lease lines credit sources cannot raise necessary funds reduce capital expenditures scale back development new products reduce workforce outlicense others products technologies otherwise would seek commercialize amount capital need depend many factors including level future zadaxin sales timing location scope results ongoing planned preclinical studies clinical trials cost manufacturing obtaining preclinical clinical materials timing cost involved applying obtaining fda international regulatory approvals costs involved filing prosecuting enforcing patent claims competing technological market developments whether outstanding common stock warrants exercised timing amount exercises ability establish maintain strategic arrangements development sales manufacturing marketing products whether elect establish additional partnering arrangements development sales manufacturing marketing products many foregoing factors within control need raise additional funds available reasonable terms may required delay cancel longterm product development commercialization programs additional equity financing dilutive shareholders debt financing available may include restrictive covenants may able successfully develop commercialize products many products development stage require commitment substantial resources devoted extensive research development preclinical testing clinical trials manufacturing scaleup regulatory approval prior ready sale assure commercially viable products result efforts face significant technological risks inherent developing products may also abandon proposed products become commercially viable products even developed approved cannot successfully commercialized timely manner business harmed price stock may decline yet sold product zadaxin future revenue growth depends increased market acceptance commercialization zadaxin additional countries fail successfully market zadaxin cannot commercialize drug additional markets revenue operating results suffer future revenue also depend part ability develop commercially viable accepted products market acceptance products depend many factors including ability convince prospective customers products attractive alternative treatments therapies convince prospective strategic partners products attractive alternative treatments therapies manufacture products sufficient quantities acceptable quality acceptable cost dependent sale zadaxin foreign countries particularly china experience difficulties foreign sales efforts financial condition harmed financial condition near term highly dependent sale zadaxin foreign countries experience difficulties foreign sales efforts business suffer financial condition harmed majority zadaxin sales customers china sales zadaxin china may limited due low average income poorly developed infrastructure addition zadaxin sales operations parts asia well latin america middle east subject number risks including difficulties delays obtaining pricing approvals reimbursement difficulties delays obtaining product health registration difficulties delays obtaining importation permits unexpected changes regulatory requirements difficulties staffing managing foreign operations long payment cycles difficulties accounts receivable collection currency fluctuations adverse deteriorating economic conditions potential adverse tax consequences product sales us offset decrease revenue zadaxin sales asia latin america middle east addition countries regions regulate pharmaceutical prices pharmaceutical importation regulations may reduce prices zadaxin levels significantly would prevail unregulated market limit volume product may imported sold either cause revenues fall business suffer limited sales marketing distribution capabilities may adversely affect ability successfully commercialize products currently limited sales marketing distribution capabilities anticipate relying thirdparty collaborators sell market distribute products foreseeable future arrangements third parties successful unable enter additional thirdparty arrangements may need substantially expand sales marketing distribution force efforts expand may succeed may lack sufficient resources expand timely manner either harm operating results able develop sales marketing distribution capabilities compete companies experienced well funded operations cannot successfully compete revenues may grow business may suffer able establish maintain adequate manufacturing supply relationships development sale products could impaired successful products must manufactured commercial quantities compliance regulatory requirements acceptable cost may able maintain longterm manufacturing relationships currently suppliers zadaxin cpx manufacturing interruptions could significantly delay clinical development potential products reduce thirdparty clinical researcher interest support proposed trials interruptions could also impede commercialization products including sales zadaxin approved markets impair competitive position developments would harm business countries change may require additional regulatory approvals obtain required regulatory approvals manufacturing change timely fashion new zadaxin marketing approvals may delayed sales may interrupted manufacturing change approved either results hurt business manufacturing supply quality control problems may arise either alone subcontractors attempt scaleup manufacturing procedures may able scaleup timely manner commercially reasonable cost problems could lead delays pose threat ultimate commercialization products harm us obtain rights additional products third parties revenue may decline future development expenses may increase actively pursuing clinical development zadaxin cpx time advance scv07 dax products inlicensed rights preclinical clinical development license otherwise acquire rights additional drugs may shortage drugs develop commercialize shortage number drugs able develop commercialize may cause revenues fall increase future development expenses commercialization products depends collaborations others collaborators successful unable find future collaborators may able properly develop commercialize products depend part distributors business partners develop andor promote drugs successful efforts fail business suffer generally control amount timing resources business partners devote zadaxin perform obligations expect development expenses would increase development andor sale products could limited delayed could cause business suffer stock price decline addition relationships companies may successful disputes may arise ownership rights intellectual property knowhow technologies developed collaborators may able negotiate similar additional arrangements future develop commercialize zadaxin fail protect products technologies trade secrets may able successfully use manufacture market sell products may fail advance maintain competitive position success depends significantly ability obtain maintain meaningful patent protection products technologies preserve trade secrets avoid infringing proprietary rights third parties pending patent applications may result issuance patents future patent applications may priority others applications even patents issued may provide competitive advantage us may invalidated circumvented competitors others may independently develop similar products design around patents issued licensed us patents issued patent applications filed companies could harm ability use manufacture market products maintain competitive position respect products many patents relating zadaxin expired rights patents patent applications relating zadaxin exclusive licenses breach terms licenses could lose rights patents patent applications commercial success also depends part us infringing valid enforceable patents proprietary rights third parties breaching licenses may relate technologies products aware thirdparty patents may relate products possible may unintentionally infringe patents proprietary rights third parties may future receive notices claiming infringement third parties well invitations take licenses thirdparty patents legal action us collaborative partners claiming damages seeking enjoin commercial activities relating products processes affected thirdparty rights may require us collaborative partners obtain licenses order continue manufacture market affected products processes efforts defend claims even unmeritorious would require us devote resources attention could directed operation growth plans addition actions may subject us potential liability damages collaborative partners may prevail patent action license required patent may made available commercially acceptable terms pharmaceuticals either patentable recently become patentable countries us exclusive rights zadaxin past enforcement intellectual property rights many countries limited nonexistent future enforcement patents proprietary rights many countries likely problematic unpredictable moreover issuance patent one country assure issuance similar patent another country claim interpretation infringement laws vary nation extent patent protection uncertain may vary different jurisdictions make acquisitions incur variety costs may never realize anticipated benefits appropriate opportunities become available may attempt acquire products product candidates businesses believe fit strategically business currently commitments agreements respect material acquisitions undertake transaction sort process integrating acquired product candidate business may result operating difficulties expenditures may absorb significant management attention would otherwise available ongoing business development plans moreover may never realize anticipated benefits acquisition future acquisitions could result potentially dilutive issuances equity securities incurrence debt contingent liabilities andor amortization expenses related goodwill intangible assets could adversely affect business financial condition results operations may lose market share otherwise fail compete effectively intensely competitive biopharmaceutical industry competition biopharmaceutical industry intense expect competition increase success depends ability compete believe principal competitive factors industry include efficacy safety price therapeutic regimen manufacturing quality assurance associated given drug competitors include biopharmaceutical companies biotechnology firms universities research institutions us abroad actively engaged research development products therapeutic areas pursuing particularly cancer hepatitis b hepatitis c hiv cystic fibrosis certain instances competitors currently marketing drugs cancer hepatitis b hepatitis c hiv products latestage clinical trials competitors particularly large biopharmaceutical companies substantially greater financial technical regulatory manufacturing marketing human resource capabilities also extensive experience undertaking preclinical clinical testing obtaining regulatory approvals necessary market drugs additional mergers acquisitions pharmaceutical industry may result ever resources concentrated competitors principal competitive factors pharmaceutical field include efficacy safety therapeutic regimen comparable products marketed companies price also competitive factor increased competitive pressure could lead intensified pricebased competition resulting lower prices margins would hurt operating results currently rely sales zadaxin treatment hepatitis c hepatitis b primary source revenue however several large biopharmaceutical companies substantial commitments alpha interferon approved drug treating hepatitis b hepatitis c lamivudine approved drug treat hepatitis b cannot assure compete successfully competitors potential competitors develop drugs treatments hepatitis c hepatitis b cystic fibrosis cancer diseases superior however area immune system enhancer therapy anticipate competition zadaxin may reduced fact zadaxin administered combination numerous antiviral anticancer agents expected complementary rather competitive agents enhancing immune system believe position zadaxin complementary rather competitive drug many therapies cannot guarantee successful endeavor expect continuing advancements increasing awareness use immune system enhancer therapy fight cancer infectious diseases may create new competitors well numerous new opportunities expanded use zadaxin worldwide current economic slowdown us causes economies countries particularly asia latin america middle east experience slowdown recession business suffer us worlds largest consumer current economic slowdown us may adversely affect economies countries including developing countries asia latin america middle east derive revenues economic conditions us continue worsen developing countries may also experience economic slowdown recession would likely result decrease sales zadaxin decrease sales zadaxin would harm operating results delay efforts achieve profitability likely cause stock price decline rely continuous power supply conduct operations californias current energy crisis could disrupt business increase expenses california midst energy crisis could disrupt operations increase expenses event acute power shortage power reserves california fall 15 electricity providers occasions implemented may future continue implement rolling blackouts majority operations located california however currently backup generators alternate sources power event blackout blackouts interrupt power supply would temporarily unable continue operations facilities interruption ability continue operations facilities could damage reputation harm development efforts could adversely affect business results operation thirdparty reimbursement available patients cannot otherwise pay zadaxin may able successfully market zadaxin ability successfully commercialize products may depend part extent coverage reimbursement patients products available government health care programs private health insurers third party payors organizations significant uncertainty exists reimbursement status new therapeutic products zadaxin cannot assure third party insurance coverage reimbursement available therapeutic products might develop emerging markets sell zadaxin intend sell zadaxin reimbursement zadaxin government private health insurance programs yet widely available failure obtain thirdparty reimbursement products particularly us europe japan hurt business us proposed health care reforms could limit amount thirdparty reimbursement available products cannot assure future additional limitations imposed future drug coverage reimbursement many emerging markets marketing rights zadaxin government resources per capita income may low products prohibitively expensive countries may able market products economically favorable terms efforts governmental thirdparty payors contain reduce health care costs could cause us reduce prices market drugs reduce gross margins may harm business various governments thirdparty payors trying contain reduce costs health care various means expect continue number legislative proposals implement government controls announcement proposals reforms could cause us reduce prices market drugs reduce gross margins may harm business lose key personnel unable attract retain additional highly skilled personnel required expansion activities business suffer highly dependent upon ability attract retain qualified personnel specialized scientific international nature business intense competition qualified management scientific technical personnel pharmaceutical industry may able attract retain qualified personnel need grow develop business globally addition numerous key responsibilities sciclone assigned small number individuals unable attract retain qualified personnel needed promptly replace employees critical product development commercialization development commercialization products would adversely affected time maintain key person life insurance key personnel may subject product liability lawsuits insurance may inadequate cover damages clinical trials marketing current potential products may expose us liability claims use products currently carry product liability insurance however cannot certain able maintain insurance acceptable terms clinical commercial activities insurance would sufficient cover potential product liability claim recall fail sufficient coverage business results operation cash flows could adversely affected unable comply environmental laws regulations business may harmed subject federal state local laws regulations governing use manufacture storage handling disposal hazardous materials waste products currently maintain supply hazardous materials facilities event accident could liable damages result liability could exceed resources outsource research development programs involving controlled use biohazardous materials future conduct programs might required incur significant cost comply environmental laws regulations price common stock experienced substantial volatility may fluctuate due factors beyond control significant volatility market prices publicly traded shares pharmaceutical biotechnology companies including following factors may adverse impact market price common stock significant negative changes major equity market indices announcements technical product developments us competitors governmental regulation health care legislation public announcements regarding advances treatment disease states targeting public announcements government officials relating biotechnology pharmaceutical industries patent proprietary rights developments changes thirdparty reimbursement policies products fluctuations operating results price common stock may remain exceed current levels substantial sales stock convertible securities may impact market price common stock december 31 2000 stock options 4426077 shares common stock outstanding options 3002884 shares currently exercisable warrants exercisable 1970500 shares common stock outstanding upon exercise issuance shares common stock freely tradable future sales substantial amounts common stock could adversely affect market price common stock similarly raise additional funds issuance common stock securities convertible exercisable common stock percentage ownership shareholders reduced price common stock may fall issuing preferred stock rights senior common stock could adversely affect holders common stock charter documents give board directors authority issue additional series preferred stock without vote action shareholders board also authority determine terms preferred stock including price preferences voting rights holders common stock may adversely affected rights granted holders preferred stock example series preferred stock may granted right receive liquidation preference preset distribution event sciclone liquidated would reduce amount available distribution holders common stock addition issuance preferred stock could make difficult third party acquire majority outstanding voting stock result common shareholders could prevented participating transactions would offer optimal price shares item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations read conjunction “selected financial data” consolidated financial statements related notes thereto included elsewhere annual report form 10k management’s discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see “note regarding forwardlooking statements” “risk factors” contained annual report form 10k overview sciclone pharmaceuticals inc biopharmaceutical company engaged development commercialization novel therapeutics treat lifethreatening diseases strategy inlicense products areas cancer viral infectious diseases develop commercialization major pharmaceutical markets particular focus china one world’s fastest growing pharmaceutical markets zadaxin® brand thymalfasin one largest imported drugs measured revenue china today currently latestage clinical development treatment malignant melanoma hepatitis c virus hcv proprietary inlicensed compound scv07 entered phase 2 clinical development viral infectious disease june 2007 also submitted regulatory application chinese state food drug administration sfda december 2006 related dc bead™ product treatment liver cancer hepatocellular carcinoma hcc obtained chinese marketing rights june 2006 april 26 2007 announced acquired exclusive rights united states canada develop commercialize rp101 clinicalstage compound treatment cancer terms agreements resistys inc whollyowned subsidiary avantogen oncology inc resprotect gmbh paid approximately 1700000 upfront fees first quarter 2008 1320000 milestone payment upon dosage first patient phase 2 clinical trial addition may obligated pay post phase 3 successbased regulatory commercial payments 22000000 royalties future sales intend initially develop rp101 treatment pancreatic cancer combination therapy gemcitabine standard care pancreatic cancer therapy addition current product portfolio believe wellpositioned inlicense additional therapeutics china significantly larger us european markets part opportunity develop commercialize products china also intend use clinical work china support accelerate regulatory applications united states europe european partner sigmatau conducting triple therapy combination zadaxin plus pegylated interferon alpha ribavirin hepatitis c clinical trial europe press release dated february 11 2008 reported promising interim blinded results indicating thymalfasin may increase sustained viral response svr rates hcv nonresponder patients expect results trial third quarter 2008 june 2007 reported positive survival data phase 2 trial also conducted sigmatau treating patients stage iv malignant melanoma indicating thymalfasin combination dacarbazine dtic chemotherapy tripled overall response rate extended overall survival nearly 3 months compared malignant melanoma patients treated dtic current standard care interferon alpha collaboration sigmatau october 2007 shared melanoma clinical data received approval united states federal food drug administration fda initiate phase 3 registration trials sigmatau planning design phase 3 melanoma trial regulatory strategy including special protocol assessment spa filed fda thymalfasin phase 3 clinical development commercialization plans hcv melanoma potentially significantly different timelines costs sizes prospective addressable markets two products differ terms competitive products factors consequently proceeding melanoma trial sigmatau review final results current hcv clinical trial anticipated third quarter 2008 order determine next steps optimal thymalfasin development program hcv malignant melanoma indications manufacture zadaxin sale clinical trials third party contract manufacturers conduct research development efforts principally arrangements clinical research sites contract research organizations universities december 31 2007 accumulated deficit approximately 169000000 least next years expect net losses due increased operating expenses expand research development clinical testing efforts sales marketing capabilities ability achieve sustain operating profitability dependent expansion sales zadaxin securing regulatory approval dc bead china execution successful completion zadaxin scv07 rp101 clinical trials securing regulatory approvals products major pharmaceutical markets united states europe japan regulatory approval secured territories ability achieve sustain operating profitability depend successful commercialization marketing products clinical development involves numerous risks uncertainties addition successes experienced setbacks clinical development past particular december 2005 june 2006 reported results two us phase 3 trials evaluating double therapy combination zadaxin pegylated interferon alpha treat hcv patients failed previous therapy results trials demonstrate zadaxin combination pegylated interferon alpha provides statistically significant clinical benefit compared pegylated interferon alpha alone addition factors may also impact ability achieve sustain operating profitability including pricing zadaxin manufacturing marketing costs ability compete pharmaceutical markets cost product development commercialization programs including scv07 dc bead rp101 timing costs acquiring rights additional drugs ability fund operations entrance extension agreements product development commercialization appropriate expect net sales increase 2008 due increased sales china primarily due level research development activities operations expect net loss reduction cash equivalents shortterm investments 2008 believe need raise additional capital 2008 fund operations including anticipated clinical trials beyond first quarter 2009 exploring various alternatives financing addition sales equity sciclone including line credit debt financing chinese operations either debt equity joint venture transactions determined timing structure transaction operating results may fluctuate quarter fluctuations may substantial result among factors number timing costs results preclinical clinical trials products market acceptance zadaxin potentially scv07 dc bead rp101 timing orders zadaxin international markets particularly china regulatory approval process timing fda international regulatory approvals acquisition additional product rights funding provided result corporate partnering arrangements critical accounting policies estimates general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout “management’s discussion analysis financial condition results operations” policies affect reported expected financial results detailed discussion application accounting policies see note 1 “notes consolidated financial statements” part ii item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united sates requires us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates base estimates historical experience various market specific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition recognize revenue product sales time delivery significant customer acceptance requirements postshipment obligations part sales importing agents distributors recognized time shipment title product transferred importing agents distributors contractual rights return except limited terms regarding product quality however intend replace products expired deemed damaged defective delivered exercise judgment estimating return reserves estimate expected returns primarily historical patterns historically product returns damaged defective expired product amount accrued product returns december 31 2007 2006 respective consolidated balance sheets payments importing agents distributors contingent upon sale end user importing agents distributors contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement us recognized earlier payments received collection assured revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment amounts invoiced relating arrangements revenue cannot recognized reflected balance sheet deferred revenue recognized applicable revenue recognition criteria satisfied accounts receivable required estimate collectibility trade receivables maintain reserves credit losses within expectations recognize reserves bad debts ranging 25 100 past due accounts receivable based length time receivables past due collectibility experience considerable amount judgment required assessing ultimate realization receivables including limited analysis historical payment patterns customers circumstances individual customer geographic region including review local economic environment ability collect outstanding receivables customers critical operating performance cash flows maintain allowances doubtful accounts estimated losses resulting inability customers make required payments financial condition customers economic environment operate deteriorate resulting impairment ability make payments additional allowances may required would increase general administrative expenses conversely actual credit losses significantly less expected would decrease general administrative expenses inventories stated lower cost realizable market value assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels current assumptions future production inventory levels demand change actual market conditions less favorable projected management inventory writedowns may required could negatively impact gross margins results operations impairment intangible assets december 31 2007 net intangible assets 332000 related zadaxin product rights recorded impairment losses todate related intangible assets assessing recoverability intangible assets must make assumptions regarding estimated future cash flows factors estimates related assumptions change future may required record impairment charges assets research development expenses research development expenses principally incurred clinical trials including cost sharing sigmatau’s clinical trial europe using zadaxin part novel triple therapy combination treatment hepatitis c virus hcv phase 2 clinical trials rp101 scv07 2007 development plans 2007 phase 3 clinical trial malignant melanoma phase 3 clinical trials took place united states primarily 2005 2004 research development expenses charged operations incurred cost accruals clinical trials based estimates services received efforts expended pursuant contracts numerous institutions conduct clinical trials behalf financial terms agreements subject negotiation vary contract may result uneven payment flows payments contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses financial statements actual services received efforts expended expenses related grants institutions us hcv scv07 clinical trials accrued based level patient enrollment activity according protocol general clinical trials expenses higher initial final months patient’s scheduled treatment observation expenses relating clinical research organizations entities managing trials laboratory direct expenses recognized period estimated incurred services performed monitor active patient enrollment levels related activity extent possible adjust estimates accordingly however management underestimated activity levels associated various studies given point time could underestimate actual research development expenses requiring recording additional expenses increase net loss future stock option valuation effective january 1 2006 adopted fair value recognition provisions financial accounting standards board “fasb” statement 123r sharebased payment “fas 123r” prior january 1 2006 accounted sharebased payments recognition measurement provisions accounting principles board opinion 25 “apb 25” related interpretations permitted fasb statement 123 accounting stockbased compensation “fas 123” accordingly recognize compensation expense accounting employee stock purchase plan stock option plans options employees directors granted exercise prices equal fair market value underlying common stock date grant adopted fas 123r using modifiedprospective transition method compensation cost recognized years ended december 31 2007 2006 includes compensation cost sharebased payments granted prior yet vested january 1 2006 based grantdate fair value estimated accordance provisions fas 123 compensation cost also includes sharebased payments granted subsequent january 1 2006 based grantdate fair value estimated accordance provisions fas 123r compensation cost calculated date grant using fair value option determined using black scholes option valuation model single option approach company amortizes compensation cost vesting period generally four years using straight line attribution method results prior periods restated reflect impact fas 123r determining fair value option award fas 123r using black scholes option valuation model requires use certain subjective assumptions determined weightedaverage valuation assumptions follows volatilitywe believe historical volatility stock price indicative expectations expected future stock price volatility estimated volatility using historical share price performance time period equivalent expected term option also considered implied volatility market traded puts calls common stock however since puts calls thinly traded information considered representative future estimated volatility expected termwhen establishing estimate expected term award consider vesting period option historical experience employee stock option exercises including forfeitures riskfree interest ratethe risk free interest rate based us treasury constant maturity rates similar terms expected term option dividend yieldthe expected dividend yield 0 paid expect pay dividends foreseeable future expected forfeitureswe use historical data regarding forfeitures options estimate prevesting option forfeitures record stockbased compensation awards expected vest significant assumptions estimates expected volatility expected term award addition judgment also required estimating amount sharebased awards expected forfeited actual conditions events amounts differ significantly estimates stockbased compensation expense noncash effect results operations could materially impacted december 31 2007 unamortized compensation expense related unvested options approximately 3251000 weighted average period compensation expense related options recognized 340 years results operations product sales 37038000 32433000 27842000 years ended december 31 2007 2006 2005 respectively derived sales zadaxin sales customers china accounted approximately 92 91 revenue years ended december 31 2007 2006 2005 respectively product prices remained stable throughout three year period years ended december 31 2007 2006 2005 sales year three four importing agents china accounted approximately 92 91 respectively product sales 2007 shanghai lingyun china national pharmaceutical foreign trade corporation accounted 63 21 sales respectively one importer accounted 8 sales 2006 shanghai lingyun china national pharmaceutical foreign trade corporation accounted 66 15 sales respectively two others accounted combined 11 2005 guang dong south pharmaceutical foreign trade co ltd zhuhai golden medicine co ltd china national pharmaceutical foreign trade corporation accounted 57 19 15 sales respectively customers accounted 10 sales periods december 31 2007 approximately 11941000 94 accounts receivable attributable two customers china perform ongoing credit evaluations customers’ financial condition generally require collateral customers contract revenue 20000 229000 492000 years ended december 31 2007 2006 2005 respectively 2007 recognized 20000 contract revenue partial license fee zadaxin third party similar revenue years ended december 31 2006 2005 contract revenue recognized 2006 2005 connection 2685000 payment received sigmatau january 2002 50000 payment received sigmatau december 2006 revenue recognized contract revenue course zadaxin hcv us clinical program period sharing clinical data program sigmatau accordance performance requirements contract sigmatau gross margin 82 79 83 2007 2006 2005 respectively decrease gross margin 2006 primarily due increase 929000 royalty expense recorded december 2006 related annual minimum royalties due sales product 1997 2006 according license agreement wayne state university wsu expect cost product sales hence gross margin vary year depending upon level zadaxin sales absorption productrelated fixed costs charges associated excess expiring finished product inventory research development rd expenses 17446000 14088000 14406000 represented approximately 42 41 45 total operating costs expenses years ended december 31 2007 2006 2005 respectively increase rd expenses 2006 2007 primarily due 2200000 increase acquisition legal costs incurred april 2007 related acquisition exclusive rights united states canada develop commercialize rp101 increase approximately 1893000 clinical trial expenses increase 1131000 drug development expenses mainly related phase 2 trials rp101 scv07 preparation prospective phase 3 trial melanoma increases offset partially decreases rd including decrease 531000 stockbased compensation expense 377000 decrease compensation benefits related expenses net consulting fees decrease 597000 preclinical pharmacology expenses decrease 146000 rent expense due lower rents new corporate office decrease 106000 computer software expense rd expenses 2006 included stockbased compensation expense 771000 following adoption fas 123r overall decrease rd expenses 2005 2006 primarily related us phase 3 hcv clinical trials completed mid2006 major components rd expenses consist clinical studies performed clinical trial institutions contract research organizations related materials supplies preclinical work pharmaceutical development personnel costs including salaries benefits third party research funding overhead allocations consisting various support facilities related costs research development activities also separated three main categories research clinical development pharmaceutical development research costs typically consist business development patent costs preclinical toxicology work clinical development costs primarily relate clinical trials pharmaceutical development costs consist product formulation chemical analysis 2007 recorded approximately 5320000 research 10723000 clinical development 1403000 pharmaceutical development activities 2006 recorded approximately 5400000 research 6900000 clinical development 1800000 pharmaceutical development activities compares expenses 2005 approximately 4300000 research 8300000 clinical development 1800000 pharmaceutical development activities initiation continuation current clinical development programs expected continue significant effect research development expenses although possible determine total cost expected incurred particular year clinical trial due uncertain nature clinical trial process estimate future costs 2008 relating research development approximately 27400000 including 1320000 milestone payment upon dosage first patient rp101 phase 2 clinical trial rp101 zadaxin scv07 development costs actual costs incurred future periods vary depending particular upon timeline design zadaxin phase 3 melanoma clinical trial final decisions regarding timing expense sharing arrangements trial proceed current development programs zadaxin rp101 scv07 would need seek additional capital 2008 expansion significant extension clinical development programs may require us seek additional capital resources sales marketing expenses 13928000 11569000 10237000 years ended december 31 2007 2006 2005 respectively increase sales marketing expenses 2007 2006 partially due 772000 639000 respectively stockbased compensation expense following adoption fas 123r remaining increases 2007 2006 primarily due increases sales marketing personnel promotional activities operating expense related expanding sales marketing efforts expect sales marketing expenses 2008 approximately 2800000 higher incurred 2007 due increased sales efforts general administrative expenses 10245000 9040000 7457000 years ended december 31 2007 2006 2005 respectively increase general administrative expenses 2007 compared 2006 primarily related increase compensation benefits related expenses 713000 due increase general administrative personnel increase stockbased compensation expense 196000 mainly related chief executive officer’s employment agreement 150000 increase office expense related relocation corporate office increase general administrative expenses 2006 compared 2005 primarily related increase compensation benefits related expenses 410000 increased consulting fees 656000 increase stockbased compensation expense 564000 following adoption fas 123r 2008 expect general administrative expenses decrease approximately 700000 compared general administrative expenses incurred 2007 result reduction consulting fees interest investment income approximately 1629000 1764000 1273000 years ended december 31 2007 2006 2005 respectively decrease 2007 resulted reduced interest earned cash balances due lower cash balances partially offset higher interest rates 2007 period increase interest investment income 2006 primarily due cash balances earning higher interest rates period 2008 expect decrease approximately 900000 interest investment income result lower cash balances interest investment expense 20000 94000 345000 years ended december 31 2007 2006 2005 respectively interest expense 2006 2005 primarily related interest company’s convertible notes payable company repaid 4000000 1600000 convertible notes december 2005 march 2006 respectively resulting decrease interest expense periods income expense net 40000 7981000 0 years ended december 31 2007 2006 2005 respectively increase income 2006 period compared 2007 2005 primarily due onetime payment 8000000 received april 2006 resolution dispute schering plough kk regarding conduct hbv clinical trials japan zadaxin provision income tax 301000 year ended december 31 2007 related foreign operations china similar provision income tax recorded years ended december 31 2006 2005 net loss income years ended december 31 2007 2006 2005 9948000 727000 7713000 respectively increase net loss 2007 mainly due 2006 income effect onetime payment 8000000 received april 2006 resolution dispute regarding conduct hbv clinical trials japan increased clinical trial activities related phase 2 clinical trials rp101 scv07 2007 development plans phase 3 clinical trial melanoma increase net income 2006 compared 2005 primarily due onetime payment 8000000 part settlement regarding clinical trials japan basic diluted net loss income per share years ended december 31 2007 2006 2005 022 002 017 respectively weighted average shares outstanding used computing basic net loss income per share years ended december 31 2007 2006 2005 46099641 45901015 45328714 respectively weighted average shares outstanding used computing diluted net loss income per share years ended december 31 2007 2006 2005 46099641 46072027 45328714 respectively income taxes recorded federal state income tax expense years ended december 31 2007 2006 2005 undistributed earnings foreign subsidiaries amounted approximately 9328000 6126000 6673000 december 31 2007 2006 2005 respectively earnings considered permanently reinvested accordingly deferred us income taxes provided thereon december 31 2007 net operating loss carryforwards federal income tax purposes approximately 122000000 expire years 2008 2027 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred foreign subsidiaries december 31 2007 federal tax credit carryforwards approximately 8000000 expire years 2009 2027 “change ownership” provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities liquidity capital resources days’ sales outstanding accounts receivable using average receivables method 137 138 139 days 2007 2006 2005 respectively majority sales customers people’s republic china accounts receivable collections standard credit terms 180 days 2007 2006 2005 receivables collected within terms days’ sales outstanding decreased 2005 2007 due normal fluctuations timing customer payments received december 31 2007 2006 2005 35281000 42592000 42256000 respectively cash equivalents shortterm investments years principal factors affecting balances net loss income cash used financing activities currently estimate cash equivalents shortterm investments december 31 2008 lower balance december 31 2007 expected decrease balance primarily attributable cash used operations shortterm investments consist primarily highly liquid marketable securities restricted shortterm investment 72000 december 31 2007 relates letter credit secured certificate deposit facilitate value added tax filings europe due recent adverse developments credit markets may experience reduced liquidity respect shortterm student loan related aaa rated adjustable rate securities developments could result reclassification securities longterm investments december 31 2007 held 2825000 adjustable rate notes reflected shortterm investments february 29 2008 liquidated 1025000 notes held remaining 1800000 february march 2008 remaining 1800000 auctionrate securities experienced failed auction result ability liquidate investments fully recover carrying value investments near term may limited exist may required hold securities stability restored respect securities believe even allowing reclassification securities long term possible requirement hold securities indefinite period time remaining cash equivalents shortterm investments sufficient meet anticipated cash needs least next twelve months net cash used provided operating activities totaled 7011000 1682000 8162000 years ended december 31 2007 2006 2005 respectively net cash used operating activities 7011000 year ended december 31 2007 comprised primarily net loss 9948000 adjusted noncash items stockbased compensation expense 2243000 depreciation amortization 248000 350000 net cash inflow related changes operating assets liabilities changes included increase clinical trials expense 1431000 increase accounts payable accrued expenses 1852000 increases related primarily phase 2 rp101 scv07 clinical trials development plans melanoma clinical trial inflows partially offset increase inventory levels 2262000 supplier bulk active pharmaceutical ingredient api product manufacture zadaxin able produce higher yields production runs enabling us increase inventory levels compared lower expected inventory levels prior year period increase prepaid expenses assets 1259000 mainly related phase 2 rp101 clinical trial net cash provided operating activities 1682000 year ended december 31 2006 primarily due net income 727000 adjusted noncash expense related employee stock options 2446000 due adoption fas 123r depreciation amortization 233000 1686000 net cash outflow related changes operating assets liabilities changes included increase accounts receivable 3576000 due fluctuations timing payments received within credit terms customers increase accounts payable accrued expenses 1137000 primarily related increase royalty accrual net cash used operating activities year ended december 31 2005 primarily due net loss 7713000 net cash provided investing activities amounted 12994000 year ended december 31 2007 compared cash used investing activities 577000 year ended december 31 2006 6363000 year ended december 31 2005 net cash provided investing activities 2007 12994000 primarily due sale us treasury securities municipal securities holdings fund operations partially offset 446000 purchases property equipment net cash used investing activities 2006 577000 primarily due increased holdings us treasury securities 4369000 offset partially decrease municipal securities holdings 3850000 due purchases property equipment 75000 net cash used investing activities 2005 6363000 primarily due purchase us treasury securities amount 6034000 2005 purchases property equipment 119000 net cash provided financing activities totaled 241000 year ended december 31 2007 compared net cash used financing activities 1335000 year ended december 31 2006 834000 year ended december 31 2005 net cash provided financing activities year ended december 31 2007 consisted proceeds received approximately 241000 related exercises outstanding options employee stock option plans net cash used financing activities year ended december 31 2006 consisted repayment 1600000 convertible note partially offset proceeds received approximately 221000 related exercises outstanding options employee stock option plans 44000 issuance common stock employee stock purchase plan net cash used financing activities year ended december 31 2005 consisted repayment 4000000 convertible note partially offset proceeds received approximately 3003000 related exercises outstanding options employee director stock option plans 163000 issuance common stock employee stock purchase plan following table summarizes contractual obligations commitments december 31 2007 1 future minimum rental commitments office space copiers leased noncancelable operating lease arrangements 2 amounts payable european marketing development partner sigmatau conduct complete hcv clinical trial europe 3 includes minimum royalty payments us army 2010 wayne state university “wsu” 2012 additionally upon regulatory approval zadaxin commercialization product certain countries company obligated pay us army wsu greater respective minimum annual royalty based percentage zadaxin sales see note 12 notes consolidated financial statements 4 amount represents discretionary accrued longterm bonus payable chief executive officer december 31 2007 based performance targets years 20062008 addition commitments sciclone result acquisition exclusive rights united states canada develop commercialize rp101 paid 1320000 milestone payment upon dosage first patient phase 2 clinical trial january 2008 may obligated pay post phase 3 successbased regulatory commercial milestone payments 22000000 royalties future sales rp101 avantogen resprotect also assumed amended terms certain agreement clinical trials management services randomized double blind placebo controlled phase 2 study evaluating efficacy safety rp101 previously entered avantogen oncology inc pharmaceutical research associates inc pra estimated cost pra’s management services passthrough costs per amended agreement 8000000 4000000 respectively 2184000 paid company pra 52000 payable pra december 31 2007 remaining amounts expected paid pra incurred 2009 entered supply agreement resprotect purchase rp101 resprotect clinical trials commercial purposes following regulatory approval terms supply agreement sciclone resprotect share scaleup costs required manufacture rp101 prior fda approval share scaleup costs estimated 1448000 june 2010 455000 paid us resprotect december 31 2007 existing capital resources funds product sales sufficient finance operations first quarter 2009 sufficient complete current plans conduct complete clinical trials rp101 scv07 thymalfasin proceed development efforts planning would need raise additional financing unavailability inopportune timing financing could prevent delay longterm product development commercialization programs either would severely hurt business cannot assure funds financings sufficient complete current plans conduct complete clinical trials need timing amount financing would depend upon numerous factors including level zadaxin sales timing amount manufacturing costs related zadaxin availability complementary products technologies businesses initiation continuation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative parties status competitive products condition capital markets availability financing sciclone particular exploring various alternatives financing addition sales equity sciclone including line credit debt financing chinese operations either debt equity joint venture transactions determined timing structure transaction related party transactions officers directors involved related party transactions 2007 licensed largest shareholder sigmatau exclusive zadaxin development marketing rights include countries european union march 2000 also entered agreement sigmatau related clinical development zadaxin received 2685000 first quarter 2002 related agreement contract revenue recognized estimated time complete zadaxin us phase 3 hcv clinical trials deliver clinical data substantive performance requirements contract years ended december 31 2006 2005 recognized contract revenue 229000 492000 respectively related agreement contract revenue recognized 2007 related agreement also entered agreement sigmatau whereby sigmatau conducting multicenter phase 3 hepatitis c triple therapy clinical trial europe 553 patients objective european trial provide data thymalfasin’s use part triple therapy treating hcv patients providing sigmatau approximately 2509000 funding support course patient enrollment trial period 2009000 paid december 31 2007 remaining 500000 paid upon completion trial also pay 1500000 milestone payment upon completion final report based level activity trial recorded approximately 507000 1750000 1203000 research development expense related trial years ended december 31 2007 2006 2005 respectively december 31 2007 2006 accrued clinical trial expenses 1620000 1599000 respectively due sigmatau offbalance sheet arrangements offbalance sheet arrangements 2007 2006 2005 recent accounting pronouncements december 2007 financial accounting standards board “fasb” released emerging issues task force “eitf” issue 071 accounting collaboration arrangements related development commercialization intellectual property” “eitf 071” focuses parties collaborative arrangement account costs incurred revenue generated sales third parties sharing payments pursuant collaboration agreement presented income statement certain related disclosure questions eitf 071 effective fiscal years ending december 15 2008 expect impact adoption eitf 071 results operations financial position july 2007 fasb released eitf 073 “eitf 073” “accounting nonrefundable advance payments goods services used future research development activities” accordance eitf 073 nonrefundable advance payments goods services received future use research development activities deferred capitalized amounts expensed related goods delivered services performed eitf 073 effective new contracts entered fiscal years beginning december 15 2007 including interim periods within fiscal years currently assessing impact eitf 073 results operations financial position september 2006 fasb issued statement financial accounting standards “sfas” 157 fair value measurements “sfas 157” sfas 157 defines fair value establishes framework gives guidance regarding methods used measuring fair value expands disclosures fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years fasb staff position fas 1572 effective date fasb statement 157 delays effective date sfas 157 fair value measurements nonfinancial assets nonfinancial liabilities except items recognized disclosed fair value financial statements recurring basis least annually currently assessing impact sfas 157 results operations financial position february 2007 fasb issued sfas 159 fair value option financial assets financial liabilitiesincluding amendment fasb statement 115 “sfas 159” sfas 159 expands use fair value accounting affect existing standards require assets liabilities carried fair value objective sfas 159 improve financial reporting providing companies opportunity mitigate volatility reported earnings caused measuring related assets liabilities differently without apply complex hedge accounting provisions sfas 159 company may elect use fair value measure eligible items specified election dates report unrealized gains losses items fair value option elected earnings subsequent reporting date eligible items include limited accounts loans receivable availableforsale heldtomaturity securities equity method investments accounts payable guarantees issued debt firm commitments elected sfas 159 effective fiscal years beginning november 15 2007 currently assessing whether fair value accounting appropriate eligible items cannot estimate impact results operations financial position item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations read conjunction “selected financial data” consolidated financial statements related notes thereto included elsewhere annual report form 10k management’s discussion analysis financial condition results operations parts annual report form 10k contain forwardlooking statements involve risks uncertainties see “note regarding forwardlooking statements” “risk factors” contained annual report form 10k overview sciclone pharmaceuticals nasdaq scln revenuegenerating profitable united states “us”based chinafocused specialty pharmaceutical company substantial commercial business product portfolio therapies oncology infectious diseases cardiovascular urological respiratory central nervous system disorders focused continuing international sales growth strong sales marketing efforts growing profitability business corporate strategy focused primarily people’s republic china “china” built solid reputation established strong brand many years experience marketing lead product zadaxin believe strengths position us benefit expansion pharmaceutical market china believe china rank second among global pharmaceutical markets 2016 projected annual growth rates 1520 annually next several years seek grow sales current product portfolio region leverage strong balance sheet future acquisitions product inlicensing acquired novamed pharmaceuticals inc “novamed” april 18 2011 results operations include operations novamed date forward believe novamed acquisition positions us leading specialty pharmaceutical company china key pharmaceutical assets new therapeutic areas focus expanded management team larger stronger commercial infrastructure including combined sales force 850 sales professionals aim expand presence china increasing revenues key products inlicensing additional products expanding sales force penetrate market broadened portfolio 16 marketed products spans major therapeutic areas including oncology infectious diseases cardiovascular urological respiratory central nervous system disorders acquisition increased portfolio commercial development stage products exclusive licensing promotion agreements number leading pharmaceutical companies since acquisition operated two segments generally based nature location customers 1 china 2 rest world including us two categories revenues “product sales revenues” “promotion services revenues” product sales revenues result proprietary inlicensed products including lead product zadaxin products pfizer inc iroko pharmaceuticals llc zadaxin highest margins portfolio premium proprietary product sold exclusively sciclone aggrastat® inlicensed product recently began selling china also higher margins promoted products expect revenues product grow significantly penetrates china market addition anticipate new marketed products introduced dc bead® tramadol® ondansetron rapidfilm® increase future revenues profitability growing pharmaceutical business china coming years recently received notification approval tramadol use treatment moderate severe pain see part item 3 “legal proceedings” regarding status agreement meda pharma gmbh co kg regarding tramadol products development “promotion services revenues” result fees receive exclusively promoting products certain partners including sanofi baxter international inc china recognize promotion services revenues percentage collaborators’ product sales revenue exclusively promoted products depakine® stilnox® tritace® time additional proprietary inlicensed products come market expect product mix shift towards higher margin products sciclone’s zadaxin thymalfasin approved 30 countries may used treatment hepatitis b “hbv” hepatitis c “hcv” vaccine adjuvant certain cancers according approvals countries china thymalfasin also included treatment guidelines issued ministry health “moh” liver cancer continue grow zadaxin sales china sales force focused increasing sales country’s largest hospitals class 3 500 beds well midsize hospitals class 2 hospitals serve tier 1 tier 2 cities located mostly eastern part china largest generally affluent populations zadaxin’s list price china currently review regulatory authorities anticipate price reduction may occur substantial reduction list price occurs revenues gross margins zadaxin would substantially reduced timing extent zadaxin price reduction unknown sciclone’s marketed portfolio also includes depakine widely prescribed broadspectrum anticonvulsant china tritace ace inhibitor treatment hypertension stilnox fastacting hypnotic shortterm treatment insomnia marketed ambien® us aggrastat intervention cardiology product launched 2009 sciclone also pursuing registration several therapeutic products china continue look inlicensing opportunities approved latestage branded welldifferentiated products yet approved clear regulatory approval pathway china based existing regulatory approval outside china preference inlicense products higher margins augment product sales revenue category continue explore opportunities optimize promotion services revenues category also working final stage regulatory approval china inlicensed candidate dc bead approval process product candidates clinical trials stages regulatory approval process china 2011 developing scv07 phase 2b clinical trial delayed onset oral mucositis “om” march 2 2012 announced discontinuation trial based preplanned interim analysis results indicated trial would meet prespecified efficacy endpoints intention curtail usbased development efforts december 2011 announced california superior court county san mateo granted final approval settlement reached parties consolidated derivative lawsuits certain current former directors officers sciclone pharmaceuticals company nominal defendant summary final settlement provides litigation dismissed prejudice release certain known unknown claims could brought later court arising allegations company adopt certain governance measures addition settlement provides payment approximately 25 million attorney’s fees counsel plaintiffs sciclone’s insurers paying substantially fees united states securities exchange commission “sec” united states department justice “doj” conducting formal investigations sciclone regarding range matters including possibility violations foreign corrupt practices act “fcpa” continue cooperate fully sec doj conduct investigations response matters board appointed special committee independent directors “special committee” oversee response government inquiry special committee substantially concluded investigation may 4 5 2011 reported findings recommendations board directors part continuing cooperation ongoing investigation sec doj special committee also reported findings sec doj sec’s doj’s formal investigations continuing investigations could result administrative orders us imposition significant penalties andor fines us andor imposition civil criminal sanctions us certain officers directors andor employees cannot predict outcome investigations timing resolution refer footnote 16 “other corporate matters” part item 3 “legal proceedings” part ii item 9a “changes internal controls” form 10k information regarding investigation remedial measures related litigation material weaknesses remediated believe cash investments december 31 2011 ongoing revenue generating business operations sufficient support current operating plan least next 12 months results may fluctuate quarter may report quarterly losses future results operations revenues following table summarizes year changes product sales promotion services revenues thousands product sales 1130 million 851 million 724 million years ended december 31 2011 2010 2009 respectively increases 279 million 33 year ended december 31 2011 compared 2010 127 million 18 year ended december 31 2010 compared 2009 primarily attributable increased sales zadaxin increase 2011 period also related addition novamed product sales result acquisition novamed zadaxin sales 1048 million year ended december 31 2011 compared 851 million 724 million years ended december 2010 2009 overall zadaxin revenue growth attributable increase quantity zadaxin sold primarily due market penetration china promotion services revenue 206 million year ended december 31 2011 reflects addition novamed promotion services result acquisition novamed related distribution products promotional contracts total revenues attributable china 1300 million 820 million 697 million 97 96 sales years ended december 31 2011 2010 2009 respectively year ended december 31 2011 sales three importing distributor agents china accounted approximately 61 15 14 revenues year ended december 31 2010 sales two importing distributor agents china accounted approximately 74 14 revenues year ended december 31 2009 sales two importing distributor agents china accounted approximately 66 27 revenues last year sinopharm group co limited acquired majority interest two largest importers shanghai lingyun pharmaceutical company ltd guangdong south pharmaceutical foreign trade company ltd believe acquisitions impact sales experience largest importers distributors good anticipate continue sell majority product cost product sales following table summarizes year changes cost product sales thousands cost product sales 200 million year ended december 31 2011 compared 127 million 120 million years ended december 31 2010 2009 respectively increases 73 million 58 07 million 6 years ended december 31 2011 compared years ended december 31 2010 2009 attributable higher zadaxin sales addition novamed cost product sales 2011 result acquisition novamed zadaxin cost sales 150 million year ended december 31 2011 compared 127 million 120 million years ended december 31 2010 2009 respectively gross margin zadaxin 857 year ended december 31 2011 compared 851 835 years ended december 31 2010 2009 respectively increase gross margin zadaxin year ended december 31 2011 compared years ended december 31 2010 2009 due primarily lower per vial production costs mainly result manufacturing volume efficiencies expect total revenues cost product sales increase 2012 compared 2011 due increased unit sales zadaxin related market penetration china partially offset potential price reductions zadaxin result addition revenues novamed’s product portfolio december 31 2011 able maintain zadaxin gross margin part due relatively stable even decreasing costs sales part due maintaining relatively stable sales price zadaxin’s list price china currently review regulatory authorities anticipate price reduction may occur substantial reduction list price occurred revenues gross margins zadaxin would substantially reduced expect zadaxin cost product sales gross margins fluctuate period depending upon level sales price products absorption productrelated fixed costs currency exchange fluctuations charges associated excess expiring finished product inventory timing inventory period costs manufacturing process improvements goal future cost reductions sales marketing following tables summarize year changes sales marketing expenses thousands sales marketing expenses 489 million 220 million 188 million years ended december 31 2011 2010 2009 respectively increases 226 million year ended december 31 2011 compared year ended december 31 2010 attributable novamed operations result acquisition novamed sales force 440 individuals remaining increases 42 million year ended december 31 2011 related increased growth zadaxin sales force china approximately 100 additional sales individuals market penetration china resulting increased sales marketing costs compensation benefits sales incentives travel medical training business taxes increase sales marketing expenses 32 million 17 year ended december 31 2010 compared year ended december 31 2009 primarily related increased conferences local training seminars increase employeerelated costs associated growth sales force sales efforts zadaxin 2010 period expect sales marketing expenses year ending december 31 2012 higher incurred year ended december 31 2011 due increased sales efforts zadaxin depakine aggrastat primarily china amortization acquired intangible assets year ended december 31 2011 recognized 25 million amortization acquired intangible assets expense reflecting amortization promotion distribution contract intangible assets acquired part novamed acquisition similar expense years ended december 31 2010 2009 expect 34 million per year annual amortization expenses future years research development “rd” following tables summarize year changes rd expenses thousands research development “rd” expenses 123 million 124 million 165 million years ended december 31 2011 2010 2009 respectively rd expenses decreased 01 million 1 year ended december 31 2011 compared year ended december 31 2010 year ended december 31 2011 rd expenses primarily related scv07 phase 2b clinical trial began enrollment january 2011 treatment om lesser extent addition novamed rd expenses due acquisition novamed year ended december 31 2010 rd expenses primarily related phase 2a clinical trial scv07 delay onset severe om initiation scv07 phase 2b clinical trial treatment om scv07 phase 2b clinical trial treatment hcv decrease 41 million 25 rd expenses year ended december 31 2010 compared year ended december 31 2009 primarily related timing clinical trialrelated expenses including completion enrollment patients phase 2a clinical trial scv07 delay onset severe om first quarter 2010 discontinuation rp101 clinical trial treatment pancreatic cancer 2009 decreases partially offset increased expenses related scv07 phase 2b clinical trials treatment hcv om 2010 period major components rd expenses include salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment licenserelated fees services performed clinical research organizations research institutions outside service providers initiation continuation completion current clinical development programs expected continue significant effect research development expenses march 2 2012 announced discontinuation scv07 phase 2b clinical trial delay onset severe om based results preplanned interim analysis indicated trial would meet prespecified efficacy endpoints expect research development expenses decrease significantly 2012 compared 2011 result discontinuation scv07 phase 2b clinical trial curtailment usbased development expenses continue evaluate opportunities inlicense marketing rights proprietary products primarily china may result increased research development expenses due license fee payments expenses related inlicensing development new products future general administrative following tables summarize year changes general administrative expenses thousands general administrative expenses 240 million 156 million 125 million years ended december 31 2011 2010 2009 respectively general administrative expenses year ended december 31 2011 increased 84 million 54 compared year ended december 31 2010 increase attributable acquisition novamed april 2011 including general administrative expenses attributable novamed operations acquisition related transaction costs including legal banker fees accounting advisory services 38 million higher professional services primarily related fcpa compliance efforts various tax planning compliance matters year ended december 31 2010 general administrative expenses increased 31 million 25 compared year ended december 31 2009 primarily result higher corporate legal expenses connection responding sec doj investigations announced august 2010 shareholder litigations filed following announcement investigations conduct independent investigation special committee board directors order evaluate whether violation fcpa laws occurred well business development efforts china expect general administrative expenses decrease 2012 compared 2011 result lower professional expenses including legal tax accountingrelated expect incur significant acquisitionrelated costs 2012 though continue evaluate opportunities china may result increased general administrative expenses future contingent consideration part acquisition novamed may required pay additional 430 million earnout payments upon successful achievement revenue earnings targets 2011 2012 fiscal years “earnout” “contingent consideration” estimate fair value contingent consideration using monte carlo simulation model initially recorded 189 million estimated fair value contingent consideration fair value contingent consideration remeasured period changes fair value recorded contingent consideration expense december 31 2011 estimate payment contingent consideration 154 million resulting gain 35 million remeasurement contingent consideration fair value estimates based variety factors may significantly fluctuate period including likelihood earnout targets achieved present value factors associated timing earnout targets may result significant fluctuations contingent consideration expense future interest income interest income approximately 01 million 01 million 02 million years ended december 31 2011 2010 2009 respectively interest income decreased primarily result lower returns due declining interest rate environment 2011 2010 compared 2009 interest expense interest expense 02 million years ended december 31 2011 2010 2009 included expenses related loan origination fees interest expense associated silicon valley bank line credit expect interest expense year ending december 31 2012 remain comparable level incurred year ended december 31 2011 income november 2010 awarded approximately 10 million nontaxable grants part us department treasury’s therapeutic discovery project program related research development activities scv07 zadaxin similar grants awarded us years ended december 31 2011 2009 expect income related nontaxable grants year ending december 31 2012 provision income tax provision income tax 08 million 22 million 06 million years ended december 31 2011 2010 2009 respectively relates foreign operations china tax expense decreased 14 million year ended december 31 2011 compared year ended december 31 2010 decreases related tax benefits recognized 10 million year ended december 31 2011 deferred tax assets liabilities mainly result acquisition novamed april 2011 lower tax expense recorded year ended december 31 2011 related uncertain tax position china offset partially increase tax expense due growth china operations increase statutory tax rate certain operations china 22 2010 2425 2011 tax expense increased 15 million year ended december 31 2010 compared year ended december 31 2009 increase resulted increase operating activities china increase statutory tax rate china addition year ended december 31 2010 recorded additional tax expense 08 million related uncertain tax position china statutory tax rate china 2425 22 20 years ended december 31 2011 2010 2009 respectively statutory tax rate china 25 2012 expect provision income tax decrease year ending december 31 2012 compared year ended december 31 2011 expect decrease tax expense related uncertain tax positions china 2012 recorded us federal state income tax expense years ended december 31 2011 2010 2009 undistributed earnings foreign subsidiaries amounted approximately 330 million december 31 2011 earnings considered permanently reinvested accordingly deferred us income taxes provided thereon december 31 2011 net operating loss carryforwards federal income tax purposes approximately 1095 million expire years 2012 2030 december 31 2011 federal research development orphan drug investment tax credit carryforwards approximately 130 million expire years 2012 2031 “change ownership” provisions internal revenue code portion net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities liquidity capital resources continue closely manage liquidity capital resources rely operating cash flows cash equivalents shortterm investments shortterm borrowing arrangement provide liquidity requirements continue believe ability meet liquidity needs least next 12 months fund working capital requirements operations including research development activities investments business share repurchases pay shortterm borrowing arrangements fund business development activities following tables summarize cash investments cash flow activities end years presented thousands december 31 2011 670 million cash investments 431 million located subsidiaries company outside us cash held subsidiaries outside us held primarily us dollars cash used fund operating activities foreign subsidiaries investment foreign operations may include inlicensing new products particularly china potential acquisitions generally consider cash permanently reinvested foreign operations current plans demonstrate need repatriate cash fund us operations net operating loss credit carryforwards anticipate repatriation cash held foreign subsidiaries would result payment taxes us net cash provided operating activities 295 million year ended december 31 2011 primarily reflected net income period adjusted noncash items stockbased compensation expense depreciation amortization expense changes operating assets liabilities changes included increase accounts receivable 39 million related increases sales volume normal fluctuations timing customer receipts majority sales importers distributors china accounts receivable collections standard credit terms generally ranging 45 180 days changes also included increase inventory levels 17 million related higher inventory stock levels support increased demand zadaxin product increase accounts payable accrued expenses 45 million primarily result acquisition novamed year ended december 31 2010 changes included increase accounts receivable 93 million compared year ended december 31 2009 related increased sales fluctuations timing cash receipts customers addition inventory levels decreased 31 million year ended december 31 2010 compared year ended december 31 2009 primarily related increase sales decrease production fiscal 2010 accounts payable accrued liabilities increased 37 million mainly related increase legal costs associated sec doj investigations shareholder litigations filed following announcement investigations conduct independent investigation special committee board directors increase accrued taxes tax reserves net cash used investing activities 188 million 13 million 01 million years ended december 31 2011 2010 2009 respectively year ended december 31 2011 net cash used investing activities primarily related acquisition novamed used cash approximately 213 million lesser extent related sale availableforsale investments net purchases availableforsale investments purchases property equipment cash used investing activities years ended december 31 2010 2009 primarily related purchases investments net proceeds sale maturities investments purchases property equipment net cash provided financing activities 28 million 39 million 26 million years ended december 31 2011 2010 2009 respectively consisted proceeds issuances common stock made stock award plans year ended december 31 2011 also used 35 million repurchase approximately 781000 shares common stock repurchase program year ended december 31 2010 received proceeds 25 million borrowing line credit following summarizes future contractual obligations december 31 2011 thousands 1 shortterm debt obligations include expected principal interest unused line fee obligations related silicon valley bank lineofcredit calculations expected principal interest payments incorporate current period assumptions interest rates borrowings 2 future minimum rental commitments office space copiers leased noncancelable operating lease arrangements 3 consist purchase obligations manufacturers distributors 4 part acquisition novamed may required pay 430 million contingent consideration upon successful achievement revenue earnings targets 2011 2012 fiscal years timing contingent consideration payment dependent upon several factors including whether changeincontrol contingent consideration expected paid later first half 2013 5 able reasonably estimate timing payments amount obligations unrecognized tax benefits increase decrease time related balances reflected “payments due period” section table loan security agreement silicon valley bank “svb” “the credit facility” financing facility 15 million expires october 1 2012 credit facility bears interest borrowed funds bank’s prime rate plus 125 525 december 31 2011 outstanding balances secured first priority secured interest assets including intellectual property event default required meet certain financial covenants including minimum liquidity defined subject certain minimum fees interest payments also required meet certain operating covenants limit ability incur liabilities create liens make capital expenditures pay dividends distributions make investments dispose assets december 31 2011 borrowed 25 million credit facility required maintain debt coverage ratio 135 1 equal 34 million cash svb cash accounts meet financial liquidity covenant compliance significant terms credit facility upon termination credit facility amounts borrowed must repaid full may 2009 filed shelf registration statement form s3 sec may offer sell 500 million securities assuming continue meet sec’s eligibility requirements primary offerings form s3 ability issue securities registration statement expire may 2012 filed additional shelf registration sec march 15 2012 declared effective sec would enable us offer sell 1000 million securities april 18 2011 issued 8298110 shares common stock former stockholders novamed part acquisition novamed 25 shares may sold holders threemonth period october 18 2012 october 2011 announced board directors approved share repurchase program authorizes company repurchase 20 million outstanding common stock twentyfour month period repurchased retired approximately 781000 shares cost 35 million year ended december 31 2011 made share repurchases years ended december 31 2010 2009 december 31 2011 165 million 20 million share repurchase program authorized board available future share repurchase consider several factors determining make share repurchases including among things cash needs availability funding market price stock expect cash provided future operating activities well available cash equivalents shortterm investments sources funding share repurchase program believe existing cash investments ongoing revenue generating business operations sufficient support current operating plan least next 12 months current commitments offer sell securities may offered sold pursuant registration statement extent raise additional capital issuing equity securities stockholders may experience dilution debt financing available may subject us restrictive covenants significant interest costs extent raise additional funds collaboration licensing arrangements would required relinquish rights technologies product candidates marketing territories additional financing collaboration licensing arrangements may available needed either favorable terms intend continue explore alternatives financing provide additional flexibility managing operations inlicensing new products particularly china potential acquisitions unavailability inopportune timing financing could prevent delay longterm product development commercialization programs either could hurt business cannot assure funds financings sufficient conduct complete clinical trials inlicense additional products need timing amount financing would depend upon numerous factors including status pending regulatory investigations pending litigations level price sales products timing amount manufacturing costs related products availability complementary products technologies businesses initiation continuation preclinical clinical trials testing timing regulatory approvals developments relationships existing future collaborative parties status competitive products various alternatives financing determined timing structure transaction offbalance sheet arrangements offbalance sheet arrangements 2011 2010 2009 critical accounting policies significant judgments estimates general identified policies critical business operations understanding results operations impact associated risks related policies business operations discussed throughout “management’s discussion analysis financial condition results operations” policies affect reported expected financial results detailed discussion application accounting policies see note 1 “notes consolidated financial statements” part ii item 8 annual report form 10k consolidated financial statements prepared accordance accounting principles generally accepted united sates require us make estimates assumptions affect reported amount assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period ongoing basis evaluate relevance estimates judgments base estimates historical experience various market specific assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources assurance actual results differ estimates revenue recognition recognize revenue persuasive evidence arrangement exists services rendered delivery occurred price buyer fixed determinable collectability reasonably assured product revenue earn product revenue selling manufactured zadaxin product time delivery sales zadaxin importing agents distributors recognized time shipment title product transferred also earn product revenue purchasing medical products pharmaceutical companies selling directly importers distributors sales recognized medical products delivered importers distributors payments importing agents distributors contingent upon sale end user importing agents distributors promotion services revenue recognize promotion services revenue designated medical products delivered distributors specified promotional contract marks period marketing promotional services rendered revenue recognition criteria met accounts receivable accounts receivable recorded net allowance doubtful accounts net allowance product returns established time sale allowance doubtful accounts maintain allowance doubtful accounts estimated losses resulting inability customers make required payments appropriate record allowance doubtful accounts based assessment various factors estimating need allowance doubtful accounts consider historical payment patterns customers circumstances individual customer geographic region including review local economic environment age accounts receivable balances credit quality customers factors may affect customers’ ability pay december 31 2011 allowance doubtful accounts considered necessary allowance product returns maintain allowance product returns based estimates amount product returned customers may result expired product price reductions related sales based historical patterns analysis market demand andor percentage sales based industry trends management’s evaluation specific factors may increase risk product returns importing agents distributors contractual rights return except limited terms regarding product quality however expected replace products expired deemed damaged defective delivered calculation product returns allowance requires estimates involves high degree subjectivity judgment result uncertainties involved estimating product returns allowance possibility materially different amounts could reported different conditions using different assumptions december 31 2011 estimated product returns allowance 02 million consolidated balance sheet related oncology products aggrastat product sales evaluate returns allowance quarterly adjust events indicate change estimate appropriate changes estimate could materially affect results operations financial position however date material possible may need adjust estimates future periods inventories stated lower cost market net realizable value cost determined firstin firstout basis include amounts related materials labor overhead assessing ultimate realization inventories required make judgments future demand requirements compare current inventory levels current assumptions future production inventory levels demand change actual market conditions less favorable projected management inventory writedowns may required could negatively impact gross margins results operations obsolete items excess observed alternate uses inventory record writedown net realizable value period impairment first recognized business combinations accounted acquisition novamed april 2011 accordance asc topic 805 business combinations asc topic 805 establishes principles requirements recognizing measuring total consideration transferred assets acquired liabilities assumed acquired target business combination consideration paid acquire novamed required measured fair value included contingent consideration earnout payments paid upon successful achievement revenue earnings targets 2011 2012 fiscal years total consideration transferred calculated determining fair value contingent consideration sciclone common stock plus cash consideration assigned purchase price novamed fair value assets acquired liabilities assumed resulted recognition intangible assets related promotion distribution contract rights goodwill determination recognition consideration transferred requires management make significant estimates assumptions especially acquisition date respect fair value contingent consideration intangible assets acquired part acquisition novamed may required pay 430 million contingent consideration upon successful achievement revenue earnings targets 2011 2012 fiscal years december 31 2011 estimated fair value contingent consideration 154 million fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date quoted prices observable inputs unavailable fair values based internally developed cash flow models classified level 3 valuation hierarchy estimated fair value contingent consideration using monte carlo simulation model classified level 3 valuation hierarchy inputs used monte carlo simulation model reflect assumptions estimates including riskadjusted discount rate volatility assessment inputs used fair value measurement requires judgment may affect valuation contingent consideration measured earnout based upon certain financial performance metrics including revenuebased formula adjusted ebitda earnings interest depreciation taxes based formula earnout provisions subject number adjustments acceleration provisions total earnout payments described may increased 100 million exceeding total maximum contingent cash consideration 430 million reduced 100 million depending upon whether able achieve targets relating product distribution agreements changeincontrol company april 18 2012 earnout payment would deemed 230 million changeincontrol company april 18 2012 december 31 2012 earnout payment would range 115 million 230 million depending upon achievement adjusted ebitda revenue targets date changeincontrol addition either mark lotter terminated without cause prior december 31 2012 ii fail meet certain obligations appoint retain mark lotter peter barrett replacements board directors december 31 2012 earnout payment would deemed 230 million required remeasure contingent consideration reporting period amount payment finalized may occur december 31 2012 change estimated fair value contingent consideration recognized adjustment operating expenses acquisition date april 18 2011 december 31 2011 estimated fair value contingent consideration decreased 35 million primarily result adjustments certain performance metric projections used estimate fair value future changes estimated fair value contingent consideration may significant ultimate contingent consideration payout could range 0 430 million goodwill intangible assets account goodwill intangible assets accordance asc topic 805 asc topic 350 intangibles goodwill asc topic 805 requires purchase method accounting used business combinations specifies criteria must met order intangible assets acquired business combination recognized reported apart goodwill december 31 2011 recognized acquisition 452 million intangible assets related promotion distribution relationships 320 million goodwill intangible assets amortized 135 years based estimated useful life goodwill determined indefinite life therefore amortized intangible assets goodwill tested impairment least annually whenever events circumstances occur indicate impairment might occurred accordance asc topic 350 judgment regarding existence impairment indicators based operating results changes manner use acquired assets overall business strategy market economic trends future events loss promotion distribution contracts could cause us conclude impairment indicators exist certain intangibles longlived assets impaired resulting adverse impact financial position results operations contingent liabilities record liabilities estimated amounts litigation claims legal actions probable reasonably estimated likelihood material change estimated reserves dependent possible outcome settlement negotiations regulatory judicial review development facts circumstances extended litigation could change claims assessments amount range loss outstanding litigation uncertain disclose footnotes financial statements unable make reasonable estimate material liability could result unfavorable outcomes events occur assess potential liability related pending litigation claims legal actions adjust estimates accordingly adjustments could materially impact financial statements stockbased compensation record stockbased compensation costs relating sharebased payment transactions including stock options restricted stock units “rsus” employee stock purchase plans stockbased compensation expense stock options employee stock purchase plan estimated date grant based fair value award using blackscholes optionpricing model stockbased compensation expense rsus estimated date grant based number shares granted quoted price company’s common stock grant date stockbased compensation expense values recognized expense straightline basis requisite service period net estimated forfeitures stockbased compensation costs ultimately expected vest recognized expense ratably awards vest requisite service period generally one four years stock options rsus three months employee stock purchase plan company estimates prevesting forfeitures time grant analyzing historical data revises estimates subsequent periods actual forfeitures differ estimates total expense recognized vesting period awards ultimately vest certain targetstockpricebased options valued using monte carlo simulation options pricing model recognized expense service periods vesting portions awards six eight years optionpricing models require use certain subjective assumptions including expected volatility market price underlying stock expected term award expected volatility based historical volatility stock expected term derived historical data employee exercises terminations contractual life award targetstockpricebased options review valuation assumptions grant date result valuation assumptions used value stockbased compensation awards granted future periods may change income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse provide valuation allowance net deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized realization deferred tax assets dependent upon generation future taxable income timing amount uncertain tax years 19952011 remain open examination major taxing jurisdictions subject although subsequent december 31 2011 internal revenue service completed examination 2009 2008 us federal tax returns additional tax assessments proposed adjustments relating taxable income years record liabilities related uncertain tax positions accordance guidance clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribing minimum recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return believe uncertain tax positions currently pending material adverse effect consolidated financial statements although adverse resolution one uncertain tax positions period could material impact results operations period recent accounting guidance may 12 2011 financial accounting standards board “fasb” issued accounting standards update “asu” 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrs new guidance changes fair value measurement principles disclosure requirements disclosure requirements enhanced certain exceptions us nonpublic companies significant change require entities recurring level 3 fair value measurements disclose quantitative information unobservable inputs used description valuation processes used entity qualitative discussion sensitivity measurements new disclosures required use nonfinancial asset measured disclosed fair value use differs highest best use addition entities must report level fair value hierarchy assets liabilities recorded fair value fair value disclosed amendments update applied prospectively public entities amendments effective interim annual periods beginning december 15 2011 early application public entities permitted currently assessing impact adoption update consolidated financial statements disclosures june 2011 fasb issued asu 201105 comprehensive income topic 220 presentation comprehensive income asu 201105 requires nonowner changes stockholders’ equity presented either single continuous statement comprehensive income two separate consecutive statements eliminating option present comprehensive income statement changes equity either choice items reclassified comprehensive income net income required presented face financial statements components net income components comprehensive income presented december 2011 fasb issued another update indefinitely deferred specific requirement presenting reclassification adjustments comprehensive income net income comprehensive income face financial statements deferral period existing requirements presentation reclassification adjustments must continue followed guidance effective interim annual periods beginning january 1 2012 believe adoption guidance material impact consolidated financial statements requires change format presentation september 2011 fasb issued asu 201108 intangibles goodwill topic 350 testing goodwill impairment revised guidance provides entity option make qualitative evaluation likelihood goodwill impairment revised guidance entity permitted first assess qualitative factors determine whether goodwill impairment exists prior performing analyses comparing fair value reporting unit carrying amount assessing totality events circumstances entity determines likely fair value reporting unit less carrying amount performing twostep impairment test unnecessary guidance effective us beginning january 1 2012 however early adoption permitted believe adoption guidance significantly impact financial position results operations cash flows item 7a nanitem 7a quantitative qualitative disclosures market risk primary objective companys investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective company invests highly liquid high quality debt securities companys investments debt securities subject interest rate risk minimize exposure due adverse shift interest rates company invests short term securities maintain average maturity less 2 years hypothetical 60 basis point increase interest rates would result approximate 36300 decrease less 04 fair value companys availableforsale securities potential change noted based sensitivity analyses performed companys financial positions december 31 1998 actual results may differ materially item 8item 7a quantitative qualitative disclosures market risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest highly liquid high quality debt securities investments debt securities subject interest rate risk minimize exposure due adverse shift interest rates invest short term securities maintain average maturity less 1 year hypothetical 60 basis point increase interest rates would result approximate 12456 decrease less 06 fair value availableforsale securities potential change noted based sensitivity analyses performed financial positions december 31 1999 actual results may differ materially item 8item 7a quantitative qualitative disclosures market risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest highly liquid high quality debt securities investments debt securities subject interest rate risk minimize exposure due adverse shift interest rates invest shortterm securities maintain average maturity less one year hypothetical 60 basis point increase interest rates would result approximate 92448 decrease 06 fair value availableforsale securities potential change based sensitivity analyses performed financial position december 31 2001 actual results may differ materially item 8item 7a quantitative qualitative disclosures market risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest solely us treasury us government agency notes investments notes subject interest rate risk minimize exposure due adverse shift interest rates invest shortterm notes maintain average maturity less one year hypothetical 60 basis point increase interest rates would result approximate 90355 decrease 06 fair value availableforsale securities potential change based sensitivity analyses performed financial position december 31 2002 actual results may differ materially substantially sales manufacturing costs date us dollars accordingly currently material exposure foreign currency rate fluctuations item 8item 7a quantitative qualitative disclosures market risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest solely us treasury us government agency notes investments notes subject interest rate risk minimize exposure due adverse shift interest rates invest shortterm notes maintain average maturity less one year hypothetical 60 basis point increase interest rates would result approximate 149464 decrease 06 fair value availableforsale securities potential change based sensitivity analyses performed financial position december 31 2003 actual results may differ materially substantially sales manufacturing costs date us dollars purchases one contract manufacturers denominated euros exposes us foreign currency rate fluctuations item 8item 7a quantitative qualitative disclosures market risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest solely us treasury us government agency notes highly rated highly liquid shortterm municipal securities investments notes subject interest rate risk minimize exposure due adverse shift interest rates invest shortterm notes maintain average maturity less one year hypothetical 60 basis point increase interest rates would result approximate 233246 decrease 06 fair value availableforsale securities potential change based sensitivity analyses performed financial position december 31 2004 actual results may differ materially purchases one contract manufacturers denominated euros exposes us foreign currency rate fluctuations however substantially sales manufacturing costs date us dollars item 8item 7a quantitative qualitative disclosures market risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest cash solely us treasury us government agency notes highly rated highly liquid shortterm municipal securities investments notes subject interest rate risk minimize exposure due adverse shift interest rates invest shortterm notes maintain average maturity less one year hypothetical 60 basis point increase interest rates would result approximate 177347 decrease 06 fair value availableforsale securities potential change based sensitivity analyses performed financial position december 31 2005 actual results may differ materially substantially sales manufacturing costs date us dollars however purchases one contract manufacturers denominated euros costs marketing efforts china paid local currency exposes us foreign currency exchange rate fluctuations losses related foreign currency exchange rate fluctuations insignificant date item 8item 7a quantitative qualitative disclosures market risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest cash solely us treasury us government agency notes highly rated highly liquid shortterm municipal securities investments notes subject interest rate risk minimize exposure due adverse shift interest rates invest shortterm notes maintain average maturity less one year hypothetical 60 basis point increase interest rates would result approximate 136575 decrease 06 fair value availableforsale heldtomaturity securities potential change based sensitivity analyses performed financial position december 31 2006 actual results may differ materially substantially sales manufacturing costs date us dollars however purchases one contract manufacturers denominated euros costs marketing efforts china paid local currency exposes us foreign currency exchange rate fluctuations losses related foreign currency exchange rate fluctuations insignificant date item 8item 7a quantitative qualitative disclosures market risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest money market funds certificates deposit us treasury us government agency notes past also invested highlyrated auction rate securities auction rate securities classified trading securities december 31 2008 consequently recorded balance sheet fair value realized gains losses reported income loss investments mature within one year date purchase except auction rate securities whose ultimate maturities range 22 34 years italian state bonds mature 2013 holdings investments one issue exceed 2 cash equivalents investments investment securities subject interest rate risk interest rates rise market value investments may decline could result realized loss forced sell investment scheduled maturity minimize exposure due adverse shift interest rates invest shortterm notes maintain average maturity less one year hypothetical 60 basis point increase interest rates would result approximate 14000 decrease 06 fair value availableforsale securities potential change based sensitivity analyses performed financial position december 31 2008 actual results may differ materially hold derivative financial instruments manage interest rate risks december 31 2008 held approximately 1485000 auction rate securities classified longterm assets auction rate feature whose underlying assets generally student loans substantially backed federal government february 2008 auctions began fail securities auction failed since february 2008 effective january 1 2008 determined fair market values financial instruments based fair value hierarchy established sfas 157 requires entity maximize use observable inputs level 1 level 2 inputs minimize use unobservable inputs level 3 inputs measuring fair value given current failures auction markets provide quoted market prices ars securities well lack correlation instruments observable market data valued securities using pricing model significant inputs categorized level 3 significant inputs went model credit quality issuer percentage types guarantees federal family education loan programffelp probability auction succeeding security called illiquidity discount factor tax status december 2008 recorded otherthantemporary impairment charge 315000 related ars changes assumptions model based dynamic market conditions could significant impact valuation securities may lead us future take impairment charges securities recorded put option fair value 285000 assets accompanying consolidated balance sheet december 31 2008 estimate fair value put option based discounted cash flow model assumptions used preparing discounted cash flow model include estimates interest rates estimates discount rates using yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods ars inputs reflect assumptions risk developed based best information available circumstances year ended december 31 2008 recorded 285000 gain income related fair value put option changes assumptions model based dynamic market conditions could significant impact valuation asset may lead us future record gains losses asset substantially sales manufacturing costs date us dollars however purchases contract manufacturers denominated euros costs marketing efforts china paid local currency addition certain cash balances denominated euros result exposed foreign currency rate fluctuations hedge risk associated fluctuations consequently changes exchange rates could unpredictably materially adversely affect operating results stock price could result exchange losses although losses insignificant date item 8item 7a quantitative qualitative disclosures market risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest money market funds certificates deposit term deposits us treasury government agency notes past also invested highlyrated auction rate securities auction rate securities classified trading securities december 31 2009 consequently recorded balance sheet fair value realized gains losses reported income loss investments mature within one year date purchase except auction rate securities right sell par value sole discretion anytime period june 30 2010 july 2 2012 italian state bonds mature 2013 investment securities may subject interest rate risk could decrease value market interest rates rise minimize risk primarily hold securities shortterm duration maintain average maturity less one year believe exposure interest rate risk significant 1 movement market interest rates would significant impact total value investment portfolio december 31 2009 hold derivative financial instruments speculation trading purposes determined fair market values financial instruments based fair value hierarchy requires entity maximize use observable inputs level 1 level 2 inputs minimize use unobservable inputs level 3 inputs measuring fair value categorized 18 million par value ars level 3 shortterm investments due failures markets provide quoted market prices ars securities well lack correlation instruments observable market data valued securities using pricing model significant inputs went model credit quality issuer percentage types guarantees federal family education loan programffelp probability auction succeeding security called illiquidity discount factor tax status december 31 2009 ars recorded determined fair value 16 million loss 02 million realized financial statements changes assumptions model based dynamic market conditions could significant impact valuation securities may lead us future take losses gains securities recorded put option fair value 02 million prepaid expenses current assets accompanying consolidated balance sheet december 31 2009 estimate fair value put option based discounted cash flow model assumptions used preparing discounted cash flow model include estimates interest rates estimates discount rates using yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding period inputs reflect assumptions risk developed based best information available circumstances changes assumptions model based dynamic market conditions could significant impact valuation asset may lead us future record gains losses asset substantially sales manufacturing costs date us dollars however purchases contract manufacturers denominated euros costs marketing efforts china paid local currency addition certain cash balances denominated euros result exposed foreign currency rate fluctuations hedge risk associated fluctuations consequently changes exchange rates could result material exchange losses could unpredictably materially adversely affect operating results stock price losses insignificant date item 8item 7a quantitative qualitative disclosures market risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest money market funds term deposits us treasury government agency notes investments mature within one year date purchase except italian state bonds mature 2013 investment securities may subject interest rate risk could decrease value market interest rates rise minimize risk primarily hold securities shortterm duration maintain average maturity less one year believe exposure interest rate risk significant 1 movement market interest rates would significant impact total value investment portfolio december 31 2010 hold derivative financial instruments speculation trading purposes sales us dollars purchases contract manufacturers denominated us dollars euros costs sales marketing efforts china paid local currency addition certain cash balances assets liabilities denominated euros renminbi result exposed foreign currency rate fluctuations hedge risk associated fluctuations consequently changes exchange rates could result material exchange losses could unpredictably materially adversely affect operating results stock price losses significant date item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange rate risk hold derivative financial instruments speculation trading purposes majority sales us dollars although significant amount sales denominated renminbi purchases contract manufacturers denominated us dollars euros costs marketing efforts china paid local currency addition certain cash balances assets liabilities denominated euros renminbi hong kong dollars result exposed foreign currency rate fluctuations hedge risk associated fluctuations consequently changes exchange rates could result material exchange losses could unpredictably materially adversely affect operating results stock price hypothetical 1 increase decrease foreign exchange rates would result approximate 01 million 02 million increase decrease respectively financial assets liabilities denominated euros renminbi hong kong dollars december 21 2012 2011 respectively potential changes based sensitivity analyses performed financial position december 31 2012 2011 actual results may differ materially hold derivative financial instruments manage foreign currency exchange rate risks losses significant date interest rate risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest money market funds term deposits commercial paper corporate bonds us treasury government agency notes investments mature within one year date purchase except italian state bonds mature 2013 investment securities may subject interest rate risk could decrease value market interest rates rise minimize risk primarily hold securities shortterm duration maintain average maturity less one year believe exposure interest rate risk significant 1 movement market interest rates would significant impact total value investment portfolio december 31 2012 item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange rate risk hold derivative financial instruments speculation trading purposes majority sales us dollars although significant amount sales denominated renminbi purchases contract manufacturers denominated us dollars euros costs marketing efforts china paid local currency addition certain cash balances assets liabilities denominated euros renminbi hong kong dollars result exposed foreign currency rate fluctuations hedge risk associated fluctuations consequently changes exchange rates could result material exchange losses could unpredictably materially adversely affect operating results stock price hypothetical 1 increase decrease foreign exchange rates would result approximate 01 million increase decrease financial assets liabilities denominated euros renminbi hong kong dollars december 21 2013 2012 potential changes based sensitivity analyses performed financial position december 31 2013 2012 actual results may differ materially hold derivative financial instruments manage foreign currency exchange rate risks losses significant date interest rate risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest money market funds term deposits commercial paper corporate bonds us treasury government agency notes investments mature within one year date purchase investment securities may subject interest rate risk could decrease value market interest rates rise minimize risk primarily hold securities shortterm duration maintain average maturity less one year believe exposure interest rate risk significant 1 movement market interest rates would significant impact total value investment portfolio december 31 2013 2012 item 8item 7aquantitative qualitative disclosures market risk foreign currency exchange rate risk hold derivative financial instruments speculation trading purposes majority sales us dollars although significant amount sales denominated rmb purchases contract manufacturers denominated us dollars euros costs marketing efforts china paid local currency addition certain cash balances assets liabilities denominated euros rmb hong kong dollars result exposed foreign currency rate fluctuations hedge risk associated fluctuations consequently changes exchange rates could result material exchange losses could unpredictably materially adversely affect operating results stock price hypothetical 1 increase decrease foreign exchange rates would result approximate 01 million increase decrease financial assets liabilities denominated euros rmb hong kong dollars december 31 2014 2013 potential changes based sensitivity analyses performed financial position december 31 2014 2013 actual results may differ materially interest rate risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest money market funds term deposits commercial paper corporate bonds us treasury government agency notes investments frequently classified cash equivalents also invested loan business partner however purpose loan facilitate business relationship principally investment purposes investment securities may subject interest rate risk could decrease value market interest rates rise minimize risk primarily hold securities shortterm duration maintain average maturity less one year believe exposure interest rate risk significant 1 movement market interest rates would significant impact total value investment portfolio december 31 2014 2013 item 8item 7aquantitative qualitative disclosures market risk foreign currency exchange rate risk hold derivative financial instruments speculation trading purposes majority sales us dollars although portion sales denominated rmb per previous contractual arrangement sinopharm december 31 2015 renewed contractual arrangement sinopharm sole importer distributor zadaxin china took effect january 1 2016 sales zadaxin sinopharm continue denominated us dollars however established importer price may adjusted quarterly based upon exchange rate fluctuations us dollar rmb recent months rmb experienced devaluation led may continue lead downward adjustments importer price devaluation continues revenue may negatively affected expenses also positively impacted substantial portion expenses denominated rmb purchases contract manufacturers denominated us dollars euros costs marketing efforts china paid local currency addition certain cash balances assets liabilities denominated euros rmb hong kong dollars result exposed foreign currency rate fluctuations hedge risk associated fluctuations consequently changes exchange rates could result material exchange losses could unpredictably materially adversely affect operating results stock price hypothetical 1 increase decrease foreign exchange rates would result approximate 01 million increase decrease financial assets liabilities denominated euros rmb hong kong dollars december 31 2015 2014 potential changes based sensitivity analyses performed financial position december 31 2015 2014 actual results may differ materially interest rate risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest money market funds term deposits commercial paper corporate bonds us treasury government agency notes investments frequently classified cash equivalents also invested loan business partner however purpose loan facilitate business relationship principally investment purposes investment securities may subject interest rate risk could decrease value market interest rates rise minimize risk primarily hold securities shortterm duration maintain average maturity less one year believe exposure interest rate risk significant 1 movement market interest rates would significant impact total value investment portfolio december 31 2015 2014 item 8item 7aquantitative qualitative disclosures market risk foreign currency exchange rate risk hold derivative financial instruments speculation trading purposes majority sales since july 1 2016 denominated rmb purchases contract manufacturers denominated us dollars euros costs marketing efforts china paid local currency recent year months rmb experienced devaluation negatively affects us dollar value revenues positively affects us dollar value china operating expenses rmb freely convertible foreign currencies china foreign exchange transactions required law transacted authorized financial institutions exchange rates quoted peoples bank china remittances currencies rmb company china require certain supporting documentation order process remittance addition certain cash balances longterm assets liabilities denominated euros rmb hong kong dollars result exposed foreign currency rate fluctuations hedge risk associated fluctuations consequently changes exchange rates could result material exchange losses could unpredictably materially adversely affect operating results stock price hypothetical 1 increase decrease foreign exchange rates would result approximate 01 million increase decrease financial assets liabilities denominated euros rmb hong kong dollars december 31 2016 2015 potential changes based sensitivity analyses performed financial position december 31 2016 2015 actual results may differ materially interest rate risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest money market funds term deposits commercial paper corporate bonds us treasury government agency notes investments frequently classified cash equivalents also invested loan business partner however purpose loan facilitate business relationship principally investment purposes investment securities may subject interest rate risk could decrease value market interest rates rise minimize risk primarily hold securities shortterm duration maintain average maturity less one year believe exposure interest rate risk significant 1 movement market interest rates would significant impact total value investment portfolio december 31 2016 2015 item 8nanitem 7a quantitative qualitative disclosures market risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest highly liquid high quality debt securities investments debt securities subject interest rate risk minimize exposure due adverse shift interest rates invest short term securities maintain average maturity less 1 year hypothetical 60 basis point increase interest rates would result approximate 90305 decrease equal 06 fair value availableforsale securities potential change noted based sensitivity analyses performed financial positions december 31 2000 actual results may differ materially item 8item 7a quantitative qualitative disclosures market risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest money market funds certificates deposit us treasury us government agency notes highlyrated highly liquid shortterm municipal securities auction reset feature “auction rate securities” shortterm municipal securities classified available sale consequently recorded balance sheet fair value unrealized gains losses reported separate component accumulated comprehensive income loss investments mature within one year date purchase except auction rate securities whose ultimate maturities range 22 34 years holdings shortterm investments one issue exceed 2 cash equivalents shortterm investments investment securities subject interest rate risk interest rates rise market value investments may decline could result realized loss forced sell investment scheduled maturity minimize exposure due adverse shift interest rates invest shortterm notes maintain average maturity less one year hypothetical 60 basis point increase interest rates would result approximate 72000 decrease 06 fair value availableforsale securities potential change based sensitivity analyses performed financial position december 31 2007 actual results may differ materially hold derivative financial instruments manage interest rate risks february march 2008 began observing failed auctions auction rate securities whose underlying assets comprised student loans six auctionrate securities experienced failed auction combined 1800000 december 31 2007 held approximately 2825000 auction rate securities within availableforsale shortterm investments classified current assets whose underlying assets comprised student loans substantially backed federal government auction rate securities comprised approximately 8 total cash equivalents shortterm investments december 31 2007 february 29 2008 held 1800000 auction rate securities whose underlying assets comprised student loans auction rate securities investment portfolio continue experience failed auctions ability liquidate investments fully recover carrying value investments near term may limited exist may required hold securities stability restored respect securities auction failure means parties wishing sell securities could although auction rate securities currently rated aaa highest rating agency issuers unable successfully close future auctions credit ratings deteriorate may future required record impairment charge investments believe able liquidate investment without significant loss within next year currently believe securities significantly impaired primarily due government guarantee underlying securities however could take final maturity underlying notes realize investments’ recorded value range 22 34 years based expected operating cash flows sources cash anticipate potential lack liquidity investments affect ability execute business plan next 12 months substantially sales manufacturing costs date us dollars however purchases one contract manufacturers denominated euros costs marketing efforts china paid local currency addition certain cash balances denominated euros result exposed foreign currency rate fluctuations hedge risk associated fluctuations consequently changes exchange rates could unpredictably materially adversely affect operating results stock price could result exchange losses although losses insignificant date item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange rate risk hold derivative financial instruments speculation trading purposes majority sales us dollars although significant amount sales denominated renminbi purchases contract manufacturers denominated us dollars euros costs marketing efforts china paid local currency addition certain cash balances assets liabilities denominated euros renminbi hong kong dollars result exposed foreign currency rate fluctuations hedge risk associated fluctuations consequently changes exchange rates could result material exchange losses could unpredictably materially adversely affect operating results stock price hypothetical 1 increase decrease foreign exchange rates would result approximate 02 million increase decrease respectively financial assets liabilities denominated euros renminbi hong kong dollars potential change based sensitivity analysis performed financial position december 31 2011 actual results may differ materially hold derivative financial instruments manage foreign currency exchange rate risks losses significant date interest rate risk primary objective investment activities preserve principal time maximizing yields without significantly increasing risk achieve objective invest money market funds term deposits commercial paper corporate bonds us treasury government agency notes investments mature within one year date purchase except italian state bonds mature 2013 investment securities may subject interest rate risk could decrease value market interest rates rise minimize risk primarily hold securities shortterm duration maintain average maturity less one year believe exposure interest rate risk significant 1 movement market interest rates would significant impact total value investment portfolio december 31 2011 item 8 item 8 financial statements supplementary data sciclone pharmaceuticals inc financial statements december 31 1996 1995 three years ended december 31 1996 1995 1994 independent auditors report sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies company sciclone pharmaceuticals inc sciclone company international biopharmaceutical company involved acquisition development commercialization pharmaceuticals worldwide company focuses specialist oriented products address significantly unmet chronic lifethreatening diseases company concentrates infectious diseases hepatitis b c cancer immune system disorders cystic fibrosis currently company acquired two drugs development commercialization zadaxinr thymosin alpha 1 hepatitis b c cancer immune system disorders cpx cystic fibrosis date companys principal focus development commercialization zadaxin basis presentation consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany accounts transactions eliminated use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents investments cash equivalents consist highly liquid investments remaining maturities three months less cash equivalents carried cost plus accrued interest approximates market company classified entire investments portfolio availableforsale records investments fair value determined available market information balance sheet portfolio primarily consists us government securities shortterm longdebt instruments unrealized holding gains losses carried separate component shareholders equity amortized cost debt securities classified availableforsale adjusted amortization premiums accretion discounts maturity amortization included investment income along interest earned realized gains losses declines value judged temporary also included investment income management believes credit risk associated investments limited due nature investments sciclone pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 1996 net unrealized losses approximately 621000 charged shareholders equity leaving balance december 31 1996 approximately 171000 net unrealized losses year ended december 31 1995 net unrealized gains approximately 2755000 charged shareholders equity leaving balance december 31 1995 approximately 450000 net unrealized gains property equipment property equipment stated cost less accumulated depreciation provided estimated useful lives respective assets three five years straightline basis notes receivable officers august 1996 company extended loan one executive officers aggregate principal amount 1000000 used finance purchase primary residence loan secured first deed trust property bears interest 8 per annum payable five years subject renewal executive officer remains employed company june 1995 company extended loan one executive officers aggregate principal amount 1365000 used finance purchase renovation primary residence loan secured first deed trust property 20000 shares sciclone common stock owned executive officer bears interest 75 per annum payable five years subject renewal executive officer remains employed company july 1995 company extended loan one board members former executive officers principal amount 95000 carries interest rate 7375 december 1995 company extended additional loan individual principal amount 600000 carries interest rate 750 loans due payable december 1997 currently unsecured process secured second deed trust residential property owned individual december 31 1996 fair value notes receivable officers 2710000 fair value estimated using discounted cash flow analyses using interest rates currently offered loans similar terms borrowers similar credit quality foreign currency translation company determined us dollar functional currency wholly owned subsidiaries adjustments resulting translation included results operations significant research development research development expenditures charged operations incurred sciclone pharmaceuticals inc notes consolidated financial statementscontinued income taxes income tax expense based reported results operations extraordinary items income taxes deferred income taxes reflect impact temporary differences amount assets liabilities recognized financial reporting purposes amounts recognized tax purposes deferred taxes measured applying current tax laws based companys lack earnings history deferred tax assets fully offset valuation allowance retirement benefits company pretax savings plan covering substantially us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 20 employee contributions 6 employees salary company contributions terminated companys discretion 25000 24000 years ended december 31 1996 1995 1994 respectively plan commenced january 1 1991 net loss per share net loss per share computed using weighted average number common equivalent shares outstanding period presented common equivalent shares outstanding options warrants included weighted average shares outstanding effect would antidilutive accounting employee stockbased compensation october 1995 financial accounting standards board issued statement financial accounting standards 123 sfas 123 accounting stockbased compensation permitted sfas 123 company accounts stock option employee stock purchase plans provisions accounting principles board opinion 25 apb 25 related interpretations accordingly company recognize compensation expense accounting stock option employee stock purchase plans awards exercise price equal fair value companys common stock date grant reclassifications certain prior year amounts reclassified conform current years presentation sciclone pharmaceuticals inc notes consolidated financial statementscontinued note 2 investments sciclone pharmaceuticals inc notes consolidated financial statementscontinued note 3 inventories stated lower cost firstin firstout basis market inventories consisted following december 31 1996 1995 raw materials 1545923 2301650 finished goods 1062954 58829 2608877 2360479 note 4 property equipment property equipment consisted following december 31 1996 1995 office furniture fixtures 279369 254574 office equipment 619709 550095 899078 804669 less accumulated depreciation 599673 490966 net property equipment 299405 313703 note 5 license agreements october 1996 company entered expanded amended license supply agreement scheringplough kk spkk giving spkk exclusive rights zadaxin japan amended agreement spkk continue development thymosin alpha 1 monotherapy treatment hepatitis b initiate investigation combination intronr interferon alfa2b zadaxin treatment hepatitis c parties sharing certain development expenses spkk undertake development registration marketing zadaxin japan contingent upon successful research development results sciclone receive milestone payments date license fee revenue recognized company sciclone pharmaceuticals inc notes consolidated financial statementscontinued april 1996 company acquired exclusive license cpx synthetic compound developed national institutes health nih potential treatment cystic fibrosis nih receive certain milestone payments upon successful research development results addition royalties net sales revenue december 1994 company acquired rights develop manufacture commercialize thymosin alpha 1 south korea pharmaceutical company august 1994 sciclone entered 15year license agreement alpha 1 biomedicals inc alpha 1 rights thymosin alpha 1 agreement grants company manufacturing marketing rights right conduct research clinical development existing new indications worldwide except italy spain portugal south korea addition agreement transferred control alpha 1s thymosin alpha 1 patent portfolio company agreement requires company pay certain royalties based net sales revenue thymosin alpha 1 companys territories see note 7 connection license agreement company incurred special research development charge 3470000 consisting primarily writedown companys equity interest alpha 1 estimated market value expenses associated transaction costs expensed inprocess research development note 6 income taxes sciclone pharmaceuticals inc notes consolidated financial statementscontinued deferred tax assets relating net operating loss carryforwards december 31 1996 include 3300000 associated stock option activity subsequently recognized tax benefits credited directly shareholders equity december 31 1996 company net operating loss carryforwards us tax purposes totaling approximately 26000000 expiring 20062011 approximately 12000000 state net operating losses expiring 19972001 difference current years loss financial reporting purposes federal income tax purposes primarily attributable losses incurred companys foreign subsidiaries due change ownership provisions tax reform act 1986 utilization net operating loss carryforwards limited taxable income future periods note 7 commitments contingencies leases company leases main office facility noncancelable lease agreement expires april 2000 lease period five years requires company pay insurance taxes prorata share operating expenses company also leases various office facilities abroad sciclone pharmaceuticals inc notes consolidated financial statementscontinued noncancelable lease agreements expiring 1997 rental expense 1996 1995 1994 397000 391000 333000 respectively minimum future rental commitments amount 448000 1997 436000 1998 450000 1999 162000 2000 38000 2001 royalties april 1996 cpx license agreement nih company obligated pay nih royalty based percentage cpx net sales revenue date royalty amounts paid due nih august 1994 thymosin alpha 1 license agreement alpha 1 see note 5 company obligated pay alpha 1 certain royalties addition assuming certain alpha 1 royalties payable third parties companys royalty obligations alpha 1 based percentage thymosin alpha 1 net sales revenue range 3 35 6 7 dependent upon territory revenue recognized whether certain intellectual property protection exists territory royalties payable alpha 1 eight years provided however time alpha 1 paid aggregate royalties 35 million companys royalty obligations alpha 1 continue earlier payment alpha 1 royalties aggregating 35 million ii september 30 2009 1996 alpha 1 agreed accept 500000 company prepayment 25 million future royalties may become due alpha 1 company prepaid royalties take effect payment company alpha 1 royalties totaling 175 million october 1992 company amended services agreement japanese trading company upon receipt sciclone revenues japan thymosin alpha 1 japanese trading company receive royalty percentage revenues specified period time date royalty amounts paid due japanese trading company respect agreement note 8 shareholders equity common stock january 1994 company sold 2000000 shares common stock underwritten public offering 2325 per share company received approximately 43600000 net proceeds offering conjunction initial public offering company granted investment banker warrants purchase 300000 shares common stock 300000 nonredeemable warrants exercisable four year period ending march 16 1997 exercise price 300000 shares common stock subject certain adjustments defined purchase agreement december 31 1996 shares common stock may purchased 600 per share nonredeemable warrants may purchased 033 per warrant nonredeemable warrants exercisable one share common stock 1555 per share 1996 1995 warrants exercised 1994 135005 warrants purchase common stock 600 per share exercised december 31 1996 464995 common shares reserved exercise warrants sciclone pharmaceuticals inc notes consolidated financial statementscontinued repurchase common stock 1995 1994 companys board directors authorized repurchase 15 million 10 million shares companys common stock respectively year ended december 31 1996 1995 1994 company repurchased 78000 346000 1148000 shares common stock aggregate cost 659000 1925000 7798000 respectively impact companys results operations stock award plans august 1991 board directors shareholders company approved 1991 stock plan 1991 plan reserved 1300000 shares issuance thereunder may 1993 board directors shareholders company approved 2150000 share increase shares reserved 1991 plan 1991 plan permits award incentive nonqualified stock options shares common stock restricted stock purchase agreements january 1992 board directors shareholders company approved 1992 stock plan 1992 plan reserved 240000 shares issuance thereunder 1992 plan permits award incentive nonqualified stock options must exercised cash june 1995 board directors shareholders company approved 1995 equity incentive plan 1995 plan reserved 1250000 shares issuance thereunder 1995 plan permits award incentive nonqualified stock options shares common stock restricted stock awards 1991 1992 1995 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years june 1995 board directors shareholders company approved nonemployee director stock option plan nonemployee director plan reserved 250000 shares issuance thereunder nonemployee director plan automatically grants nonqualified stock options nonemployee directors upon appointment first election companys board directors initial grant annually upon reelection board directors companys annual meeting shareholders annual grant options granted fair market value date grant initial grants vest annually period three years annual grants vest monthly period one year july 1996 board directors shareholders company approved 1996 employee stock purchase plan espp reserved 500000 shares issuance thereunder fulltime employees eligible participate espp terms espp employees choose 15 salary withheld purchase companys common stock purchase price stock lower 85 fair market value first trading day quarterly participation period last trading day quarterly participation period espp company sold 5675 shares employees 1996 sciclone pharmaceuticals inc notes consolidated financial statementscontinued sciclone pharmaceuticals inc notes consolidated financial statementscontinued permitted sfas 123 company applies apb 25 related interpretations accounting stock award plans accordingly recognize compensation expense awards exercise price equal fair value companys common stock date grant pro forma information regarding net loss net loss per share required sfas 123 determined company accounted stock awards fair value method statement fair value options estimated date grant using blackscholes option pricing model following weightedaverage assumptions 1996 1995 riskfree interest rates 514 681 respectively dividend yields 0 volatility factors expected market price companys stock 84 weighted average expected life option 437 years fair value employee stock purchases also estimated using blackscholes model following assumptions 1996 riskfree interest rate 53 dividend yield 0 expected volatility 84 expected life 25 years blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock awards characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate companys opinion existing models necessarily provide reliable single measure fair value employee stock options stock purchases company recorded deferred compensation approximately 24 million related 1992 stock option grants deferred compensation amortized vesting period ranges two five years ended december 31 1996 1995 1994 approximately 205000 555000 487000 deferred compensation related stock option grants charged compensation expense respectively compensation expense companys option employee purchase plans determined based fair value grant date awards 1996 1995 consistent provisions sfas 123 companys net loss net loss per share would adjusted pro forma amounts indicated 1996 1995 net loss reported 14746000 14775000 net loss pro forma 15821000 14643000 net loss per share reported 085 088 net loss per share pro forma 091 087 effects applying sfas 123 pro forma disclosures likely representative effects reported net loss future years pro forma net loss year ended december 31 1996 sciclone pharmaceuticals inc notes consolidated financial statementscontinued reflects compensation expense two years vesting year ended december 31 1997 reflect compensation expense three years vesting outstanding stock awards note 9 significant geographic information approximate foreign sources revenues follows 1996 1995 1994 asia 636000 239000 67000 34000 sciclone pharmaceuticals inc notes consolidated financial statementscontinued report ernst young llp independent auditors board directors shareholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 1996 1995 related consolidated statements operations shareholders equity cash flows three years period ended december 31 1996 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 1996 1995 consolidated results operations cash flows three years period ended december 31 1996 conformity generally accepted accounting principles ernst young llp palo alto california january 23 1997 item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc financial statements december 31 1998 1997 three years ended december 31 1998 1997 1996 sciclone pharmaceuticals inc consolidated balance sheets assets see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements operations see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statement shareholders equity see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financials note 1 company summary significant accounting policies company sciclone pharmaceuticals inc sciclone company global biopharmaceutical company acquires develops commercializes specialistoriented proprietary drugs treating chronic lifethreatening diseases hepatitis b hepatitis c cancer immune system disorders cystic fibrosis currently company two products clinical development zadaxin hepatitis b hepatitis c cancer immune system disorders cpx cystic fibrosis company drug candidates preclinical development date companys principal focus development commercialization zadaxin development cpx accompanying financial statements prepared assuming company continue going concern company incurred losses period since inception expects incur additional losses next several years obtaining additional funds critical companys ability maintain operations beyond june 1999 company continue seek funding equity financing sources including private placement common stock common stock warrants company signed agreement march 1999 investment banker assist raising additional capital company plans raise 40 60 million equity privately placed accredited investors next two six months raising additional funds public private sources may result significant dilution existing shareholders additionally company seeking funding debt sources well corporate partners develop commercialize zadaxin us europe adequate funding available timely basis company required curtail operations significantly cease operation basis presentation consolidated financial statements include accounts company wholly owned subsidiary principal office companys subsidiary located hong kong significant intercompany accounts transactions eliminated use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents investments cash equivalents consist highly liquid investments original maturities three months less cash equivalents carried cost plus accrued interest approximates market company classified entire investment portfolio availableforsale records investments fair value determined available market information balance sheet portfolio primarily consists us government securities shortterm longterm debt instruments unrealized holding gains losses included accumulated comprehensive income amortized cost debt securities classified availableforsale adjusted amortization premiums accretion discounts maturity amortization included investment income along interest earned realized gains losses declines value judged temporary also included investment income management believes credit risk associated investments limited due nature investments sciclone pharmaceuticals inc notes consolidated financials continued years ended december 31 1998 1997 net unrealized gains approximately 27000 153000 respectively charged accumulated comprehensive income property equipment property equipment stated cost less accumulated depreciation provided estimated useful lives respective assets three five years straightline basis notes receivable officers december 31 1998 1997 fair value notes receivable officers 235000 2327000 respectively fair value estimated using discounted cash flow analyses using interest rates currently offered loans similar terms borrowers similar credit quality august 1996 company extended loan one executive officers aggregate principal amount 1000000 used finance purchase primary residence loan secured first deed trust property bears interest 8 per annum payable july 2000 approximately 750000 repaid note march 1998 june 1995 company extended loan one executive officers aggregate principal amount 1365000 used finance purchase renovation primary residence loan secured first deed trust property 20000 shares sciclone common stock owned executive officer bears interest 75 per annum payable july 2000 november 1998 company settled loan accepting payment approximately 950000 cash offsetting approximately 181000 retained salary housing allowance accruals debt approximately 194000 written july 1995 company extended loan one former board members former executive officers principal amount 95000 carries interest rate 7375 december 1995 company extended additional loan individual principal amount 600000 carries interest rate 750 loans due payable december 1997 became subject additional 35 accelerated interest loans secured second deed trust residential property owned individual december 31 1998 loans repaid january 1999 company foreclosed loans possession underlying property actively seeking sell property entry reflecting transaction recorded companys financial statements assets include following product rights acquired amortized 6 years beginning september 1998 foreign currency translation company determined us dollar functional currency wholly owned subsidiaries adjustments resulting translation included results operations significant sciclone pharmaceuticals inc notes consolidated financials continued revenue recognition company recognizes revenue product sales time shipment company recognized contract revenue result receiving orphan drug grants cpx revenues recognized time grant research development research development expenditures charged operations incurred income taxes income tax expense based reported results operations extraordinary items income taxes deferred income taxes reflect impact temporary differences amount assets liabilities recognized financial reporting purposes amounts recognized tax purposes deferred taxes measured applying current tax laws based companys lack earnings history deferred tax assets fully offset valuation allowance retirement benefits company pretax savings plan covering substantially us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 20 employee contributions 6 employees salary company contributions terminated companys discretion 24000 26000 25000 years ended december 31 1998 1997 1996 respectively plan commenced january 1 1991 net loss per share effective december 31 1997 company adopted statement financial accounting standards 128 earnings per share sfas 128 sfas 128 requires presentation basic earnings loss per share diluted earnings loss per share dilutive periods presented accordance sfas 128 basic net loss per share computed using weighted average number shares common stock outstanding period weighted average number shares excludes shares held collateral former officers loan see note 8 diluted net loss per share presented result would antidilutive given companys history net losses company net income position diluted earnings per share would included shares used computation basic net loss per share well additional 3548978 3058734 2526265 shares 1998 1997 1996 respectively related outstanding options warrants included calculation basic net loss per share accounting employee stockbased compensation permitted sfas 123 company accounts stock option employee stock purchase plans provisions accounting principles board opinion 25 apb 25 related interpretations accordingly company recognize compensation expense accounting stock option employee stock purchase plans awards exercise price equal fair value companys common stock date grant sciclone pharmaceuticals inc notes consolidated financials continued reporting comprehensive income loss january 1 1998 company adopted statement financial accounting standards 130 reporting comprehensive income sfas 130 sfas 130 establishes new rules reporting display comprehensive income components sfas 130 requires unrealized gains losses companys availableforsale securities foreign currency translation adjustments included comprehensive income loss prior year financial statements reclassified conform requirements sfas 130 year periods ended december 31 1998 1997 1996 total comprehensive loss attributable common shareholders amounted 21044000 13844000 15367000 respectively segment information effective january 1 1998 company adopted statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 sfas 131 establishes standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports sfas 131 also establishes standards related disclosures products services geographic areas major customers company evaluating impact sfas 131 disclosures believe disclosures material adoption sfas 131 significant effect results operations financial position company recent accounting pronouncement june 1998 financial accounting standards board issued statement 133 accounting derivative instruments hedging activities sfas 133 required adopted year ending december 31 2000 management anticipate adoption sfas 133 significant effect results operations financial position company reclassifications certain prior year amounts reclassified conform current years presentation note 2 investments following summary availableforsale securities sciclone pharmaceuticals inc notes consolidated financials continued amortized cost estimated fair value debt investments december 31 1998 contractual maturity shown note 3 inventories stated lower cost firstin firstout basis market inventories consisted following note 4 property equipment property equipment consisted following note 5 license agreements september 1998 company acquired rights sclavo spa italian licensee thymosin alpha 1 italy spain portugal agreement sclavo spa sclavo international pharmaceutical company resulted acquisition sclavos marketing approval zadaxin thymosin alpha 1 italy influenza vaccine adjuvant marketing application italy use zadaxin treat nonsmall cell lung cancer well sclavos development marketing rights zadaxin italy spain portugal purchase price consisted 297000 cash 375000 shares companys common stock warrants purchase 375000 shares common stock exercise price 4125 per share pursuant 1994 license agreement alpha 1 biomedicals inc a1b company obtained worldwide marketing development manufacturing rights thymosin alpha 1 exception italy spain portugal april 1997 sciclone entered arrangement a1b administer sublicense activities a1b licensee italy spain portugal 1997 agreement company also acquired control a1bs patent portfolio thymosin alpha 1 december 1997 sciclone a1b entered asset purchase agreement pursuant company acquired a1bs sciclone pharmaceuticals inc notes consolidated financials continued worldwide rights thymosin alpha 1 rights a1b licensed hoffmannlaroche inc f hoffmannlaroche ag collectively roche eliminated companys current future sublicensees royalty obligations a1b respect future sales thymosin alpha 1 july 1998 company a1b closed asset purchase agreement approved a1bs stockholders a1bs 1998 annual meeting stockholders july 1998 accordance agreement company issued a1b 549703 shares common stock 444115 shares issued july 1998 105588 shares issued october 1998 loaned a1b 210000 exchange assets described company required issue a1b additional 50297 shares agreement company commissioned independent appraisal rights acquired sclavo a1b acquisitions results valuations resulted 707000 charge inprocess research development 2456000 capitalized product rights product rights amortized 6 years october 1996 company entered expanded amended license supply agreement scheringplough kk giving scheringplough kk exclusive development marketing rights zadaxin japan amended agreement company expects scheringplough kk continue development zadaxin monotherapy treatment hepatitis b hepatitis c initiate investigation combination zadaxin plus scheringplough kks intronr interferon alfa2b treatment hepatitis c parties sharing certain development expenses schering plough kk undertake development registration marketing zadaxin japan contingent upon product approval sciclone receive milestone payments date license fee revenue recognized company april 1996 company acquired exclusive license cpx synthetic compound national institutes health nih developed cpx potential treatment cystic fibrosis license agreement company obligated pay nih minimum annual royalty payment upon product approval nih receive milestone payment addition royalties based percentage cpx net sales revenue note 6 income taxes company uses liability method account income taxes required fasb statement 109 accounting income taxes method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities deferred tax assets liabilities measured using enacted tax rates laws effect differences expected reverse domestic foreign components loss income tax follows december 31 sciclone pharmaceuticals inc notes consolidated financials continued significant components companys deferred tax assets liabilities december 31 valuation allowance increased approximately 5670000 3600000 years ended december 31 1988 1997 respectively deferred tax assets relating carryforwards december 31 1998 include approximately 3400000 associated stock option activity subsequently recognized tax benefits credited directly stockholders equity december 31 1998 company net operating loss carryforwards federal income tax purposes approximately 43500000 expire years 2006 2018 difference cumulative looses financial reporting purposes federal income tax purposes primarily attributable losses incurred companys foreign subsidiaries december 31 1998 company federal tax credit carryforwards approximately 1100000 expire years 2009 2018 change ownership provisions internal revenue code portion companys net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities note 7 commitments contingencies leases company leases main office facility noncancelable lease agreement expires august 2000 lease period five years requires company pay insurance taxes prorata share operating expenses company also leases various office facilities abroad noncancelable lease agreements expiring 1999 rental expense 1998 1997 1996 461000 462000 397000 respectively minimum future rental commitments amount 395000 1999 293000 2000 4000 2001 royalties august 1997 thymosin alpha 1 patent license agreement fitzsimons army medical center us army company obligated pay army minimum annual royalty upon commercialization thymosin alpha 1 company obligated pay army royalty based percentage thymosin alpha 1 net sales revenue sciclone pharmaceuticals inc notes consolidated financials continued april 1996 cpx license agreement nih company obligated pay nih minimum annual royalty upon commercialization cpx company obligated pay nih royalty based percentage cpx net sales revenue 1998 1997 company paid 10000 related minimum annual royalty royalties paid 1996 october 1992 company amended service agreement japanese trading company upon receipt sciclone revenues japan zadaxin japanese trading company receive royalty percentage revenues specified period time date royalty amounts paid due japanese trading company respect agreement note 8 shareholders equity common stock preferred stock warrants june 1998 company entered agreement institutional investor equity line allows company access 32 million sales common stock twoyear period subject certain limitations decision draw funds timing draw solely companys discretion company obligated draw minimum amount equity line agreement provides company option obtain 4000000 per quarter two years sales common stock company elect draw upon equity line shares sold 3 discount lowest trading price companys common stock specified period time prior date sale commitment fee investor company issued fiveyear warrant purchase 200000 shares common stock exercise price 553 per share additional warrants purchase 300000 additional shares common stock less 553 per share issued investor based upon number shares common stock purchased investor calendar year term financing draws equity line subject satisfaction certain conditions including registration investors resale shares minimum trading price per share volume limitations number shares issued without shareholder approval limitations number shares companys common stock investor may hold point time unless company investor agree otherwise facility available companys stock trading less 150 per share price decreased 100 pursuant oral agreement parties april 1998 company sold 661157 shares series c preferred stock 605 per share received 3931000 net proceeds offering preferred stock convertible common stock time next five years prices based market price common stock pricing period preceding conversion december 31 1998 58356 shares series c preferred stock converted 3168404 shares common stock january 1999 46922 remaining 58536 shares converted 299483 shares common stock 11434 remaining shares series c preferred stock redeemed conversion price approximately 095 per common share conjunction offering company granted investors warrants purchase 100000 shares common stock warrants exercisable fiveyear period ending march 2003 exercise price 567 per share second quarter ended june 30 1998 company recognized deemed dividend amount 3143000 connection issuance series c preferred stock amount increased net loss per share attributable common shareholders calculated required sec july 1997 company loaned thomas e moore former chairmanceo 5944 million secured approximately 19 million shares companys common stock owned loan carries interest 7 period loan outstanding immediately prior closing offering companys common stock company may convert loan noncash exchange sciclone pharmaceuticals inc notes consolidated financials continued individuals sciclone common stock retiring sciclone common stock fixed discount rate offering price december 31 1997 loan classified offset shareholders equity 1998 determined value collateral underlying loan made mr moore temporarily impaired writedown book value note would required upon investigation relative collectibility demand note determined entire 5944 million plus accumulated interest approximately 689000 substantial doubt result determination company elected write entire remaining book value noncash charge earnings fourth quarter 1998 cancel 1882500 shares held collateral new agreement mr moore received credit total indebtedness approximately 6633 million credit calculated value mr moores 1882500 shares sciclone common stock cancelled company based greater two stock prices first stock price calculated average 5day closing stock price closing agreement second stock price calculated average 5day closing stock price september 30 1999 calculating applying appropriate credit balance remaining debt paid five installments according schedule beginning october 11999 20000 increasing factor 4 six month anniversary thereafter final payment due later october 1 2001 event higher 5day average stock price exceeds amount indebtedness excess remitted mr moore cash stock companys sole discretion stock number shares exceed 1882500 shares repurchase common stock 1995 1994 companys board directors authorized repurchase 10 million 15 million shares companys common stock respectively year ended december 31 1998 company repurchased shares common stock years ended december 31 1997 1996 company repurchased 684500 78000 shares common stock aggregate cost 4267000 659000 respectively stock award plans august 1991 board directors shareholders company approved 1991 stock plan 1991 plan reserved 1300000 shares issuance thereunder may 1993 board directors shareholders company approved 2150000 share increase shares reserved 1991 plan 1991 plan permits award incentive nonqualified stock options shares common stock restricted stock purchase agreements january 1992 board directors shareholders company approved 1992 stock plan 1992 plan reserved 240000 shares issuance thereunder 1992 plan permits award incentive nonqualified stock options must exercised cash june 1995 board directors shareholders company approved 1995 equity incentive plan 1995 plan reserved 1250000 shares issuance thereunder 1995 plan permits award incentive nonqualified stock options shares common stock restricted stock awards june 1998 board directors shareholders company approved 1150000 share increase shares reserved 1995 plan 1991 1992 1995 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years june 1995 board directors shareholders company approved nonemployee director stock option plan nonemployee director plan reserved 250000 shares issuance thereunder nonemployee director plan automatically grants nonqualified stock options nonemployee directors upon appointment first election companys board directors initial grant sciclone pharmaceuticals inc notes consolidated financials continued annually upon reelection board directors companys annual meeting shareholders annual grant options granted fair market value date grant initial grants vest annually period three years annual grants vest monthly period one year july 1996 board directors shareholders company approved 1996 employee stock purchase plan espp reserved 500000 shares issuance thereunder fulltime employees eligible participate espp terms espp employees choose 15 salary withheld purchase companys common stock purchase price stock lower 85 fair market value first trading day quarterly participation period last trading day quarterly participation period espp company sold 46738 20432 5675 shares employees 1998 1997 1996 respectively following table summarizes stock option activity 1991 1992 1995 plans noneemployee director plan following table summarizes information concerning outstanding exercisable options december 31 1998 permitted sfas 123 company applies apb 25 related interpretations accounting stock award plans accordingly recognize compensation expense awards exercise price equal fair value companys common stock date grant sciclone pharmaceuticals inc notes consolidated financials continued pro forma information regarding net loss net loss per share required sfas 123 determined company accounted stock awards fair value method statement fair value options estimated date grant using blackscholes option pricing model following weightedaverage assumptions 1998 1997 1996 riskfree interest rates 473 616 514 respectively dividend yields 0 volatility factors expected market price companys stock 87 1998 83 1997 84 1996 weighted average expected life option 430 years 1998 431 years 1997 437 1996 fair value employee stock purchases also estimated using blackscholes model following assumptions 1998 1997 riskfree interest rate 473 523 respectively dividend yield 0 expected volatility 80 74 respectively expected life 25 years blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock awards characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate companys opinion existing models necessarily provide reliable single measure fair value employee stock options stock purchases company recorded deferred compensation approximately 24 million related 1992 stock option grants deferred compensation amortized vesting period ranged two five years year ended december 31 1996 approximately 205000 deferred compensation related stock option grants charged compensation expense deferred compensation charged compensation expense years ended december 31 1998 1997 compensation expense companys option employee purchase plans determined based fair value grant date awards 1998 1997 1996 consistent provisions sfas 123 companys net loss net loss per share would adjusted pro forma amounts indicated effects applying sfas 123 pro forma disclosures likely representative effects reported net loss future years pro forma net loss year ended december 31 1998 reflects compensation expense three years vesting year ended december 31 1998 reflect compensation expense four years vesting outstanding stock awards note 9 significant geographic information company operates one business segment development commercialization specialistoriented proprietary drugs treatment chronic life threatening diseases currently companys principal focus development commercialization zadaxin development cpx chief executive officer identified chief operating decision maker codm final authority resource allocation decisions performance assessment codm receive discrete financial information individual components sciclone pharmaceuticals inc notes consolidated financials continued companys total revenues year ended december 31 1998 1997 1996 regions outside united states years ended december 31 1998 1997 1996 customers comprising 10 net sales follows less 10 report ernst young llp independent auditors board directors shareholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 1998 1997 related consolidated statements operations shareholders equity cash flows three years period ended december 31 1998 audits also included financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 1998 1997 consolidated results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole present fairly material respects information set forth therein accompanying financial statements prepared assuming sciclone pharmaceuticals inc continue going concern fully described note 1 companys recurring losses operations raise substantial doubt ability continue going concern managements plans matters also described note 1 financial statements include adjustments reflect possible future effects recoverability classification assets amounts classifications liabilities might result outcome uncertainty ernst young llp palo alto california march 17 1999 item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc financial statements december 31 1999 1998 three years ended december 31 1999 1998 1997 report ernst young llp independent auditors board directors shareholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 1999 1998 related consolidated statements operations shareholders equity cash flows three years period ended december 31 1999 audits also include financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 1999 1998 consolidated results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole present fairly material respects information set forth therein ernst young llp palo alto california january 28 2000 sciclone pharmaceuticals inc consolidated balance sheets assets see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements operations see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statement shareholders equity see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financials note 1 company summary significant accounting policies company sciclone pharmaceuticals inc sciclone company global biopharmaceutical company develops commercializes novel medicines treating broad range worlds serious diseases companys current product development commercial activities focused hepatitis b hepatitis c cancer cystic fibrosis january 18 2000 company completed private placement common stock common stock warrants resulted aggregate net proceeds approximately 5720000 excluding 5600000 aggregate proceeds received warrants issued connection private placement fully exercised addition january 1 2000 january 28 2000 company received approximately 5029000 aggregate net proceeds exercises outstanding common stock warrants employee stock options without additional financing sales growth beyond managements expectations combination thereof management believes existing capital resources interest funds available adequate maintain current planned operations least next twelve months basis presentation consolidated financial statements include accounts company wholly owned subsidiary principal office companys subsidiary located hong kong significant intercompany accounts transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted us requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents investments cash equivalents consist highly liquid investments original maturities three months less cash equivalents carried cost plus accrued interest approximates market company classified entire investment portfolio availableforsale records investments fair value determined available market information balance sheet portfolio primarily consists us government securities shortterm longterm debt instruments unrealized holding gains losses included accumulated comprehensive income amortized cost debt securities classified availableforsale adjusted amortization premiums accretion discounts maturity amortization included investment income along interest earned realized gains losses declines value judged temporary also included investment income management believes credit risk associated investments limited due nature investments years ended december 31 1999 1998 1997 net unrealized gains loss approximately 7000 27000 153000 respectively charged accumulated comprehensive income property equipment property equipment stated cost less accumulated depreciation provided estimated useful lives respective assets three five years straightline basis sciclone pharmaceuticals inc notes consolidated financials continued notes receivable officers december 31 1999 1998 fair value notes receivable officers 0 235000 respectively fair value estimated using discounted cash flow analyses using interest rates currently offered loans similar terms borrowers similar credit quality august 1996 company extended loan one executive officers aggregate principal amount 1000000 used finance purchase primary residence loan secured first deed trust property accrued interest 8 per annum payable july 2000 approximately 750000 repaid note march 1998 remaining balance repaid april 1999 assets availableforsale july 1995 company extended loan one former board members former executive officers principal amount 95000 carries interest rate 7375 december 1995 company extended additional loan individual principal amount 600000 carried interest rate 750 loans due payable december 1997 became subject additional 35 accelerated interest loans secured second deed trust residential property owned individual december 31 1998 loans repaid company fully reserved loan january 1999 company foreclosed loans possession underlying property actively seeking sell property company recorded net value property assets availableforsale approximately 1184000 related assumed mortgage liability current liabilities approximately 942000 income approximately 242000 assets include following product rights acquired amortized six years beginning september 1998 see note 5 company identifies records impairment losses circumstances dictate intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets july 1998 company acquired worldwide rights zadaxin alpha 1 biomedicals inc a1b original developer zadaxin approximately 1800000 transaction eliminated companys royalty obligation a1b respect sales zadaxin acquisition date a1b transaction allowed sciclone market zadaxin worldwide except italy spain portugal sclavo spa sclavo international pharmaceutical entity owned exclusive marketing rights april 1998 company acquired zadaxin rights italy spain portugal sclavo spa approximately 1400000 connection foregoing transactions company estimated fair market value intangible assets purchased approximately 2500000 wrote remaining 700000 sciclone pharmaceuticals inc notes consolidated financials continued although company history operating cash flow losses company believes impairment intangible assets zadaxin approved sale 16 countries december 31 1999 principally treatment hepatitis b hepatitis c based companys anticipated financial results zadaxin sales 2000 2004 company expects able achieve operating profitability end fourth quarter year 2000 based projections determined net present value future cash flows exceed carrying amount asset foreign currency translation company determined us dollar functional currency wholly owned subsidiary adjustments resulting translation included results operations significant revenue recognition company recognizes revenue product sales time shipment recognizes contract grant revenue services performed sales distributors recognized time shipment titles products transferred distributors contractual right return march 1999 company received nonrefundable 200000 fda orphan drug grant initial phase 2 development cpx company future performance obligations respect fda grant company recognized entire amount revenue march 1999 april 1999 company awarded 517000 grant cystic fibrosis foundation ongoing phase 2 study cpx potential protein repair therapy cystic fibrosis company expects grant paid installments services performed first installment 107000 received june 1999 recognized revenue 1999 december 1999 securities exchange commission issued staff accounting bulletin 101 revenue recognition financial statements sab 101 summarizes certain areas staffs views applying generally accepted accounting principles revenue recognition financial statements company currently evaluating impact sab 101 results operations financial position research development research development expenditures charged operations incurred income taxes income tax expense based reported results operations extraordinary items income taxes deferred income taxes reflect impact temporary differences amount assets liabilities recognized financial reporting purposes amounts recognized tax purposes deferred taxes measured applying current tax laws based companys lack earnings history deferred tax assets fully offset valuation allowance retirement benefits company pretax savings plan covering substantially us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions 15 employees salary company contributions terminated companys discretion 17000 24000 26000 years ended december 31 1999 1998 1997 respectively plan commenced january 1 1991 sciclone pharmaceuticals inc notes consolidated financials continued net loss per share company computes net loss per share accordance statement financial accounting standards 128 earnings per share sfas 128 sfas 128 requires presentation basic earnings loss per share diluted earnings loss per share dilutive periods presented accordance sfas 128 basic net loss per share computed using weighted average number shares common stock outstanding period weighted average number shares excludes shares held collateral former officers loan see note 8 diluted net loss per share presented result would antidilutive given companys history net losses company net income position diluted earnings per share would included shares used computation basic net loss per share well additional 9822008 4223978 3058734 shares 1999 1998 1997 respectively related outstanding options warrants included calculation basic net loss per share accounting stockbased compensation permitted statement financial accounting standards 123 accounting stockbased compensation sfas 123 company accounts stock option employee stock purchase plans provisions accounting principles board opinion 25 apb 25 related interpretations accordingly company recognize compensation expense accounting stock option employee stock purchase plans awards exercise price equal fair value companys common stock date grant company accounts equity instruments issued nonemployees accordance provisions sfas 123 emerging issues task force eitf 9618 warrants issued connection equity debt arrangements valued using blackscholes option valuation model warrants issued placement agents similar parties connection equity financing accounted stock issuance cost equal amount recorded additional paidin capital warrants issued purchasers companys equities specifically accounted value subcomponent additional paidin capital fair value warrants issued connection debt arrangements material accounted debt discount amortized additional interest expense term related debt reporting comprehensive income loss january 1 1998 company adopted statement financial accounting standards 130 reporting comprehensive income sfas 130 sfas 130 establishes new rules reporting display comprehensive income components sfas 130 requires unrealized gains losses companys availableforsale securities foreign currency translation adjustments included comprehensive income loss year periods ended december 31 1999 1998 1997 total comprehensive loss attributable common shareholders amounted 5474000 21044000 13844000 respectively segment information january 1 1998 company adopted statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 sfas 131 establishes standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports sfas 131 also establishes standards related disclosures products services geographic areas major customers sciclone pharmaceuticals inc notes consolidated financials continued concentration credit risk peoples republic china like japan certain asian markets uses tiered method import distribute products distributors make sales country product imported licensed importers 1997 company sold one principal importeragent resold four distributors inside peoples republic china reflecting expansion stability companys sales peoples republic china 1998 company began working extensively second importing agent addition agent used 1997 enabled expansion sales four distributors year ended december 31 1999 four distributors china accounted 87 companys product sales company performs ongoing credit evaluations customers financial condition generally require collaterals customers company maintains reserves credit losses within managements expectation recent accounting pronouncement june 1998 financial accounting standards board issued statement 133 accounting derivative instruments hedging activities sfas 133 required adopted year ending december 31 2001 company anticipate adoption sfas 133 significant effect results operations financial position company reclassifications certain prior year amounts reclassified conform current years presentation note 2 investments following summary availableforsale securities december 31 1999 average portfolio duration less one year sciclone pharmaceuticals inc notes consolidated financials continued note 3 inventories stated lower cost firstin firstout basis market inventories consisted following note 4 property equipment property equipment consisted following note 5 license agreements april 1999 company licensed sigmatau semiexclusive zadaxin development marketing rights italy spain exclusive rights switzerland september 1998 company acquired rights sclavo spa zadaxin italy spain portugal including sclavos marketing approval zadaxin italy influenza vaccine adjuvant purchase price consisted 297000 cash 375000 shares companys common stock warrants purchase 375000 shares common stock exercise price 4125 per share warrants exercised january 2000 pursuant 1994 license agreement a1b company obtained worldwide marketing development manufacturing rights zadaxin exception italy spain portugal april 1997 sciclone entered arrangement a1b administer sublicense activities a1b licensee italy spain portugal 1997 agreement company also acquired control a1bs patent portfolio zadaxin december 1997 sciclone a1b entered asset purchase agreement pursuant company acquired a1bs worldwide rights zadaxin rights a1b licensed hoffmannlaroche inc f hoffmannlaroche ag eliminated companys current future sublicensees royalty obligations a1b respect future sales zadaxin july 1998 company a1b closed asset purchase agreement accordance agreement company issued a1b 600000 shares common stock loaned a1b 210000 exchange assets described connection foregoing transactions sclavo a1b company estimated fair market value intangible assets purchased approximately 2500000 wrote remaining 700000 sciclone pharmaceuticals inc notes consolidated financials continued october 1996 company entered expanded amended license supply agreement scheringplough kk giving scheringplough kk exclusive development marketing rights zadaxin japan amended agreement company expects scheringplough kk continue development zadaxin monotherapy treatment hepatitis b hepatitis c initiate investigation combination zadaxin plus scheringplough kks intronr interferon alfa2b treatment hepatitis c parties sharing certain development expenses schering plough kk undertake development registration marketing zadaxin japan contingent upon product approval sciclone receive milestone payments date license fee revenue recognized company april 1996 company acquired exclusive license cpx synthetic compound national institutes health nih developed cpx potential treatment cystic fibrosis license agreement company obligated pay nih minimum annual royalty payment upon product approval nih receive milestone payment addition royalties based percentage cpx net sales revenue note 6 income taxes company uses liability method account income taxes required fasb statement 109 accounting income taxes method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities deferred tax assets liabilities measured using enacted tax rates laws effect differences expected reverse domestic foreign components loss income tax follows december 31 significant components companys deferred tax assets liabilities december 31 valuation allowance increased approximately 5670000 3600000 years ended december 31 1998 1997 respectively deferred tax assets relating carryforwards december 31 sciclone pharmaceuticals inc notes consolidated financials continued 1999 include approximately 3400000 associated stock option activity subsequently recognized tax benefits credited directly shareholders equity december 31 1999 company net operating loss carryforwards federal income tax purposes approximately 47700000 expire years 2006 2019 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred companys foreign subsidiaries december 31 1999 company federal tax credit carryforwards approximately 2100000 expire years 2009 2019 change ownership provisions internal revenue code portion companys net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities note 7 commitments contingencies leases company leases main office facility noncancelable lease agreement expires august 2005 lease period five years requires company pay insurance taxes prorata share operating expenses company also leases various office facilities abroad noncancelable lease agreements expiring 2001 rental expense 1999 1998 1997 398000 461000 462000 respectively minimum future rental commitments amount 395000 2000 399000 2001 358000 2002 338000 2003 346000 2004 234000 2005 royalties august 1997 zadaxin patent license agreement fitzsimons army medical center us army company obligated pay army minimum annual royalty upon commercialization zadaxin company obligated pay army royalty based percentage zadaxin net sales revenue april 1996 cpx license agreement nih company obligated pay nih minimum annual royalty upon commercialization cpx company obligated pay nih royalty based percentage cpx net sales revenue 1999 1998 1997 company paid 10000 related minimum annual royalty october 1992 company amended service agreement japanese trading company upon receipt sciclone revenues japan zadaxin japanese trading company receive royalty percentage revenues specified period time date royalty amounts paid due japanese trading company respect agreement note 8 shareholders equity common stock preferred stock warrants july 21 1999 company completed 3620000 private placement strategic institutional investors led brown simpson asset management new york life insurance company offering consisted units 2515934 shares common stock redeemable warrants purchase 2515934 shares common stock unit priced 159 consisted one share common stock one fiveyear redeemable warrant purchase one share common stock exercise price 172 per share connection private placement companys placement agents received fiveyear sciclone pharmaceuticals inc notes consolidated financials continued redeemable warrants purchase 345933 shares common stock exercise price 183 per share december 31 1999 none foregoing redeemable warrants exercised july 2 1999 company completed 1810000 private placement strategic institutional accredited investors offering consisted units 1370145 shares common stock redeemable warrants purchase 1370145 shares common stock unit priced 146 consisted one share common stock one fiveyear redeemable warrant purchase one share common stock exercise price 133 per share connection private placement companys placement agents received fiveyear redeemable warrants purchase 183179 shares common stock exercise price 166 per share december 31 1999 265000 1370145 investor warrants exercised aggregate proceeds company approximately 352000 may 1999 company issued 411330 shares common stock companys employees lieu cash bonuses april 1999 sigmatau paid 1000000 445000 shares companys unregistered common stock sigmatau group may sell shares april 12 2001 addition sigmatau group granted registration rights covering resale shares june 1998 company entered agreement institutional investor equity line allowed company access 32 million sales common stock twoyear period subject certain limitations decision draw funds timing draw solely companys discretion company obligated draw minimum amount equity line draw amounts equity line commitment fee investor company issued fiveyear warrants purchase 300000 shares common stock exercise price 350 per share fiveyear warrants purchase 200000 shares common stock exercise price 553 per share company cancelled equity line november 1999 december 31 1999 none foregoing warrants exercised april 1998 company sold 661157 shares series c preferred stock 605 per share received 3931000 net proceeds offering second quarter ended june 30 1998 company recognized deemed dividend amount 3143000 connection issuance series c preferred stock amount computed accordance eitf appendix d60 accounting issuance convertible preferred stock debt securities nondetachable conversion feature eitf d60 series c preferred stock beneficial conversion feature date issue allowed converted common stock discount common stocks market price date conversion amount increased net loss per share attributable common shareholders calculated required sec december 31 1998 58356 shares series c preferred stock converted 3168404 shares common stock january 1999 46922 remaining 58536 shares converted 299483 shares common stock 11434 remaining shares series c preferred stock redeemed conversion price approximately 095 per common share result shares series c preferred stock outstanding conjunction offering company granted investors fiveyear warrants purchase 100000 shares common stock exercise price 567 per share july 23 1997 company loaned thomas e moore former chairman chief executive officer 5944000 exchange promise repay loan demand pledge 1882500 shares sciclone common stock owned mr moore collateral loan 1998 determined value collateral underlying loan made mr moore temporarily impaired writedown book value note would required upon investigation relative collectibility demand note repeated attempts obtain full repayment note receivable determined repayment 5944000 million loan plus accumulated interest approximately sciclone pharmaceuticals inc notes consolidated financials continued 689000 substantial doubt result determination company elected cancel 1882500 shares sciclone common stock held collateral write entire remaining book value noncash charge earnings fourth quarter 1998 march 23 2000 shares would market value approximately 28708000 new agreement 1999 mr moore received credit total indebtedness approximately 6633000 million equal value date 1882500 shares sciclone common stock calculating applying appropriate credit 3142000 mr moore agreed pay balance remaining debt 3615000 million five installments according schedule beginning october 1 1999 20000 increasing factor 4 six month anniversary thereafter final payment due later october 1 2001 first 20000 payment paid october 1999 repurchase common stock 1995 1994 companys board directors authorized repurchase 10 million 15 million shares companys common stock respectively years ended december 31 1999 1998 company repurchased shares common stock years ended december 31 1997 1996 company repurchased 684500 shares common stock aggregate cost 4267000 stock award plans august 1991 board directors shareholders company approved 1991 stock plan 1991 plan reserved 1300000 shares issuance thereunder may 1993 board directors shareholders company approved 2150000 share increase shares reserved 1991 plan 1991 plan permits award incentive nonqualified stock options shares common stock restricted stock purchase agreements january 1992 board directors shareholders company approved 1992 stock plan 1992 plan reserved 240000 shares issuance thereunder 1992 plan permits award incentive nonqualified stock options must exercised cash june 1995 board directors shareholders company approved 1995 equity incentive plan 1995 plan reserved 1250000 shares issuance thereunder 1995 plan permits award incentive nonqualified stock options shares common stock restricted stock awards may 1997 board directors shareholders company approved 750000 share increase shares reserved 1995 plan june 1998 board directors shareholders company approved 1500000 share increase shares reserved 1995 plan 1991 1992 1995 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years june 1995 board directors shareholders company approved nonemployee director stock option plan nonemployee director plan reserved 250000 shares issuance thereunder nonemployee director plan automatically grants nonqualified stock options nonemployee directors upon appointment first election companys board directors initial grant annually upon reelection board directors companys annual meeting shareholders annual grant options granted fair market value date grant initial grants vest annually period three years annual grants vest monthly period one year july 1996 board directors shareholders company approved 1996 employee stock purchase plan espp reserved 500000 shares issuance thereunder fulltime employees eligible participate espp terms espp employees choose 15 salary withheld purchase companys common stock purchase price stock lower 85 fair market value first trading day quarterly participation sciclone pharmaceuticals inc notes consolidated financials continued period last trading day quarterly participation period espp company sold 47038 46738 20432 shares employees 1999 1998 1997 respectively following table summarizes stock option activity 1991 1992 1995 plans nonemployee director plan following table summarizes information concerning outstanding exercisable options december 31 1999 pro forma information regarding net loss net loss per share required sfas 123 determined company accounted stock awards fair value method statement fair value options estimated date grant using blackscholes option pricing model following weightedaverage assumptions 1999 1998 1997 riskfree interest rates 600 473 616 respectively dividend yields 0 volatility factors expected market price companys stock 091 1999 087 1998 083 1997 weighted average expected life option 392 years 1999 430 years 1998 431 years 1997 fair value employee stock purchases also estimated using blackscholes model following assumptions 1999 1998 1997 riskfree interest rate 600 473 523 respectively dividend yield 0 expected volatility 091 080 074 respectively expected life 025 years sciclone pharmaceuticals inc notes consolidated financials continued blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock awards characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate companys opinion existing models necessarily provide reliable single measure fair value employee stock options stock purchases compensation expense companys option employee purchase plans determined based fair value grant date awards 1999 1998 1997 consistent provisions sfas 123 companys net loss net loss per share would adjusted pro forma amounts indicated effects applying sfas 123 pro forma disclosures likely representative effects reported net loss future years pro forma net loss year ended december 31 1997 reflects compensation expense three years vesting year ended december 31 1998 december 31 1999 reflect compensation expense four years vesting outstanding stock awards reserved shares december 31 1999the company reserved shares common stock future issuance follows note 9 significant geographic information company operates one business segment development commercialization specialistoriented proprietary drugs treatment chronic life threatening diseases currently companys principal focus development commercialization zadaxin development cpx chief executive officer identified chief operating decision maker codm final authority resource allocation decisions performance assessment codm receive discrete financial information individual components companys domestic operations primarily consist product development companys wholly owned international subsidiary sciclone pharmaceuticals international ltd based hong kong engaged sales marketing product distribution worldwide sciclone pharmaceuticals inc notes consolidated financials continued information regarding geographic areas follows note 10 subsequent events january 2000 company completed 5720000 private placement brown simpson asset management strategic institutional investor brown simpson purchased 1000000 shares newly issued common stock slight premium market warrants purchase 800000 additional shares 700 per share warrants exercised cannot sold less 1000 per share 9 months passed note 11 subsequent events unaudited march 2000 company licensed sigmatau exclusive development marketing rights zadaxin europe sciclone retains rights zadaxin us agreement sigmatau fund paneuropean pivotal phase 3 hepatitis c trial zadaxin also fund onethird companys clinical expenses complementary pivotal phase 3 hepatitis c trial us european zadaxin pivotal phase 3 hepatitis c trials planned start year march 2000 company completed 3100000 million selfplaced private placement sigmatau consisting 198072 shares common stock fiveyear warrants purchase 200000 shares common stock 1567 per share fiveyear warrants purchase 200000 shares common stock 3133 per share sigma tau registration rights respect shares purchased issuable upon exercise warrants january 29 2000 march 23 2000 company received approximately 3213000 connection exercises outstanding options warrants purchase common stock item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc consolidated financial statements december 31 2001 2000 three years period ended december 31 2001 report ernst young llp independent auditors board directors shareholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 2001 2000 related consolidated statements operations shareholders equity cash flows three years period ended december 31 2001 audits also included financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 2001 2000 consolidated results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp palo alto california january 24 2002 sciclone pharmaceuticals inc consolidated balance sheets see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements operations see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statement shareholders equity see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financials statements note 1 company summary significant accounting policies company sciclone pharmaceuticals inc sciclone company develops commercializes pharmaceutical biological therapeutic compounds acquired inlicensed stage late preclinical early clinical development companys current product development commercial activities focused hepatitis b hepatitis c cancer cystic fibrosis basis presentation consolidated financial statements include accounts company wholly owned subsidiaries sciclone pharmaceuticals international limited sciclone italy srl sciclone japan kk sciclone pharmaceuticals international limited registered cayman islands principal office located hong kong sciclone italy srl registered italy principal office located rome sciclone japan kk registered japan principal office located tokyo significant intercompany accounts transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted us requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents investments cash equivalents consist highly liquid investments original maturities three months less cash equivalents carried cost plus accrued interest approximates market value companys lease agreement company required maintain letter credit amount 633000 favor lessor letter credit secured certificate deposit amount 633000 company classifies entire investment portfolio availableforsale records investments fair value determined available market information balance sheet portfolio primarily consists us government securities shortterm longterm debt instruments unrealized holding gains losses included accumulated comprehensive income amortized cost debt securities adjusted amortization premiums accretion discounts maturity amortization included investment income along interest earned realized gains losses determined basis specific identification declines value judged temporary also included investment income management believes credit risk associated investments limited due nature investments years ended december 31 2001 2000 1999 net unrealized gains loss approximately 31000 6000 7000 respectively charged accumulated comprehensive income years ended december 31 2001 2000 1999 net realized gains loss less 1000 years property equipment property equipment stated cost less accumulated depreciation provided estimated useful lives respective assets three five years straightline basis depreciation expense years ended december 31 2001 2000 1999 146000 120000 184000 respectively sciclone pharmaceuticals inc notes consolidated financials statements continued income january 1999 company foreclosed loans extended one former executive officers board members possession real property securing loans company recorded net value property assets availableforsale approximately 1184000 related assumed mortgage liability current liabilities approximately 942000 income approximately 242000 november 2000 company sold property recorded additional 21000 income sale assets include following product rights acquired amortized six years see note 5 company identifies records impairment losses circumstances dictate intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets july 1998 company acquired worldwide rights zadaxin alpha 1 biomedicals inc a1b rights a1b licensed hoffmannlaroche inc f hoffmannlaroche ag approximately 1800000 transaction eliminated companys royalty obligation a1b respect sales zadaxin acquisition date a1b transaction allowed sciclone market zadaxin worldwide except italy spain portugal sclavo spa sclavo international pharmaceutical entity owned exclusive marketing rights april 1998 company acquired zadaxin rights italy spain portugal sclavo approximately 1400000 connection foregoing transactions company estimated fair market value intangible assets purchased approximately 2456000 wrote remaining 700000 although company history operating cash flow losses company believes impairment intangible assets zadaxin approved sale 26 countries march 15 2002 principally treatment hepatitis b hepatitis c based companys anticipated financial results zadaxin sales 2001 2005 determined net present value future cash flows exceed carrying amount asset foreign currency translation company determined us dollar functional currency wholly owned subsidiary adjustments resulting translation foreign currency transactions included results operations significant sciclone pharmaceuticals inc notes consolidated financials statements continued revenue recognition company recognizes revenue product sales time shipment recognizes contract grant revenue services performed significant customer acceptance requirements post shipment obligations part company sales importing agents distributors recognized time shipment title product transferred contractual rights return except limited terms regarding product quality however company replace products expired deemed damaged defective delivered payments importing agents distributors contingent upon sale end user importing agents distributors contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement sciclone recognized earlier payments received collection assured revenue associated substantive performance milestones recognized based upon achievement milestones defined respective agreements revenue research development cost reimbursement contracts recognized related costs incurred research development research development expenditures charged operations incurred major components research development expenses consist personnel costs including salaries benefits clinical development performed contract research organizations preclinical work pharmaceutical development materials supplies third party research funding overhead allocations consisting various administrative facilities related costs research development activities also separated three main categories research clinical development pharmaceutical development research costs typically consist preclinical toxicology work clinical development costs include phase 1 2 3 clinical trials well expanded access programs pharmaceutical development costs consist product formulation chemical analysis contract research organization management fees expensed monthly remaining clinical program activity generally expensed straightline basis life individual contract study company monitors patient enrollment levels related activity extent possible adjusts estimates accordingly shipping handling costs related shipping handling included cost sales periods presented advertising expenses company accounts advertising costs expense period incurred included marketing expenses periods presented advertising expense years ended december 31 2001 2000 1999 233000 204000 188000 respectively income taxes income tax expense based reported results operations extraordinary items income taxes deferred income taxes reflect impact temporary differences amount assets liabilities recognized financial reporting purposes amounts recognized tax purposes sciclone pharmaceuticals inc notes consolidated financials statements continued deferred taxes measured applying current tax laws based companys lack earnings history deferred tax assets fully offset valuation allowance retirement benefits company pretax savings plan covering substantially us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions 15 employees salary company contributions terminated companys discretion 73000 58000 17000 years ended december 31 2001 2000 1999 respectively net loss per share basic net loss per share computed using weighted average number shares common stock outstanding period weighted average number shares excludes shares held collateral former officers loan shares retired 1999 diluted net loss per share equals basic net loss per share given companys history net losses company net income position diluted earnings per share would included shares used computation basic net loss per share well additional 6897357 6396577 9822008 shares 2001 2000 1999 respectively related outstanding options warrants included calculation basic net loss per share accounting stockbased compensation company accounts stock option employee stock purchase plans provisions accounting principles board opinion 25 apb 25 related interpretations accordingly company recognize compensation expense accounting stock option employee stock purchase plans awards employees directors warrants issued connection equity debt arrangements equity instruments issued nonemployees valued using blackscholes option valuation model warrants issued placement agents similar parties connection equity financing accounted stock issuance costs equal amount recorded additional paidin capital warrants issued purchasers companys equities specifically accounted value subcomponent additional paidin capital fair value warrants issued connection debt arrangements material accounted debt discount amortized additional interest expense term related debt reporting comprehensive income loss company reports unrealized gains losses companys availableforsale securities comprehensive income loss years ended december 31 2001 2000 1999 total comprehensive loss attributable common shareholders amounted 6201000 1711000 5474000 respectively segment information company operates one segment see note 9 concentration credit risk peoples republic china like japan certain asian markets uses tiered method import distribute products distributors make sales country product imported sciclone pharmaceuticals inc notes consolidated financials statements continued licensed importers 1997 company sold one principal importing agent resold four distributors inside peoples republic china reflecting expansion stability companys sales peoples republic china 1998 company began working extensively second importing agent addition agent used 1997 2000 company began selling third importing agent 2001 company began selling fourth importing agent enabled expansion sales four distributors year ended december 31 2001 importing agents china accounted 89 companys product sales december 31 2001 approximately 8653000 91 companys accounts receivable attributable four customers china company performs ongoing credit evaluations customers financial condition generally require collateral customers company maintains reserves credit losses within managements expectation company recognizes reserves bad debts ranging 25 100 based length time receivables past due recent accounting pronouncements financial accounting standards board issued statements financial accounting standards 141 business combinations sfas 141 142 goodwill intangible assets sfas 142 june 2001 new rules goodwill intangible assets deemed indefinite lives longer amortized subjected annual impairment tests accordance statements intangible assets continue amortized useful economic lives statements effective combinations initiated july 1 2001 apply assets related acquisitions prior date january 1 2002 based current circumstances management believes application new rules material impact companys consolidated financial statements financial accounting standards board issued statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 august 2001 statement addresses financial accounting reporting impairment disposal longlived assets sfas 144 effective fiscal years beginning december 15 2001 earlier application encouraged based current circumstances management believes application new rules material impact companys consolidated financial statements reclassifications certain prior year amounts reclassified conform current years presentation reclassifications material impact consolidated financial statements sciclone pharmaceuticals inc notes consolidated financials statements continued note 2 availableforsale securities following summary availableforsale securities december 31 2001 total availableforsale securities included follows 10897000 cash equivalents 633000 restricted shortterm investments 283000 shortterm investments december 31 2000 total available sale securities included follows 18482000 cash equivalents 317000 restricted shortterm investments 198000 shortterm investments december 31 2001 2000 availableforsale securities maturities 12 months less note 3 inventories stated lower cost firstin firstout basis market inventories consisted following sciclone pharmaceuticals inc notes consolidated financials statements continued note 4 property equipment property equipment consisted following note 5 collaborative agreements april 1999 company licensed sigmatau semiexclusive zadaxin development marketing rights italy spain exclusive rights switzerland march 2000 license expanded amended include countries european union sigmatau made exclusive licensee countries september 1998 company acquired rights sclavo zadaxin italy spain portugal including sclavos marketing approval zadaxin italy influenza vaccine adjuvant purchase price consisted 297000 cash 375000 shares companys common stock warrants purchase 375000 shares common stock exercise price 4125 per share warrants exercised january 2000 pursuant 1994 license agreement a1b company obtained worldwide marketing development manufacturing rights zadaxin exception italy spain portugal april 1997 sciclone entered arrangement a1b administer sublicense activities a1b licensee italy spain portugal 1997 agreement company also acquired control a1bs patent portfolio zadaxin december 1997 sciclone a1b entered asset purchase agreement pursuant company acquired a1bs worldwide rights zadaxin rights a1b licensed hoffmannlaroche inc f hoffmannlaroche ag eliminated companys current future sublicensees royalty obligations a1b respect future sales zadaxin july 1998 company a1b closed asset purchase agreement accordance agreement company issued a1b 600000 shares common stock loaned a1b 210000 exchange assets described connection foregoing transactions sclavo a1b company estimated fair market value intangible assets purchased approximately 2456000 wrote remaining 700000 august 1997 company entered zadaxin patent license agreement fitzsimons army medical center us army company obligated pay army minimum annual royalty upon commercialization zadaxin treatment chronic hepatitis c certain countries company obligated pay army royalty based percentage zadaxin net sales revenue october 1996 company entered agreement scheringplough kk giving scheringplough kk exclusive marketing rights zadaxin japan agreement scheringplough kk initiated development zadaxin monotherapy treatment hepatitis b hepatitis c sciclone pharmaceuticals inc notes consolidated financials statements continued historically scheringplough kk managed development process parties shared certain development expenses 2001 company exercised right participate directly development process manages process wholly owned subsidiary sciclone japan kk using japanese clinical research organization scheringplough kk consultant scheringplough kk continues exclusive marketing rights zadaxin japan april 1996 company acquired exclusive license cpx synthetic compound national institutes health nih developed cpx potential treatment cystic fibrosis license agreement company obligated pay nih minimum annual royalty payment upon product approval nih receive milestone payment addition royalties based percentage cpx net sales revenue note 6 income taxes company uses liability method account income taxes method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities deferred tax assets liabilities measured using enacted tax rates laws effect differences expected reverse domestic foreign components loss income tax december 31 follows significant components companys deferred tax assets december 31 follows valuation allowance increased approximately 1734000 3774000 1200000 years ended december 31 2001 2000 1999 respectively deferred tax assets relating carryforwards december 31 2001 include approximately 6265000 associated stock option activity subsequently recognized tax benefits credited directly shareholders equity company deferred tax liabilities december 31 2000 2001 december 31 2001 company net operating loss carryforwards federal income tax purposes approximately 59700000 expire years 2006 2021 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred companys foreign subsidiaries december 31 2001 company federal tax credit carryforwards approximately 3200000 expire years 2009 2021 sciclone pharmaceuticals inc notes consolidated financials statements continued change ownership provisions internal revenue code portion companys net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities result net operating losses valuation allowances company record state income tax expense years ended december 31 2001 2000 1999 note 7 commitments contingencies leases company leases main office facility noncancelable operating lease agreement expires august 2005 lease period five years requires company pay insurance taxes prorata share operating expenses company also leases various office facilities abroad noncancelable lease agreements expiring 2001 rental expense 2001 2000 1999 1296000 498000 398000 respectively minimum future rental commitments amount 1311000 2002 1349000 2003 1385000 2004 1270000 2005 royalties august 1997 zadaxin patent license agreement fitzsimons army medical center us army company obligated pay army minimum annual royalty upon commercialization zadaxin treatment chronic hepatitis c certain countries company obligated pay army royalty based percentage zadaxin net sales revenue april 1996 cpx license agreement nih company obligated pay nih minimum annual royalty upon commercialization cpx company obligated pay nih royalty based percentage cpx net sales revenue 2001 2000 1999 company paid 30000 10000 respectively related minimum annual royalty convertible notes payable march 2001 company issued 16 million senior unsecured convertible note investment affiliate ubs ag 16 million note convertible 276530 shares common stock fixed conversion price 57860 per share note accrue interest rate 6 per year mature march 2006 note convertible march 21 2002 company also received 354000 granting investor right purchase time notes maturity date approximately 24 million senior unsecured convertible notes due march 2006 issued notes bear interest zero coupon convertible 276530 shares common stock fixed conversion price 85532 per share company may elect lieu delivering convertible notes deliver respective number shares common stock december 2000 company issued 4 million senior unsecured convertible note investment affiliate ubs ag 4 million note convertible 407610 shares common stock fixed conversion price 98133 per share note accrue interest rate 6 per year mature december 2005 company also received 900000 granting investor right purchase time notes maturity date approximately 59 million senior unsecured convertible notes due december 2005 issued notes bear interest zero coupon convertible 407610 shares common stock fixed conversion price 145066 per share company may elect lieu delivering convertible notes deliver respective number shares common stock sciclone pharmaceuticals inc notes consolidated financials statements continued note 8 shareholders equity common stock preferred stock warrants march 2000 company licensed sigmatau exclusive development marketing rights zadaxin europe addition company completed 3100000 million private placement sigmatau consisting 198072 shares common stock fiveyear immediately exercisable warrants purchase 200000 shares common stock 1567 per share fiveyear immediately exercisable warrants purchase 200000 shares common stock 3133 per share sigmatau registration rights respect shares purchased issuable upon exercise warrants december 31 2001 none foregoing warrants exercised january 2000 company completed 6100000 private placement brown simpson asset management purchased 1000000 shares common stock price 600 per share slight premium market fiveyear immediately exercisable warrants purchase 800000 shares common stock exercise price 700 per share december 31 2001 none warrants exercised july 21 1999 company completed 3620000 private placement strategic institutional investors offering consisted units 2515934 shares common stock immediately exercisable warrants purchase 2515934 shares common stock unit priced 159 consisted one share common stock one fiveyear immediately exercisable warrant purchase one share common stock exercise price 172 per share connection private placement companys placement agents received fiveyear immediately exercisable warrants purchase 345933 shares common stock exercise price 183 per share december 31 2001 none warrants outstanding 2515934 investor warrants exercised aggregate proceeds company approximately 4327000 july 2 1999 company completed 1810000 private placement strategic institutional accredited investors offering consisted units 1370145 shares common stock immediately exercisable warrants purchase 1370145 shares common stock unit priced 146 consisted one share common stock one fiveyear immediately exercisable warrant purchase one share common stock exercise price 133 per share connection private placement companys placement agents received fiveyear immediately exercisable warrants purchase 183179 shares common stock exercise price 166 per share december 31 2001 none warrants outstanding 1370145 investor warrants exercised aggregate proceeds company approximately 1822000 may 1999 company issued 411330 shares common stock companys employees lieu cash bonuses april 1999 sigmatau paid 1000000 445000 shares companys unregistered common stock sigmatau granted registration rights covering resale shares june 1998 company entered agreement institutional investor equity line allowed company access 32 million sales common stock twoyear period subject certain limitations decision draw funds timing draw solely companys discretion company obligated draw minimum amount equity line draw amounts equity line commitment fee investor company issued fiveyear warrants purchase 300000 shares common stock exercise price 350 per share fiveyear warrants purchase 200000 shares common stock exercise price 553 per share company cancelled equity line november 1999 december 31 2001 none foregoing warrants exercised sciclone pharmaceuticals inc notes consolidated financials statements continued april 1998 company sold 661157 shares series c preferred stock 605 per share received 3931000 net proceeds offering second quarter ended june 30 1998 company recognized deemed dividend amount 3143000 connection issuance series c preferred stock amount computed accordance eitf appendix d60 accounting issuance convertible preferred stock debt securities nondetachable conversion feature eitf d60 series c preferred stock beneficial conversion feature date issuance allowed converted common stock discount common stocks market price date issuance amount increased net loss per share attributable common shareholders calculated required sec december 31 1998 58356 shares series c preferred stock converted 3168404 shares common stock january 1999 46922 remaining 58536 shares converted 299483 shares common stock 11434 remaining shares series c preferred stock redeemed conversion price approximately 095 per common share result shares series c preferred stock outstanding conjunction offering company granted investors fiveyear warrants purchase 100000 shares common stock exercise price 567 per share december 31 2001 none warrants outstanding remaining 37500 100000 investor warrants exercised aggregate proceeds company approximately 213000 stock award plans august 1991 board directors shareholders company approved 1991 stock plan 1991 plan reserved 1300000 shares issuance thereunder may 1993 board directors shareholders company approved 2150000 increase shares reserved 1991 plan 1991 plan permits award incentive nonqualified stock options shares common stock restricted stock purchase agreements january 1992 board directors shareholders company approved 1992 stock plan 1992 plan reserved 240000 shares issuance thereunder 1992 plan permits award incentive nonqualified stock options must exercised cash june 1995 board directors shareholders company approved 1995 equity incentive plan 1995 plan reserved 1250000 shares issuance thereunder 1995 plan permits award incentive nonqualified stock options shares common stock restricted stock awards may 1997 board directors shareholders company approved 750000 increase shares reserved 1995 plan june 1998 june 2000 board directors shareholders company approved increases 1500000 1250000 respectively shares reserved 1995 plan 1991 1992 1995 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years june 1995 board directors shareholders company approved nonemployee director stock option plan nonemployee director plan reserved 250000 shares issuance thereunder nonemployee director plan automatically grants nonqualified stock options nonemployee directors upon appointment first election companys board directors initial grant annually upon reelection board directors companys annual meeting shareholders annual grant options granted fair market value date grant initial grants vest annually period three years annual grants vest monthly period one year june 2000 board directors shareholders company approved 250000 increase shares reserved nonemployee director plan july 1996 board directors shareholders company approved 1996 employee stock purchase plan espp reserved 500000 shares issuance thereunder fulltime sciclone pharmaceuticals inc notes consolidated financials statements continued employees eligible participate espp terms espp employees choose 15 salary withheld purchase companys common stock purchase price stock 85 lower fair market value first trading day quarterly participation period fair market value last trading day quarterly participation period espp company sold 33009 144505 47038 shares employees 2001 2000 1999 respectively following table summarizes stock option activity 1991 1992 1995 plans nonemployee director plan following table summarizes information concerning outstanding exercisable options december 31 2001 sciclone pharmaceuticals inc notes consolidated financials statements continued pro forma information regarding net loss net loss per share required sfas 123 determined company accounted stock awards fair value method statement fair value options estimated date grant using blackscholes option pricing model following weightedaverage assumptions 2001 2000 1999 riskfree interest rates 400 600 respectively dividend yields 0 volatility factors expected market price companys common stock 096 2001 097 2000 091 1999 weighted average expected life option 394 years 2001 390 years 2000 392 years 1999 weighted average estimated fair value options granted 272 2001 731 2000 093 1999 fair value employee stock purchases also estimated using blackscholes model following assumptions 2001 2000 1999 riskfree interest rate 400 600 respectively dividend yield 0 expected volatility 096 097 091 respectively expected life 025 years weighted average estimated fair value employee stock purchase plan shares purchased 186 2001 196 2000 055 1999 blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock awards characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate companys opinion existing models necessarily provide reliable single measure fair value employee stock options stock purchases compensation expense companys option employee purchase plans determined based fair value grant date awards 2001 2000 1999 consistent provisions sfas 123 companys net loss net loss per share would adjusted pro forma amounts years ended december 31 indicated effects applying sfas 123 pro forma disclosures likely representative effects reported net loss future years reserved shares december 31 2001 company reserved shares common stock future issuance follows sciclone pharmaceuticals inc notes consolidated financials statements continued note 9 significant geographic information company operates one business segment development commercialization specialistoriented proprietary drugs treatment chronic life threatening diseases currently companys principal focus development commercialization zadaxin development cpx chief executive officer identified chief operating decision maker codm final authority resource allocation decisions performance assessment codm receive discrete financial information individual components companys domestic operations primarily consist product development companys wholly owned international subsidiary sciclone pharmaceuticals international ltd based hong kong engaged sales marketing product distribution worldwide information regarding geographic areas follows december 31 two customers accounted 10 total revenues 46 29 year ended december 31 2001 two customers accounted 10 total revenues 63 16 year ended december 31 2000 one customer accounted 10 total revenues 77 year ended december 31 1999 customer accounted 10 revenues years sciclone pharmaceuticals inc notes consolidated financials statements continued note 10 selected quarterly financial data unaudited item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc consolidated financial statements december 31 2002 2001 three years period ended december 31 2002 report ernst young llp independent auditors board directors shareholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 2002 2001 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2002 audits also included financial statement schedule listed item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 2002 2001 consolidated results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp palo alto california january 30 2003 sciclone pharmaceuticals inc consolidated balance sheets see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements operations see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statement shareholders’ equity see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financials statements note 1 company summary significant accounting policies company sciclone pharmaceuticals inc “sciclone” “company” biopharmaceutical company engaged development commercialization therapeutics treat lifethreatening diseases company’s lead product zadaxin several latestage clinical trials including two phase 3 hepatitis c clinical trials us recently completed phase 3 hepatitis b clinical trial japan phase 2 malignant melanoma clinical trial europe two phase 2 liver cancer trials us zadaxin approved sale ministries health 30 countries marketed china selected countries outside us primarily treatment hepatitis b hepatitis c basis presentation consolidated financial statements include accounts company wholly owned subsidiaries sciclone pharmaceuticals international limited sciclone italy srl sciclone japan kk sciclone pharmaceuticals international limited registered cayman islands principal office located hong kong sciclone italy srl registered italy principal office located rome sciclone japan kk registered japan principal office located tokyo significant intercompany accounts transactions eliminated revenue recognition company recognizes revenue product sales time shipment significant customer acceptance requirements post shipment obligations part company sales importing agents distributors recognized time shipment title product transferred contractual rights return except limited terms regarding product quality however company replace products expired deemed damaged defective delivered payments importing agents distributors contingent upon sale end user importing agents distributors contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement sciclone recognized earlier payments received collection assured revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment use estimates preparation financial statements conformity accounting principles generally accepted us requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents investments cash equivalents consist highly liquid investments original maturities three months less cash equivalents carried cost plus accrued interest approximates market value sciclone pharmaceuticals inc notes consolidated financials statements continued required lease agreement letter credit secured certificate deposit 633000 december 31 2002 european value added tax filing arrangement letter credit secured certificate deposit 52000 december 31 2002 company classifies entire investment portfolio availableforsale records investments fair value determined available market information balance sheet portfolio primarily consists us government securities shortterm debt instruments unrealized gains losses included accumulated comprehensive income consolidated balance sheet amortized cost debt securities adjusted amortization premiums accretion discounts maturity amortization included investment income along interest earned realized gains losses determined basis specific identification management believes credit risk associated investments limited due nature investments years ended december 31 2002 2001 2000 net unrealized gains approximately 40000 31000 6000 respectively included accumulated comprehensive income years ended december 31 2002 2001 2000 net realized gains less 1000 years inventories stated lower cost firstin firstout basis market property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets three five years straightline basis leasehold improvements amortized shorter estimated useful life lease term straightline basis depreciation expense years ended december 31 2002 2001 2000 122000 146000 120000 respectively intangible assets intangible assets include following december 1997 company entered agreement alpha 1 biomedicals inc “a1b” acquire worldwide rights except italy spain portugal sclavo spa “sclavo” international pharmaceutical entity owned exclusive marketing rights zadaxin rights a1b licensed hoffmannlaroche inc f hoffmannlaroche ag approximately 1800000 transaction closed july 1998 eliminated company’s royalty obligation a1b respect sales zadaxin acquisition date april 1998 company entered agreement sclavo acquire zadaxin rights italy spain portugal sclavo approximately 1400000 connection foregoing transactions company estimated fair market value intangible assets purchased approximately 2456000 expensed 700000 related hepatitis c inprocess technology acquired zadaxin product rights amortized straightline basis beginning september 1998 amortization expense years ended december 31 2002 2001 2000 409000 per year sciclone pharmaceuticals inc notes consolidated financials statements continued based estimated useful life six years amortization expense years 2003 2012 expected 70000 per year company reassessed estimated useful life assets additional eight years december 31 2002 given european patent use zadaxin treatment hepatitis c expires 2012 company reassesses useful life assets accordance current facts circumstances company’s policy identify record impairment losses intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets company date identified impairment losses assets although company history operating cash flow losses company believes impairment intangible assets zadaxin approved sale 30 countries principally treatment hepatitis b hepatitis c based company’s anticipated financial results zadaxin sales 2001 2005 determined future cash flows exceed carrying amount assets foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using rates exchange effect period gains losses translation financial statements denominated foreign currencies material included separate component comprehensive income loss statement shareholders’ equity accumulated currency translation gains losses included period presented company records foreign currency transactions exchange rate prevailing date transaction monetary assets liabilities denominated foreign currency retranslated exchange rates effect balance sheet date translation differences arising foreign currency transactions included results operations significant research development expenses research development expenditures charged operations incurred major components research development expenses consist clinical development performed behalf institutions contract research organizations personnel costs including salaries benefits preclinical work pharmaceutical development materials supplies third party research funding overhead allocations consisting various administrative facilities related costs research development activities also separated three main categories research clinical development pharmaceutical development research costs typically consist preclinical toxicology work clinical development costs include phase 1 2 3 clinical trials well expanded access programs pharmaceutical development costs consist product formulation chemical analysis continuation zadaxin clinical trials expected continue largest significant effect research development expenses cost accruals clinical trials based estimates services received efforts expended pursuant contracts numerous institutions conduct clinical trials company’s behalf financial terms agreements subject negotiation variation contract may result uneven payment flows payments contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses actual services received efforts expended expenses related grants institutions conduct clinical trials behalf accrued based level patient enrollment activity according protocol general expenses higher initial final months patient’s scheduled 18 months treatment observation expenses relating clinical research organization cro managing trials laboratory direct expenses sciclone pharmaceuticals inc notes consolidated financials statements continued recognized period incurred services performed company monitors patient enrollment levels related activity extent possible adjusts estimates accordingly phase 3 clinical trials us increase research development expenditures significantly next year research development expenditures charged operations incurred cost accruals clinical trials based estimates services received efforts expended expenses related grants institutions accrued based level patient enrollment activity according protocol general expenses higher initial final months patient’s scheduled 18 months treatment observation expenses relating clinical research organization managing trials laboratory direct expenses recognized period incurred services performed monitor patient enrollment levels related activity extent possible adjust estimates accordingly however management underestimated activity levels associated various studies given point time could underestimate actual research development expenses shipping handling costs related shipping handling included cost sales periods presented advertising expenses company expenses advertising costs incurred costs included sales marketing expenses periods presented advertising expenses years ended december 31 2002 2001 2000 108000 233000 204000 respectively income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period included enactment date deferred tax assets reduced valuation allowance opinion management likely deferred tax assets may realized net loss per share basic net loss per share computed using weighted average number shares common stock outstanding period diluted net loss per share equals basic net loss per share given company’s history net losses company net income position diluted earnings per share would included shares used computation basic net loss per share well additional 8436262 8265637 7211797 shares 2002 2001 2000 respectively related convertible notes payable outstanding options warrants regardless conversion exercise prices included calculation basic net loss per share accounting stockbased compensation company accounts stock option employee stock purchase plans provisions accounting principles board opinion 25 “apb 25” related interpretations accordingly company sciclone pharmaceuticals inc notes consolidated financials statements continued generally recognize compensation expense accounting stock option employee stock purchase plans awards employees directors pro forma information regarding net loss net loss per share required statement financial accounting standards 123 “accounting stockbased compensation” “sfas 123” determined company accounted stock awards fair value method statement fair value options estimated date grant using blackscholes option pricing model following weightedaverage assumptions 2002 2001 2000 riskfree interest rates 200 400 600 respectively dividend yield 0 volatility factors expected market price company’s common stock 096 097 respectively weighted average expected life option 388 years 394 years 390 years respectively weighted average estimated fair value options granted 275 2002 272 2001 731 2000 fair value employee stock purchases also estimated using blackscholes model following assumptions 2002 2001 2000 riskfree interest rate 200 400 600 respectively dividend yield 0 expected volatility 096 097 respectively expected life 025 years weighted average estimated fair value employee stock purchase plan shares purchased 099 2002 186 2001 196 2000 blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility company’s employee stock awards characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate company’s opinion existing models necessarily provide reliable single measure fair value employee stock options stock purchases compensation expense company’s option employee purchase plans determined based fair value grant date awards 2002 2001 2000 consistent provisions sfas 123 company’s net loss net loss per share would adjusted pro forma amounts years ended december 31 indicated effects applying sfas 123 pro forma disclosures likely representative effects reported net loss future years due different number options granted year warrants issued connection equity debt arrangements equity instruments issued nonemployees valued using blackscholes option valuation model warrants issued placement agents similar parties connection equity financing accounted stock issuance costs equal amount recorded additional paidin capital warrants issued purchasers company’s equities separately included financial statements value subcomponent additional paidin capital fair value warrants issued connection debt arrangements material accounted debt discount amortized additional interest expense term related debt sciclone pharmaceuticals inc notes consolidated financials statements continued comprehensive income loss company reports changes unrealized gains losses company’s availableforsale securities comprehensive income loss years ended december 31 2002 2001 2000 total comprehensive loss amounted 9997000 6201000 1711000 respectively segment information company operates one segment see note 9 concentration credit risk people’s republic china like japan certain asian markets uses tiered method import distribute products distributors make sales country product imported licensed importers year ended december 31 2002 sales six importing agents china accounted 88 company’s product sales four importing agents accounted 89 86 product sales years ended december 31 2001 2000 respectively 2002 largest customer accounted 41 sales second largest customer accounted 27 sales customers accounted 10 sales 2002 2001 largest customer accounted 47 sales second largest customer accounted 30 sales customers accounted 10 sales 2001 2000 largest customer accounted 63 sales second largest customer accounted 14 sales customers accounted 10 sales 2000 december 31 2002 approximately 8627000 87 company’s accounts receivable attributable four importing agents china company performs ongoing credit evaluations customers’ financial condition generally require collateral customers company maintains reserves credit losses within management’s expectation company recognizes reserves bad debts ranging 25 100 based length time receivables past due company’s collectibility experience recent accounting pronouncements financial accounting standards board issued statement financial accounting standards 148 “accounting stockbased compensationtransition disclosure” “sfas 148” december 2002 sfas 148 amends sfas 123 provide alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results additional disclosure requirements sfas 148 effective fiscal years ending december 15 2002 included financial statements company elected continue follow intrinsic value method accounting prescribed accounting principles board opinion 25 “accounting stock issued employees” account employee stock options reclassifications certain prior year amounts reclassified conform current year’s presentation reclassifications material impact consolidated financial statements sciclone pharmaceuticals inc notes consolidated financials statements continued note 2 availableforsale securities following summary availableforsale securities december 31 2002 total availableforsale securities included follows 13723000 cash equivalents 685000 restricted shortterm investments 232000 shortterm investments december 31 2001 total availableforsale securities included follows 10897000 cash equivalents 633000 restricted shortterm investments 317000 shortterm investments december 31 2002 2001 availableforsale securities maturities 12 months less note 3 inventories consisted following sciclone pharmaceuticals inc notes consolidated financials statements continued note 4 property equipment property equipment consisted following note 5 collaborative agreements april 1999 company licensed sigmatau semiexclusive zadaxin development marketing rights italy spain exclusive rights switzerland march 2000 license expanded amended include countries european union sigmatau made exclusive licensee countries december 2001 license amended define scope clinical development zadaxin sigmatau would undertake europe terms december 2001 amendment company received 2685000 first quarter 2002 contract revenue recognized three years commencing april 2002 estimated time complete zadaxin hepatitis c us clinical program anticipated fda regulatory filings substantive performance requirements contract amendment year ended december 31 2002 company recognized 671000 contract revenue remaining 2014000 recorded deferred revenue december 31 2002 april 1998 company entered agreement acquire rights sclavo zadaxin italy spain portugal including sclavo’s marketing approval zadaxin italy influenza vaccine adjuvant purchase price consisted 297000 cash 375000 shares company’s common stock warrants purchase 375000 shares common stock exercise price 4125 per share warrants exercised january 2000 pursuant 1994 license agreement a1b company obtained worldwide marketing development manufacturing rights zadaxin exception italy spain portugal april 1997 sciclone entered arrangement a1b administer sublicense activities a1b licensee italy spain portugal 1997 agreement company also acquired control a1b’s patent portfolio zadaxin december 1997 sciclone a1b entered asset purchase agreement pursuant company acquired a1b’s worldwide rights zadaxin rights a1b licensed hoffmannlaroche inc f hoffmannlaroche ag eliminated company’s current future sublicensees’ royalty obligations a1b respect future sales zadaxin july 1998 company a1b closed asset purchase agreement accordance agreement company issued a1b 600000 shares common stock loaned a1b 210000 exchange assets described connection foregoing transactions sclavo a1b company estimated fair market value intangible assets purchased approximately 2456000 wrote remaining 700000 related hepatitis c inprocess technology august 1997 company entered zadaxin patent license agreement fitzsimons army medical center us army “us army” company obligated pay us army sciclone pharmaceuticals inc notes consolidated financials statements continued minimum annual royalty based percentage zadaxin net sales revenue upon commercialization zadaxin treatment chronic hepatitis c certain countries including us european union japan including china october 1996 company entered agreement scheringplough kk giving scheringplough kk exclusive marketing rights zadaxin japan agreement scheringplough kk initiated development zadaxin monotherapy treatment hepatitis b hepatitis c initially scheringplough kk managed development process parties shared certain development expenses 2001 company exercised right participate directly development process manages process wholly owned subsidiary sciclone japan kk using japanese clinical research organization scheringplough kk consultant scheringplough kk continues exclusive marketing rights zadaxin japan april 1996 company acquired exclusive license cpx synthetic compound national institutes health “nih” nih developed cpx potential treatment cystic fibrosis license agreement company obligated pay nih minimum annual royalty payment upon product approval nih receive milestone payment addition royalties based percentage cpx net sales revenue note 6 income taxes domestic foreign components loss income tax net loss december 31 follows significant components company’s deferred tax assets december 31 follows valuation allowance increased approximately 3272000 1734000 3774000 years ended december 31 2002 2001 2000 respectively deferred tax assets relating carryforwards december 31 2002 include approximately 6401000 associated stock option activity subsequently recognized tax benefits credited directly shareholders’ equity company deferred tax liabilities december 31 2002 2001 december 31 2002 company net operating loss carryforwards federal income tax purposes approximately 71400000 expire years 2006 2022 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable sciclone pharmaceuticals inc notes consolidated financials statements continued losses incurred company’s foreign subsidiaries december 31 2002 company federal tax credit carryforwards approximately 4100000 expire years 2009 2022 “change ownership” provisions internal revenue code portion company’s net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities result net operating losses valuation allowances company record state income tax expense years ended december 31 2002 2001 2000 note 7 commitments contingencies leases company leases main office facility noncancelable operating lease agreement expires august 2007 lease period seven years requires company pay insurance taxes prorata share operating expenses company also leases various office facilities abroad noncancelable lease agreements expiring 2003 2005 rental expense 2002 2001 2000 1376000 1296000 498000 respectively minimum future rental payments amount 1302000 2003 1323000 2004 1427000 2005 1280000 2006 930000 2007 royalties august 1997 zadaxin patent license agreement us army company obligated pay us army minimum annual royalty based percentage zadaxin net sales revenue upon commercialization zadaxin treatment chronic hepatitis c certain countries including us european union japan including china 2002 2001 2000 company paid 20000 per year related minimum annual royalty april 1996 cpx license agreement nih company obligated pay nih minimum annual royalty upon commercialization cpx company obligated pay nih royalty based percentage cpx net sales revenue 2002 2001 2000 company paid 45000 30000 respectively related minimum annual royalty convertible notes payable march 2001 company issued 1600000 senior unsecured convertible note investment affiliate ubs ag 1600000 note convertible 276530 shares common stock fixed conversion price 57860 per share note accrues interest rate 6 per year payable semiannually mature march 2006 company also received 354000 granting investor right purchase time note’s maturity date approximately 2400000 senior unsecured convertible notes due march 2006 issued notes bear interest zero coupon convertible 276530 shares common stock fixed conversion price 85532 per share company may elect lieu delivering convertible notes deliver respective number shares common stock december 2000 company issued 4000000 senior unsecured convertible note investment affiliate ubs ag 4000000 note convertible 407610 shares common stock fixed conversion price 98133 per share note accrue interest rate 6 per year payable semiannually mature december 2005 company also received 900000 granting investor right purchase time note’s maturity date approximately 5900000 senior unsecured convertible notes due december 2005 issued notes bear interest zero coupon sciclone pharmaceuticals inc notes consolidated financials statements continued convertible 407610 shares common stock fixed conversion price 145066 per share company may elect lieu delivering convertible notes deliver respective number shares common stock note 8 shareholders’ equity common stock warrants june 2002 company completed direct offering common stock institutional investors company raised net proceeds 9914000 offering 4088460 shares common stock 260 per share march 2000 company licensed sigmatau exclusive development marketing rights zadaxin europe addition company completed 3100000 million private placement sigmatau consisting 198072 shares common stock fiveyear immediately exercisable warrants purchase 200000 shares common stock 1567 per share fiveyear immediately exercisable warrants purchase 200000 shares common stock 3133 per share sigmatau registration rights respect shares purchased january 2003 sigmatau’s warrants cancelled see note 11 subsequent events january 2000 company completed 6100000 private placement brown simpson asset management purchased 1000000 shares common stock price 600 per share fiveyear immediately exercisable warrants purchase 800000 shares common stock exercise price 700 per share december 31 2002 none warrants exercised june 1998 company entered agreement institutional investor equity line cancelled november 1999 commitment fee investor company issued fiveyear warrants purchase 300000 shares common stock exercise price 350 per share fiveyear warrants purchase 200000 shares common stock exercise price 553 per share december 31 2002 none foregoing warrants exercised connection equity offerings company granted additional fiveyear warrants investors purchase 100000 shares common stock exercise price 567 per share amount warrants purchase 37500 shares exercised aggregate proceeds company approximately 213000 december 31 2002 remaining warrants purchase 62500 shares outstanding stock award plans august 1991 board directors shareholders company approved 1991 stock plan “1991 plan” reserved 1300000 shares issuance thereunder may 1993 board directors shareholders company approved 2150000 increase shares reserved 1991 plan 1991 plan permits award incentive nonqualified stock options shares common stock restricted stock purchase agreements january 1992 board directors shareholders company approved 1992 stock plan “1992 plan” reserved 240000 shares issuance thereunder 1992 plan permits award incentive nonqualified stock options must exercised cash june 1995 board directors shareholders company approved 1995 equity incentive plan “1995 plan” reserved 1250000 shares issuance thereunder 1995 plan permits award incentive nonqualified stock options shares common stock restricted stock awards may 1997 board directors shareholders company approved 750000 increase shares reserved 1995 plan june 1998 june 2000 june 2002 board directors shareholders company approved increases 1500000 1250000 1350000 respectively shares reserved 1995 plan sciclone pharmaceuticals inc notes consolidated financials statements continued 1991 1992 1995 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years june 1995 board directors shareholders company approved nonemployee director stock option plan “nonemployee director plan” reserved 250000 shares issuance thereunder nonemployee director plan automatically grants nonqualified stock options nonemployee directors upon appointment first election company’s board directors “initial grant” annually upon reelection board directors company’s annual meeting shareholders “annual grant” options granted fair market value date grant initial grants vest annually period three years annual grants vest monthly period one year june 2000 june 2002 board directors shareholders company approved 250000 increases shares reserved issuance nonemployee director plan may 2002 shareholders company approved increase annual grant 10000 shares 20000 shares july 1996 board directors shareholders company approved 1996 employee stock purchase plan “espp” reserved 500000 shares issuance thereunder fulltime employees eligible participate espp terms espp employees choose 15 salary withheld purchase company’s common stock purchase price stock 85 lower fair market value first last trading day quarterly participation period espp company sold 67160 33009 144505 shares employees 2002 2001 2000 respectively following table summarizes stock option activity 1991 1992 1995 plans nonemployee director plan sciclone pharmaceuticals inc notes consolidated financials statements continued following table summarizes information concerning outstanding exercisable options december 31 2002 401k plan company pretax savings plan covering substantially us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions 15 employee’s salary company contributions terminated company’s discretion approximately 83000 73000 58000 years ended december 31 2002 2001 2000 respectively reserved shares december 31 2002 company reserved shares common stock future issuance follows excluding warrants purchase 400000 shares held sigmatau cancelled january 2003 see note 11 subsequent events sciclone pharmaceuticals inc notes consolidated financials statements continued note 9 significant geographic information company operates one business segment development commercialization specialistoriented proprietary drugs treatment chronic life threatening diseases currently company’s principal focus development commercialization zadaxin product company sells chief executive officer identified chief operating decision maker “codm” final authority resource allocation decisions performance assessment codm receive discrete financial information individual components business segment company’s domestic operations primarily consist product development company’s wholly owned international subsidiary sciclone pharmaceuticals international ltd based hong kong engaged sales marketing product distribution worldwide information regarding geographic areas follows two customers accounted 10 total revenues 41 27 year ended december 31 2002 two customers accounted 10 total revenues 46 29 year ended december 31 2001 two customers accounted 10 total revenues 63 16 year ended december 31 2000 customer accounted 10 revenues years sciclone pharmaceuticals inc notes consolidated financials statements continued note 10 selected quarterly financial data unaudited note 11 subsequent events january 2003 sciclone completed direct placement affiliates sigmatau reliance upon regulation securities act 1933 amended affiliates purchased 504938 shares company’s common stock 35648 per share shares issued restricted securities sigma tau affiliates permitted sell shares purchased private placement january 24 2004 prior transaction warrants held sigmatau purchase 400000 shares sciclone’s common stock cancelled item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc consolidated financial statements report ernst young llp independent auditors board directors stockholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 2003 2002 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2003 audits also included financial statement schedule listed item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 2003 2002 consolidated results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp palo alto california february 13 2004 sciclone pharmaceuticals inc consolidated balance sheets see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements operations see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statement stockholders’ equity see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies company sciclone pharmaceuticals inc “sciclone” “company” biopharmaceutical company engaged development commercialization therapeutics treat lifethreatening diseases company’s lead product zadaxin several latestage clinical trials including two phase 3 hepatitis c clinical trials united states recently completed phase 3 hepatitis b clinical trial japan ongoing phase 2 malignant melanoma clinical trial europe exclusive european marketing partner sigmatau two ongoing phase 2 pilot studies united states treatment liver cancer ongoing hcv pilot study mexico zadaxin approved sale ministries health 30 countries marketed china selected countries outside us primarily treatment hepatitis b hepatitis c basis presentation consolidated financial statements include accounts company wholly owned subsidiaries sciclone pharmaceuticals international limited sciclone italy srl sciclone japan kk sciclone brasil produtos farmaceuticos ltda sciclone pharmaceuticals international limited registered cayman islands principal office located hong kong sciclone italy srl registered italy principal office located rome sciclone japan kk registered japan principal office located tokyo sciclone brasil registered brazil principal office located sao paulo significant intercompany accounts transactions eliminated revenue recognition company recognizes revenue product sales time shipment significant customer acceptance requirements post shipment obligations part company sales importing agents distributors recognized time shipment title product transferred contractual rights return except limited terms regarding product quality however company replace products expired deemed damaged defective delivered payments importing agents distributors contingent upon sale end user importing agents distributors contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement company recognized earlier payments received collection assured revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents investments cash equivalents consist highly liquid investments original maturities three months less cash equivalents carried cost plus accrued interest approximates market value company required lease agreement letter credit secured certificate deposit 633000 december 31 2003 european value added tax filing arrangement company letter credit secured certificate deposit 62000 december 31 2003 amounts recorded restricted shortterm investments accompanying balance sheets company classifies entire investment portfolio availableforsale records investments fair value determined available market information balance sheet portfolio primarily consists us government securities shortterm municipals unrealized gains losses included accumulated comprehensive income consolidated balance sheet amortized cost debt securities adjusted amortization premiums accretion discounts maturity amortization included investment income along interest earned realized gains losses determined basis specific identification management believes credit risk associated investments limited due nature investments years ended december 31 2003 2002 2001 net unrealized gains approximately 97000 40000 31000 respectively included accumulated comprehensive income years ended december 31 2003 2002 2001 net realized gains less 1000 years fair value financial instruments fair value cash equivalents marketable securities based quoted market prices carrying amount cash equivalents marketable securities equal respective fair values december 31 2003 2002 financial instruments including accounts receivable accounts payable accrued liabilities carried cost believe approximates fair value shortterm maturity instruments believe reported value convertible debt 5600000 december 31 2003 2002 approximates fair value inventories stated lower cost firstin firstout basis market property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets three five years straightline basis leasehold improvements amortized shorter estimated useful life lease term straightline basis depreciation expense years ended december 31 2003 2002 2001 90000 122000 146000 respectively intangible assets intangible assets include following december 1997 company entered agreement alpha 1 biomedicals inc “a1b” acquire worldwide rights except italy spain portugal sclavo spa “sclavo” international pharmaceutical entity owned exclusive marketing rights zadaxin rights a1b licensed hoffmannlaroche inc f hoffmannlaroche ag approximately 1800000 transaction closed july 1998 eliminated company’s royalty obligation a1b respect sales zadaxin acquisition date april 1998 company entered agreement sclavo acquire zadaxin rights italy spain portugal sclavo approximately 1400000 connection foregoing transactions sclavo a1b company estimated fair market value intangible assets purchased approximately 2456000 wrote remaining 700000 related hepatitis c inprocess technology acquired zadaxin product rights amortized straightline basis beginning september 1998 amortization expense years ended december 31 2002 2001 409000 per year based estimated useful life six years amortization expense year ended december 31 2003 70000 years 2004 2012 expected 70000 per year company reassessed estimated useful life assets january 1 2003 additional eight years 2012 based upon progress zadaxin clinical trials company’s actual experience product sales company assessed acquired product rights useful company 2012 european patent use zadaxin treatment hepatitis c expires company reassesses useful life assets accordance current facts circumstances company’s policy identify record impairment losses intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets company date identified impairment losses assets although company history operating cash flow losses company believes impairment intangible assets zadaxin approved sale 30 countries principally treatment hepatitis b hepatitis c based company’s anticipated financial results zadaxin sales 2003 2007 determined future cash flows exceed carrying amount assets foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using rates exchange effect period gains losses translation financial statements denominated foreign currencies material included separate component comprehensive income loss statement stockholders’ equity accumulated currency translation gains losses included period presented company records foreign currency transactions exchange rate prevailing date transaction monetary assets liabilities denominated foreign currency retranslated exchange rates effect balance sheet date translation differences arising foreign currency transactions included results operations significant research development expenses research development expenditures charged operations incurred major components research development expenses consist clinical development performed behalf institutions contract research organizations personnel costs including salaries benefits preclinical work pharmaceutical development materials supplies third party research funding overhead allocations consisting various administrative facilities related costs sciclone’s research development activities also separated three main categories research clinical development pharmaceutical development research costs typically consist preclinical toxicology work clinical development costs include phase 1 2 3 clinical trials well expanded access programs pharmaceutical development costs consist product formulation chemical analysis continuation zadaxin clinical trials expected continue largest significant effect company’s research development expenses cost accruals clinical trials based estimates services received efforts expended pursuant contracts numerous institutions conduct clinical trials company’s behalf financial terms agreements subject negotiation variation contract may result uneven payment flows payments contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses actual services received efforts expended expenses related grants institutions conduct clinical trials company’s behalf accrued based level patient enrollment activity according protocol general expenses higher initial final months patient’s scheduled 18 months treatment observation expenses relating clinical research organization cro managing trials laboratory direct expenses recognized period incurred services performed company monitors patient enrollment levels related activity extent possible adjusts estimates accordingly however management underestimated activity levels associated various studies given point time actual research development expenses could underestimated shipping handling costs related shipping handling included cost sales periods presented advertising expenses company expenses advertising costs incurred costs included sales marketing expenses periods presented advertising expenses years ended december 31 2003 2002 2001 255000 108000 233000 respectively income taxes income taxes accounted liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period included enactment date deferred tax assets reduced valuation allowance opinion management likely deferred tax assets may realized net loss per share basic net loss per share computed using weighted average number shares common stock outstanding period diluted net loss per share equals basic net loss per share given company’s history net losses company net income position diluted earnings per share would included shares used computation basic net loss per share well additional 7906758 8436262 8265637 shares 2003 2002 2001 respectively related convertible notes payable outstanding options warrants regardless conversion exercise prices included calculation basic net loss per share accounting stockbased compensation company accounts stock option employee stock purchase plans provisions accounting principles board opinion 25 “apb 25” related interpretations accordingly company generally recognize compensation expense accounting stock option employee stock purchase plans awards employees directors pro forma information regarding net loss net loss per share required statement financial accounting standards 123 “accounting stockbased compensation” “sfas 123” determined company accounted stock awards fair value method statement fair value options estimated date grant using blackscholes option pricing model following weightedaverage assumptions 2003 2002 2001 riskfree interest rates 200 400 respectively dividend yield 0 volatility factors expected market price company’s common stock 093 096 respectively weighted average expected life option 403 years 388 years 394 years respectively weighted average estimated fair value options granted 410 2003 275 2002 272 2001 fair value employee stock purchases also estimated using blackscholes model following assumptions 2003 2002 2001 riskfree interest rate 200 400 respectively dividend yield 0 expected volatility 094 096 respectively expected life 025 years weighted average estimated fair value employee stock purchase plan shares purchased 174 2003 099 2002 186 2001 blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility company’s employee stock awards characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate company’s opinion existing models necessarily provide reliable single measure fair value employee stock options stock purchases compensation expense company’s option employee purchase plans determined based fair value grant date awards 2003 2002 2001 consistent provisions sfas 123 company’s net loss net loss per share would adjusted pro forma amounts years ended december 31 indicated effects applying sfas 123 pro forma disclosures likely representative effects reported net loss future years due different number options granted year warrants issued connection equity debt arrangements equity instruments issued nonemployees valued using blackscholes option valuation model warrants issued placement agents similar parties connection equity financing accounted stock issuance costs equal amount recorded additional paidin capital warrants issued purchasers company’s equities separately included financial statements value subcomponent additional paidin capital fair value warrants issued connection debt arrangements material accounted debt discount amortized additional interest expense term related debt comprehensive income loss company reports changes unrealized gains losses company’s availableforsale securities comprehensive income loss accumulated comprehensive income balances represent unrealized gains securities balance sheet dates segment information company operates one segment see note 9 concentration credit risk people’s republic china like japan certain asian markets uses tiered method import distribute products distributors make sales country product imported licensed importers year ended december 31 2003 sales five importing agents china accounted 88 company’s product sales six importing agents accounted 88 product sales year ended december 31 2002 sales four importing agents accounted 89 product sales 2001 2003 largest customer accounted 52 sales second largest customer accounted 14 sales customers accounted 10 sales 2003 2002 largest customer accounted 41 sales second largest customer accounted 27 sales customers accounted 10 sales 2002 2001 largest customer accounted 47 sales second largest customer accounted 30 sales customers accounted 10 sales 2001 december 31 2003 approximately 9112000 85 company’s accounts receivable attributable four importing agents china company performs ongoing credit evaluations customers’ financial condition generally require collateral customers company maintains reserves credit losses within management’s expectation company recognizes reserves bad debts ranging 25 100 based length time receivables past due company’s collectibility experience reclassifications company made certain classification changes consolidated balance sheets also consolidated statements cash flow statement appropriate december 31 2002 10000000 reclassified cash equivalent shortterm investments note 2 availableforsale securities following summary availableforsale securities december 31 2003 total availableforsale securities included accompanying balance sheets follows 38259000 cash equivalents 695000 restricted shortterm investments 9380000 shortterm investments december 31 2002 total availableforsale securities included follows 3723000 cash equivalents 685000 restricted shortterm investments 10232000 shortterm investments december 31 2003 2002 availablefor sale securities excluding shortterm municipal securities maturities 12 months less shortterm municipals auction rate securities long final maturities however highly rated highly liquid interest rate reset auction every 30 days included availableforsale securities interest rate risk associated securities limited due interest rate reset mechanism note 3 inventories consisted following note 4 property equipment property equipment consisted following note 5 collaborative agreements october 2003 company wayne state university “wsu” amended license agreement wsu a1b entered 1994 subsequently assigned a1b sciclone 2003 amendment allows company maintain exclusive license certain wsu patents regarding use thymosin alpha 1 treatment hepatitis b hepatitis c addition certain minimum royalty payments sales zadaxin certain territories company obligated pay wsu total 1400000 prepaid royalties following three years whether company receives regulatory approval zadaxin sales made covered territories including united states company offset annual minimum royalties due sales zadaxin prepaid royalties extent 50 annual royalties one year ended december 31 2003 company paid 200000 prepaid royalties amount plus unpaid balance 1200000 due following three years recorded prepaid royalties long term assets account accompanying balance sheets remaining obligation pay 1200000 included accrued expenses long term liabilities accompanying balance sheets april 1999 company licensed sigmatau semiexclusive zadaxin development marketing rights italy spain exclusive rights switzerland march 2000 license expanded amended include countries european union sigmatau made exclusive licensee countries december 2001 license amended define scope clinical development zadaxin sigmatau would undertake europe terms december 2001 amendment company received 2685000 first quarter 2002 contract revenue recognized estimated time complete zadaxin hepatitis c us clinical program deliver clinical data substantive performance requirements contract amendment upon full enrollment company’s current phase 3 us clinical trials company earn 1000000 milestone payment sigmatau year ended december 31 2003 2002 company recognized 806000 671000 respectively contract revenue remaining 1208000 recorded deferred revenue december 31 2003 august 1997 company entered zadaxin patent license agreement fitzsimons army medical center us army “us army” company obligated pay us army minimum annual royalty based percentage zadaxin net sales revenue upon commercialization zadaxin treatment chronic hepatitis c certain countries including us european union japan including china october 1996 company entered agreement scheringplough kk giving scheringplough kk exclusive marketing rights zadaxin japan agreement scheringplough kk initiated development zadaxin monotherapy treatment hepatitis b hepatitis c initially scheringplough kk managed development process parties shared certain development expenses 2000 company amended agreement scheringplough kk allow company participate directly development process company manages pays expenses process wholly owned subsidiary sciclone japan kk using japanese clinical research organization scheringplough kk consultant scheringplough kk continues exclusive marketing rights zadaxin japan note 6 income taxes domestic foreign components pre tax income loss years ended december 31 follows significant components company’s deferred tax assets december 31 follows valuation allowance increased approximately 5825000 3272000 1734000 years ended december 31 2003 2002 2001 respectively deferred tax assets relating carryforwards december 31 2003 include approximately 7503000 associated stock option activity subsequently recognized tax benefits credited directly stockholders’ equity company deferred tax liabilities december 31 2003 2002 december 31 2003 company net operating loss carryforwards federal income tax purposes approximately 86000000 expire years 2006 2023 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred company’s foreign subsidiaries december 31 2003 company federal tax credit carryforwards approximately 4900000 expire years 2006 2023 “change ownership” provisions internal revenue code portion company’s net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities result net losses valuation allowances company record state income tax expense years ended december 31 2003 2002 2001 note 7 commitments contingencies leases company leases main office facility noncancelable operating lease agreement expires august 2007 lease period seven years requires company pay insurance taxes prorata share operating expenses company also leases various office facilities abroad noncancelable lease agreements expiring 2005 rent expense 2003 2002 2001 1362000 1376000 1296000 respectively minimum future rental payments amount total 4958000 consists 1383000 2004 1422000 2005 1280000 2006 873000 2007 royalties october 2003 amendment patent license agreement wayne state university company obligated pay wsu royalty subject minimum amounts percentage zadaxin net sales revenue treatment hepatitis b hepatitis c certain countries including us european union japan including china addition company obligated pay wsu prepaid royalties 300000 400000 500000 2004 2005 2006 respectively whether company receives regulatory approval zadaxin sales made covered territories including united states company offset annual minimum royalties due sales zadaxin prepaid royalties extent 50 annual royalties one year ended december 31 2003 company paid wsu 200000 prepaid royalties august 1997 zadaxin patent license agreement us army company obligated pay us army minimum annual royalty based percentage zadaxin net sales revenue upon commercialization zadaxin treatment chronic hepatitis c certain countries including us european union japan including china 2003 2002 2001 company paid 20000 per year related minimum annual royalty convertible notes payable march 2001 company issued 1600000 convertible note investment affiliate ubs ag 1600000 note convertible 276530 shares common stock fixed conversion price 57860 per share note accrues interest rate 6 per year payable semiannually mature march 2006 company also received 354000 granting investor right purchase time note’s maturity date approximately 2400000 convertible notes due march 2006 issued notes bear interest zero coupon convertible 276530 shares common stock fixed conversion price 85532 per share company may elect lieu delivering convertible notes deliver respective number shares common stock december 2000 company issued 4000000 convertible note investment affiliate ubs ag 4000000 note convertible 407610 shares common stock fixed conversion price 98133 per share note accrue interest rate 6 per year payable semiannually mature december 2005 company also received 900000 granting investor right purchase time note’s maturity date approximately 5900000 convertible notes due december 2005 issued notes bear interest zero coupon convertible 407610 shares common stock fixed conversion price 145066 per share company may elect lieu delivering convertible notes deliver respective number shares common stock note 8 stockholders’ equity july 18 2003 company reincorporated california corporation delaware corporation merging company california corporation sciclone pharmaceuticals inc delaware corporation whollyowned subsidiary company share outstanding stock california corporation automatically exchanged like share stock delaware corporation common stock warrants september 2003 company completed public followon offering 6000000 shares common stock 800 per share received proceeds 45120000 sale net 694000 financingrelated costs january 2003 company completed 1800000 direct placement affiliates sigmatau less 13000 financingrelated costs affiliates purchased 504938 shares company’s common stock 35648 per share shares issued restricted securities sigmatau affiliates permitted sell shares purchased private placement january 24 2004 june 2002 company completed direct offering common stock institutional investors company raised net proceeds 9914000 offering 4088460 shares common stock 260 per share march 2000 company licensed sigmatau exclusive development marketing rights zadaxin europe addition company completed 3100000 million private placement sigmatau consisting 198072 shares common stock fiveyear immediately exercisable warrants purchase 200000 shares common stock 1567 per share fiveyear immediately exercisable warrants purchase 200000 shares common stock 3133 per share sigmatau registration rights respect shares purchased january 2003 sigmatau’s warrants cancelled advance direct placement affiliates sigma tau described january 2000 company completed 6100000 private placement brown simpson asset management purchased 1000000 shares common stock price 600 per share fiveyear immediately exercisable warrants purchase 800000 shares common stock exercise price 700 per share december 31 2003 none warrants exercised addition placement agent transaction received part fee fiveyear warrants purchase 108000 shares common stock exercise price 700 per share 2003 warrants purchase 3240 shares common stock exercised proceeds 22680 december 31 2003 placement agent warrants purchase 104760 common stock exercised january 1999 company issued warrants purchase total 150000 shares common stock cato research ltd part settlement agreement total warrants purchase 50000 shares common stock exercised price 1225 proceeds 61250 march 2000 warrants purchase 100000 shares common stock exercise price 225 outstanding december 31 2003 january 2004 warrants purchase 100000 shares common stock exercised price 225 cashless exchange 65753 shares common stock award plans august 1991 board directors stockholders company approved 1991 stock plan “1991 plan” reserved 1300000 shares issuance thereunder may 1993 board directors stockholders company approved 2150000 increase shares reserved 1991 plan 1991 plan permits award incentive nonqualified stock options shares common stock restricted stock purchase agreements january 1992 board directors stockholders company approved 1992 stock plan “1992 plan” reserved 240000 shares issuance thereunder 1992 plan permits award incentive nonqualified stock options must exercised cash june 1995 board directors stockholders company approved 1995 equity incentive plan “1995 plan” reserved 1250000 shares issuance thereunder 1995 plan permits award incentive nonqualified stock options shares common stock restricted stock awards may 1997 board directors stockholders company approved 750000 increase shares reserved 1995 plan june 1998 june 2000 june 2002 board directors stockholders company approved increases 1500000 1250000 1350000 respectively shares reserved 1995 plan 1991 1992 1995 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years june 1995 board directors stockholders company approved nonemployee director stock option plan “nonemployee director plan” reserved 250000 shares issuance thereunder nonemployee director plan automatically grants nonqualified stock options nonemployee directors upon appointment first election company’s board directors “initial grant” annually upon reelection board directors company’s annual meeting stockholders “annual grant” options granted fair market value date grant initial grants vest annually period three years annual grants vest monthly period one year june 2000 june 2002 board directors stockholders company approved 250000 increases shares reserved issuance nonemployee director plan may 2002 stockholders company approved increase annual grant 10000 shares 20000 shares july 1996 board directors stockholders company approved 1996 employee stock purchase plan “espp” reserved 500000 shares issuance thereunder fulltime employees eligible participate espp terms espp employees choose 15 salary withheld purchase company’s common stock purchase price stock 85 lower fair market value first last trading day quarterly participation period espp company sold 127920 67160 33009 shares employees 2003 2002 2001 respectively following table summarizes stock option activity 1991 1992 1995 plans nonemployee director plan following table summarizes information concerning outstanding exercisable options december 31 2003 december 31 2002 2001 options outstanding exercisable 3677142 3457061 respectively reserved shares december 31 2003 company reserved shares common stock future issuance follows note 9 401k plan company pretax savings plan covering substantially us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions 15 employee’s salary company contributions terminated company’s discretion approximately 129000 101000 83000 years ended december 31 2003 2002 2001 respectively note 10 significant geographic information company operates one business segment development commercialization specialistoriented proprietary drugs treatment chronic life threatening diseases currently company’s principal focus development commercialization zadaxin product company sells chief executive officer identified chief operating decision maker “codm” final authority resource allocation decisions performance assessment codm receive discrete financial information individual components business segment company’s domestic operations primarily consist product development company’s wholly owned international subsidiary sciclone pharmaceuticals international ltd based hong kong engaged sales marketing product distribution worldwide information regarding geographic areas follows two customers accounted 10 total revenues 52 14 year ended december 31 2003 two customers accounted 10 total revenues 41 27 year ended december 31 2002 two customers accounted 10 total revenues 47 30 year ended december 31 2001 customer accounted 10 revenues years note 11 selected quarterly financial data unaudited item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc index consolidated financial statements page reports independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statement stockholders equity consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 2004 2003 related consolidated statements operations stockholders equity cash flows three years period ended december 31 2004 audits also included financial statement schedule listed item 15a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 2004 2003 consolidated results operations cash flows three years period ended december 31 2004 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness sciclone pharmaceuticals incs internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 10 2005 expressed unqualified opinion thereon ernst young llp palo alto california march 10 2005 report independent registered public accounting firm board directors stockholders sciclone pharmaceuticals inc audited managements assessment included accompanying managements report internal control financial reporting sciclone pharmaceuticals inc maintained effective internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria sciclone pharmaceuticals incs management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion managements assessment opinion effectiveness companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating managements assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion managements assessment sciclone pharmaceuticals inc maintained effective internal control financial reporting december 31 2004 fairly stated material respects based coso criteria also opinion sciclone pharmaceuticals inc maintained material respects effective internal control financial reporting december 31 2004 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets sciclone pharmaceuticals inc december 31 2004 2003 related consolidated statements operations stockholders equity cash flows three years period ended december 31 2004 report dated march 10 2005 expressed unqualified opinion thereon ernst young llp palo alto california march 10 2005 sciclone pharmaceuticals inc consolidated balance sheets december 31 2004 2003 assets current assets cash equivalents 41204000 52899000 restricted shortterm investments 700000 695000 shortterm investments 9395000 9381000 accounts receivable net allowance 452000 2004 638000 2003 10279000 10142000 inventories 4179000 5778000 prepaid expenses current assets 1478000 2456000 total current assets 67235000 81351000 property equipment net 398000 325000 intangible assets net 542000 612000 assets 1534000 total assets 69709000 83822000 liabilities stockholders equity current liabilities accounts payable 2225000 3423000 accrued compensation employee benefits 2177000 1440000 accrued professional fees 452000 481000 accrued expenses 917000 631000 accrued clinical trials expense 1500000 1889000 deferred revenue 537000 convertible note payable 4000000 total current liabilities 11808000 8401000 deferred revenue 134000 671000 longterm liabilities 1044000 900000 convertible note payable 1600000 5600000 commitments contingencies stockholders equity preferred stock 0001 par value 10000000 shares authorized shares outstanding common stock 0001 par value 75000000 shares authorized 44677845 44484144 shares issued outstanding 2004 2003 respectively 45000 44000 additional paidin capital 206608000 206320000 accumulated comprehensive income 38000 176000 accumulated deficit 151568000 138290000 total stockholders equity 55123000 68250000 total liabilities stockholders equity 69709000 83822000 see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements operations years ended december 31 2004 2003 2002 revenues product sales 22765000 31732000 17101000 contract revenues 1631000 806000 671000 total revenues 24396000 32538000 17772000 cost product sales 4577000 5636000 3487000 gross margin 19819000 26902000 14285000 operating expenses research development 17994000 18949000 11647000 sales marketing 9665000 9018000 8724000 general administrative 6311000 4134000 3902000 total operating expenses 33970000 32101000 24273000 loss operations 14151000 5199000 9988000 interest investment income1 1285000 266000 323000 interest expense 361000 income expense net 51000 19000 11000 net loss 13278000 5275000 10037000 basic diluted net loss per share 030 013 029 weighted average shares used computing basic diluted net loss per share 44626337 39568199 35002003 1 year ended december 31 2004 interest investment income included approximate gain 697000 sale equity securities see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statement stockholders equity accumulated common stock additional comprehensive total paidin income accumulated stockholders shares amount capital loss deficit equity balance december 31 2001 32474150 145713000 39000 122978000 22774000 issuance common stock exercise stock options warrants employee stock purchase plan 342306 663000 issuance common stock private placements 4088460 9914000 net loss 10037000 net unrealized gain availableforsale securities 40000 total comprehensive loss 9997000 balance december 31 2002 36904916 156290000 79000 133015000 23354000 issuance common stock exercise stock options warrants employee stock purchase plan 847171 3256000 issuance common stock sigmatau 504938 1800000 reincorporation delaware 161308000 issuance common stock exercise stock options warrants employee stock purchase plan 227119 592000 issuance common stock secondary offering net financing costs 6000000 6000 44420000 44426000 net loss 5275000 net unrealized gain availableforsale securities 97000 total comprehensive loss 5178000 balance december 31 2003 44484144 44000 206320000 176000 138290000 68250000 issuance common stock exercise stock options warrants employee stock purchase plan 193701 1000 288000 289000 net loss 13278000 net unrealized loss availableforsale securities 138000 total comprehensive loss 13416000 balance december 31 2004 44677845 45000 206608000 38000 151568000 55123000 see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows years ended december 31 2004 2003 2002 operating activities net loss 13278000 5275000 10037000 adjustments reconcile net loss net cash used operating activities depreciation amortization 190000 160000 531000 amortization deferred financing costs 25000 noncash income expense net 3000 13000 21000 gain sale equity investment 697000 changes operating assets liabilities accounts receivable 137000 866000 484000 inventories 1599000 2347000 628000 prepaid expenses assets 952000 355000 967000 accounts payable accrued expenses 912000 345000 1576000 accrued clinical trials expense 389000 923000 670000 accrued professional fees 29000 198000 46000 accrued compensation employee benefits 737000 352000 129000 longterm liabilities 144000 deferred revenue 537000 806000 2014000 net cash used operating activities 12335000 8055000 5890000 investing activities purchases property equipment 196000 303000 66000 proceeds sales shortterm equity investments 697000 1000000 94000 proceeds maturities shortterm investments 6000000 500000 2600000 payments purchases shortterm investments 6150000 550000 6600000 net cash provided used investing activities 351000 647000 3972000 financing activities proceeds issuances common stock net 289000 50074000 10577000 net cash provided financing activities 289000 50074000 10577000 net increase decrease cash equivalents 11695000 42666000 715000 cash equivalents beginning year 52899000 10233000 9518000 cash equivalents end year 41204000 52899000 10233000 supplemental disclosures cash flow information cash paid interest 336000 noncash investing activities obligations incurred related prepaid royalties 1200000 see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies company sciclone pharmaceuticals inc sciclone company biopharmaceutical company engaged development commercialization therapeutics treat lifethreatening diseases companys lead product zadaxin® currently evaluated two phase 3 hepatitis c clinical trials united states zadaxin also evaluated latestage clinical trials treatment hepatitis b certain cancers zadaxin currently approved sale certain international locations primarily asia middle east latin america marketed companys whollyowned subsidiary sciclone pharmaceuticals international ltd spil sciclones proprietary drug development candidate scv07 currently preclinical studies treatment viral infectious diseases basis presentation consolidated financial statements include accounts company wholly owned subsidiaries spil sciclone italy srl sciclone japan kk sciclone brasil produtos farmaceuticos ltda spil registered cayman islands principal office located hong kong sciclone italy srl registered italy principal office located rome sciclone japan kk registered japan principal office located tokyo sciclone brasil registered brazil principal office located sao paulo significant intercompany accounts transactions eliminated revenue recognition company recognizes revenue product sales time shipment significant customer acceptance requirements post shipment obligations part company sales importing agents distributors recognized time shipment title product transferred contractual rights return except limited terms regarding product quality however company replace products expired deemed damaged defective delivered payments importing agents distributors contingent upon sale end user importing agents distributors contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement company recognized earlier payments received collection assured revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents investments cash equivalents consist highly liquid investments original maturities three months less company required lease agreement letter credit secured certificate deposit 633000 december 31 2004 european value added tax filing arrangement company letter credit secured certificate deposit 67000 december 31 2004 amounts recorded restricted shortterm investments accompanying balance sheets company classifies entire investment portfolio availableforsale records investments fair value determined available market information balance sheet portfolio primarily consists us government securities shortterm municipals unrealized gains losses included accumulated comprehensive income consolidated balance sheet amortized cost debt securities adjusted amortization premiums accretion discounts maturity amortization included investment income along interest earned realized gains losses determined basis specific identification included investment income management believes credit risk associated investments limited due nature investments years ended december 31 2004 2003 2002 net unrealized loss gains approximately 138000 97000 40000 respectively included accumulated comprehensive income year ended december 31 2004 net realized gain approximately 697000 recognized primarily connection sale equity securities years ended december 31 2003 2002 net realized gains less 1000 years fair value financial instruments fair value cash equivalents marketable securities based quoted market prices carrying amount cash equivalents marketable securities equal respective fair values december 31 2004 2003 financial instruments including accounts receivable accounts payable accrued liabilities carried cost company believes approximates fair value shortterm maturity instruments company believes reported value convertible debt 5600000 december 31 2004 2003 approximates fair value inventories stated lower cost firstin firstout basis market property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets three five years straightline basis leasehold improvements amortized shorter estimated useful life lease term straightline basis intangible assets intangible assets definite lives amortized estimated useful lives reviewed impairment facts circumstances suggest carrying value assets may recoverable companys policy identify record impairment losses intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets company date identified impairment losses assets although company history operating cash flow losses company believes impairment intangible assets zadaxin approved sale several countries principally treatment hepatitis b based companys anticipated financial results future zadaxin sales determined expected future cash flows exceed carrying amount assets foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using rates exchange effect period gains losses translation financial statements denominated foreign currencies material included separate component comprehensive income loss statement stockholders equity accumulated currency translation gains losses included period presented company records foreign currency transactions exchange rate prevailing date transaction monetary assets liabilities denominated foreign currency retranslated exchange rates effect balance sheet date translation differences arising foreign currency transactions included results operations significant research development expenses research development expenditures charged operations incurred major components research development expenses consist clinical development performed companys behalf institutions contract research organizations personnel costs including salaries benefits preclinical work pharmaceutical development materials supplies third party research funding overhead allocations consisting various administrative facilities related costs sciclones research development activities also separated three main categories research clinical development pharmaceutical development research costs typically consist preclinical toxicology work clinical development costs essentially include clinical trials pharmaceutical development costs consist product formulation chemical analysis zadaxin clinical trials largest significant effect companys research development expenses cost accruals clinical trials based estimates services received efforts expended pursuant contracts numerous institutions conduct clinical trials companys behalf financial terms agreements subject negotiation vary contract may result uneven payment flows payments contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses actual services received efforts expended expenses related grants institutions conduct clinical trials companys behalf accrued based level patient enrollment activity according protocol general expenses higher initial final months patients scheduled 18 months treatment observation expenses relating clinical research organization entities managing trials laboratory direct expenses recognized period estimated incurred services performed company monitors active patient enrollment levels related activity extent possible adjusts estimates accordingly shipping handling costs related shipping handling included cost sales periods presented advertising expenses company expenses advertising costs incurred costs included sales marketing expenses periods presented advertising expenses years ended december 31 2004 2003 2002 235000 255000 108000 respectively income taxes income taxes accounted liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period included enactment date deferred tax assets reduced valuation allowance opinion management likely deferred tax assets may realized net loss per share basic net loss per share computed using weighted average number shares common stock outstanding period diluted net loss per share equals basic net loss per share given companys history net losses company net income position diluted earnings per share would included shares used computation basic net loss per share well effect additional 8979653 7906758 8436262 shares 2004 2003 2002 respectively related convertible notes payable outstanding options warrants impact shares included calculation diluted net loss per share effect antidilutive accounting stockbased compensation company accounts stock option employee stock purchase plans provisions accounting principles board opinion 25 apb 25 related interpretations accordingly company generally recognize compensation expense accounting stock option employee stock purchase plans awards employees directors pro forma information regarding net loss net loss per share required statement financial accounting standards 123 accounting stockbased compensation sfas 123 determined company accounted stock awards fair value method statement fair value options estimated date grant using blackscholes option pricing model following weightedaverage assumptions used years ended december 31 follows 2004 2003 2002 weightedaverage fair value stock options granted 322 410 275 riskfree interest rate 259 200 dividend yield 000 volatility factor expected market price common stock 8736 9329 9562 weightedaverage expected life option years 400 403 388 weightedaverage fair value employee stock purchase plan purchases 183 174 099 riskfree interest rate 332 200 dividend yield 000 volatility factor expected market price common stock 8534 9431 9562 weightedaverage expected life option years 024 025 blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee director stock awards characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate companys opinion existing models necessarily provide reliable single measure fair value stock options stock purchases compensation expense companys option employee stock purchase plans determined based fair value grant date awards 2004 2003 2002 consistent provisions sfas 123 companys net loss net loss per share would adjusted pro forma amounts years ended december 31 indicated 2004 2003 2002 net loss reported 13278000 5275000 10037000 total stockbased employee compensation expense determined fair value based method awards 4257000 3010000 2283000 net loss pro forma 17535000 8285000 12320000 basic diluted net loss per share reported 030 013 029 basic diluted net loss per share pro forma 039 021 035 effects applying sfas 123 pro forma disclosures likely representative effects reported net loss future years due primarily different number options granted year warrants issued connection equity debt arrangements equity instruments issued nonemployees valued using blackscholes option valuation model warrants issued placement agents similar parties connection equity financing accounted stock issuance costs equal amount recorded additional paidin capital warrants issued purchasers companys equities separately included financial statements value subcomponent additional paidin capital fair value warrants issued connection debt arrangements material accounted debt discount amortized additional interest expense term related debt comprehensive income loss company reports changes unrealized gains losses companys availableforsale securities comprehensive income loss accumulated comprehensive income balances represent unrealized gains losses securities balance sheet dates segment information company operates one segment see note 14 concentration credit risk peoples republic china like japan certain asian markets uses tiered method import distribute products distributors make sales country product imported licensed importers year ended december 31 2004 sales four importing agents china accounted 91 companys product sales five importing agents china accounted 88 companys product sales year ended december 31 2003 sales six importing agents accounted 88 product sales year ended december 31 2002 2004 three largest customers accounted 32 29 23 sales respectively customer accounted 10 sales 2004 2003 largest customer accounted 52 sales second largest customer accounted 14 sales customers accounted 10 sales 2003 2002 largest customer accounted 41 sales second largest customer accounted 27 sales customers accounted 10 sales 2002 three years importing agent single largest customer december 31 2004 approximately 9609000 90 companys accounts receivable attributable four importing agents china company performs ongoing credit evaluations customers financial condition generally require collateral customers company maintains reserves credit losses within managements expectation company recognizes reserves bad debts ranging 25 100 based length time receivables past due companys collectibility experience recently issued accounting pronouncements december 2004 financial accounting standards board fasb issued fasb statement 123 revised 2004 sharebased payment sfas 123r revises sfas 123 supersedes apb 25 related implementation guidance generally approach sfas 123r similar approach described sfas 123 however sfas 123r requires sharebased payments employees directors including grants stock options recognized statement operations based fair values pro forma disclosure longer alternative amount compensation cost measured based grantdate fair value instruments issued compensation cost recognized period employee director provides service exchange award expect adopt sfas 123r july 1 2005 permitted sfas 123 company currently accounts sharebased payments employees directors using apb 25s intrinsic value method generally recognizes compensation cost employee director stock options accordingly adoption sfas 123rs fair value method significant impact result operations although impact overall financial position impact adoption sfas 123r cannot predicted time depend levels sharebased payments granted future however adopted sfas 123r prior periods impact standard would approximated impact sfas 123 described disclosure pro forma net loss net loss per share accounting stockbased compensation section note 1 consolidated financial statements note 2 availableforsale securities following summary availableforsale securities availablefor sale securities gross estimated amortized unrealized fair cost gains value december 31 2004 certificates deposit 805000 us government obligations 22843000 shortterm municipal securities 9200000 corporate equity securities 51000 38000 89000 32899000 38000 32937000 december 31 2003 certificates deposit 798000 us government obligations 38259000 shortterm municipal securities 9050000 corporate equity securities 51000 176000 227000 48158000 176000 48334000 december 31 2004 total availableforsale securities included accompanying balance sheets follows 22843000 cash equivalents 700000 restricted shortterm investments 9395000 shortterm investments december 31 2003 total availableforsale securities included follows 38259000 cash equivalents 695000 restricted shortterm investments 9381000 shortterm investments december 31 2004 2003 availablefor sale securities excluding shortterm municipal securities maturities 12 months less shortterm municipals auction rate securities long final maturities however highly rated highly liquid interest rate reset auction every 30 days included availableforsale securities companys interest rate risk associated securities limited due interest rate reset mechanism note 3 prepaid expenses current assets following summary prepaid expenses current assets december 31 2004 2003 prepaid insurance 694000 717000 prepaid rent 102000 100000 prepaid clinical trial expense 247000 1085000 vat receivable 142000 208000 prepaid expenses 293000 346000 1478000 2456000 note 4 inventories consisted following december 31 2004 2003 raw materials 1517000 1577000 work process 276000 1955000 finished goods 2386000 2246000 4179000 5778000 note 5 property equipment property equipment consisted following december 31 2004 2003 office furniture fixtures 290000 243000 office equipment 788000 667000 leasehold improvements 139000 121000 1217000 1031000 less accumulated depreciation amortization 819000 706000 net property equipment 398000 325000 depreciation expense years ended december 31 2004 2003 2002 115000 90000 122000 respectively note 6 intangible assets intangible assets include following december 31 2004 2003 intangible product rights 2456000 accumulated amortization 1914000 1844000 542000 612000 december 1997 company entered agreement alpha 1 biomedicals inc a1b acquire worldwide rights except italy spain portugal sclavo spa sclavo international pharmaceutical entity owned exclusive marketing rights zadaxin rights a1b licensed hoffmannlaroche inc f hoffmannlaroche ag approximately 1800000 transaction closed july 1998 eliminated companys royalty obligation a1b respect sales zadaxin acquisition date april 1998 company entered agreement sclavo acquire zadaxin rights italy spain portugal sclavo approximately 1400000 connection foregoing transactions sclavo a1b company estimated fair market value intangible assets purchased approximately 2456000 wrote remaining 700000 related hepatitis c inprocess technology acquired zadaxin product rights amortized straightline basis estimated useful lives amortization expense year ended december 31 2002 409000 based estimated useful life six years amortization expense years ended december 31 2004 2003 70000 per year years 2005 2012 expected 70000 per year company reassessed estimated useful life assets january 1 2003 additional eight years 2012 based upon progress zadaxin clinical trials companys actual experience product sales company assessed acquired product rights useful company 2012 european patent use zadaxin treatment hepatitis c expires company reassesses useful life assets accordance current facts circumstances note 7 accrued expenses following summary accrued expenses december 31 2004 2003 accrued royalties 420000 323000 accrued annual reportswebsite expenses 81000 120000 accrued preclinical trial expenses 133000 accrued interest payable 52000 231000 136000 917000 631000 note 8 collaborative agreements may 2004 company entered agreement sigmatau whereas sigmatau conducting multicenter phase 3 hepatitis c triple therapy clinical trial europe approximately 550 patients objective european trial provide data zadaxins use part triple therapy treating hcv patients company provide zadaxin approximately 2500000 funding support 1500000 milestone payment sigmatau completion study october 2003 company wayne state university wsu amended license agreement wsu a1b entered 1994 subsequently assigned a1b sciclone 2003 amendment allows company maintain exclusive license certain wsu patents regarding use thymosin alpha 1 treatment hepatitis b hepatitis c addition certain minimum royalty payments following sales zadaxin certain territories company obligated pay wsu total 1400000 prepaid royalties following three years whether company receives regulatory approval zadaxin sales made covered territories including united states company offset annual minimum royalties due sales zadaxin prepaid royalties extent 50 annual royalties one year ended december 31 2004 2003 company paid 300000 200000 respectively prepaid royalties amounts plus unpaid balance 900000 due next two years recorded prepaid royalties long term assets account accompanying balance sheets remaining obligation pay 900000 included accrued expenses long term liabilities accompanying balance sheets april 1999 company licensed sigmatau semiexclusive zadaxin development marketing rights italy spain exclusive rights switzerland march 2000 license expanded amended include countries european union sigmatau made exclusive licensee countries december 2001 license amended define scope clinical development zadaxin sigmatau would undertake europe terms december 2001 amendment company received 2685000 first quarter 2002 contract revenue recognized estimated time complete zadaxin us phase 3 hcv clinical trials deliver clinical data substantive performance requirements contract amendment year ended december 31 2004 2003 2002 company recognized 537000 806000 671000 respectively contract revenue remaining 671000 recorded deferred revenue december 31 2004 additionally second quarter 2004 company recognized 1000000 milestone payment sigmatau full enrollment companys current phase 3 us clinical trials future performance obligations associated milestone payment august 1997 company entered zadaxin patent license agreement fitzsimons army medical center us army us army company obligated pay us army minimum annual royalty based percentage zadaxin net sales revenue upon commercialization zadaxin treatment chronic hepatitis c certain countries including us european union japan including china note 9 longterm liabilities following summary longterm liabilities december 31 2004 2003 accrued compensation employee benefits 544000 accrued royalties 500000 900000 1044000 900000 note 10 income taxes domestic foreign components pre tax income loss years ended december 31 follows years ended december 31 2004 2003 2002 domestic 17433000 15768000 9510000 foreign 4155000 10493000 527000 loss 13278000 5275000 10037000 significant components companys deferred tax assets december 31 follows december 31 2004 2003 assets net operating loss carryforwards 36264000 30212000 rd credit carryforwards 5474000 5238000 1156000 1095000 gross deferred tax assets 42894000 36545000 valuation allowance 42894000 36545000 total deferred tax assets valuation allowance increased approximately 6349000 5825000 3272000 years ended december 31 2004 2003 2002 respectively deferred tax assets relating carryforwards december 31 2004 include approximately 7504000 associated stock option activity subsequently recognized tax benefits credited directly stockholders equity company deferred tax liabilities december 31 2004 2003 december 31 2004 company net operating loss carryforwards federal income tax purposes approximately 104000000 expire years 2006 2024 december 31 2003 company federal tax credit carryforwards approximately 5000000 expire years 2006 2024 december 31 2004 company state net operating loss carryforwards approximately 17000000 available reduce future taxable income carryforwards begin expire 2005 utilized addition company research development tax credit carryforwards approximately 700000 state tax purposes december 31 2004 tax credit carryforward carried forward indefinitely utilized change ownership provisions internal revenue code portion companys net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities result net losses company record state income tax expense years ended december 31 2004 2003 2002 note 11 commitments contingencies leases company leases main office facility noncancelable operating lease agreement expires august 2007 lease period seven years requires company pay insurance taxes prorata share operating expenses company also leases various office facilities abroad noncancelable lease agreements expiring 2005 rent expense 2004 2003 2002 1393000 1362000 1376000 respectively minimum future rental payments amount total 3540000 consists 1378000 2005 1299000 2006 863000 2007 royalties october 2003 amendment patent license agreement wayne state university company obligated pay wsu royalty subject minimum amounts percentage zadaxin net sales revenue treatment hepatitis b hepatitis c certain countries including united states european union japan including china addition company obligated pay wsu prepaid royalties 400000 500000 2005 2006 respectively whether company receives regulatory approval zadaxin sales made covered territories including united states company offset annual minimum royalties due sales zadaxin prepaid royalties extent 50 annual royalties one year ended december 31 2004 2003 company paid wsu 300000 200000 respectively prepaid royalties august 1997 zadaxin patent license agreement us army company obligated pay us army minimum annual royalty based percentage zadaxin net sales revenue upon commercialization zadaxin treatment chronic hepatitis c certain countries including us european union japan including china 2004 2003 2002 company paid 20000 per year us army related minimum annual royalty convertible notes payable march 2001 company issued 1600000 convertible note investment affiliate ubs ag 1600000 note convertible 276530 shares common stock fixed conversion price 57860 per share note accrues interest rate 6 per year payable semiannually mature march 2006 company also received 354000 granting investor right purchase time notes maturity date approximately 2400000 convertible notes due march 2006 issued notes bear interest zero coupon convertible 276530 shares common stock fixed conversion price 85532 per share company may elect lieu delivering convertible notes deliver respective number shares common stock december 2000 company issued 4000000 convertible note investment affiliate ubs ag 4000000 note convertible 407610 shares common stock fixed conversion price 98133 per share note accrue interest rate 6 per year payable semiannually mature december 2005 company also received 900000 granting investor right purchase time notes maturity date approximately 5900000 convertible notes due december 2005 issued notes bear interest zero coupon convertible 407610 shares common stock fixed conversion price 145066 per share company may elect lieu delivering convertible notes deliver respective number shares common stock note 12 stockholders equity july 18 2003 company reincorporated california corporation delaware corporation merging company california corporation sciclone pharmaceuticals inc delaware corporation whollyowned subsidiary company share outstanding stock california corporation automatically exchanged like share stock delaware corporation common stock warrants july 2004 former ceo left company outstanding unvested options purchase 253541 shares companys common stock became fully vested outstanding options purchase 1615454 shares became exercisable one two year period changes former ceos options result stockbased compensation changes effected accordance original terms option grants september 2003 company completed public offering 6000000 shares common stock 800 per share received proceeds 45120000 sale net 694000 financingrelated costs january 2003 company completed 1800000 direct placement affiliates sigmatau affiliates purchased 504938 shares companys common stock 35648 per share shares issued restricted securities sigmatau affiliates permitted sell shares purchased private placement january 24 2004 june 2002 company completed direct offering common stock institutional investors company raised net proceeds 9914000 offering 4088460 shares common stock 260 per share january 2000 company completed 6100000 private placement brown simpson asset management purchased 1000000 shares common stock price 600 per share fiveyear immediately exercisable warrants purchase 800000 shares common stock exercise price 700 per share december 31 2004 none warrants exercised exercise period warrants expired january 2005 addition placement agent transaction received part fee fiveyear warrants purchase 108000 shares common stock exercise price 700 per share 2003 warrants purchase 3240 shares common stock exercised proceeds 22680 december 31 2004 placement agent warrants purchase 104760 common stock exercised exercise period warrants expired january 2005 january 1999 company issued warrants purchase total 150000 shares common stock cato research ltd part settlement agreement total warrants purchase 50000 shares common stock exercised price 1225 proceeds 61250 march 2000 january 2004 remaining warrants purchase 100000 shares common stock exercised price 225 65753 shares common stock award plans august 1991 board directors stockholders company approved 1991 stock plan 1991 plan reserved 1300000 shares issuance thereunder may 1993 board directors stockholders company approved 2150000 increase shares reserved 1991 plan 1991 plan permits award incentive nonqualified stock options shares common stock restricted stock purchase agreements january 1992 board directors stockholders company approved 1992 stock plan 1992 plan reserved 240000 shares issuance thereunder 1992 plan permits award incentive nonqualified stock options must exercised cash june 1995 board directors stockholders company approved 1995 equity incentive plan 1995 plan reserved 1250000 shares issuance thereunder 1995 plan permits award incentive nonqualified stock options shares common stock restricted stock awards may 1997 board directors stockholders company approved 750000 increase shares reserved 1995 plan june 1998 june 2000 june 2002 board directors stockholders company approved increases 1500000 1250000 1350000 respectively shares reserved 1995 plan although 1995 plan expired january 1 2005 outstanding options relating fully valid may 2004 board directors stockholders company approved 2004 stock option plan 2004 plan reserved 2500000 shares issuance thereunder 2004 plan permits award incentive stock options nonstatutory stock options 1991 1992 1995 2004 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years june 1995 board directors stockholders company approved nonemployee director stock option plan nonemployee director plan reserved 250000 shares issuance thereunder june 2000 june 2002 board directors stockholders company approved 250000 increases shares reserved issuance nonemployee director plan may 2004 board directors stockholders company approved 2004 outside directors stock option plan reserved 465000 shares issuance thereunder nonemployee director stock option plan canceled 2004 outside directors stock option plan automatically grants nonqualified stock options nonemployee directors upon appointment first election companys board directors initial grant annually upon reelection board directors companys annual meeting stockholders annual grant options granted fair market value date grant initial grants become exercisable three equal annual installments beginning first anniversary date grant annual grants become exercisable twelve equal monthly installments date grant subject case outside directors continuous service board directors following table summarizes stock option activity 1991 1992 1995 2004 stock option plans nonemployee director plan 2004 outside director stock option plan shares weighted available number average exercise grant shares price balances december 31 2001 1025869 4926857 486 1995 plan shares reserved 1350000 nonemployee director plan shares reserved 250000 options canceled 349979 667 options granted 795500 413 options exercised 274896 187 plan shares expired 126542 balances december 31 2002 2053806 5097482 476 options canceled 345168 743 options granted 1162034 617 options exercised 380630 276 plan shares expired 79697 balances december 31 2003 1157243 5533718 502 2004 plan shares reserved 2500000 2004 outside directors plan shares reserved 465000 options canceled 225955 635 options granted 1402000 505 options exercised 3150 379 plan shares expired 269775 balances december 31 2004 2676423 6706613 499 following table summarizes information concerning outstanding exercisable options december 31 2004 options outstanding options exercisable weighted average weighted remaining average range exercise number contractual exercise number exercise prices outstanding life price exercisable price 122 247 1214391 409 168 1214391 168 267 425 1546416 693 389 1214126 387 450 523 1148267 734 492 472250 485 525 583 1801614 584 563 1097008 556 588 1075 990925 480 962 969029 968 1250 5000 516 1250 5000 1250 6706613 588 499 4971804 494 december 31 2003 2002 options outstanding exercisable 3943906 3677142 shares respectively july 1996 board directors stockholders company approved 1996 employee stock purchase plan espp reserved 500000 shares issuance thereunder june 2003 board directors stockholders company approved 500000 increases shares reserved issuance 1996 employee stock purchase plan fulltime employees eligible participate espp terms espp employees choose 15 salary withheld purchase companys common stock purchase price stock 85 lower fair market value first last trading day quarterly participation period espp company sold 124798 127920 67160 shares employees 2004 2003 2002 respectively reserved shares december 31 2004 company reserved shares common stock future issuance follows options outstanding 6706613 shares available grant 2676423 warrants outstanding 904760 convertible notes payable 1368280 espp 385086 12041162 note 13 401k plan company pretax savings plan covering substantially us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions 15 employees salary company contributions terminated companys discretion approximately 161000 129000 101000 years ended december 31 2004 2003 2002 respectively note 14 significant geographic information company operates one business segment development commercialization specialistoriented proprietary drugs treatment chronic life threatening diseases currently companys principal focus development commercialization zadaxin product company sells office president consisting chief operating officer chief financial officer identified chief operating decision makers codm final authority resource allocation decisions performance assessment codm receive discrete financial information individual components business segment companys domestic operations primarily consist product development companys wholly owned international subsidiary sciclone pharmaceuticals international ltd engaged sales marketing product distribution worldwide information regarding geographic areas follows product contract sales revenue long lived year ended year ended assets net assets december 31 december 31 december 31 december 31 2004 us 1980000 26892000 china 20174000 283000 28014000 2051000 1631000 211000 217000 total 22225000 1631000 2474000 55123000 2003 us 2043000 45093000 china 28078000 213000 22928000 3654000 806000 215000 229000 total 31732000 806000 2471000 68250000 2002 us 624000 9417000 china 15073000 99000 13728000 2028000 671000 234000 209000 total 17101000 671000 957000 23354000 three customers accounted 10 total revenues 32 29 23 aggregate 84 total revenues year ended december 31 2004 two customers accounted 10 total revenues 52 14 aggregate 66 total revenues year ended december 31 2003 two customers accounted 10 total revenues 41 27 aggregate 68 total revenues year ended december 31 2002 customer accounted 10 total revenues years note 15 selected quarterly financial data unaudited three months ended march 31 june 30 september 30 december 31 2004 product sales 5414000 5613000 5753000 5985000 contract revenue 228000 1135000 134000 cost product sales 1142000 1178000 1109000 1148000 gross margin 4500000 5570000 4778000 4971000 net loss 3133000 2877000 4913000 2355000 basic net loss per share 007 006 011 005 diluted net loss per share 007 006 011 005 2003 product sales 5000000 16207000 5421000 5104000 contract revenue 224000 134000 cost product sales 1016000 2931000 935000 754000 gross margin 4208000 13500000 4710000 4484000 net income loss 2862000 5124000 2850000 4687000 basic net income loss per share 008 014 007 011 diluted net income loss per share 008 013 007 011 item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc index consolidated financial statements page reports independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statement stockholders’ equity consolidated statements cash flows notes consolidated financial statements report independent registered public accounting fir board directors stockholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 2005 2004 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2005 audits also included financial statement schedule listed item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 2005 2004 consolidated results operations cash flows three years period ended december 31 2005 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness sciclone pharmaceuticals inc’s internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 10 2006 expressed unqualified opinion thereon ernst young llp palo alto california march 10 2006 sciclone pharmaceuticals inc consolidated balance sheets see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements operations see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statement stockholders’ equity see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies company sciclone pharmaceuticals inc “sciclone” “company” biopharmaceutical company engaged development commercialization therapeutics treat lifethreatening diseases company’s lead product zadaxin® currently evaluated melanoma hcv clinical trials zadaxin currently approved sale certain international locations sold primarily china company’s whollyowned subsidiary sciclone pharmaceuticals international ltd “spil” basis presentation consolidated financial statements include accounts company wholly owned subsidiaries spil sciclone italy srl sciclone japan kk sciclone brasil produtos farmaceuticos ltda sciclone pharmaceuticals international holding ltd spil registered cayman islands principal office located hong kong sciclone italy srl registered italy principal office located rome sciclone japan kk registered japan principal office located tokyo sciclone brasil registered brazil principal office located sao paulo sciclone pharmaceuticals international holding ltd registered cayman islands principal office located hong kong significant intercompany accounts transactions eliminated revenue recognition company recognizes revenue product sales time shipment significant customer acceptance requirements post shipment obligations part company sales importing agents distributors recognized time shipment title product transferred contractual rights return except limited terms regarding product quality however company replace products expired deemed damaged defective delivered payments importing agents distributors contingent upon sale end user importing agents distributors contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement company recognized earlier payments received collection assured revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment amounts invoiced relating arrangements revenue cannot recognized reflected balance sheet deferred revenue recognized applicable revenue recognition criteria satisfied use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents investments cash equivalents consist highly liquid investments original maturities three months less company required lease agreement letter credit secured certificate deposit 633000 december 31 2005 european value added tax filing arrangement company letter credit secured certificate deposit 59000 december 31 2005 amounts recorded restricted shortterm investments accompanying balance sheets company classifies investment portfolio availableforsale heldtomaturity company records availableforsale investments fair value determined available market information balance sheet portfolio primarily consists us government securities shortterm municipals unrealized gains losses included accumulated comprehensive income consolidated balance sheet amortized cost debt securities adjusted amortization premiums accretion discounts maturity amortization included interest investment income along interest earned realized gains losses determined basis specific identification included interest investment income company also heldtomaturity investments records amortized cost company assessment reporting period determine whether investment impaired management believes credit risk associated investments limited due nature investments years ended december 31 2005 2004 2003 net unrealized gains losses approximately 15000 138000 97000 respectively included accumulated comprehensive income year ended december 31 2005 realized gains year ended december 31 2004 net realized gain approximately 697000 recognized primarily connection sale equity securities year ended december 31 2003 realized gains fair value financial instruments fair value cash equivalents availableforsale marketable securities based quoted market prices carrying amounts equal respective fair values december 31 2005 2004 amortized cost heldtomaturity securities approximates fair value december 31 2005 2004 financial instruments including accounts receivable accounts payable accrued liabilities carried cost company believes approximates fair value shortterm maturity instruments company believes reported value convertible debt 1600000 5600000 december 31 2005 2004 respectively approximates fair value inventories consist principally raw materials finishedgood products inventories stated lower cost market cost determined firstin firstout basis periodically review inventory order identify obsolete items obsolete items observed alternate uses inventory record writedown net realizable value period impairment first recognized property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets three five years straightline basis leasehold improvements amortized shorter estimated useful life lease term straightline basis intangible assets intangible assets definite lives amortized estimated useful lives reviewed impairment facts circumstances suggest carrying value assets may recoverable company’s policy identify record impairment losses necessary intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets company date identified impairment losses assets although company history operating cash flow losses company believes impairment intangible assets zadaxin approved sale several countries principally treatment hbv based company’s anticipated financial results future zadaxin sales determined expected future cash flows exceed carrying amount assets foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using rates exchange effect period gains losses translation financial statements denominated foreign currencies material would included separate component comprehensive income loss statement stockholders’ equity accumulated currency translation gains losses included period presented company records foreign currency transactions exchange rate prevailing date transaction monetary assets liabilities denominated foreign currency retranslated exchange rates effect balance sheet date translation differences arising foreign currency transactions included results operations significant research development expenses research development expenditures charged operations incurred major components research development expenses consist clinical development performed company’s behalf institutions contract research organizations personnel costs including salaries benefits preclinical work pharmaceutical development materials supplies third party research funding overhead allocations consisting various administrative facilities related costs sciclone’s research development activities also separated three main categories research clinical development pharmaceutical development research costs typically consist preclinical toxicology work clinical development costs primarily relate clinical trials pharmaceutical development costs consist product formulation chemical analysis zadaxin clinical trials largest significant impact company’s research development expenses cost accruals clinical trials based estimates services received efforts expended pursuant contracts numerous institutions conduct clinical trials company’s behalf financial terms agreements subject negotiation vary contract may result uneven payment flows payments contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses actual services received efforts expended expenses related grants institutions conduct clinical trials company’s behalf accrued based level patient enrollment activity according protocol general us phase 3 clinical trials expenses higher initial final months patient’s scheduled 18 months treatment observation expenses relating clinical research organization entities managing trials laboratory direct expenses recognized period estimated incurred services performed company monitors active patient enrollment levels related activity extent possible adjusts estimates accordingly shipping handling costs related shipping handling included cost sales periods presented advertising expenses company expenses advertising costs incurred costs included sales marketing expenses periods presented advertising expenses years ended december 31 2005 2004 2003 150000 235000 255000 respectively income taxes income taxes accounted liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date deferred tax assets reduced valuation allowance opinion management likely deferred tax assets may realized net loss per share basic net loss per share computed using weighted average number shares common stock outstanding period diluted net loss per share equals basic net loss per share given company’s history net losses company net income position diluted earnings per share would included shares used computation basic net loss per share well effect additional 7080186 8979653 7906758 shares 2005 2004 2003 respectively related convertible notes payable outstanding options warrants impact shares included calculation diluted net loss per share effect antidilutive accounting stockbased compensation company accounts stock option employee stock purchase plans provisions accounting principles board opinion 25 “apb 25” related interpretations accordingly company generally recognize compensation expense accounting stock option employee stock purchase plans awards employees directors pro forma information regarding net loss net loss per share required statement financial accounting standards 123 “accounting stockbased compensation” “sfas 123” determined company accounted stock awards fair value method statement fair value options estimated date grant using blackscholes option pricing model following weightedaverage assumptions used years ended december 31 follows blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility company’s employee director stock awards characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate company’s opinion existing models necessarily provide reliable single measure fair value stock options stock purchases ceo granted target stock price award see footnote 13 target stock price option therefore grant date fair values related four vesting portions award calculated related expense included sfas 123 pro forma expense disclosure derived service periods years ended december 31 2005 2004 2003 approximately 232000 0 respectively included sfas 123 pro forma expense related award compensation expense company’s option employee stock purchase plans determined based fair value grant date awards 2005 2004 2003 consistent provisions sfas 123 company’s net loss net loss per share would adjusted pro forma amounts years ended december 31 indicated warrants issued connection equity debt arrangements equity instruments issued nonemployees valued using blackscholes option valuation model warrants issued placement agents similar parties connection equity financing accounted stock issuance costs equal amount recorded additional paidin capital warrants issued purchasers company’s equities separately included financial statements value subcomponent additional paidin capital fair value warrants issued connection debt arrangements material accounted debt discount amortized additional interest expense term related debt comprehensive income loss company reports changes unrealized gains losses company’s availableforsale securities comprehensive income loss accumulated comprehensive income balances represent unrealized gains losses securities balance sheet dates segment information company operates one segment see note 15 concentration credit risk people’s republic china like japan certain asian markets uses tiered method import distribute products distributors make sales country product imported licensed importers year ended december 31 2005 sales three importing agents china accounted 91 company’s product sales four importing agents china accounted 91 company’s product sales year ended december 31 2004 sales five importing agents china accounted 88 company’s product sales year ended december 31 2003 2005 three largest customers accounted 57 19 15 sales respectively customer accounted 10 sales 2005 2004 three largest customers accounted 32 29 23 sales respectively customer accounted 10 sales 2004 2003 largest customer accounted 52 sales second largest customer accounted 14 sales customers accounted 10 sales 2003 december 31 2005 approximately 8847000 90 company’s accounts receivable attributable three importing agents china company performs ongoing credit evaluations customers’ financial condition generally require collateral customers company maintains reserves credit losses within management’s expectation company recognizes reserves bad debts ranging 25 100 based length time receivables past contractual payment due dates company’s collectibility experience recently issued accounting pronouncements december 2004 financial accounting standards board “fasb” issued fasb statement 123 revised 2004 “sharebased payment” “sfas 123r” revises sfas 123 supersedes apb 25 related implementation guidance generally approach sfas 123r similar approach described sfas 123 however sfas 123r requires sharebased payments employees directors including grants stock options recognized statement operations based fair values pro forma disclosure longer alternative amount compensation cost measured based grantdate fair value instruments issued compensation cost recognized period employee director provides service exchange award adopted sfas 123r using modified prospective basis january 1 2006 anticipate compensation expense twelve months ended december 31 2006 approximately 2500000 however estimate future stockbased compensation expense affected stock price number stockbased awards board directors may grant 2006 well number complex subjective valuation assumptions valuation assumptions include limited volatility stock price employee stock option exercise behaviors permitted sfas 123 company currently accounts sharebased payments employees directors using apb 25’s intrinsic value method generally recognizes compensation cost employee director stock options accordingly adoption sfas 123r’s fair value method significant impact result operations although impact overall financial position adopted sfas 123r prior periods impact standard would approximated impact sfas 123 described disclosure pro forma net loss net loss per share accounting stockbased compensation section note 1 consolidated financial statements reclassifications company made certain classification changes 2004 consolidated balance sheets ensure consistency current period presentation december 31 2004 492000 reclassified accounts payable accrued expenses note 2 marketable securities following summary availableforsale heldto maturity securities december 31 2005 692000 restricted shortterm investments 9685000 shortterm investments held availablefor sale securities december 31 2004 availableforsale securities included follows 22843000 cash equivalents 700000 restricted shortterm investments 9395000 shortterm investments december 31 2005 2004 availablefor sale securities excluding shortterm municipal securities maturities 12 months less shortterm municipals auction rate securities long final maturities however highly rated highly liquid interest rate reset auction every 30 days included availableforsale securities company’s interest rate risk associated securities limited due interest rate reset mechanism december 31 2005 6034000 shortterm investments classified heldtomaturity securities us treasury bills mature february may 2006 fair market value investments approximated cost december 31 2005 december 31 2004 heldtomaturity securities note 3 prepaid expenses current assets following summary prepaid expenses current assets note 4 inventories consisted following note 5 property equipment property equipment consisted following depreciation expense years ended december 31 2005 2004 2003 133000 115000 90000 respectively note 6 intangible assets intangible assets include following december 1997 company entered agreement alpha 1 biomedicals inc “a1b” acquire worldwide rights except italy spain portugal sclavo spa “sclavo” international pharmaceutical entity owned exclusive marketing rights zadaxin rights a1b licensed hoffmannlaroche inc f hoffmannlaroche ag approximately 1800000 transaction closed july 1998 eliminated company’s royalty obligation a1b respect sales zadaxin acquisition date april 1998 company entered agreement sclavo acquire zadaxin rights italy spain portugal sclavo approximately 1400000 connection foregoing transactions sclavo a1b company estimated fair market value intangible assets purchased approximately 2456000 wrote remaining 700000 related hcv inprocess technology acquired zadaxin product rights amortized straightline basis estimated useful lives amortization expense years ended december 31 2005 2004 2003 70000 per year years 2006 2012 expected 70000 per year based upon progress zadaxin clinical trials company’s actual experience product sales company assessed acquired product rights useful company 2012 european patent use zadaxin treatment hcv expires company reassesses useful life assets accordance current facts circumstances note 7 accrued expenses following summary accrued expenses note 8 collaborative agreements may 2004 company entered agreement sigmatau whereby sigmatau conducting multicenter phase 3 hepatitis c triple therapy clinical trial europe approximately 550 patients objective european trial provide data zadaxin’s use part triple therapy treating hcv patients company providing zadaxin approximately 2500000 funding support course patient enrollment 584000 paid december 31 2005 1500000 milestone payment sigmatau completion study based level activity trial company recorded approximately 1203000 169000 research development expense related trial years ended december 31 2005 2004 respectively october 2003 company wayne state university “wsu” amended license agreement wsu a1b entered 1994 subsequently assigned a1b sciclone 2003 amendment allows company maintain exclusive license certain wsu patents regarding use thymosin alpha 1 treatment hepatitis b hepatitis c addition certain minimum royalty payments following sales zadaxin certain territories company obligated pay wsu total 1400000 prepaid royalties following three years whether company receives regulatory approval zadaxin sales made covered territories including united states company offset annual minimum royalties due sales zadaxin prepaid royalties extent 50 annual royalties one year ended december 31 2005 2004 2003 company paid 400000 300000 200000 respectively prepaid royalties amounts plus unpaid balance 500000 due next year recorded prepaid royalties long term assets account accompanying balance sheets remaining obligation pay 500000 december 31 2005 included accrued expenses accompanying balance sheet april 1999 company licensed sigmatau semiexclusive zadaxin development marketing rights italy spain exclusive rights switzerland march 2000 license expanded amended include countries european union sigmatau made exclusive licensee countries december 2001 license amended define scope clinical development zadaxin sigmatau would undertake europe terms december 2001 amendment company received 2685000 first quarter 2002 contract revenue recognized estimated time complete zadaxin us phase 3 hcv clinical trials deliver clinical data substantive performance requirements contract amendment year ended december 31 2005 2004 2003 company recognized 492000 537000 806000 respectively contract revenue remaining balance 211000 recorded deferred revenue december 31 2005 additionally second quarter 2004 company recognized 1000000 milestone payment sigmatau full enrollment company’s current phase 3 us clinical trials future performance obligations associated milestone payment august 1997 company entered zadaxin patent license agreement fitzsimons army medical center us army “us army” company obligated pay us army minimum annual royalty based percentage zadaxin net sales revenue upon commercialization zadaxin treatment chronic hepatitis c certain countries including us european union japan including china note 9 longterm liabilities following summary longterm liabilities note 10 income taxes result net losses company record federal state income tax expense years ended december 31 2005 2004 2003 domestic foreign components pre tax income loss years ended december 31 follows significant components company’s deferred tax assets december 31 follows valuation allowance increased approximately 5818000 6349000 5825000 years ended december 31 2005 2004 2003 respectively deferred tax assets relating net operating loss carryforwards december 31 2005 include approximately 2973000 associated stock option activity subsequently recognized tax benefits credited directly stockholders’ equity company deferred tax liabilities december 31 2005 2004 december 31 2005 company net operating loss carryforwards federal income tax purposes approximately 119000000 expire years 2006 2025 december 31 2005 company federal tax credit carryforwards approximately 5000000 expire years 2006 2025 december 31 2005 company state net operating loss carryforwards approximately 16000000 available reduce future taxable income carryforwards begin expire 2007 utilized addition company research development tax credit carryforwards approximately 800000 state tax purposes december 31 2005 tax credit carryforwards carried forward indefinitely utilized “change ownership” provisions internal revenue code portion company’s net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities note 11 commitments contingencies leases company leases main office facility noncancelable operating lease agreement expires august 2007 lease period seven years requires company pay insurance taxes prorata share operating expenses company also leases various office facilities abroad noncancelable lease agreements rent expense 2005 2004 2003 1458000 1393000 1362000 respectively minimum future rental payments amount total 3040000 consists 1561000 2006 1181000 2007 298000 2008 purchase obligations years ended december 31 2005 2004 2003 company purchase obligation requirements amounts 4749000 6456000 5270000 respectively december 31 2005 purchase obligations consist minimum purchase requirements contract manufacturer amount 1012000 addition research development fees payable contract research organization agreement us phase 3 hcv clinical trials amount 321000 3416000 european marketing development partner sigmatau conduct complete hcv clinical trial europe royalties october 2003 amendment patent license agreement wayne state university company obligated pay wsu royalty subject minimum amounts percentage zadaxin net sales revenue treatment hepatitis b hepatitis c certain countries including united states european union japan including china addition company obligated pay wsu prepaid royalties 500000 2006 whether company receives regulatory approval zadaxin sales made covered territories including united states year ended december 31 2005 2004 2003 company paid wsu 400000 300000 200000 respectively prepaid royalties company offset annual minimum royalties due sales zadaxin prepaid royalties extent 50 annual royalties one year august 1997 zadaxin patent license agreement us army company obligated pay us army minimum annual royalty based percentage zadaxin net sales revenue upon commercialization zadaxin treatment chronic hepatitis c certain countries including us european union japan including china 2005 2004 2003 company paid 20000 per year us army related minimum annual royalty convertible notes payable march 2001 company issued 1600000 convertible note investment affiliate ubs ag 1600000 note convertible option holder 276530 shares common stock fixed conversion price 57860 per share note accrues interest rate 6 per year payable semiannually mature march 2006 company also received 354000 granting investor right purchase time note’s maturity date approximately 2400000 convertible notes due march 2006 issued notes bear interest zero coupon convertible 276530 shares common stock fixed conversion price 85532 per share company may elect lieu delivering convertible notes deliver respective number shares common stock december 2000 company issued 4000000 convertible note investment affiliate ubs ag 4000000 note convertible 407610 shares common stock fixed conversion price 98133 per share december 2005 4000000 note repaid note 12 stockholders’ equity july 18 2003 company reincorporated california corporation delaware corporation merging company california corporation sciclone pharmaceuticals inc delaware corporation whollyowned subsidiary company share outstanding stock california corporation automatically exchanged like share stock delaware corporation common stock warrants july 2004 former ceo left company outstanding unvested options purchase 253541 shares company’s common stock became fully vested outstanding options purchase 1615454 shares became exercisable one two year period changes former ceo’s options result stockbased compensation changes effected accordance original terms option grants september 2003 company completed public offering 6000000 shares common stock 800 per share received proceeds 45120000 sale net 694000 financingrelated costs january 2003 company completed 1800000 direct placement affiliates sigmatau affiliates purchased 504938 shares company’s common stock 35648 per share shares issued restricted securities sigmatau affiliates permitted sell shares purchased private placement january 24 2004 january 2000 company completed 6100000 private placement brown simpson asset management purchased 1000000 shares common stock price 600 per share fiveyear immediately exercisable warrants purchase 800000 shares common stock exercise price 700 per share none warrants exercised exercise period warrants expired january 2005 addition placement agent transaction received part fee fiveyear warrants purchase 108000 shares common stock exercise price 700 per share 2003 warrants purchase 3240 shares common stock exercised proceeds 22680 additional placement agent warrants exercised exercise period balance placement agent warrants expired january 2005 january 1999 company issued warrants purchase total 150000 shares common stock cato research ltd part settlement agreement total warrants purchase 50000 shares common stock exercised price 1225 proceeds 61250 march 2000 january 2004 remaining warrants purchase 100000 shares common stock exercised price 225 65753 shares common stock award plans august 1991 board directors stockholders company approved 1991 stock plan “1991 plan” reserved 1300000 shares issuance thereunder may 1993 board directors stockholders company approved 2150000 increase shares reserved 1991 plan 1991 plan permits award incentive nonqualified stock options shares common stock restricted stock purchase agreements january 1992 board directors stockholders company approved 1992 stock plan “1992 plan” reserved 240000 shares issuance thereunder 1992 plan permits award incentive nonqualified stock options must exercised cash june 1995 board directors stockholders company approved 1995 equity incentive plan “1995 plan” reserved 1250000 shares issuance thereunder 1995 plan permits award incentive nonqualified stock options shares common stock restricted stock awards may 1997 board directors stockholders company approved 750000 increase shares reserved 1995 plan june 1998 june 2000 june 2002 board directors stockholders company approved increases 1500000 1250000 1350000 respectively shares reserved 1995 plan although 1991 1992 1995 plans expired outstanding options relating fully valid may 2004 board directors stockholders company approved 2004 stock option plan “2004 plan” reserved 2500000 shares issuance thereunder 2004 plan permits award incentive stock options nonstatutory stock options june 2005 board directors stockholders company approved increase maximum number shares issuable 2004 plan 2300000 shares total 4800000 shares board directors stockholders also approved amendments 2004 plan expand types stockbased incentives authorized 2004 plan restate 2004 plan 2005 equity incentive plan “2005 plan” 2005 equity incentive plan permits grant incentive stock options nonstatutory stock options stock appreciation rights stock purchase rights stock bonuses restricted stock units performance shares performance units options granted fair market value date grant expire ten years date grant 1991 1992 1995 2005 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years june 1995 board directors stockholders company approved 1995 nonemployee director stock option plan “nonemployee director plan” reserved 250000 shares issuance thereunder june 2000 june 2002 board directors stockholders company approved increase 250000 shares reserved issuance nonemployee director plan may 2004 board directors stockholders company approved 2004 outside directors stock option plan reserved 465000 shares issuance thereunder 1995 nonemployee director stock option plan canceled 2004 outside directors stock option plan automatically grants nonqualified stock options nonemployee directors upon appointment first election company’s board directors “initial grant” annually upon reelection board directors company’s annual meeting stockholders “annual grant” options granted fair market value date grant expire ten years date grant initial grants become exercisable three equal annual installments beginning first anniversary date grant annual grants become exercisable twelve equal monthly installments date grant subject case outside director’s continuous service board directors june 2005 board directors stockholders company approved increase maximum number shares issuable 2004 outside directors stock option plan 550000 shares total 1015000 shares following table summarizes stock option activity 1991 1992 1995 2005 stock option plans nonemployee director plan 2004 outside director stock option plan following table summarizes information concerning outstanding exercisable options december 31 2005 december 31 2004 2003 options outstanding exercisable 4971804 3943906 shares respectively july 1996 board directors stockholders company approved 1996 employee stock purchase plan “espp” reserved 500000 shares issuance thereunder june 2003 board directors stockholders company approved increase 500000 shares reserved issuance 1996 employee stock purchase plan fulltime employees eligible participate espp terms espp employees choose 15 salary withheld purchase company’s common stock purchase price stock 85 lower fair market value first last trading day quarterly participation period espp company sold 80113 124798 127920 shares employees 2005 2004 2003 respectively january 2006 board directors amended espp provide offering period commencing january 31 2006 purchase price stock shall equal 95 fair market value share company’s common stock purchase date amount may established board reserved shares december 31 2005 company reserved shares common stock future issuance follows note 13 target stock price option company entered employment agreement new ceo effective june 1 2005 employment agreement included award option purchase 400000 shares company’s common stock 297 per share closing price nasdaq national market share company’s common stock june 1 2005 option term 10 years 25 second option vest upon company’s common stock trading june 1 2005 least 30 consecutive calendar days greater target closing stock price reported nasdaq national market 450 june 1 2008 b 600 june 1 2009 c 800 june 1 2010 1000 june 1 2011 price adjusted stock dividends stock splits similar changes company’s capital structure apb 25 company recognizes noncash expense related stock price performance based option granted chief executive officer june 1 2005 date commenced employment terms option require application variable accounting related noncash expense recognized effected price level trading activity stock company recognizes noncash expense vesting portion option determined probable threemonth period ended september 30 2005 market price company’s common stock price closed 450 least 30 consecutive calendar days thus triggering vesting 25 shares underlying option therefore company recognized 423000 noncash expense attributable vesting threemonth period ended september 30 2005 december 31 2005 vesting portions option probable therefore expense related option recognized sfas 123 option considered target stock price award therefore grant date fair values related four vesting portions award calculated related expense included sfas 123 pro forma expense disclosure derived service periods four vesting portions award aggregate fair value award estimated 691000 date grant using monte carlo simulation option pricing model following assumptions riskfree interest rate 4097 dividend yield 0 volatility factor 74 expected life 10 years fair values four vesting portions awards 186000 173000 166000 amortized related derived service periods 13 21 28 36 months respectively years ended december 31 2005 2004 2003 approximately 232000 0 respectively expense included sfas 123 pro forma expense see footnote 1 significant accounting policies accounting stockbased compensation note 14 401k plan company pretax savings plan covering substantially us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions 15 employee’s salary company contributions terminated company’s discretion approximately 170000 161000 129000 years ended december 31 2005 2004 2003 respectively note 15 significant geographic information company operates one business segment development commercialization specialistoriented proprietary drugs treatment chronic life threatening diseases currently company’s principal focus development commercialization zadaxin product company sells president chief executive officer identified chief operating decision makers “codm” final authority resource allocation decisions performance assessment codm receive discrete financial information individual components business segment company’s domestic operations primarily consist product development company’s wholly owned international subsidiary sciclone pharmaceuticals international ltd engaged sales marketing product distribution worldwide information regarding geographic areas follows three customers accounted 10 total revenues 57 19 15 aggregate 91 total revenues year ended december 31 2005 three customers accounted 10 total revenues 32 29 23 aggregate 84 total revenues year ended december 31 2004 two customers accounted 10 total revenues 52 14 aggregate 66 total revenues year ended december 31 2003 customer accounted 10 total revenues years note 16 selected quarterly financial data unaudited item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc index consolidated financial statements page report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statement stockholders’ equity consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 2006 2005 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2006 audits also included financial statement schedule listed item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 2006 2005 consolidated results operations cash flows three years period ended december 31 2006 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements 2006 sciclone pharmaceuticals inc changed method accounting stockbased compensation accordance guidance provided statement financial accounting standards 123r “sharebased payment” also audited accordance standards public company accounting oversight board united states effectiveness sciclone pharmaceuticals inc’s internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 15 2007 expressed unqualified opinion thereon ernst young llp palo alto california march 15 2007 sciclone pharmaceuticals inc consolidated balance sheets see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements operations see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statement stockholders’ equity see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies company sciclone pharmaceuticals inc “sciclone” “company” biopharmaceutical company engaged development commercialization therapeutics treat lifethreatening diseases company’s lead product zadaxin® currently evaluated melanoma hepatitis c virus “hcv” clinical trials currently approved sale certain international locations sold primarily china company’s whollyowned subsidiary sciclone pharmaceuticals international ltd “spil” 2006 company inlicensed chinese marketing rights dc beadtm product treatment liver cancer hepatocellular carcinoma submitted regulatory application chinese state food drug administration related product basis presentation consolidated financial statements include accounts company wholly owned subsidiaries spil sciclone italy srl sciclone japan kk sciclone brasilprodutos farmaceuticos ltda sciclone pharmaceuticals international holding ltd sciclone pharmaceuticals china ltd spil registered cayman islands principal office located hong kong sciclone italy srl registered italy principal office located rome sciclone japan kk registered japan principal office located tokyo sciclone brasil registered brazil principal office located sao paulo sciclone pharmaceuticals international holding ltd registered cayman islands principal office located hong kong sciclone pharmaceuticals china ltd registered china principal office located shanghai significant intercompany accounts transactions eliminated revenue recognition company recognizes revenue product sales time delivery significant customer acceptance requirements post shipment obligations part company sales importing agents distributors recognized time shipment title product transferred contractual rights return except limited terms regarding product quality however company expected replace products expired deemed damaged defective delivered payments importing agents distributors contingent upon sale end user importing agents distributors contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement company recognized earlier payments received collection assured revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment amounts invoiced relating arrangements revenue cannot recognized reflected balance sheet deferred revenue recognized applicable revenue recognition criteria satisfied use estimates preparation financial statements conformity us generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents investments cash equivalents consist highly liquid investments maturities three months less date purchase company classifies investment portfolio availableforsale heldtomaturity company records availableforsale investments fair value determined available market information balance sheet portfolio primarily consists us government securities shortterm municipal securities unrealized gains losses included accumulated comprehensive income consolidated balance sheet realized gains losses declines value judged temporary determined basis specific identification included interest investment income company also heldtomaturity investments records amortized cost company assessment reporting period determine whether investment impaired management believes credit risk associated investments limited due nature investments company required lease agreement letter credit secured certificate deposit 633000 december 31 2006 european value added tax filing arrangement company letter credit secured certificate deposit 65000 december 31 2006 amounts recorded restricted shortterm investments accompanying balance sheets years ended december 31 2006 2005 2004 net unrealized gains losses approximately 25000 15000 138000 respectively included accumulated comprehensive income loss years ended december 31 2006 2005 realized gains losses year ended december 31 2004 net realized gain approximately 697000 recognized primarily connection sale equity securities fair value financial instruments fair value cash equivalents availableforsale marketable securities based quoted market prices carrying amounts equal respective fair values december 31 2006 2005 amortized cost heldtomaturity securities approximates fair value december 31 2006 2005 financial instruments including accounts receivable accounts payable accrued liabilities carried cost company believes approximates fair value shortterm maturity instruments inventories consist principally raw materials work progress finished goods products inventories stated lower cost market cost determined firstin firstout basis periodically review inventory order identify obsolete items obsolete items observed alternate uses inventory record writedown net realizable value period impairment first recognized property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets three five years straightline basis leasehold improvements amortized shorter estimated useful life lease term straightline basis intangible assets intangible assets definite lives amortized estimated useful lives reviewed impairment facts circumstances suggest carrying value assets may recoverable companys policy identify record impairment losses necessary intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets company date identified impairment losses assets although company history operating losses negative cash flow company believes impairment intangible assets zadaxin approved sale several countries principally treatment hepatitis b virus based companys anticipated financial results future zadaxin sales determined expected future cash flows exceed carrying amount assets foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using rates exchange effect period gains losses translation financial statements denominated foreign currencies material would included separate component comprehensive income loss statement stockholders equity company records foreign currency transactions exchange rate prevailing date transaction resultant gains losses included results operations foreign currency transaction gains losses significant period presented research development expenses research development expenditures charged operations incurred major components research development expenses consist clinical development performed company’s behalf institutions contract research organizations sharing certain costs sigmatau’s clinical development zadaxin personnel costs including salaries benefits preclinical work pharmaceutical development materials supplies third party research funding overhead allocations consisting various administrative facilities related costs sciclone’s research development activities also separated three main categories research clinical development pharmaceutical development research costs typically consist preclinical toxicology work clinical development costs primarily relate clinical trials pharmaceutical development costs consist product formulation chemical analysis zadaxin clinical trials largest significant impact company’s research development expenses cost accruals clinical trials based estimates services received efforts expended pursuant contracts numerous institutions conduct clinical trials companys behalf financial terms agreements subject negotiation vary contract may result uneven payment flows payments contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses actual services received efforts expended expenses related grants institutions conduct clinical trials company’s behalf accrued based level patient enrollment activity according protocol general us hcv clinical trials expenses higher initial final months patients scheduled 18 months treatment observation expenses relating clinical research organization entities managing trials laboratory direct expenses recognized period estimated incurred services performed company monitors active patient enrollment levels related activity extent possible adjusts estimates accordingly shipping handling costs related shipping handling included cost sales periods presented advertising expenses company expenses advertising costs incurred costs included sales marketing expenses periods presented advertising expenses years ended december 31 2006 2005 2004 221000 150000 235000 respectively income taxes income taxes accounted liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date deferred tax assets reduced valuation allowance opinion management likely deferred tax assets may realized accordingly net deferred tax assets fully offset valuation allowance net income loss per share basic net income loss per share computed dividing net income loss weightedaverage number shares common stock outstanding period diluted net income loss per share computed dividing net income loss weightedaverage number common equivalent shares outstanding period diluted net income loss per share includes dilutive impact stock options outstanding using treasury stock method following reconciliation numerator denominators basic diluted net income loss per share computations years ended december 31 2006 2005 2004 approximately 6903336 7080186 8979653 shares respectively related convertible notes payable outstanding options excluded calculation diluted net income loss per share inclusion would antidilutive accounting stockbased compensation effective january 1 2006 company adopted fair value recognition provisions financial accounting standards board “fasb” statement 123r sharebased payment “fas 123r” prior january 1 2006 company accounted sharebased payments recognition measurement provisions accounting principles board opinion 25 “apb 25” related interpretations permitted fasb statement 123 accounting stockbased compensation “fas 123” accordingly company recognize compensation expense accounting employee stock purchase plan stock option plans options employees directors granted exercise prices fair market value company adopted fas 123r using modifiedprospective transition method compensation cost recognized year ended december 31 2006 includes compensation cost sharebased payments granted prior yet vested january 1 2006 based grantdate fair value estimated accordance provisions fas 123 compensation cost also includes sharebased payments granted subsequent january 1 2006 based grantdate fair value estimated accordance provisions fas 123r compensation cost calculated date grant using fair value option determined using black scholes option valuation model single option approach company amortizes compensation cost vesting period generally four years using straight line attribution method results prior periods restated reflect impact fas 123r november 2005 fasb issued fasb staff position 123r3 “transition election related accounting tax effects sharebased payment awards” company adopted simplified method calculate beginning balance additional paidincapital “apic” pool excess tax benefit determine subsequent effect apic pool consolidated statements cash flows tax effects stockbased compensation awards outstanding upon adoption fas 123r stockbased compensation expense recognized consolidated statement operations year ended december 31 2006 based awards ultimately expected vest fas 123r requires forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates use historical data estimate prevesting option forfeitures company’s pro forma information required fas 123 periods prior january 1 2006 company accounted forfeitures occurred recognized expect recognize near future tax benefit related employee stockbased compensation cost blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee director stock awards characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate companys opinion existing models necessarily provide reliable single measure fair value stock options stock purchases former chief executive officer “ceo” granted target stock price award see note 13 ceo agreements therefore grant date fair values related four vesting portions award calculated related expense included sfas 123 pro forma expense disclosure derived service periods years ended december 31 2005 2004 approximately 232000 0 respectively included sfas 123 pro forma expense related award following table illustrates effect net loss net loss per share years ended december 31 2005 2004 compensation expense company’s stock option employee stock purchase plans determined based fair value grant date consistent provisions fas 123 warrants issued connection equity debt arrangements equity instruments issued nonemployees valued using blackscholes option valuation model warrants issued placement agents similar parties connection equity financing accounted stock issuance costs equal amount recorded additional paidin capital warrants issued purchasers companys equities separately included financial statements value subcomponent additional paidin capital fair value warrants issued connection debt arrangements material accounted debt discount amortized additional interest expense term related debt comprehensive income loss comprehensive income loss comprised net income loss comprehensive income loss accumulated comprehensive income loss includes net unrealized gains losses availableforsale securities balance sheet dates segment information company operates one segment see note 16 concentration credit risk peoples republic china like japan certain asian markets uses tiered method import distribute products distributors make sales country product imported licensed importers year ended december 31 2006 sales four importing agents china accounted 92 company’s product sales year ended december 31 2005 sales three importing agents china accounted 91 company’s product sales four importing agents china accounted 91 company’s product sales year ended december 31 2004 2006 two largest customers accounted 66 15 sales respectively customer accounted 10 sales 2006 2005 three largest customers accounted 57 19 15 sales respectively customer accounted 10 sales 2005 2004 three largest customers accounted 32 29 23 sales respectively customer accounted 10 sales 2004 december 31 2006 approximately 12562000 94 companys accounts receivable attributable three importing agents china company performs ongoing credit evaluations customers financial condition generally require collateral customers company maintains reserves credit losses within managements expectation company recognizes reserves bad debts ranging 25 100 based length time receivables past contractual payment due dates companys collection experience recently issued accounting pronouncement july 2006 fasb issued financial interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48” change accounting income taxes fin 48 specifies tax benefits uncertain tax positions recognized measured derecognized financial statements requires certain disclosures uncertain tax matters specifies reserves uncertain tax positions classified balance sheet provides transition interim period guidance among provisions fin 48 effective company’s first quarter calendar year 2007 company anticipate fin 48 material impact consolidated financial position results operations cash flows reclassifications company made classification change shortterm longterm liabilities consolidated balance sheet december 31 2005 conform current period presentation december 31 2005 68000 reclassified accrued compensation employee benefits longterm liabilities note 2 marketable securities following summary availableforsale heldto maturity securities december 31 2006 698000 restricted shortterm investments 5876000 shortterm investments held availablefor sale securities december 31 2005 692000 restricted shortterm investments 9685000 shortterm investments held availablefor sale securities december 31 2006 2005 availablefor sale securities excluding shortterm municipal securities maturities 12 months less shortterm municipals auction rate securities long final maturities however highly rated highly liquid interest rate reset auction every 30 days included availableforsale securities company’s interest rate risk associated securities limited due interest rate reset mechanism december 31 2006 2005 10403000 6034000 respectively shortterm investments classified heldtomaturity securities us treasury bills mature february may june 2007 fair value investments december 31 2006 2005 respectively approximated cost note 3 prepaid expenses current assets following summary prepaid expenses current assets note 4 inventories consisted following note 5 property equipment property equipment consisted following depreciation expense years ended december 31 2006 2005 2004 157000 133000 115000 respectively note 6 intangible assets intangible assets include following december 1997 company entered agreement alpha 1 biomedicals inc “a1b” acquire worldwide rights except italy spain portugal sclavo spa “sclavo” international pharmaceutical entity owned exclusive marketing rights zadaxin rights a1b licensed hoffmannlaroche inc f hoffmannlaroche ag approximately 1800000 transaction closed july 1998 eliminated companys royalty obligation a1b respect sales zadaxin acquisition date april 1998 company entered agreement sclavo acquire zadaxin rights italy spain portugal sclavo approximately 1400000 connection foregoing transactions sclavo a1b company estimated fair market value intangible assets purchased approximately 2456000 wrote remaining 700000 related hcv inprocess technology acquired zadaxin product rights amortized straightline basis estimated useful lives amortization expense years ended december 31 2006 2005 2004 70000 per year years 2007 2012 expected 70000 per year based upon progress zadaxin clinical trials company’s actual experience product sales company assessed acquired product rights useful company 2012 european patent use zadaxin treatment hepatitis c expires company reassesses useful life assets accordance current facts circumstances note 7 accrued expenses following summary accrued expenses note 8 collaborative agreements may 2004 company entered agreement sigmatau whereby sigmatau conducting multicenter phase 3 hepatitis c triple therapy clinical trial europe approximately 550 patients objective european trial provide data zadaxin’s use part triple therapy treating hcv patients company providing sigmatau approximately 2500000 funding support course patient enrollment trial period 1523000 paid december 31 2006 1500000 milestone payment completion study based level activity trial company recorded approximately 1750000 1203000 research development expense related trial years ended december 31 2006 2005 respectively october 2003 company wayne state university “wsu” amended license agreement wsu a1b entered 1994 subsequently assigned a1b sciclone 2003 amendment allows company maintain exclusive license certain wsu patents regarding use thymosin alpha 1 treatment hepatitis b hepatitis c addition certain minimum royalty payments following sales zadaxin certain territories company paid wsu total 1400000 nonrefundable prepaid royalties company offset annual minimum royalties due sales zadaxin prepaid royalties extent 50 annual royalties one year december 31 2006 1000000 royalties included assets accompanying balance sheet april 1999 company licensed sigmatau semiexclusive zadaxin development marketing rights italy spain exclusive rights switzerland march 2000 license expanded amended include countries european union sigmatau made exclusive licensee countries december 2001 license amended define scope clinical development zadaxin sigmatau would undertake europe terms december 2001 amendment company received 2685000 first quarter 2002 contract revenue recognized estimated time complete zadaxin us phase 3 hcv clinical trials deliver clinical data substantive performance requirements contract amendment year ended december 31 2006 2005 2004 company recognized 229000 492000 537000 respectively additionally second quarter 2004 company recognized 1000000 milestone payment sigmatau full enrollment company’s current phase 3 us clinical trials future performance obligations associated milestone payment august 1997 company entered zadaxin patent license agreement fitzsimons army medical center us army “us army” company obligated pay us army minimum annual royalty based percentage zadaxin net sales revenue upon commercialization zadaxin treatment chronic hepatitis c certain countries including us european union japan including china note 9 longterm liabilities longterm liabilities consisted 68000 accrued compensation employee benefits december 31 2006 2005 note 10 income taxes company recorded federal state income tax expense years ended december 31 2006 2005 2004 undistributed earnings company’s foreign subsidiaries amounted approximately 6126000 6673000 4155000 december 31 2006 2005 2004 respectively earnings considered permanently reinvested accordingly deferred us income taxes provided thereon domestic foreign components pre tax income loss years ended december 31 follows reconciliation statutory federal income tax rate 34 actual tax rate years ended december 31 follows significant components companys deferred tax assets december 31 follows valuation allowance increased approximately 3353000 5818000 6349000 years ended december 31 2006 2005 2004 respectively deferred tax assets relating net operating loss carryforwards december 31 2006 include approximately 3014000 associated stock option activity subsequently recognized tax benefits credited directly stockholders equity company deferred tax liabilities december 31 2006 2005 december 31 2006 company net operating loss carryforwards federal income tax purposes approximately 123000000 expire years 2007 2026 december 31 2006 company federal tax credit carryforwards approximately 7000000 expire years 2007 2026 december 31 2006 company state net operating loss carryforwards approximately 17000000 available reduce future taxable income carryforwards begin expire 2007 utilized addition company research development tax credit carryforwards approximately 1000000 state tax purposes december 31 2006 tax credit carryforwards carried forward indefinitely utilized “change ownership” provisions internal revenue code portion companys net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities note 11 commitments contingencies leases company leases main office facility noncancelable operating lease agreement expires august 2007 lease requires company pay insurance taxes prorata share operating expenses company also leases various office facilities abroad noncancelable lease agreements company expenses rent incurred costs included operating expenses rent expense 2006 2005 2004 1625000 1458000 1393000 respectively minimum future rental payments facility equipment operating lease agreements amount total 1469000 consists 1209000 2007 197000 2008 63000 2009 purchase obligations years ended december 31 2006 2005 2004 company purchase obligation requirements amounts 3684000 4749000 6456000 respectively december 31 2006 purchase obligations consist minimum purchase requirements contract manufacturer amount 1198000 addition research development fees payable amount 2486000 sigmatau conduct complete hcv clinical trial europe royalties october 2003 amendment patent license agreement wsu company obligated pay wsu royalty subject minimum amounts percentage zadaxin net sales revenue treatment hepatitis b hepatitis c certain countries including united states european union japan including china year ended december 31 2006 2005 2004 company paid wsu 500000 400000 300000 respectively nonrefundable prepaid royalties company certain rights offset annual minimum royalties due sales zadaxin prepaid royalties minimum annual royalties 500000 due year 2012 august 1997 zadaxin patent license agreement us army company obligated pay us army minimum annual royalty payments 2010 royalty based percentage zadaxin net sales revenue upon commercialization zadaxin treatment chronic hepatitis c certain countries including us european union japan including china 2006 2005 2004 company paid 20000 per year us army related minimum annual royalty convertible notes payable march 2001 company issued 1600000 convertible note investment affiliate ubs ag 1600000 note convertible 276530 shares common stock fixed conversion price 57860 per share march 2006 1600000 note repaid december 2000 company issued 4000000 convertible note investment affiliate ubs ag 4000000 note convertible 407610 shares common stock fixed conversion price 98133 per share december 2005 4000000 note repaid note 12 stockholders’ equity july 18 2003 company reincorporated california corporation delaware corporation merging company california corporation sciclone pharmaceuticals inc delaware corporation whollyowned subsidiary company share outstanding stock california corporation automatically exchanged like share stock delaware corporation common stock warrants july 2004 former ceo left company outstanding unvested options purchase 253541 shares company’s common stock became fully vested outstanding options purchase 1615454 shares became exercisable one two year period changes former ceo’s options result stockbased compensation changes effected accordance original terms option grants january 1999 company issued warrants purchase total 150000 shares common stock cato research ltd part settlement agreement total warrants purchase 50000 shares common stock exercised price 1225 proceeds 61250 march 2000 january 2004 remaining warrants purchase 100000 shares common stock exercised price 225 65753 shares common stock award plans august 1991 board directors stockholders company approved 1991 stock plan “1991 plan” reserved 1300000 shares issuance thereunder may 1993 board directors stockholders company approved 2150000 increase shares reserved 1991 plan 1991 plan permits award incentive nonqualified stock options shares common stock restricted stock purchase agreements january 1992 board directors stockholders company approved 1992 stock plan “1992 plan” reserved 240000 shares issuance thereunder 1992 plan permits award incentive nonqualified stock options must exercised cash june 1995 board directors stockholders company approved 1995 equity incentive plan “1995 plan” reserved 1250000 shares issuance thereunder 1995 plan permits award incentive nonqualified stock options shares common stock restricted stock awards may 1997 board directors stockholders company approved 750000 increase shares reserved 1995 plan june 1998 june 2000 june 2002 board directors stockholders company approved increases 1500000 1250000 1350000 respectively shares reserved 1995 plan may 2004 board directors stockholders company approved 2004 stock option plan “2004 plan” reserved 2500000 shares issuance thereunder 2004 plan permits award incentive stock options nonstatutory stock options june 2005 board directors stockholders company approved increase maximum number shares issuable 2004 plan 2300000 shares total 4800000 shares board directors stockholders also approved amendments 2004 plan expand types stockbased incentives authorized 2004 plan restate 2004 plan 2005 equity incentive plan “2005 plan” 2005 equity incentive plan permits grant incentive stock options nonstatutory stock options stock appreciation rights stock purchase rights stock bonuses restricted stock units performance shares performance units options granted fair market value date grant expire ten years date grant 1991 1992 1995 2005 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years although 1991 1992 1995 plans expired outstanding options relating fully valid june 1995 board directors stockholders company approved 1995 nonemployee director stock option plan “nonemployee director plan” reserved 250000 shares issuance thereunder june 2000 june 2002 board directors stockholders company approved increase 250000 shares reserved issuance nonemployee director plan may 2004 board directors stockholders company approved 2004 outside directors stock option plan reserved 465000 shares issuance thereunder nonemployee director stock option plan canceled 2004 outside directors stock option plan automatically grants nonqualified stock options nonemployee directors upon appointment first election company’s board directors “initial grant” annually upon reelection board directors company’s annual meeting stockholders “annual grant” options granted fair market value date grant expire ten years date grant initial grants become exercisable three equal annual installments beginning first anniversary date grant annual grants become exercisable twelve equal monthly installments date grant subject case outside director’s continuous service board directors june 2005 board directors stockholders company approved increase maximum number shares issuable 2004 outside directors stock option plan 550000 shares total 1015000 shares following table summarizes stock option activity 1991 1992 1995 2005 stock option plans nonemployee director plan 2004 outside director stock option plan aggregate intrinsic value table represents value company’s closing stock price last trading day fiscal year excess exercise price multiplied number options outstanding exercisable intrinsic value options time exercise 112000 1668000 2000 years ended december 31 2006 2005 2004 respectively estimated fair value shares vested years ended december 31 2006 2005 2004 2674000 2744000 4373000 respectively following table summarizes information concerning outstanding exercisable options december 31 2006 following table illustrates allocation compensation cost related stock options employee stock purchases income statement line items year december 31 result adopting fas 123r january 1 2006 income operations net income year ended december 31 2006 approximately 2446000 lower continued account sharebased compensation apb 25 basic diluted income per share year ended december 31 2006 007 lower company continued account sharebased compensation apb 25 total compensation cost capitalized inventory approximately 108000 year ended december 31 2006 weightedaverage assumptions used blackscholes option valuation model calculate estimated fair values date grant 2006 2005 2004 resulting weightedaverage expected life weightedaverage fair value stock options granted stock purchases periods follows expected term options granted derived historical data employee exercises terminations riskfree interest rate based us treasury yield curve effect time grant expected volatility based historical volatility stock expected dividend assumption based company’s history expectations dividend payouts july 1996 board directors stockholders company approved 1996 employee stock purchase plan “espp” reserved 500000 shares issuance thereunder june 2003 board directors stockholders company approved increase 500000 shares reserved issuance 1996 employee stock purchase plan fulltime employees eligible participate espp terms espp employees could choose 15 salary withheld purchase companys common stock purchase price stock 85 lower fair market value first last trading day quarterly participation period january 2006 board directors amended espp provide offering period commencing january 31 2006 purchase price stock shall equal 95 fair market value share company’s common stock purchase date amount may established board accordingly fair value calculation performed purchases subsequent january 31 2006 amended plan noncompensatory fas 123r espp company sold 22454 80113 124798 shares employees 2006 2005 2004 respectively december 31 2006 unamortized compensation expense related unvested options approximately 4000000 weighted average period compensation expense related options recognized 209 years reserved shares december 31 2006 company reserved shares common stock future issuance follows stockholder rights agreement december 18 2006 company’s board directors declared dividend distribution one preferred stock purchase right collectively “rights” outstanding share company’s common stock right entitles registered holder purchase company one onethousandth share company’s series preferred stock 0001 par value price 2500 pursuant rights agreement dated december 19 2006 company mellon investor services llc “rights agreement” rights initially trade common stock become exercisable person group acquires 15 company’s common stock without prior board approval event rights permit company’s stockholders acquiror purchase company’s common stock market value twice exercise price rights lieu preferred stock alternatively rights become exercisable company’s board directors may authorize issuance one share company’s common stock exchange right exercisable addition event certain business combinations rights permit purchase common stock acquiror 50 discount rights held acquiror become null void case prior person group acquiring 15 rights redeemed 0001 action board rights agreement contains exception 15 ownership threshold shares currently beneficially owned sigmatau finanziaria spa rights expire december 19 2016 rights agreement includes requirement committee independent directors evaluate rights agreement least every three years “tide” provision note 13 ceo agreements june 2 2006 dr friedhelm blobel became president ceo joined board directors dr ira lawrence resigned president ceo became consultant company dr lawrence also continues serve director company serves member business development committee medical review committee board directors accordance dr lawrence’s separation agreement unvested stock options cancelled options purchase 200000 shares vested time services ceo exercisable term provided dr lawrence continues service consultant director company entered employment agreement dr lawrence effective june 1 2005 employment agreement included award option purchase 400000 shares company’s common stock 297 per share closing price nasdaq stock market llc formerly nasdaq national market share company’s common stock june 1 2005 option term 10 years 25 second option would vest upon company’s common stock trading june 1 2005 least 30 consecutive calendar days greater target closing stock price reported nasdaq stock market llc 450 june 1 2008 b 600 june 1 2009 c 800 june 1 2010 1000 june 1 2011 price adjusted stock dividends stock splits similar changes company’s capital structure apb 25 company recognized noncash expense related stock price performance based option granted dr lawrence june 1 2005 date commenced employment terms option required application variable accounting related noncash expense recognized effected price level trading activity stock company recognized noncash expense vesting portion option determined probable year ended december 31 2005 market price company’s common stock price closed 450 least 30 consecutive calendar days thus triggering vesting 25 shares underlying option therefore company recognized 423000 noncash expense attributable vesting 2005 year ended december 31 2006 expense related option recognized company remaining unvested shares forfeited upon dr lawrence’s departure company sfas 123 option considered target stock price award therefore grant date fair values related four vesting portions award calculated related expense included sfas 123 pro forma expense disclosure derived service periods four vesting portions award aggregate fair value award estimated 691000 date grant using monte carlo simulation option pricing model following assumptions riskfree interest rate 4097 dividend yield 0 volatility factor 74 expected life 10 years fair values four vesting portions awards 186000 173000 166000 amortized related derived service periods 13 21 28 36 months respectively years ended december 31 2005 2004 approximately 232000 0 respectively expense included sfas 123 pro forma expense see note 1 significant accounting policies accounting stockbased compensation new ceo agreement dr blobel effective june 2 2006 board directors obligated 2008 consider award dr blobel special cash bonus 300000 based achievement previously agreed upon performance targets years 20062008 company estimate probable amount longterm incentive bonus quarterly basis order accrue bonus related performance period year ended december 31 2006 company accrued approximately 68000 relating special cash bonus expenses related agreement dr blobel recorded general administrative expenses employment agreement dr blobel also includes two option awards first option award purchase 400000 shares company’s common stock exercise price per share equal closing price nasdaq stock market llc share company’s common stock june 2 2006 option term ten years vest annual installments first four anniversaries june 2 2006 company recognizing compensation cost options based grantdate fair value estimated accordance provision fas 123r company amortizing compensation cost vesting period four years using straight line attribution method second option award granted dr blobel purchase 600000 shares company’s common stock exercise price per share equal closing price nasdaq stock market llc share company’s common stock june 2 2006 option term 10 years shares option vest upon company’s common stock trading june 2 2006 least 30 consecutive calendar days greater target closing stock price reported nasdaq stock market llc 450 june 2 2009 100000 shares b 600 june 2 2010 100000 shares c 800 june 2 2011 100000 shares 1000 june 2 2012 100000 shares e 1200 june 2 2013 100000 shares f 1400 june 2 2014 100000 shares price adjusted stock dividends stock splits similar changes company’s capital structure second option grant considered award market service conditions market conditions considered performance conditions therefore compensation expense recognized option market conditions long service requirements met even market condition reached therefore grant date fair values related six vesting portions award calculated related compensation costs expensed service periods six vesting portions award year ended december 31 2006 company recorded 265000 compensation expense related award note 14 401k plan company pretax savings plan covering substantially us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions 15 employees salary company contributions terminated companys discretion approximately 200000 170000 161000 years ended december 31 2006 2005 2004 respectively note 15 income april 3 2006 company announced resolution dispute schering plough kk spkk concerning clinical trials conducted japan zadaxin terms settlement spkk paid sciclone 8000000 april 18 2006 recorded income year ended december 31 2006 note 16 significant geographic information company operates one business segment development commercialization novel therapeutics treat chronic life threatening diseases december 31 2006 company’s revenues generated sale zadaxin president ceo identified chief operating decision makers “codm” final authority resource allocation decisions performance assessment codm receive discrete financial information level business segment companys domestic operations primarily consist product development companys wholly owned international subsidiary sciclone pharmaceuticals international ltd engaged sales marketing product distribution worldwide information regarding geographic areas follows two customers accounted 10 total revenues 66 15 aggregate 81 total revenues year ended december 31 2006 three customers accounted 10 total revenues 57 19 15 aggregate 91 total revenues year ended december 31 2005 three customers accounted 10 total revenues 32 29 23 aggregate 84 total revenues year ended december 31 2004 customer accounted 10 total revenues years note 17 selected quarterly financial data unaudited 1 three months ended december 31 2006 company recorded 929000 royalty expense related license agreement 2 april 2006 company received 8000000 resolution dispute schering plough kk item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc index consolidated financial statements page report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statement stockholders’ equity consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 2008 2007 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2008 audits also included financial statement schedule listed item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 2008 2007 consolidated results operations cash flows three years period ended december 31 2008 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states sciclone pharmaceuticals inc’s internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated march 13 2009 expressed adverse opinion effectiveness internal control financial reporting ernst young llp palo alto california march 13 2009 sciclone pharmaceuticals inc consolidated balance sheets see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements operations see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statement stockholders’ equity see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies company sciclone pharmaceuticals inc “sciclone” “company” pharmaceutical company engaged development commercialization therapeutics treat lifethreatening diseases company’s lead product zadaxin® currently evaluated melanoma clinical trial approved sale certain international locations sold primarily china company’s whollyowned subsidiary sciclone pharmaceuticals international ltd 2007 company acquired exclusive rights united states canada develop commercialize rp101 clinicalstage compound treatment cancer initiated phase 2 rp101 clinical trial first patient phase 2 rp101 clinical trial dosed january 2008 company’s proprietary inlicensed compound scv07 entered phase 2 clinical development viral infectious disease june 2007 treatment oral mucositis december 2008 2006 company inlicensed chinese marketing rights dc beadtm product treatment liver cancer hepatocellular carcinoma submitted regulatory application chinese state food drug administration related product presentation consolidated financial statements include accounts company wholly owned subsidiaries sciclone pharmaceuticals international ltd spil sciclone pharmaceuticals international china holding ltd sciclone pharmaceuticals china ltd sciclone italy srl sciclone japan kk sciclone brasilprodutos farmaceuticos ltda spil registered cayman islands principal office located hong kong sciclone pharmaceuticals international china holding ltd registered cayman islands principal office located hong kong sciclone pharmaceuticals china ltd registered china principal office located shanghai sciclone italy srl registered italy principal office located rome sciclone japan kk registered japan principal office located tokyo sciclone brasil registered brazil principal office located sao paulo significant intercompany accounts transactions eliminated revenue recognition company recognizes revenue product sales time delivery significant customer acceptance requirements postshipment obligations part except sales new market acceptance requirements met sales importing agents distributors recognized time shipment title product transferred importing agents distributors contractual rights return except limited terms regarding product quality however company expected replace products expired deemed damaged defective delivered company estimates expected returns primarily historical patterns historically company product returns damaged defective expired product amount accrued product returns december 31 2008 2007 respective consolidated balance sheets payments importing agents distributors contingent upon sale end user importing agents distributors amounts invoiced relating arrangements collectibility uncertain revenue cannot recognized reflected company’s balance sheet deferred revenue recognized applicable revenue recognition criteria satisfied contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement company recognized earlier payments received collection assured revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment use estimates preparation financial statements conformity us generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents investments cash equivalents consist highly liquid investments maturities three months less date purchase company classifies investment portfolio availableforsale trading securities company records investments fair value determined available market information balance sheet company’s availableforsale portfolio primarily consists certificates deposit corporate equity securities restricted longterm italian state bonds company’s availableforsale certificate deposit 120000 secures company’s letter credit required european value added tax filing arrangements company’s trading portfolio consists longterm auctionrate securities ars company transferred ars “availableforsale” “trading” december 31 2008 intent trade ars desire account ars fair value changes fair value reported earnings occur unrealized gains losses availableforsale securities included accumulated comprehensive income consolidated balance sheet realized gains losses availableforsale trading securities declines value judged temporary availableforsale securities determined basis specific identification included expense years ended december 31 2008 2007 2006 net change unrealized loss gains approximately 102000 22000 25000 availableforsale securities respectively included accumulated comprehensive income 2008 net change unrealized losses foreign currency translation foreigndenominated availableforsale securities 60000 included accumulated comprehensive income company evaluates investments impairment reporting period accordance fsp fas 1151 meaning otherthantemporary impairment application certain investments fsp fas 1151 fsp fas 1151 provides guidance determining investment considered impaired whether impairment otherthantemporary measurement impairment loss investment considered impaired fair value investment less cost consideration available evidence evaluate realizable value investment impairment determined otherthantemporary impairment loss recognized consolidated statement operations equal difference investment’s cost fair value year ended december 31 2008 company recorded otherthantemporary impairment otti charge related ars 315000 refer notes 2 3 consolidated financial statements additional information regarding otti charge realized gains losses year ended december 31 2008 company’s investments years ended december 31 2007 2006 realized gains losses recorded company’s investments fair value financial instruments company adopted provisions financial accounting standards board fasb statement 157 “fair value measurements” sfas 157 effective january 1 2008 february 2008 fasb issued fasb staff position fas 1572 “effective date fasb statement 157” provides one year deferral effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed financial statements fair value least annually therefore company deferred adoption sfas 157 relates non financial assets liabilities sfas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles enhances disclosures fair value measurements fair value defined sfas 157 exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date valuation techniques used measure fair value sfas 157 must maximize use observable inputs minimize use unobservable inputs standard describes fair value hierarchy based three levels inputs first two considered observable last unobservable may used measure fair value company’s assessment significance particular input fair value measurements requires judgment may affect valuation assets liabilities measured placement within fair value hierarchy three levels input level 1quoted prices active markets identical assets liabilities level 2inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3unobservable inputs supported little market activity significant fair value assets liabilities adoption statement material impact company’s consolidated results operations financial condition effective january 1 2008 company also adopted sfas 159 “the fair value option financial assets financial liabilities” sfas 159 sfas 159 allows entity irrevocable option elect fair value initial subsequent measurement specified financial assets liabilities contractbycontract basis company elected adopt fair value accounting sfas 159 initial recognition put option recorded assets company’s consolidated balance sheet information refer notes 2 3 form 10k following description company’s valuation methodologies assets liabilities measured fair value quoted prices available active market fair value based upon quoted market prices classified level 1 valuation hierarchy level 1 securities include money market funds us term deposits corporate equity securities restricted longterm italian state bonds quoted market price available fair value based upon observable inputs quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities classified level 2 valuation hierarchy level 2 securities include company’s certificate deposit quoted prices observable inputs unavailable fair values based internally developed cash flow models classified level 3 valuation hierarchy internally developed cash flow models primarily use inputs estimates interest rates discount rates including yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods assets inputs reflect company’s assumptions market participants would use pricing assets including assumptions risk developed based best information available circumstances level 3 securities include ars company’s put option financial instruments including accounts receivable accounts payable accrued liabilities carried cost company believes approximates fair value shortterm maturity instruments inventories consist raw materials work progress finished goods products inventories stated lower cost market cost determined firstin firstout basis company periodically reviews inventory order identify obsolete items obsolete items observed alternate uses inventory company record writedown net realizable value period impairment first recognized property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets three five years straightline basis leasehold improvements amortized shorter estimated useful life lease term straightline basis intangible assets intangible assets definite lives amortized estimated useful lives reviewed impairment facts circumstances suggest carrying value assets may recoverable company’s policy identify record impairment losses necessary intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets company date identified impairment losses assets although company history operating losses negative cash flow company believes impairment intangible assets zadaxin approved sale several countries principally treatment hepatitis b virus based company’s anticipated financial results future zadaxin sales determined expected future cash flows exceed carrying amount assets foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using rates exchange effect period gains losses translation financial statements denominated foreign currencies included separate component accumulated comprehensive income statement stockholders’ equity company records foreign currency transactions exchange rate prevailing date transaction resultant gains losses included results operations foreign currency transaction gains losses significant period presented research development expenses effective january 1 2008 company adopted emerging issues task force eitf issue 073 “accounting nonrefundable advance payments goods services used future research development activities” eitf 073 accordance eitf 073 nonrefundable advance payments goods services received future use research development activities deferred capitalized amounts expensed related goods delivered services performed adoption material impact company’s consolidated results operations financial condition research development expenses principally incurred company’s clinical trials including cost sharing sigmatau’s clinical trial europe using zadaxin part novel triple therapy combination treatment hepatitis c virus hcv phase 2 clinical trials rp101 scv07 company’s development plans phase 3 clinical trial malignant melanoma research development expenditures charged operations incurred cost accruals clinical trials based estimates services received efforts expended pursuant contracts numerous institutions conduct clinical trials company’s behalf financial terms agreements subject negotiation vary contract may result uneven payment flows payments contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses actual services received efforts expended expenses related grants institutions conduct clinical trials company’s behalf accrued based level patient enrollment activity according protocol expenses relating clinical research organization entities managing trials laboratory direct expenses recognized period estimated incurred services performed company monitors active patient enrollment levels related activity extent possible adjusts estimates accordingly major components research development expenses consist clinical development performed company’s behalf institutions contract research organizations sharing certain costs sigmatau’s clinical development zadaxin personnel costs including salaries benefits preclinical work pharmaceutical development materials supplies third party research funding overhead allocations consisting various administrative facilities related costs shipping handling costs related shipping handling included cost sales periods presented advertising expenses company expenses advertising costs incurred costs included sales marketing expenses periods presented advertising expenses years ended december 31 2008 2007 2006 243000 403000 221000 respectively income taxes income taxes accounted liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date deferred tax assets reduced valuation allowance opinion management likely deferred tax assets may realized accordingly net deferred tax assets fully offset valuation allowance net loss income per share basic net loss income per share computed dividing net loss income weightedaverage number shares common stock outstanding period diluted net loss income per share computed dividing net loss income weightedaverage number common equivalent shares outstanding period diluted net loss income per share includes dilutive impact stock options outstanding using treasury stock method following reconciliation numerator denominators basic diluted net loss income per share computations years ended december 31 2008 2007 2006 approximately 7968269 7324688 6903336 shares respectively related outstanding options excluded calculation diluted net loss income per share inclusion would antidilutive stockbased compensation company applies statement financial accounting standards fas 123r “sharebased payment” fas 123r stockbased payment transactions company receives employee services exchange its’ equity instruments employee stockbased compensation estimated date grant based employee stock award’s fair value using blackscholes optionpricing model recognized expense ratably requisite service period generally four years blackscholes optionpricing model requires use certain subjective assumptions significant assumptions company’s estimate expected volatility market price stock expected term award establishing estimate expected term award company considers vesting period award recent historical experience employee stock option exercises including forfeitures expected volatility required accounting rules company reviews valuation assumptions grant date result valuation assumptions used value employee stockbased awards granted future periods may change compared assumptions used current period company recognized expect recognize near future tax benefit related employee stockbased compensation cost refer also note 14 “stockholders’ equity” notes consolidated financial statements information regarding stockbased compensation comprehensive income comprehensive income comprised net loss income comprehensive income loss following table summarizes components accumulated comprehensive income segment information company operates one segment see note 18 concentration credit risk people’s republic china uses tiered method import distribute products distributors make sales country product imported licensed importers years ended december 31 2008 2007 sales three importing agents china accounted 94 92 respectively company’s product sales year ended december 31 2006 sales four importing agents china accounted 92 company’s product sales 2008 two largest customers accounted 68 22 sales respectively 2007 two largest customers accounted 63 21 sales respectively 2006 two largest customers accounted 66 15 sales respectively customer accounted 10 sales 2006 2007 2008 december 31 2008 approximately 11420000 96 company’s accounts receivable attributable two importing agents china company performs ongoing credit evaluations customers’ financial condition generally require collateral customers company maintains reserves credit losses within management’s expectation company recognizes reserves bad debts ranging 25 100 based length time receivables past contractual payment due dates company’s collection experience recent accounting pronouncements december 2007 fasb released emerging issues task force eitf issue 071 accounting collaboration arrangements related development commercialization intellectual property” eitf 071 focuses parties collaborative arrangement account costs incurred revenue generated sales third parties sharing payments pursuant collaboration agreement presented income statement certain related disclosure questions eitf 071 effective fiscal years beginning december 15 2008 adoption eitf 071 expected material impact company’s results operations financial position note 2 cash equivalents investments following summary cash equivalents availableforsale trading securities december 31 2008 availableforsale securities included 69000 restricted shortterm investment 100000 shortterm investments 388000 restricted longterm investments december 31 2007 72000 restricted shortterm investment 3392000 shortterm investments held availableforsale securities company believes unrealized losses availableforsale investments temporary attributable recent economic slowdown company intends hold investments recovery december 31 2008 company held 1800000 cost ars trading securities reclassified availableforsale securities year ended december 31 2008 ars investments contractual maturities generally 0 34 years whose underlying assets student loans substantially backed federal government interest rates resetting approximately every 30 days auction process end reset period investors may sell continue hold securities par company’s ars rated one major independent rating agencies either aaa historically company’s ars highly liquid using “dutch” auction process reset applicable interest rate predetermined intervals typically every 30 days turn provided liquidity par value however result liquidity issues global credit capital markets auctions company’s ars failed beginning february 2008 sell orders exceeded buy orders december 31 2008 continues auction market company’s ars failures auctions affect value collateral underlying ars company continues earn interest ars failure auctions company able liquidate ars issuer calls security successful auction occurs buyer found outside auction process security matures based company classified ars longterm assets consolidated balance sheet december 31 2008 november 2008 company accepted auction rate securities rights offer rights offer ubs ag return general release claims grant right ubs ag purchase company’s ars time full par value company received right require ubs ag purchase par value 1800000 company’s ars beginning 2010 rights nontransferable upon acceptance company granted ubs ag sole discretion right sell dispose andor enter orders auction process respect eligible ars company’s behalfwithout prior notification company ubs ag long company receives payment par upon sale disposition company expects sell ars rights however rights exercised july 2 2012 expire ubs rights obligation buy company’s ars enforceability rights results creation asset akin put option company right “put” ars back ubs specified date payment equal par value ars put option free standing asset separate ars company recorded put option fair value 285000 assets accompanying consolidated balance sheet december 31 2008 put option meet definition derivative instrument sfas 133 terms put option provide net settlement ie company must tender ars receive settlement ars readily convertible cash company elected apply sfas 159 upon initial recognition put option permits company measure put option fair value company’s fair value election intended create accounting symmetry fair value accounting ars company expects future changes fair value put option approximate fair value movements related ars company estimates fair value put option based discounted cash flow model assumptions used preparing discounted cash flow model include estimates interest rates estimates discount rates using yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods ars inputs reflect company’s assumptions risk developed based best information available circumstances year ended december 31 2008 company recorded 285000 gain income related fair value put option ars recorded estimated fair value 1485000 december 31 2008 based discounted cash flow model assumptions used preparing discounted cash flow model include estimates interest rates estimates discount rates using yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods ars inputs reflect company’s assumptions market participants would use pricing ars including assumptions risk developed based best information available circumstances upon company’s acceptance rights company determined decrease fair value ars otherthantemporary company longer intent hold ars recovery therefore company recorded otti charge investments 315000 december 31 2008 expense previously included unrealized loss accumulated comprehensive income component shareholders’ equity due ars classified trading securities unrealized gains losses included earnings future periods although company recorded realized loss 315000 ars gain 285000 related put option year ended december 31 2008 respectively company expects receive ars par value 1800000 2010 related rights offer note 3 fair value measurements accordance sfas 157 following table represents company’s fair value hierarchy financial assets cash equivalents investments assets measured fair value recurring basis december 31 2008 following table provides summary changes fair value company’s level 3 financial assets december 31 2008 company realized otherthantemporary loss 315000 related ars included expense income statement operations year ended december 31 2008 longer intent hold ars recovery result acceptance rights addition company classified investments longterm consolidated balance sheet december 31 2008 company realized gain 285000 related recording put option fair value included expense income statement operations year ended december 31 2008 company unrealized losses year ended december 31 2008 relating assets company utilized level 3 inputs determine fair value still held company december 31 2008 note 3 inventories consisted following note 4 prepaid expenses current assets following summary prepaid expenses current assets note 5 property equipment property equipment consisted following depreciation expense years ended december 31 2008 2007 2006 252000 178000 157000 respectively note 6 intangible assets intangible assets included following acquired zadaxin product rights amortized straightline basis estimated useful lives amortization expense years ended december 31 2008 2007 2006 70000 per year years 2009 2012 expected 70000 per year based upon progress zadaxin clinical trials company’s actual experience product sales company assessed acquired product rights useful company 2012 first european patent use zadaxin treatment hepatitis c expires company reassesses useful life assets accordance current facts circumstances note 7 assets following summary assets note 8 accrued expenses following summary accrued expenses note 9 lineofcredit november 2008 company subsidiaries spil china borrowers entered loan security agreement unconditional guaranty security agreement silicon valley bank company may borrow 6000000 “credit facility” credit facility lineofcredit permits borrowing 6000000 term 36 months subject certain sublimits including 2500000 letters credit facility secured first priority secured interest company’s assets intellectual property credit insurance policy insuring certain foreign account receivable assets company parent spil china guarantor credit facility line credit bears interest bank’s prime rate 4 plus 175 575 december 31 2008 outstanding balances subsequent november 14 2009 company subject unused line fee minimum monthly interest company required meet certain financial covenants including minimum consolidated revenue minimum consolidated earnings interest income tax defined company also required meet certain operating covenants limit ability incur liabilities create liens make capital expenditures pay dividends distributions make investments dispose assets company capitalized 177000 costs associated origination facility amortized expense term loan agreement company also capitalized 126000 credit insurance premiums related line credit amortized policy period line credit expires november 2011 upon termination amounts borrowed must repaid full connection line credit company issued silicon valley bank fiveyear warrant purchase 60000 shares company’s common stock exercise price 086 per share accordingly company recorded cost fair value warrants issued using blackscholes option pricing model following assumptions riskfree interest rate 229 dividend yield 0 volatility factor 6840 expected term 5 years resulting warrant value 30000 amortized term line credit december 31 2008 outstanding borrowings line credit 6000000 available future borrowing note 10 related party transactions company licensed sigmatau exclusive zadaxin development marketing rights cover countries european union defined january 1 1995 addition iceland norway switzerland sigmatau affiliated persons stockholders company time transaction entered currently company’s largest shareholder agreement sigmatau conducted multicenter phase 3 hepatitis c triple therapy clinical trial europe 553 patients objective european trial provide data zadaxin’s use part triple therapy treating hcv patients company paid sigmatau approximately 2509000 december 31 2008 funding support course patient enrollment trial period company also pay 1500000 milestone payment upon completion final report based level activity trial company recorded approximately 322000 507000 1750000 research development expense related trial years ended december 31 2008 2007 2006 respectively december 31 2008 2007 company accrued clinical trial expenses 1442000 1620000 respectively due sigmatau agreement sigmatau related clinical development zadaxin company received 2685000 first quarter 2002 contract revenue recognized estimated time complete zadaxin us phase 3 hcv clinical trials deliver clinical data substantive performance requirements contact year ended december 31 2006 company recognized remaining contract revenue 229000 related agreement note 11 longterm liabilities following summary longterm liabilities longterm deferred rent relates company’s noncancelable office lease agreements refer note 13 “commitments contingencies” information matter note 12 income taxes company adopted provisions fasb interpretation 48 accounting uncertainty income taxes fin 48 interpretation fasb statement 109 sfas 109 january 1 2007 implementation fin 48 impacted company’s consolidated financial statements january 1 2007 december 31 2008 company unrecognized tax benefits company’s policy recognize accrued interest penalties unrecognized tax benefits component tax expense years ended december 31 2008 2007 2006 interest penalties included component tax expense unrecognized tax benefits tax years 19962007 remain open examination major taxing jurisdictions company subject company recorded federal state income tax expense years ended december 31 2008 2007 2006 undistributed earnings company’s foreign subsidiaries amounted approximately 23521000 december 31 2008 earnings considered permanently reinvested accordingly deferred us income taxes provided thereon domestic foreign components pretax loss income years ended december 31 follows reconciliation statutory federal income tax rate 34 actual tax rate years ended december 31 follows significant components company’s deferred tax assets december 31 follows valuation allowance increased approximately 13050000 811000 3353000 years ended december 31 2008 2007 2006 respectively deferred tax assets relating net operating loss carryforwards december 31 2008 2007 include approximately 3056000 3054000 respectively associated stock option activity subsequently recognized tax benefits credited directly stockholders’ equity company deferred tax liabilities december 31 2008 2007 december 31 2008 company net operating loss carryforwards federal income tax purposes approximately 144102000 expire years 2009 2028 december 31 2008 company federal tax credit carryforwards approximately 8686000 expire years 2009 2028 december 31 2008 company state net operating loss carryforwards approximately 20493000 available reduce future taxable income carryforwards begin expire 2014 utilized addition company research development tax credit carryforwards approximately 1432000 state tax purposes december 31 2008 tax credit carryforwards carried forward indefinitely utilized provision income tax 475000 301000 years ended december 31 2008 2007 respectively related company’s operations people’s republic china company’s statutory tax rate people’s republic china 18 “change ownership” provisions internal revenue code portion company’s net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities note 13 commitments contingencies leases may 2007 company entered noncancelable operating lease agreement main office facility lease effective july 1 2007 june 30 2014 september 2008 company entered amendment lease additional office space expansion agreement expires june 30 2014 lease expansion agreement contain rent escalations approximately 4 6 per year respectively company recognizing rental expense straightline basis lease terms lease expansion agreement company provided allowances amounts approximately 206000 482000 respectively towards cost leasehold improvements incentive rent respectively accordance fasb technical bulletin 881 “issues relating accounting leases time pattern physical use property operating lease incentives operating lease applicability leveraged lease accounting existing assets lessor moneyovermoney lease transactions wrap lease transactions” company recorded allowances deferred rent amortized lease terms reduction rent expense leases require company pay insurance taxes prorata share operating expenses december 31 2008 company recorded 113000 768000 shortterm longterm deferred rent respectively december 31 2007 company recorded 29000 194000 shortterm longterm deferred rent respectively company also leases various office facilities abroad equipment noncancelable lease agreements subleases certain real property third party rent expense years ended december 31 2008 2007 2006 1095000 1408000 1625000 respectively future minimum lease payments sublease rental income facility equipment operating lease agreements december 31 2008 follows purchase obligations december 31 2008 company obligated pay research development fees amount 1500000 sigmatau upon completion hcv clinical trial europe amount expected paid 2009 license royalty obligations april 2007 company acquired exclusive rights united states canada develop commercialize rp101 clinicalstage compound treatment cancer terms agreements resistys inc whollyowned subsidiary avantogen oncology inc resprotect gmbh resprotect company may required pay post phase 3 successbased regulatory commercial milestone payments 22000000 royalties future sales company entered agreement pharmaceuticals research associates inc pra clinical trials management services randomized double blind placebo controlled phase 2 study evaluating efficacy safety rp101 treatment pancreatic cancer estimated cost pra’s management services passthrough costs 8500000 4000000 respectively 6728000 paid pra company another 54000 due payable december 31 2008 company also entered supply agreement resprotect purchase rp101 resprotect clinical trials commercial purposes following regulatory approval terms supply agreement company resprotect share scaleup costs required manufacture rp101 prior fda approval company’s share scaleup costs estimated 1448000 june 2010 1228000 1878000 paid company resprotect december 31 2008 leaving balance approximately 220000 307000 based upon december 31 2008 conversion rates october 2008 company wayne state university wsu amended terms license agreement license agreement entered 1994 amended 2003 resolve questions regard royalties owed prior periods license agreement allows company maintain exclusive license certain wsu patents regarding use thymosin alpha 1 treatment hepatitis b hepatitis c company obligated pay wsu royalty subject certain minimum amounts percentage zadaxin net sales revenue treatment hepatitis b hepatitis c certain countries including united states european union japan including china result amended license agreement company paid wsu royalties 150000 november 2008 addition certain minimum royalty payments following sales zadaxin certain territories reset zero time company achieves major market approval zadaxin us japan europe company reduced prepaid royalties estimated realizable amount balance sheet december 31 2008 impact company’s consolidated statement operations significant parties also agreed amended license agreement amounts owed either party past periods patent license agreement dated august 28 1997 fitzsimons army medical center us army “us army” relating zadaxin company obligated pay us army minimum annual royalty 20000 per year company makes commercial sale zadaxin treatment chronic hepatitis c company obligated make payments equal 1 12 net sales certain countries including us european union mexico russia japan including china licensed patent issued us army remains force subject minimum annual royalty 50000 years 2007 2006 company paid minimum annual royalty 20000 per year us army result commercial sale zadaxin russia 2008 company make payment 2008 royalties based 1 12 net sales countries patent issued remains force subject minimum 50000 per year company accrued royalties 264000 recorded accrued expenses consolidated balance sheet december 31 2008 reflect amounts due us army related agreement severance obligation april 4 2008 company’s former executive vice president chief financial officer resigned company resignation became effective april 30 2008 connection resignation company entered agreement former executive vice president chief financial officer available consult company limited capacity april 30 2009 retained right exercise vested options oneyear consulting period entitled payments aggregate amount 345000 payable approximately oneyear period addition payments salary bonus deemed earned date termination employment december 31 2008 106000 remains accrued compensation employee benefits included company’s consolidated balance sheet related agreement note 14 stockholders’ equity july 18 2003 company reincorporated california corporation delaware corporation merging company california corporation sciclone pharmaceuticals inc delaware corporation whollyowned subsidiary company share outstanding stock california corporation automatically exchanged like share stock delaware corporation stock award plans 1991 stock plan “1991 plan” reserved 3450000 shares issuance thereunder 1991 plan permits award incentive nonqualified stock options shares common stock restricted stock purchase agreements 1992 stock plan “1992 plan” reserved 240000 shares issuance thereunder 1992 plan permits award incentive nonqualified stock options must exercised cash 1995 equity incentive plan “1995 plan” reserved 6100000 shares issuance thereunder 1995 plan permits award incentive nonqualified stock options shares common stock restricted stock awards 2004 stock option plan “2004 plan” reserved 4800000 shares issuance thereunder board directors stockholders also approved amendments 2004 plan expand types stockbased incentives authorized 2004 plan restate 2004 plan 2005 equity incentive plan “2005 plan” 2005 equity incentive plan permits grant incentive stock options nonstatutory stock options stock appreciation rights stock purchase rights stock bonuses restricted stock units performance shares performance units options granted fair market value date grant expire ten years date grant june 2007 board directors stockholders company approved increase 3000000 shares reserved 2005 plan 1991 1992 1995 2005 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years although 1991 1992 1995 plans expired outstanding options relating fully valid june 1995 board directors stockholders company approved 1995 nonemployee director stock option plan nonemployee director plan reserved 250000 shares issuance thereunder june 2000 june 2002 board directors stockholders company approved increase 250000 shares reserved issuance nonemployee director plan may 2004 board directors stockholders company approved 2004 outside directors stock option plan reserved 465000 shares issuance thereunder nonemployee director stock option plan canceled 2004 outside directors stock option plan automatically grants nonqualified stock options nonemployee directors upon appointment first election company’s board directors initial grant annually upon reelection board directors company’s annual meeting stockholders annual grant options granted fair market value date grant expire ten years date grant initial grants become exercisable three equal annual installments beginning first anniversary date grant annual grants become exercisable twelve equal monthly installments date grant subject case outside director’s continuous service company’s board directors june 2005 2007 board directors stockholders company approved increase maximum number shares issuable 2004 outside directors stock option plan 550000 750000 shares respectively total 1765000 shares company entered change control agreements certain employees provide accelerated vesting options change control occur following table summarizes stock option activity 1991 1992 1995 2005 stock option plans nonemployee director plan 2004 outside director stock option plan aggregate intrinsic value table represents value company’s closing stock price last trading day fiscal year excess exercise price multiplied number options outstanding exercisable intrinsic value options time exercise 59000 114000 112000 years ended december 31 2008 2007 2006 respectively cash received stock option exercises 146000 241000 221000 years ended december 31 2008 2007 2006 respectively following table summarizes information concerning outstanding exercisable options december 31 2008 stockbased compensation company granted vice president business development performancebased option purchase 50000 shares company’s common stock exercise price per share 173 equal closing price share company’s common stock august 11 2008 option fully vest upon employee meeting performance goal december 31 2009 performance goal met option ten year term measured date grant performance goal met december 31 2009 option expires entirety grant date fair value per share award 099 calculated using blackscholes option pricing model following assumptions riskfree interest rate 3066 dividend yield 0 volatility factor 6714 expected term 483 years since date grant december 31 2008 company recorded stockbased compensation expense related award company recognize expense event company determines probable performance goal achieved company granted senior vice president finance chief financial officer performancebased option purchase 75000 shares company’s common stock exercise price per share 095 equal closing price share company’s common stock december 16 2008 option fully vest upon employee meeting performance goal december 31 2010 performance goal met option ten year term measured date grant performance goal met december 31 2010 option expires entirety grant date fair value per share award 055 calculated using blackscholes option pricing model following assumptions riskfree interest rate 2121 dividend yield 0 volatility factor 6906 expected term 483 years since date grant december 31 2008 company recorded stockbased compensation expense related award company recognize expense event company determines probable performance goal achieved fair value non performancebased non target stockprice based option granted plans estimated date grant using blackscholes option valuation model single option approach weighted average assumptions riskfree interest rate based us treasury yield curve effect time grant expected dividend assumption based company’s history expectations dividend payouts expected volatility based historical volatility company’s stock expected term options granted derived historical data employee exercises terminations total compensation cost capitalized inventory approximately 49000 85000 108000 respectively years ended december 31 2008 2007 2006 weightedaverage fair value stock options granted years ended december 31 2008 2007 2006 098 158 137 respectively estimated fair value shares vested years ended december 31 2008 2007 2006 1639000 1916000 2674000 respectively december 31 2008 unamortized compensation expense related unvested options approximately 2768000 weighted average period compensation expense related options recognized 366 years employee stock purchase plan july 1996 board directors stockholders company approved 1996 employee stock purchase plan “espp” reserved 500000 shares issuance thereunder june 2003 board directors stockholders company approved increase 500000 shares reserved issuance 1996 employee stock purchase plan fulltime employees eligible participate espp terms espp employees could choose 15 salary withheld purchase company’s common stock purchase price stock 85 lower fair market value first last trading day quarterly participation period january 2006 board directors amended espp provide offering period commencing january 31 2006 purchase price stock shall equal 95 fair market value share company’s common stock purchase date amount may established board accordingly fair value calculation performed purchases subsequent january 31 2006 amended plan noncompensatory fas 123r espp company sold 22454 shares employees 2006 shares sold espp company 2008 2007 fair value espp stock award 2006 estimated date grant using blackscholes option valuation model weighted average assumptions riskfree interest rate 317 dividend yield 0 volatility factor 6059 weightedaverage expected life 075 years weightedaverage fair value employee stock purchase plan purchases 084 year ended december 31 2006 reserved shares december 31 2008 company reserved shares common stock future issuance follows stockholder rights agreement december 18 2006 company’s board directors declared dividend distribution one preferred stock purchase right collectively “rights” outstanding share company’s common stock right entitles registered holder purchase company one onethousandth share company’s series preferred stock 0001 par value price 2500 pursuant rights agreement dated december 19 2006 company mellon investor services llc “rights agreement” rights initially trade common stock become exercisable person group acquires 15 company’s common stock without prior board approval event rights permit company’s stockholders acquiror purchase company’s common stock market value twice exercise price rights lieu preferred stock alternatively rights become exercisable company’s board directors may authorize issuance one share company’s common stock exchange right exercisable addition event certain business combinations rights permit purchase common stock acquiror 50 discount rights held acquiror become null void case prior person group acquiring 15 rights redeemed 0001 action board rights agreement contains exception 15 ownership threshold shares currently beneficially owned sigmatau finanziaria spa rights expire december 19 2016 rights agreement includes requirement committee independent directors evaluate rights agreement least every three years “tide” provision note 15 ceo agreements june 2 2006 dr friedhelm blobel became company’s president ceo joined board directors terms dr blobel’s employment agreement board directors obligated consider award dr blobel special cash bonus 300000 paid 2009 based achievement previously agreed upon performance targets years 20062008 company estimated probable amount longterm incentive bonus quarterly basis order accrue bonus related performance period december 31 2008 company accrued approximately 270000 relating special cash bonus expenses related agreement dr blobel recorded general administrative expenses employment agreement dr blobel also includes two option awards first option award purchase 400000 shares company’s common stock exercise price per share equal 249 closing price nasdaq stock market share company’s common stock june 2 2006 option term ten years vest annual installments first four anniversaries june 2 2006 company recognizing compensation cost options based grantdate fair value estimated accordance provision fas 123r company amortizing compensation cost vesting period four years using straight line attribution method second option award granted dr blobel purchase 600000 shares company’s common stock exercise price per share 249 equal closing price nasdaq stock market share company’s common stock june 2 2006 option term 10 years shares option vest upon company’s common stock trading june 2 2006 least 30 consecutive calendar days greater target closing stock price reported nasdaq stock market 450 june 2 2009 100000 shares b 600 june 2 2010 100000 shares c 800 june 2 2011 100000 shares 1000 june 2 2012 100000 shares e 1200 june 2 2013 100000 shares f 1400 june 2 2014 100000 shares price adjusted stock dividends stock splits similar changes company’s capital structure monte carlo simulation option pricing model used calculate grant date fair value per share 170 related six vesting portions award assumptions riskfree interest rate 5102 dividend yield 0 volatility factor 94 expected life 10 years march 18 2008 company granted dr blobel option purchase additional 300000 shares company’s common stock exercise price per share 181 equal closing price share company’s common stock march 18 2008 option term 10 years vest upon company’s common stock trading march 18 2008 lease 30 consecutive calendar days greater target closing stock price reported nasdaq stock market 450 june 2 2009 50000 shares b 600 june 2 2010 50000 shares c 800 june 2 2011 50000 shares 1000 june 2 2012 50000 shares e 1200 june 2 2013 50000 shares f 1400 june 2 2014 50000 shares price adjusted stock dividends stock splits similar changes company’s capital structure monte carlo simulation option pricing model used calculate grant date fair value per share 088 related six vesting portions award assumptions riskfree interest rate 3875 dividend yield 0 volatility factor 8914 expected life 10 years grants vest based achieving greater target closing stock prices considered awards market service conditions compensation expense recognized option market conditions long service requirements met even market conditions reached probability satisfying market conditions considered estimate grantdate fair value awards monte carlo simulation option pricing model used calculate grant date fair value per share related six vesting portions awards related compensation costs expensed service periods six vesting portions awards years ended december 31 2008 2007 2006 company recorded 338000 448000 265000 respectively compensation expense related awards note 16 401k plan company pretax savings plan covering substantially us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions 15 employee’s salary company contributions terminated company’s discretion approximately 233000 202000 200000 years ended december 31 2008 2007 2006 respectively note 17 income april 3 2006 company announced resolution dispute schering plough kk spkk concerning clinical trials conducted japan zadaxin terms settlement spkk paid sciclone 8000000 april 18 2006 recorded income year ended december 31 2006 note 18 significant geographic information company operates one business segment development commercialization novel therapeutics treat chronic life threatening diseases december 31 2008 company’s product revenues generated sale zadaxin president ceo identified chief operating decision maker codm final authority resource allocation decisions performance assessment codm receive discrete financial information level business segment company’s domestic operations primarily consist product development company’s wholly owned international subsidiary sciclone pharmaceuticals international ltd engaged sales marketing product distribution worldwide information regarding geographic areas follows two customers accounted 10 total revenue 68 22 aggregate 90 total revenue year ended december 31 2008 two customers accounted 10 total revenues 63 21 aggregate 84 total revenues year ended december 31 2007 two customers accounted 10 total revenues 66 15 aggregate 81 total revenues year ended december 31 2006 customer accounted 10 total revenues years note 19 selected quarterly financial data unaudited 1 three months ended june 30 2007 company acquired exclusive rights united states canada develop commericalize rp101 clinicalstage compound treatment cancer expensed approximately 2200000 acquisition legal costs related acquisition 2 three months ended september 30 2007 december 31 2007 march 31 2008 research development expenses increased result company’s phase 2 trial rp101 proposed phase 3 trial melanoma 3 three months ended december 31 2008 operating expenses increased primarily related company’s phase 2 trial rp101 purchase manufacture drugs use company’s clinical trials due increase legal professional fees item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc index consolidated financial statements report independent registered public accounting firm board directors stockholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 2009 2008 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2009 audits also included financial statement schedule listed item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 2009 2008 consolidated results operations cash flows three years period ended december 31 2009 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states sciclone pharmaceuticals inc’s internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated march 16 2010 expressed unqualified opinion effectiveness internal control financial reporting ernst young llp palo alto california march 16 2010 sciclone pharmaceuticals inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements operations thousands except per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements stockholders’ equity thousands see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows thousands see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies company sciclone pharmaceuticals inc “sciclone” “company” profitfocused global specialty pharmaceutical company substantial international business based primarily people’s republic china “china” product portfolio novel therapies cancer infectious diseases zadaxin® company’s brand thymalfasin thymosin alpha 1 primary product sold 30 countries primarily china company’s whollyowned subsidiary sciclone pharmaceuticals international ltd company continues seek development opportunities zadaxin focused vaccine enhancement melanoma company’s proprietary inlicensed compound scv07 phase 2 clinical development treatment oral mucositis hepatitis c virus “hcv” company inlicensed commercialization rights dc bead tm china novel treatment advanced liver cancer currently approved 40 countries worldwide including europe us commenced small local registration trial china first quarter 2010 required chinese state food drug administration regulatory approval company also inlicensed commercialization rights antinausea drug ondansetron rapidfilmtm china vietnam company intends seek regulatory approval presentation consolidated financial statements include accounts company wholly owned subsidiaries sciclone pharmaceuticals international ltd “spil” sciclone pharmaceuticals international china holding ltd “spil china” sciclone pharmaceuticals china ltd sciclone italy srl sciclone brasilprodutos farmaceuticos ltda spil registered cayman islands principal office located hong kong spil china registered cayman islands principal office located hong kong sciclone pharmaceuticals china ltd registered china principal office located shanghai sciclone italy srl registered italy principal office located rome sciclone brasil registered brazil principal office located sao paulo significant intercompany accounts transactions eliminated use estimates preparation financial statements conformity us generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents investments cash equivalents consist highly liquid investments maturities three months less date purchase company classifies investments availableforsale trading securities company records investments fair value determined available information consolidated balance sheet date company’s availableforsale portfolio primarily consists certificate deposit corporate equity securities restricted longterm italian state bonds company’s trading portfolio consists auctionrate securities “ars” unrealized gains losses availableforsale securities included accumulated comprehensive income consolidated balance sheet realized gains losses declines value judged otherthantemporary availableforsale securities included earnings gains losses declines value judged otherthantemporary trading securities included earnings amortized cost securities adjusted amortization premiums accretion discounts maturity included earnings cost securities sold based specific identification method availableforsale investments evaluated impairment reporting period investment considered impaired fair value investment less cost consideration available evidence evaluate realizable value investment impairment determined otherthantemporary impairment loss recognized consolidated statement operations years ended december 31 2009 2008 2007 net change unrealized loss gains including foreign currency translation foreigndenominated securities approximately 30000 02 million 22000 availableforsale securities respectively included accumulated comprehensive income years ended december 31 2009 2008 company realized gains losses related ars trading securities 01 million 03 million respectively realized gains losses years ended december 31 2009 2008 2007 company’s investments fair value financial instruments fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs three levels input level 1quoted prices active markets identical assets liabilities level 2inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3unobservable inputs supported little market activity significant fair value assets liabilities quoted prices available active market company determines fair value based upon quoted market prices classifies values level 1 valuation hierarchy quoted market prices available fair values based upon observable inputs quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities classified level 2 valuation hierarchy quoted prices observable inputs unavailable fair values based internally developed cash flow models classified level 3 valuation hierarchy internally developed cash flow models primarily use inputs estimates interest rates discount rates including yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods assets inputs reflect company’s assumptions market participants would use pricing assets including assumptions risk developed based best information available circumstances company’s assessment significance particular input fair value measurements requires judgment may affect valuation assets measured placement within fair value hierarchy financial instruments including accrued liabilities carried cost company believes approximates fair value shortterm maturity instruments concentration risk financial instruments potentially subject company concentration credit risk consist cash equivalents investments company exposed credit risk event default institutions holding cash equivalents investments extent amounts recorded consolidated balance sheet substantially company’s cash equivalents held financial institutions company believes high credit quality times deposits may exceed government insured limits company experienced losses deposits cash equivalents china uses tiered method import distribute products distributors make sales country product imported licensed importers years ended december 31 2009 2008 2007 sales four importing agents china accounted 96 94 92 respectively company’s product sales 2009 two largest customers accounted 66 27 sales respectively 2008 two largest customers accounted 68 22 sales respectively 2007 two largest customers accounted 63 21 sales respectively customer accounted 10 sales 2009 2008 2007 december 31 2009 approximately 208 million 97 company’s accounts receivable attributable four importing agents china company performs ongoing credit evaluations customers’ financial condition generally require collateral customers company currently relies two suppliers provide key components zadaxin manufacturing supply although limited number manufacturers would able meet requirements manufacture components management believes suppliers could provide similar components comparable terms change suppliers however could cause delay manufacturing possible loss sales would affect operating results adversely accounts receivable accounts receivable recorded net allowance doubtful accounts company maintains allowances doubtful accounts estimated losses resulting inability customers make required payments appropriate company records allowance doubtful accounts based assessment various factors estimating need allowance doubtful accounts company considers historical payment patterns customers circumstances individual customer geographic region including review local economic environment age accounts receivable balances credit quality customers factors may affect customers’ ability pay december 31 2009 allowance doubtful accounts considered necessary inventories consist raw materials work progress finished goods products inventories stated lower cost market cost determined firstin firstout basis include amounts related materials labor overhead company periodically reviews inventory order identify obsolete items obsolete items observed alternate uses inventory company record writedown net realizable value period impairment first recognized property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets three five years straightline basis leasehold improvements amortized shorter estimated useful life lease term straightline basis intangible assets intangible assets definite lives amortized estimated useful lives reviewed impairment facts circumstances suggest carrying value assets may recoverable company’s policy identify record impairment losses necessary intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets company date identified impairment losses intangible assets foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using rates exchange effect period gains losses translation financial statements denominated foreign currencies included separate component accumulated comprehensive income statement stockholders’ equity company records foreign currency transactions exchange rate prevailing date transaction resultant gains losses included results operations foreign currency transaction gains losses significant period presented revenue recognition company recognizes revenue product sales time delivery significant customer acceptance requirements postshipment obligations part company except sales new market acceptance requirements met sales importing agents distributors recognized time shipment title product transferred importing agents distributors contractual rights return except limited terms regarding product quality however company expected replace products expired deemed damaged defective delivered company estimates expected returns primarily historical patterns historically company product returns damaged defective expired product amount accrued product returns december 31 2009 2008 respective consolidated balance sheets payments importing agents distributors contingent upon sale end user importing agents distributors amounts invoiced relating arrangements collectibility uncertain revenue cannot recognized reflected company’s balance sheet deferred revenue recognized applicable revenue recognition criteria satisfied contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement company recognized contract revenue earlier payments received collection reasonably assured revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment research development expenses research development costs expensed incurred costs consist primarily salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment licenserelated fees services performed clinical research organizations research institutions outside service providers sharing certain costs development zadaxin company’s partner sigmatau finanziaria spa “sigmatau” expenses related clinical trials generally accrued based estimates work performed level patient enrollment activities according protocols agreements company monitors planned protocols work performed patient enrollment levels related activities extent possible adjusts estimates accordingly nonrefundable advance payments research development goods services recognized expense related goods delivered related services provided shipping handling costs shipping handling costs incurred inventory purchases product shipments included cost product sales periods presented advertising expenses advertising costs expensed incurred included sales marketing expenses periods presented advertising expenses years ended december 31 2009 2008 2007 03 million 02 million 04 million respectively stockbased compensation company records stockbased compensation costs relating sharebased payment transactions including stock options employee stock purchase plans stockbased compensation expense estimated date grant based fair value award using blackscholes optionpricing model stockbased compensation costs recognized expense ratably awards vest requisite service period generally one four years refer also note 13 “stockholders’ equity” notes consolidated financial statements information regarding stockbased compensation income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse company provides valuation allowance net deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized company’s policy recognize interest penalties related underpayment income taxes component income tax expense date interest penalties charged company relation underpayment income taxes comprehensive income comprehensive income comprised net income loss comprehensive income loss following table summarizes components accumulated comprehensive income thousands net income loss per share basic net income loss per share computed dividing net income loss weightedaverage number shares common stock outstanding period diluted net income loss per share computed dividing net income loss weightedaverage number common equivalent shares outstanding period diluted net income loss per share includes dilutive impact stock options warrants outstanding using treasury stock method following reconciliation numerator denominators basic diluted net income loss per share computations year ended december 31 thousands except per share amounts years ended december 31 2009 2008 2007 approximately 6107498 7968269 7324688 shares respectively related outstanding stock options warrants excluded calculation diluted net income loss per share inclusion would antidilutive segment information company operates one segment refer note 15 recent accounting guidance december 2007 financial accounting standards board “fasb” issued guidance concerning determining whether arrangement constitutes collaborative arrangement costs incurred revenue generated sales third parties payments parties collaborative arrangement reported income statement entity characterize payments income statement participants disclose notes financial statements collaborative arrangement company adopted guidance january 1 2009 adoption material impact company’s consolidated financial statements december 2007 fasb issued authoritative guidance business combinations establishes principles requirements acquirer business combination recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree ii recognizes measures goodwill acquired business combination gain bargain purchase iii determines information disclose enable users financial statements evaluate nature financial effects business combination company adopted guidance january 1 2009 adoption material impact company’s consolidated financial statements october 2008 april 2009 fasb issued authoritative guidance clarifies determining fair value measurements annual interim disclosures market active identifying transactions orderly guidance applicable valuation auctionrate securities held company inactive market december 31 2009 adoption guidance material impact company’s consolidated results operations consolidated financial position april 2009 fasb also issued guidance regarding recognition presentation otherthantemporary impairments amends otherthantemporary impairment guidance us gaap debt securities make guidance operational improve presentation disclosure otherthantemporary impairments debt equity securities company adopted guidance january 1 2009 adoption material impact company’s consolidated financial statements reclassifications company reclassified shipping handling costs related product shipments 05 million 04 million sales marketing expense cost product sales reclassified 07 million 09 million legal expense research development expense general administrative expense years ended december 31 2008 2007 respectively conform current year presentation reclassifications effect prior years’ net loss stockholders’ equity note 2 cash equivalents investments following summary cash equivalents investments thousands december 31 2009 2008 availableforsale securities included 01 million shortterm investments 05 million restricted investments company intends hold restricted italian state bond investments recovery company’s certificate deposit 01 million secures company’s letter credit required european value added tax filing arrangements december 31 2009 company held 16 million fair value ars trading securities shortterm investments ars highly rated investments one major independent rating agencies contractual maturities generally 20 32 years whose underlying assets student loans substantially backed federal government interest rates resetting approximately every 30 days auction process end reset period investors may sell continue hold securities par disruptions credit markets adversely affected market ars however company believe underlying securities collateral permanently affected november 2008 company accepted auction rate securities rights offer “settlement agreement” ubs ag return general release claims grant right ubs ag purchase company’s ars time full par value company received right require ubs ag purchase company’s ars beginning june 2010 “rights” company held approximately 18 million par value eligible ars ubs december 31 2009 entering settlement agreement company 1 received right “put option” sell auction rate securities back investment firm par sole discretion anytime period june 30 2010 july 2 2012 2 gave investment firm right purchase auction rate securities sell company’s behalf par anytime execution settlement agreement july 2 2012 company recorded fair value put option prepaid expenses current assets consolidated balance sheet december 31 2009 company’s fair value election intended create accounting symmetry fair value accounting ars recording fair value changes put option resulted net realized losses gains 01 million 03 million years ended december 31 2009 2008 respectively recorded expense company’s consolidated statements operations recording fair value changes ars trading securities resulted net realized gains losses 01 million 03 million years ended december 31 2009 2008 respectively recorded income company’s consolidated statements operations december 31 2009 combined fair value put option ars 18 million represented 99 par value ars company anticipates future changes fair value put option approximate fair value movements related ars company expects receive ars par value 18 million subsequent june 29 2010 related settlement agreement note 3 fair value measurements following table represents company’s fair value hierarchy financial assets cash equivalents investments current assets measured fair value recurring basis thousands following table provides summary changes fair value company’s level 3 financial assets fiscal 2009 thousands note 4 inventories consisted following thousands note 5 property equipment property equipment consisted following thousands depreciation expense 03 million years ended december 31 2009 2008 02 million year ended december 31 2007 note 6 accrued liabilities following summary accrued liabilities thousands note 7 longterm liabilities following summary longterm liabilities thousands note 8 commitments contingencies leases may 2007 company entered noncancelable operating lease agreement corporate headquarters “the lease” effective july 1 2007 june 30 2014 option renew additional five year period september 2008 company entered amendment lease additional office space “the expansion agreement” expires june 30 2014 option renew additional five year period lease expansion agreements contain rent escalations approximately 4 6 per year respectively company recognizing rental expense straightline basis lease terms lease expansion agreements company provided allowances amounts approximately 02 million 05 million respectively towards cost leasehold improvements incentive rent respectively company recorded allowances deferred rent amortized lease terms reduction rent expense leases require company pay insurance taxes prorata share operating expenses company also leases office facilities equipment outside us noncancelable operating lease agreements subleases certain office facilities third party rent expense years ended december 31 2009 2008 2007 16 million 11 million 14 million respectively future minimum lease payments sublease rental income noncancelable facility equipment operating lease agreements december 31 2009 follows thousands note 9 linesofcredit silicon valley bank november 2008 company subsidiaries spil china borrowers entered loan security agreement unconditional guaranty security agreement silicon valley bank “credit facility” credit facility permits borrowing 6 million term 36 months subject certain sublimits including 25 million letters credit facility secured first priority secured interest company’s assets intellectual property credit facility expires november 2011 upon termination amounts borrowed must repaid full december 31 2009 outstanding borrowings credit facility credit facility bears interest bank’s prime rate plus 175 outstanding balances company required meet certain financial covenants including minimum consolidated revenue minimum consolidated earnings interest income tax defined since november 14 2009 subject certain minimum fees interest payments company also required meet certain operating covenants limit ability incur liabilities create liens make capital expenditures pay dividends distributions make investments dispose assets carry credit insurance november 2009 company received limited waiver credit facility waive certain minimum fees interest payments waive requirement maintain credit insurance policy company capitalized 02 million costs associated origination facility amortized interest investment expense term credit facility connection credit facility company issued silicon valley bank fiveyear warrant purchase 60000 shares company’s common stock exercise price 086 per share accordingly company recorded cost fair value warrants issued using blackscholes option pricing model following assumptions riskfree interest rate 229 dividend yield 0 volatility factor 6840 expected term 5 years resulting warrant value 30000 amortized term credit facility ubs ag april 30 2009 company approved credit line “ubs credit line” ubs ag provide aggregate amount 11 million form uncommitted demand revolving line credit connection previous acceptance offer ubs ag affiliates “ubs” certain rights require ubs repurchase 18 million par value auction rate securities ubs previously sold company ubs credit line secured auction rate securities proceeds sales auction rate securities applied repayment ubs credit line advances ubs credit line made “no net cost” basis meaning interest paid company advances exceed interest dividends paid company issuer auction rate securities ubs credit line also provides among things ubs ag may demand full partial repayment ubs credit line terminate cancel ubs credit line sole discretion without cause time provided case ubs ag would required provide company alternative financing substantially similar terms repurchase auction rate securities par unless demand right exercised result certain specified events customer relationship ubs ag company terminated cause ubs ag december 31 2009 company outstanding borrowings ubs credit line note 10 related party transactions company licensed sigmatau exclusive zadaxin thymalfasin thymosin alpha 1 development marketing rights cover countries european union defined january 1 1995 addition iceland norway switzerland sigmatau affiliated persons stockholders company time transaction entered currently company’s largest shareholder agreement sigmatau conducted multicenter phase 3 hepatitis c triple therapy clinical trial europe 553 patients objective european trial provide data zadaxin’s use part triple therapy treating hcv patients company paid sigmatau approximately 40 million december 31 2009 funding support course patient enrollment trial period including period completion final report company’s accounting policy recording funding amounts due sigmatau record amounts research development expense trial period including period completion final report based level activity trial company recorded 01 million 03 million 05 million research development expense related trial years ended december 31 2009 2008 2007 respectively company amounts payable sigmatau december 31 2009 december 31 2008 company accrued clinical trial expenses 14 million due sigmatau march 30 2009 company entered settlement agreement “settlement agreement” affiliates sigmatau “sigmatau group” company issued press release march 31 2009 “press release” announcing execution settlement agreement commercial agreement referred herein “zadaxin agreement” well certain actions company taken implement provisions settlement agreement press release settlement agreement zadaxin agreement exhibits company’s current report form 8k company filed securities exchange commission april 1 2009 settlement agreement dr camerini dr jones mr lapointe appointed board directors pursuant unanimous recommendation board elected stockholders 2009 annual meeting stockholders certain obligations settlement agreement expired expires entirety around june 15 2010 company longer obligation nominate dr camerini dr jones mr lapointe however board independently decided renominate annual stockholder’s meeting 2010 except result relationships dr camerini dr jones mr lapointe sigma tau none company’s officers directors set forth involved related party transactions 2009 note 11 income taxes company recorded income tax expense 06 million 05 million 03 million years ended december 31 2009 2008 2007 respectively related operations china company’s statutory tax rate china 20 2009 company recorded federal state income tax expense years ended december 31 2009 2008 2007 undistributed earnings company’s foreign subsidiaries considered permanently invested outside us taxes provided amounted approximately 22 million december 31 2009 tax years 19962009 remain open examination major taxing jurisdictions company subject domestic foreign components pretax income loss years ended december 31 follows thousands reconciliation statutory federal income tax rate 34 actual tax rate years ended december 31 follows thousands significant components company’s deferred tax assets december 31 follows thousands realization deferred tax assets dependent upon company generating future taxable income timing amount uncertain accordingly deferred tax assets fully offset valuation allowance valuation allowance decreased increased approximately 62 million 131 million 08 million years ended december 31 2009 2008 2007 respectively december 31 2009 company federal net operating loss carryforwards approximately 1306 million expire years 2010 2029 federal research development orphan drug investment tax credit carryforwards approximately 95 million expire years 2010 2029 december 31 2009 company state net operating loss carryforwards approximately 400 million begin expire year 2012 utilized state research development tax credit carryforwards approximately 17 million expire approximately 36 million valuation allowance relates benefits associated stock option deductions recognized credited directly stockholders’ equity utilization company’s net operating loss credit carryforwards may subject substantial annual limitation due ownership change limitations provided internal revenue code similar state provisions annual limitation could result expiration net operating loss credit carryforwards utilization december 31 2009 unrecognized tax benefit 28 million offset full valuation allowance reconciliation beginning ending amount unrecognized tax benefit follows thousands note 12 restructuring charge october 2009 company implemented reduction workforce seven fulltime employees primarily research development restructuring follows discontinuation company’s rp101 phase 2 clinical trial reflects company’s focus costcontaining clinical development strategy expense management company completed restructuring fourth quarter 2009 reduction workforce resulted onetime severancerelated charge approximately 03 million primarily recognized research development expenses fourth quarter 2009 december 31 2009 substantially severancerelated charges paid note 13 stockholders’ equity stock award plans company’s 1991 stock plan 1992 stock plan 1995 equity incentive plan collectively “1991 1992 1995 plans” reserved 3450000 240000 6100000 shares common stock issuance respectively 1991 1992 1995 plans permit grant incentive stock options nonstatutory stock options forms equity compensation although 1991 1992 1995 plans expired outstanding stock options relating fully valid company’s 2005 equity incentive plan “2005 plan” reserved 7800000 shares common stock issuance 2005 plan permits grant incentive stock options nonstatutory stock options restricted stock units performance shares forms equity compensation december 31 2009 approximately 1648000 shares common stock available future issuance 2005 plan 1991 1992 1995 2005 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years upon achievement certain market service conditions see stockbased compensation company’s 1995 nonemployee director stock option plan “1995 director plan” reserved 750000 shares common stock issuance 1995 director plan permits grant nonqualified stock options nonemployee directors although 1995 directors plan expired outstanding stock options relating fully valid company’s 2004 outside directors stock option plan “2004 director plan” reserved 1765000 shares common stock issuance 2004 director plan automatically grants nonqualified stock options nonemployee directors upon appointment first election company’s board directors “initial grant” annually upon reelection board directors company’s annual meeting stockholders “annual grant” december 31 2009 approximately 635000 shares common stock available future issuance 2004 director plan 1995 2004 director plans options granted fair market value date grant expire ten years date grant initial grants become exercisable three equal annual installments beginning first anniversary date grant annual grants become exercisable twelve equal monthly installments date grant subject case director’s continuous service company’s board directors certain stock option awards subject accelerated vesting change control stockbased compensation cost charged income stock award plans 19 million 18 million 22 million respectively years ended december 31 2009 2008 2007 compensation cost capitalized inventory 35000 49000 01 million respectively years ended december 31 2009 2008 2007 income tax benefit recognized income statement sharebased compensation arrangements fair value non performancebased non target stockpricebased option granted company’s stock award plans estimated date grant using blackscholes option valuation model single option approach following weightedaverage assumptions years ended december 31 riskfree interest rate based us treasury yield curve effect time grant expected dividend yield based company’s history expectations dividend payouts expected volatility based historical volatility company’s stock expected term options granted derived historical data employee exercises terminations following table summarizes stock option activity december 31 2009 changes year ended presented thousands except per share year amounts company granted chief executive officer targetstockpricebased options purchase 600000 300000 shares company’s common stock exercise price per share 249 181 respectively options term 10 years shares option vest upon company’s common stock trading least 30 consecutive calendar days greater target closing stock price reported nasdaq stock market 450 june 2 2009 150000 shares b 600 june 2 2010 150000 shares c 800 june 2 2011 150000 shares 1000 june 2 2012 150000 shares e 1200 june 2 2013 150000 shares f 1400 june 2 2014 150000 shares price adjusted stock dividends stock splits similar changes company’s capital structure grants considered awards market service conditions compensation expense recognized option market conditions long service requirements met even market conditions reached probability satisfying market conditions considered estimate grantdate fair value awards monte carlo simulation option pricing model used calculate grant date fair value per share 170 088 respectively related six vesting portions awards assumptions riskfree interest rate 510 388 respectively volatility factor 94 8914 respectively dividend yield 0 expected life 10 years related compensation costs expensed service periods six vesting portions awards company granted certain employees performancebased options purchase shares company’s common stock exercise price equal closing price share company’s common stock grant date options fully vest upon employee meeting performance goal within established time frame performance goal met option within established time frame option ten year term measured date grant performance goal met within established time frame option expires entirety grant date fair value per share awards calculated using blackscholes option pricing model using following assumptions expected term 483 years volatility factor ranging 6906 7019 risk free interest rates ranging 172307 company recognizes expense related performancebased options period time company determines probable performance goal achieved 2009 company extended period two company’s departed board members may exercise outstanding vested stock options following cessation service company ninety days second anniversary date cessation service ceased june 9 2009 company recorded expense 01 million year ended december 31 2009 related modifications weightedaverage fair value stock options granted years ended december 31 2009 2008 2007 076 098 158 respectively intrinsic value options time exercise 17 million 01 million 01 million years ended december 31 2009 2008 2007 respectively estimated fair value shares vested years ended december 31 2009 2008 2007 15 million 16 million 19 million respectively december 31 2009 unamortized compensation expense related unvested options approximately 23 million weighted average period compensation expense related options recognized approximately 31 years cash received stock option exercises 26 million 01 million 02 million years ended december 31 2009 2008 2007 respectively employee stock purchase plan company’s 1996 employee stock purchase plan “espp” reserved 1000000 shares issuance thereunder terms espp eligible employees may choose 15 salary withheld purchase company’s common stock purchase price stock shall equal 95 fair market value share company’s common stock purchase date amount may established company’s board directors espp shares issued company 2009 2008 2007 december 31 2009 approximately 283000 shares common stock available issuance espp stockholder rights agreement december 18 2006 company’s board directors declared dividend distribution one preferred stock purchase right collectively “rights” outstanding share company’s common stock right entitles registered holder purchase company one onethousandth share company’s series preferred stock 0001 par value price 2500 pursuant rights agreement dated december 19 2006 company mellon investor services llc “rights agreement” rights initially trade common stock become exercisable person group acquires 15 company’s common stock without prior board approval event rights permit company’s stockholders acquiror purchase company’s common stock market value twice exercise price rights lieu preferred stock alternatively rights become exercisable company’s board directors may authorize issuance one share company’s common stock exchange right exercisable addition event certain business combinations rights permit purchase common stock acquiror 50 discount rights held acquiror become null void case prior person group acquiring 15 rights redeemed 0001 action board rights agreement contains exception 15 ownership threshold shares currently beneficially owned sigmatau finanziaria spa rights expire december 19 2016 rights agreement includes requirement committee independent directors evaluate rights agreement least every three years note 14 401k plan company pretax savings plan covering substantially us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions 15 employee’s salary company contributions terminated company’s discretion approximately 02 million years ended december 31 2009 2008 2007 note 15 significant geographic information company operates one business segment development commercialization novel therapeutics treat chronic life threatening diseases december 31 2009 company’s product revenues generated sale zadaxin president ceo identified chief operating decision maker “codm” final authority resource allocation decisions performance assessment codm receive discrete financial information level business segment company’s domestic operations primarily consist research development company’s wholly owned international subsidiary sciclone pharmaceuticals international ltd engaged sales marketing product distribution worldwide information regarding geographic areas follows thousands note 16 selected quarterly financial data unaudited 1 three months ended june 30 2009 product sales increased attributable higher volume zadaxin company believes primarily due increased demand result h1n1 flu virus market penetration china 2 three months ended march 31 2008 research development expenses increased result company’s phase 2 trial rp101 3 three months ended december 31 2008 operating expenses increased primarily related company’s phase 2 trial rp101 purchase manufacture drugs use company’s clinical trials due increase legal professional fees item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc index consolidated financial statements report independent registered public accounting firm board directors stockholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 2010 2009 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2010 audits also included financial statement schedule listed item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 2010 2009 consolidated results operations cash flows three years period ended december 31 2010 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states sciclone pharmaceuticals inc’s internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 31 2011 expressed adverse opinion effectiveness internal control financial reporting ernst young llp palo alto california march 31 2011 sciclone pharmaceuticals inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements operations thousands except per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements stockholders’ equity thousands see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows thousands see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies company sciclone pharmaceuticals inc “sciclone” “company” revenuegenerating global specialty pharmaceutical company substantial international business based primarily people’s republic china “china” product portfolio novel therapies cancer infectious diseases zadaxin® company’s brand thymalfasin thymosin alpha 1 primary product regulatory approval 30 countries company’s revenues derived sales zadaxin substantially sold china company’s whollyowned subsidiary sciclone pharmaceuticals international ltd company inlicensed commercialization rights dc beadtm china novel treatment advanced liver cancer currently approved 40 countries worldwide including europe us commenced small local registration trial china 2010 required chinese state food drug administration regulatory approval company also inlicensed commercialization rights antinausea drug ondansetron rapidfilmtm china including hong kong macau vietnam company intends seek regulatory approval company’s proprietary inlicensed compound scv07 phase 2 clinical development treatment oral mucositis presentation consolidated financial statements include accounts company wholly owned subsidiaries sciclone pharmaceuticals international ltd “spil” sciclone pharmaceuticals international china holding ltd “spil china” sciclone pharmaceuticals china ltd sciclone italy srl sciclone pharmaceuticals hong kong limited spil registered cayman islands principal office located hong kong spil china registered cayman islands principal office located hong kong sciclone pharmaceuticals china ltd registered china principal office located shanghai sciclone italy srl registered italy principal office located rome sciclone pharmaceuticals hong kong limited registered hong kong principal office located hong kong significant intercompany accounts transactions eliminated use estimates preparation financial statements conformity us generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ materially estimates cash equivalents investments cash equivalents consist highly liquid investments maturities three months less date purchase company records investments fair value determined available information consolidated balance sheet date company’s availableforsale portfolio december 31 2010 primarily consisted foreign us dollar term deposits restricted longterm italian state bonds december 31 2009 company’s trading portfolio consisted auctionrate securities “ars” availableforsale portfolio primarily consisted corporate equity securities certificate deposit restricted longterm italian state bonds unrealized gains losses availableforsale securities included accumulated comprehensive income consolidated balance sheet realized gains losses declines value judged otherthantemporary availableforsale securities included earnings gains losses declines value judged otherthantemporary trading securities included earnings amortized cost securities adjusted amortization premiums accretion discounts maturity included earnings cost securities sold based specific identification method availableforsale investments evaluated impairment reporting period investment considered impaired fair value investment less cost consideration available evidence evaluate realizable value investment impairment determined otherthantemporary impairment loss recognized consolidated statement operations years ended december 31 2010 2009 2008 net change unrealized loss gains including foreign currency translation foreigndenominated securities approximately 38000 30000 02 million availableforsale securities respectively included accumulated comprehensive income years ended december 31 2010 2009 2008 company realized gains losses 02 million 01 million 03 million respectively substantially related ars trading securities fair value financial instruments fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs three levels input level 1quoted prices active markets identical assets liabilities level 2inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3unobservable inputs supported little market activity significant fair value assets liabilities quoted prices available active market company determines fair value based upon quoted market prices classifies values level 1 valuation hierarchy quoted market prices available fair values based upon observable inputs quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities classified level 2 valuation hierarchy quoted prices observable inputs unavailable fair values based internally developed cash flow models classified level 3 valuation hierarchy internally developed cash flow models primarily use inputs estimates interest rates discount rates including yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods assets inputs reflect company’s assumptions market participants would use pricing assets including assumptions risk developed based best information available circumstances company’s assessment significance particular input fair value measurements requires judgment may affect valuation assets measured placement within fair value hierarchy financial instruments including accrued liabilities carried cost company believes approximates fair value shortterm maturity instruments concentration risk financial instruments potentially subject company concentration credit risk consist cash equivalents investments company exposed credit risk event default institutions holding cash equivalents investments extent amounts recorded consolidated balance sheet company’s cash equivalents held financial institutions company believes high credit quality times deposits may exceed government insured limits company experienced losses deposits cash equivalents china uses tiered method import distribute products distributors make sales country product imported licensed importers years ended december 31 2010 2009 2008 sales four importing agents china accounted 96 94 respectively company’s product sales 2010 two largest importers accounted 74 14 sales respectively 2009 two largest importers accounted 66 27 sales respectively 2008 two largest importers accounted 68 22 sales respectively importer accounted 10 sales 2010 2009 2008 company’s two largest importers years ending december 31 2010 2009 2008 recent months third party acquired majority interest two largest importers december 31 2010 approximately 301 million 98 company’s accounts receivable attributable two importing agents china company performs ongoing credit evaluations customers’ financial condition generally require collateral customers company currently relies two suppliers provide key components zadaxin manufacturing supply although limited number manufacturers would able meet requirements manufacture components management believes suppliers could provide similar components comparable terms change suppliers however could cause delay manufacturing possible loss sales would affect operating results adversely accounts receivable accounts receivable recorded net allowance doubtful accounts company maintains allowances doubtful accounts estimated losses resulting inability customers make required payments appropriate company records allowance doubtful accounts based assessment various factors estimating need allowance doubtful accounts company considers historical payment patterns customers circumstances individual customer geographic region including review local economic environment age accounts receivable balances credit quality customers factors may affect customers’ ability pay december 31 2010 2009 allowance doubtful accounts considered necessary inventories consist raw materials work progress finished goods products inventories stated lower cost market cost determined firstin firstout basis include amounts related materials labor overhead company periodically reviews inventory order identify obsolete items obsolete items observed alternate uses inventory company record writedown net realizable value period impairment first recognized property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets generally three five years straightline basis leasehold improvements amortized shorter estimated useful life lease term straightline basis company’s policy identify record impairment losses necessary property equipment events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets intangible assets intangible assets definite lives amortized estimated useful lives reviewed impairment facts circumstances suggest carrying value assets may recoverable company’s policy identify record impairment losses necessary intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets accrued expenses company’s management makes estimates accrued expenses balance sheet date consolidated financial statements based facts circumstances known examples estimated accrued expenses include fees paid contract research organizations investigative sites connection clinical trials fees paid contract manufacturers connection production clinical trial materials professional services company periodically confirms accuracy estimates selected service providers makes adjustments necessary expenses related clinical trials generally accrued based estimates work performed level patient enrollment activities according protocols agreements financial terms agreements subject negotiation vary contract may result uneven payment flows payments certain contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective company’s accrual policy match recording expenses actual services received efforts expended company’s management monitors planned protocols work performed patient enrollment levels related activities extent possible adjust estimates accordingly company records liabilities estimated amounts litigation claims legal actions probable reasonably estimated likelihood material change estimated reserves dependent possible outcome settlement negotiations regulatory judicial review development facts circumstances extended litigation could change claims assessments amount range loss outstanding litigation uncertain company discloses footnotes financial statements unable make reasonable estimate material liability could result unfavorable outcomes events occur company assesses potential liability related pending litigation claims legal actions adjusts estimates accordingly adjustments could materially impact financial statements foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using rates exchange effect period gains losses translation financial statements denominated foreign currencies included separate component accumulated comprehensive income statement stockholders’ equity company records foreign currency transactions exchange rate prevailing date transaction resultant gains losses included results operations foreign currency transaction gains losses significant period presented revenue recognition company recognizes revenue product sales time delivery significant customer acceptance requirements postshipment obligations part company except sales new market acceptance requirements met sales importing agents distributors recognized time shipment title product transferred importing agents distributors contractual rights return except limited terms regarding product quality however company expected replace products expired deemed damaged defective delivered company estimates expected returns primarily historical patterns historically company product returns damaged defective expired product amount accrued product returns december 31 2010 2009 respective consolidated balance sheets payments importing agents distributors contingent upon sale end user importing agents distributors amounts invoiced relating arrangements collectability uncertain revenue cannot recognized reflected company’s balance sheet deferred revenue recognized applicable revenue recognition criteria satisfied contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement company recognized contract revenue earlier payments received collection reasonably assured revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment research development expenses research development costs expensed incurred costs consist primarily salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment licenserelated fees services performed clinical research organizations research institutions outside service providers certain costs shared development zadaxin company’s partner sigmatau finanziaria spa “sigmatau” expenses related clinical trials generally accrued based estimates work performed level patient enrollment activities according protocols agreements company monitors planned protocols work performed patient enrollment levels related activities extent possible adjusts estimates accordingly nonrefundable advance payments research development goods services recognized expense related goods delivered related services provided shipping handling costs shipping handling costs incurred inventory purchases product shipments included cost product sales periods presented advertising expenses advertising costs expensed incurred included sales marketing expenses periods presented advertising expenses years ended december 31 2010 2009 2008 02 million 03 million 02 million respectively stockbased compensation company records stockbased compensation costs relating sharebased payment transactions including stock options employee stock purchase plans stockbased compensation expense estimated date grant based fair value award using blackscholes optionpricing model stockbased compensation costs ultimately expected vest recognized expense ratably awards vest requisite service period generally one four years stock options three months employee stock purchase plan company estimates prevesting forfeitures time grant analyzing historical data revises estimates subsequent periods actual forfeitures differ estimates total expense recognized vesting period awards ultimately vest certain targetstockpricebased options valued using monte carlo simulation options pricing model recognized expense service periods vesting portions awards six eight years refer also note 13 “stockholders’ equity” notes consolidated financial statements information regarding stockbased compensation income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse company provides valuation allowance net deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized company’s policy recognize interest penalties related estimated obligations tax positions component income tax expense amount accrued interest related tax positions taken tax returns included accrued liabilities 02 million 0 december 31 2010 2009 respectively company records liabilities related uncertain tax positions accordance guidance clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribing minimum recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return company believe uncertain tax positions currently pending material adverse effect consolidated financial statements although adverse resolution one uncertain tax positions period could material impact results operations period comprehensive income comprehensive income comprised net income loss comprehensive income loss following table summarizes components accumulated comprehensive income thousands net income loss per share basic net income loss per share computed dividing net income loss weightedaverage number shares common stock outstanding period diluted net income loss per share computed dividing net income loss weightedaverage number common equivalent shares outstanding period diluted net income loss per share includes dilutive impact outstanding stock options warrants employee stock purchase plan using treasury stock method following reconciliation numerator denominators basic diluted net income loss per share computations year ended december 31 thousands except per share amounts years ended december 31 2010 2009 2008 approximately 2872513 6107498 7968269 shares respectively related outstanding stock options warrants excluded calculation diluted net income loss per share inclusion would antidilutive addition years ended december 31 2010 2009 155000 710959 shares respectively subject market performance conditions excluded calculation diluted net income per share performance market criteria met segment information company operates one segment refer note 17 recent accounting guidance january 2010 financial accounting standards board “fasb” issued fasb accounting standards update “asu” 201006 fair value measurements disclosures topic 820improving disclosures fair value measurements asu requires new disclosures significant transfers levels 1 2 fair value measurements separate disclosures purchases sales issuances settlements relating level 3 fair value measurements asu also clarifies existing disclosure requirements regarding inputs valuation techniques well level disaggregation class assets liabilities separate fair value measurements disclosed company adopted asu 201006 beginning fiscal 2010 adoption asu material impact company’s condensed consolidated financial statements note 2 cash equivalents investments following summary cash equivalents investments thousands company’s restricted longterm italian state bonds secure italian value added tax filing arrangements unrealized losses bonds mainly relate loss foreign currency translation company intends ability hold restricted italian state bond investments recovery likely sell investments maturity company’s certificate deposit 01 million december 31 2009 secured company’s letter credit required european value added tax filing arrangements note 3 fair value measurements following table represents company’s fair value hierarchy financial assets cash equivalents investments current assets measured fair value recurring basis thousands following table provides summary changes fair value company’s level 3 financial assets fiscal 2008 2009 2010 thousands november 2008 company accepted auction rate securities rights offer “settlement agreement” ubs ag return general release claims grant right ubs ag purchase company’s ars time full par value company received right require ubs ag purchase company’s ars beginning june 2010 “rights” entering settlement agreement company 1 received right “put option” sell auction rate securities back investment firm par sole discretion anytime period june 30 2010 july 2 2012 2 gave investment firm right purchase auction rate securities sell company’s behalf par anytime execution settlement agreement july 2 2012 june 30 2010 company exercised put option sold ars back investment firm note 4 inventories consisted following thousands note 5 prepaid expenses current assets prepaid expenses current assets consisted following thousands note 6 property equipment property equipment consisted following thousands depreciation expense 03 million years ended december 31 2010 2009 2008 note 7 assets consisted following thousands note 8 accrued liabilities following summary accrued liabilities thousands note 9 commitments leases may 2007 company entered noncancelable operating lease agreement corporate headquarters “the lease” effective july 1 2007 june 30 2014 option renew additional five year period september 2008 company entered amendment lease additional office space “the expansion agreement” expires june 30 2014 option renew additional five year period lease expansion agreements contain rent escalations approximately 4 6 per year respectively company recognizing rental expense straightline basis lease terms lease expansion agreements company provided allowances amounts approximately 02 million 05 million respectively towards cost leasehold improvements incentive rent respectively company recorded allowances deferred rent amortized lease terms reduction rent expense leases require company pay insurance taxes prorata share operating expenses company also leases office facilities equipment outside us noncancelable operating lease agreements subleases certain office facilities third party rent expense years ended december 31 2010 2009 2008 16 million 16 million 11 million respectively future minimum lease payments sublease rental income noncancelable facility equipment operating lease agreements december 31 2010 follows thousands note 10 silicon valley bank lineofcredit october 1 2010 company’s subsidiaries sciclone pharmaceuticals international ltd sciclone pharmaceuticals international china holding ltd borrowers terminated existing 6 million credit facility silicon valley bank “svb” entered 15 million loan security agreement svb “the debt financing facility” sciclone pharmaceuticals inc guarantor debt financing facility debt financing facility bears interest borrowed funds svb’s prime rate plus 125 525 december 31 2010 outstanding balances secured first priority secured interest company’s assets including intellectual property event default company required meet certain financial covenants including minimum liquidity defined subject certain minimum fees interest payments company also required meet certain operating covenants limit ability incur liabilities create liens make capital expenditures pay dividends distributions make investments dispose assets debt financing facility expires october 1 2012 upon termination amounts borrowed must repaid full december 31 2010 company borrowed 25 million debt financing facility required maintain debt coverage ratio 135 1 equal 34 million cash svb cash accounts meet financial liquidity covenant company compliance covenants december 31 2010 company capitalized 01 million costs associated origination 15 million facility amortized interest investment expense term debt financing facility company recognized expense approximately 01 unamortized loan origination fees associated initial 6 million credit facility upon termination connection initial credit facility entered november 2008 company issued silicon valley bank fiveyear warrant purchase 60000 shares company’s common stock exercise price 086 per share silicon valley bank exercised warrant full december 8 2010 net share settlement resulting issuance 47132 shares company’s common stock note 11 related party transactions company licensed largest shareholder sigmatau exclusive zadaxin thymalfasin thymosin alpha 1 development marketing rights cover countries european union defined january 1 1995 addition iceland norway switzerland company’s collaboration sigmatau governed agreement entered 2000 term expiring march 2012 unless renewed well amendments agreement regarding particular development efforts addition agreement governed company’s joint collaboration development thymalfasin certain indications sharing intellectual property respective territories agreement also provides sigmatau sells zadaxin licensed territory purchase product sciclone specified price subject certain adjustments company currently anticipate sigmatau sell zadaxin nominal amounts italy pursuant agreement sigmatau conducted trials europe treatment malignant melanoma hepatitis c company conducted certain trials us treatment hepatitis c party agreed provide certain funding support development efforts development obligations completed sigmatau completed phase 3 hepatitis c triple therapy clinical trial europe delivered final report trial october 2009 company paid sigmatau aggregate 40 million funding support course patient enrollment trial period including period completion final report company’s accounting policy recording funding amounts due sigmatau record amounts research development expense trial period including period completion final report based level activity trial company recorded 01 million 03 million research development expense related trial years ended december 31 2009 2008 respectively ongoing development reimbursement obligations agreement milestones similar terms currently effect however company continues cooperate sigmatau exploring development thymalfasin indications including vaccine adjuvant aspergillosis note 12 income taxes company recorded income tax expense 22 million 06 million 05 million years ended december 31 2010 2009 2008 respectively related operations china company’s statutory tax rate china 22 20 18 years ended december 31 2010 2009 2008 respectively company recorded us federal state income tax expense years ended december 31 2010 2009 2008 undistributed earnings company’s foreign subsidiaries considered permanently invested outside us taxes provided amounted approximately 124 million december 31 2010 domestic foreign components income loss provision tax years ended december 31 follows thousands reconciliation statutory federal income tax rate 34 actual tax rate years ended december 31 follows thousands significant components company’s deferred tax assets december 31 follows thousands realization deferred tax assets dependent upon company generating future taxable income timing amount uncertain accordingly deferred tax assets fully offset valuation allowance valuation allowance decreased increased approximately 07 million 67 million 130 million years ended december 31 2010 2009 2008 respectively december 31 2010 company federal net operating loss carryforwards approximately 1227 million expire years 2011 2028 federal research development orphan drug investment tax credit carryforwards approximately 123 million expire years 2011 2020 december 31 2010 company state net operating loss carryforwards approximately 337 million begin expire year 2012 utilized state research development tax credit carryforwards approximately 21 million expire approximately 91 million operating loss carryforwards relate benefits associated stock option deductions recognized 36 million credited directly stockholders’ equity utilization company’s net operating loss credit carryforwards may subject substantial annual limitation due ownership change limitations provided internal revenue code similar state provisions annual limitation could result expiration net operating loss credit carryforwards utilization december 31 2010 unrecognized tax benefit 42 million 06 million recognized would affect effective tax rate 36 million offset valuation allowance reconciliation beginning ending amount unrecognized tax benefit follows thousands tax years 19952010 remain open examination major taxing jurisdictions company subject furthermore company notified internal revenue service 2008 us federal tax return selected examination process yet commenced although potential resolution uncertain tax positions involve multiple tax periods jurisdictions reasonably possible reduction 06 million unrecognized tax benefits may occur within next 12 months note 13 stockholders’ equity stock award plans company’s 1995 equity incentive plan reserved 6100000 shares common stock issuance permits grant incentive stock options nonstatutory stock options forms equity compensation although 1995 plan expired outstanding stock options relating fully valid company’s 2005 equity incentive plan “2005 plan” reserved 10600000 shares common stock issuance 2005 plan permits grant incentive stock options nonstatutory stock options restricted stock units performance shares forms equity compensation december 31 2010 approximately 3679000 shares common stock available future issuance 2005 plan 1995 2005 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years upon achievement certain market service conditions see stockbased compensation company’s 1995 nonemployee director stock option plan “1995 director plan” reserved 750000 shares common stock issuance 1995 director plan permits grant nonqualified stock options nonemployee directors although 1995 directors plan expired outstanding stock options relating fully valid company’s 2004 outside directors stock option plan “2004 director plan” reserved 1765000 shares common stock issuance 2004 director plan automatically grants nonqualified stock options nonemployee directors upon appointment first election company’s board directors “initial grant” annually upon reelection board directors company’s annual meeting stockholders “annual grant” december 31 2010 approximately 425000 shares common stock available future issuance 2004 director plan 1995 2004 director plans options granted fair market value date grant expire ten years date grant initial grants become exercisable three equal annual installments beginning first anniversary date grant annual grants become exercisable twelve equal monthly installments date grant subject case director’s continuous service company’s board directors certain stock option awards subject accelerated vesting change control stockbased compensation cost charged income stock award plans 22 million 19 million 18 million respectively years ended december 31 2010 2009 2008 compensation cost capitalized inventory 44000 35000 49000 respectively years ended december 31 2010 2009 2008 income tax benefit recognized income statement sharebased compensation arrangements fair value non performancebased non target stockpricebased option granted company’s stock award plans estimated date grant using blackscholes option valuation model single option approach following weightedaverage assumptions years ended december 31 riskfree interest rate based us treasury yield curve effect time grant expected dividend yield based company’s history expectations dividend payouts expected volatility based historical volatility company’s stock expected term options granted derived historical data employee exercises terminations following table summarizes stock option activity december 31 2010 changes year ended presented thousands except per share amounts company granted chief executive officer targetstockpricebased options purchase 600000 300000 shares company’s common stock exercise price per share 249 181 respectively options term 10 years shares option vest upon company’s common stock trading least 30 consecutive calendar days greater target closing stock price reported nasdaq stock market 450 june 2 2009 150000 shares b 600 june 2 2010 150000 shares c 800 june 2 2011 150000 shares 1000 june 2 2012 150000 shares e 1200 june 2 2013 150000 shares f 1400 june 2 2014 150000 shares price adjusted stock dividends stock splits similar changes company’s capital structure grants considered awards market service conditions compensation expense recognized options long service requirements met even market conditions reached market conditions grants monte carlo simulation option pricing model used calculate grant date fair value per share 170 088 respectively related six vesting portions awards assumptions riskfree interest rate 510 388 respectively volatility factor 94 8914 respectively dividend yield 0 expected life 10 years related compensation costs expensed service periods six vesting portions awards may 2010 company amended targetstockpricebased options purchase aggregate 750000 shares company’s common stock still subject vesting granted chief executive officer amendment modified vesting provisions options 136th unvested stock options vest monthly threeyear period initial vesting occurring june 1 2010 fair value modified award estimated using blackscholes option valuation model assumptions riskfree rate 228 volatility factor 7183 dividend yield 0 expected life 507 years incremental compensation cost resulting modification remaining unrecognized compensation expense original award recognized ratably threeyear vesting period company recorded expense 03 million 02 million 03 million years ended december 31 2010 2009 2008 respectively related options company granted certain performancebased options purchase shares company’s common stock exercise price equal closing price share company’s common stock grant date options fully vest upon meeting performance goal within established time frame performance goal met option within established time frame option generally tenyear term measured date grant performance goal met within established time frame option expires entirety grant date fair value per share awards calculated using blackscholes option pricing model using following assumptions expected terms ranging 483502 years volatility factor ranging 69067266 risk free interest rates ranging 172243 company recognizes expense related performancebased option period time company determines probable performance goal achieved 2009 company extended period two company’s departed board members may exercise outstanding vested stock options following cessation service company ninety days second anniversary date cessation service ceased june 9 2009 company recorded expense 01 million year ended december 31 2009 related modifications weightedaverage fair value stock options granted years ended december 31 2010 2009 2008 210 076 098 respectively intrinsic value options time exercise 13 million 17 million 01 million years ended december 31 2010 2009 2008 respectively estimated fair value shares vested years ended december 31 2010 2009 2008 19 million 15 million 16 million respectively december 31 2010 unamortized compensation expense related unvested options approximately 39 million weighted average period compensation expense related options recognized approximately 227 years cash received stock option exercises 14 million 26 million 01 million years ended december 31 2010 2009 2008 respectively employee stock purchase plan december 31 2010 1300000 shares common stock reserved issuance company’s employee stock purchase plan “espp” terms espp eligible employees may choose 15 salary withheld purchase company’s common stock may purchase 1000 shares per offering period offering espp threemonth period commencing offering period beginning june 1 2010 purchase price stock issued espp equal 85 lower fair market value share common stock first day offering final day offering period year ended december 31 2010 company recorded 16000 expense related espp issued 16426 shares expense recorded shares issued related espp years ended december 31 2009 2008 december 31 2010 approximately 566000 shares common stock available issuance espp stockholder rights agreement december 18 2006 company’s board directors declared dividend distribution one preferred stock purchase right collectively “rights” outstanding share company’s common stock right entitles registered holder purchase company one onethousandth share company’s series preferred stock 0001 par value price 2500 pursuant rights agreement dated december 19 2006 company mellon investor services llc “rights agreement” rights initially trade common stock become exercisable person group acquires 15 company’s common stock without prior board approval event rights permit company’s stockholders acquiror purchase company’s common stock market value twice exercise price rights lieu preferred stock alternatively rights become exercisable company’s board directors may authorize issuance one share company’s common stock exchange right exercisable addition event certain business combinations rights permit purchase common stock acquiror 50 discount rights held acquiror become null void case prior person group acquiring 15 rights redeemed 0001 action board rights agreement contains exception 15 ownership threshold shares currently beneficially owned sigmatau finanziaria spa rights expire december 19 2016 rights agreement includes requirement committee independent directors evaluate rights agreement least every three years note 14 401k plan company pretax savings plan covering us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions company contributions terminated company’s discretion approximately 02 million years ended december 31 2010 2009 2008 note 15 income year ended december 31 2010 included approximately 10 million nontaxable grants awarded company november 2010 related research development activities scv07 zadaxin part us department treasury’s therapeutic discovery project program note 16 corporate matters august 5 2010 sciclone contacted united states securities exchange commission “sec” advised sec initiated formal nonpublic investigation sciclone sec issued subpoena sciclone requesting variety documents information subpoena requests documents relating range matters including limited potential payments transfers anything value regulators governmentowned entities china bids contracts state governmentowned entities china joint venture partner intermediary local agent company china company’s ethics anticorruption policies training audits certain company financial disclosures august 6 2010 company received letter united states department justice “doj” indicating doj investigating foreign corrupt practices act “fcpa” issues pharmaceutical industry generally doj information company’s practices suggesting possible violations company intends cooperate fully sec doj conduct investigations response matters company’s board directors appointed special committee independent directors oversee company’s response government inquiry based initial review special committee decided undertake independent investigation matters reflected arising sec doj investigations including limited certain sales marketing matters china order evaluate whether violation fcpa laws occurred special committee concluded investigation reached conclusions date special committee management made final determination regarding whether violation fcpa law regulation occurred however anticipate special committee finalize findings near future may include findings regarding potential fcpa issues recommendations regarding additional remediation measures possible suggestions regarding personnel issues course review special committee instructed management evaluate expand company’s training employees regarding understanding compliance laws including fcpa antibribery laws regulations ii evaluate existing compliance antibribery guidelines prepare new detailed guidelines implementation review board andor committees board iii implement preapproval policy requiring compliance officer preapprove certain expenses including payments reimbursement third party gifts travel expenses honoraria sponsorships certain third party events consistently maintained policy employees comply applicable laws however reached certain conclusions regarding effectiveness implementation policy course evaluation existing training policies internal controls financial reporting expense approval expense reimbursement practices matters brought attention management special committee determined guidelines employee training expense approval practices internal controls respect certain matters including payment reimbursement third party gifts travel expenses honoraria sponsorship certain third party events required improvements order management provide reasonable assurance implementation policy compliance applicable laws addition management determined material weakness internal control financial reporting december 31 2010 relating implementation policy compliance laws described item 9a report first quarter fiscal 2011 initiated commenced various remediation efforts provide reasonable assurance implementation policy compliance laws including fcpa antibribery laws described item 9a report also determined internal controls provided adequate information us monitor policy compliance laws following company’s announcement investigations purported class actions naming sciclone certain officers defendants filed derivate lawsuits purportedly behalf company filed naming certain officers directors defendants see item 3 “legal proceedings” based information obtained date company determined potential liability may result probable cannot reasonably estimated therefore accrual made related matters consolidated financial statements december 31 2010 events occur company assess potential liability related pending investigations class action derivative lawsuits adjust estimates accordingly adjustments could materially impact company’s financial statements note 17 significant geographic information company operates one business segment development commercialization novel therapeutics treat chronic life threatening diseases december 31 2010 company’s product revenues generated sale zadaxin president ceo identified chief operating decision maker “codm” final authority resource allocation decisions performance assessment codm receive discrete financial information level business segment company’s domestic operations primarily consist research development company’s wholly owned international subsidiary sciclone pharmaceuticals international ltd engaged sales marketing product distribution worldwide information regarding geographic areas follows thousands note 18 selected quarterly financial data unaudited 1 three months ended december 31 2010 company recorded 15 million income tax expense related foreign operations china including 13 million additional tax expense fourth quarter 2010 08 million establish reserve company’s uncertain tax position china 2 three months ended june 30 2009 product sales increased attributable higher volume zadaxin company believes primarily due increased demand result h1n1 flu virus market penetration china item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc index consolidated financial statements report independent registered public accounting firm board directors stockholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 2012 2011 related consolidated statements income comprehensive income stockholders’ equity cash flows three years period ended december 31 2012 audits also included financial statement schedule item 15a2 financial statements schedule responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 2012 2011 consolidated results operations cash flows three years period ended december 31 2012 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein financial statements year ended december 31 2011 restated result accounting errors primarily related revenue recognition originating sciclone pharmaceuticals inc’s subsidiary china novamed fully described note 2 “revision previously issued consolidated financial statements” financial statements also audited accordance standards public company accounting oversight board united states sciclone pharmaceuticals inc’s internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated april 1 2013 expressed adverse opinion thereon ernst young llp redwood city california april 1 2013 sciclone pharmaceuticals inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements income thousands except per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements comprehensive income thousands see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements stockholders’ equity thousands see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows thousands see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies description business sciclone pharmaceuticals inc “sciclone” “company” incorporated 1990 revenuegenerating specialty pharmaceutical company substantial commercial business china product portfolio therapies oncology infectious diseases cardiovascular urological respiratory central nervous system disorders company’s lead product zadaxin® thymalfasin approved 30 countries may used treatment hepatitis b hbv hepatitis c hcv vaccine adjuvant certain cancers according local regulatory approvals addition zadaxin sciclone markets approximately 14 mostly partnered products china including depakine® widely prescribed broadspectrum anticonvulsant china tritace® ace inhibitor treatment hypertension stilnox® fastacting hypnotic shortterm treatment insomnia marketed ambien® us aggrastat® interventional cardiology product sciclone also pursuing registration several therapeutic products china presentation consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidated financial statements april 18 2011 sciclone acquired novamed pharmaceuticals inc “novamed” see note 9 commencing april 18 2011 company’s financial statements include assets liabilities operating results cash flows novamed use estimates preparation financial statements conformity us generally accepted accounting principles requires management make informed estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ materially estimates cash equivalents investments cash equivalents consist highly liquid investments original maturities three months less date purchase company records investments fair value determined available information consolidated balance sheet date company’s availableforsale portfolio december 31 2012 consisted money market funds certificate deposit restricted italian state bonds unrealized gains losses availableforsale securities included accumulated comprehensive income consolidated balance sheet realized gains losses declines value judged otherthantemporary availableforsale securities included earnings gains losses declines value judged otherthantemporary trading securities included earnings amortized cost securities adjusted amortization premiums accretion discounts maturity included earnings cost securities sold based specific identification method availableforsale investments evaluated impairment reporting period investment considered impaired fair value investment less cost consideration available evidence evaluate realizable value investment impairment determined otherthantemporary impairment loss recognized consolidated statement income year ended december 31 2010 company sold auction rate securities classified trading securities realized gains related investments 02 million fair value financial instruments fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs fair value measurements based threetier hierarchy prioritizes inputs used measure fair value three levels input level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities quoted prices available active market company determines fair value based upon quoted market prices classifies values level 1 valuation hierarchy quoted market prices available fair values based upon observable inputs quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities classified level 2 valuation hierarchy quoted prices observable inputs unavailable fair values based cash flow models classified level 3 valuation hierarchy cash flow models use inputs specific asset liability including estimates interest rates discount rates including yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods assets liabilities inputs reflect company’s assumptions market participants would use pricing assets liability including assumptions risk developed based best information available circumstances company’s assessment significance particular input fair value measurements requires judgment may materially affect valuation assets liability measured placement within fair value hierarchy financial instruments including accrued shortterm liabilities carried cost company believes approximates fair value shortterm maturity instruments concentration risk financial instruments potentially subject company concentration credit risk consist cash equivalents investments accounts receivable company exposed credit risk event default institutions holding cash equivalents investments extent amounts recorded consolidated balance sheet company’s cash equivalents held financial institutions company believes high credit quality times deposits may exceed government insured limits company experienced losses deposits cash equivalents people’s republic china “china” uses tiered method import distribute products distributors make sales country product imported licensed importers product sales revenues result sale company’s proprietary inlicensed products importing agents distributors promotion services revenues result fees received exclusively promoting products certain partners importing agents distributors partners company’s customers year ended december 31 2012 three customers china accounted 53 20 12 company’s revenues year ended december 31 2011 three customers china accounted 62 15 company’s revenues 2010 two largest customers accounted 74 14 revenues customer accounted 10 sales 2012 2011 2010 company’s largest customer periods third party holds majority interest company’s largest customer december 31 2012 approximately 337 million 86 company’s accounts receivable attributable four customers china including 276 million 70 attributable largest customer company generally require collateral customers company maintains reserves potential credit losses actual losses may vary significantly estimates company currently relies two suppliers provide key components zadaxin manufacturing supply although limited number manufacturers would able meet requirements manufacture components company believes suppliers could provide similar components comparable terms change suppliers however could cause delay manufacturing possible loss sales would affect operating results adversely majority company’s product sales us dollars however significant portion company’s revenues expenses denominated renminbi “rmb” significant portion company’s assets liabilities denominated rmb exposed foreign exchange risk rmb freely convertible foreign currencies china foreign exchange transactions required law transacted authorized financial institutions exchange rates quoted people’s bank china remittances currencies rmb company china require certain supporting documentation order affect remittance accounts receivable reserve company records receivable reserve based upon specific review overdue invoices company’s estimate reserve determined considering existing contractual payment terms payment patterns customers individual customer circumstances age outstanding receivables current customer relationships december 31 2012 company recorded receivable reserve approximately 10 million related total accounts receivable one customer 35 million actual collections could range 0 35 million receivable reserve represents company’s best estimate results though actual results may vary company continues pursue full amount receivables reserve product returns company maintains reserve product returns based estimates amount product returned customers may result expired product price reductions related sales based historical patterns analysis market demand andor percentage sales based industry trends management’s evaluation specific factors may increase risk product returns importing agents distributors contractual rights return except limited terms regarding product quality however company expected replace products expired deemed damaged defective delivered calculation product returns reserve requires estimates involves high degree subjectivity judgment result uncertainties involved estimating product returns reserve possibility materially different amounts could reported different conditions using different assumptions december 31 2012 2011 company estimated product returns reserve 01 million consolidated balance sheet related oncology products aggrastat product sales reserve considered necessary december 31 2010 expense recorded year ended december 31 2010 product returns part company’s restatement financial statements company recorded adjustments correct errors product returns reserve sales aggrastat sold subsidiary novamed prior date acquisition company concluded liability expired product existed time novamed acquisition related preacquisition sales december 31 2012 2011 liability aggrastat expired product 03 million 08 million respectively company evaluates returns reserve quarterly adjusts events indicate change estimate appropriate changes estimates could materially affect company’s results operations financial position possible company may need adjust estimates future periods inventories consist raw materials work progress finished goods products inventories valued lower cost market net realizable value cost determined firstin firstout basis include amounts related materials labor overhead company periodically reviews inventory order identify excess obsolete items obsolete excess items observed alternate uses inventory company record writedown net realizable value period impairment first recognized property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets generally three five years straightline basis leasehold improvements amortized shorter estimated useful life lease term straightline basis company’s policy identify record impairment losses necessary property equipment events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets intangible assets intangible assets reviewed impairment changes facts circumstances suggest carrying value assets may recoverable company’s policy identify record impairment losses necessary intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets company’s policy expense costs incurred connection renewal extension intangible assets part acquisition novamed company recorded intangible assets related promotion distribution contract rights year ended december 31 2012 company identified impairment indicators related intangible assets determined full impairment recorded refer net intangible assets note 7 information goodwill company accounted acquisition novamed purchase method accounting accordance financial accounting standards board accounting standards codification “asc” topic 805 business combinations purchase method accounting total acquisitiondate fair value assets liabilities recognized closing date total consideration paid sciclone novamed consisted cash sciclone common stock contingent consideration excess fair value total consideration transferred acquisitiondate fair value net tangible intangible assets liabilities assumed allocated goodwill tested impairment least annually whenever events circumstances occur indicate impairment might occurred accordance asc topic 350 intangibles goodwill contingent consideration part acquisition novamed company would required pay additional 430 million earnout upon successful achievement revenue earnings targets 2011 2012 fiscal years “earnout” “contingent consideration” fair value earnout remeasured period changes fair value recorded “contingent consideration” operating expenses december 31 2012 earnout determined zero september 30 2012 company used assistance thirdparty valuation expert estimate fair value contingent consideration using monte carlo simulation model refer contingent consideration note 4 acquisition note 9 information accrued expenses company makes estimates accrued expenses balance sheet date consolidated financial statements based facts circumstances known examples estimated accrued expenses include fees paid contract research organizations investigative sites connection clinical trials fees paid contract manufacturers connection production clinical trial materials professional services company periodically confirms accuracy estimates selected service providers makes adjustments necessary periods identified expenses related clinical trials generally accrued based estimates work performed level patient enrollment activities according protocols agreements financial terms agreements subject negotiation vary contract may result uneven payment flows payments certain contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective company’s accrual policy match recording expenses actual services received efforts expended company monitors planned protocols work performed patient enrollment levels related activities extent possible adjusts estimates accordingly company records liabilities estimated amounts litigation claims legal actions probable reasonably estimated likelihood material change estimated reserves dependent possible outcome settlement negotiations regulatory judicial review development facts circumstances extended litigation could change claims assessments amount range loss outstanding litigation uncertain company discloses footnotes financial statements unable make reasonable estimate material liability could result unfavorable outcomes events occur company assesses potential liability related pending litigation claims legal actions adjusts estimates accordingly adjustments could materially impact financial statements foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using average rates exchange effect period intangible assets goodwill generally recorded local currency functional currency subsidiaries located china result carrying values intangible assets goodwill may fluctuate value renminbi compared us dollar gains losses translation financial statements denominated foreign currencies included separate component accumulated comprehensive income statement stockholders’ equity company records foreign currency transactions exchange rate prevailing date transaction resultant gains losses included results operations foreign currency transaction gains losses significant period presented revenue recognition company recognizes revenue persuasive evidence arrangement exists services rendered delivery occurred price buyer fixed determinable collectability reasonably assured product revenue company earns product revenue selling manufactured zadaxin product time delivery sales zadaxin importing agents distributors recognized time shipment title product transferred company also earns product revenue purchasing medical products pharmaceutical companies selling directly importers distributors sales pfizer products date acquisition novamed subsidiary april 2011 october 2012 based “sellthrough” method distribution arrangement products allowed payment terms dependent distributor sold product company maintain information timing “sellthrough” pfizer products distributor period therefore company applied cash receipts approach application “sellthrough” method reliable information available accordingly period time revenue sales pfizer products recognized upon receipt cash distributor effective fourth quarter 2012 company entered new agreement distributor clarified “sellin” method revenue recognition provide consistency company’s policy regarding revenue recognition prospective basis product sales recognized “sellin” method medical products delivered importers distributors promotion services revenue company recognizes promotion services revenue designated medical products delivered distributors specified promotional contract marks period marketing promotional services rendered revenue recognition criteria met sales tax surcharge expense sales taxes surcharge costs expensed incurred included sales marketing expense company generally subject 5 business tax surcharge promotion services medical products relevant taxation laws china sales tax surcharge costs amounted approximately 38 million 26 million 10 million years ended december 31 2012 2011 2010 respectively research development expenses research development costs expensed incurred costs consist primarily salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment licenserelated fees services performed clinical research organizations research institutions outside service providers expenses related clinical trials generally accrued based estimates work performed level patient enrollment activities according protocols agreements company monitors planned protocols work performed patient enrollment levels related activities extent possible adjusts estimates accordingly nonrefundable advance payments research development goods services recognized expense related goods delivered related services provided shipping handling costs shipping handling costs incurred inventory purchases product shipments included cost product sales periods presented advertising expenses advertising costs expensed incurred included sales marketing expenses periods presented advertising expenses years ended december 31 2012 2011 2010 02 million stockbased compensation company records stockbased compensation costs relating sharebased payment transactions including stock options restricted stock units “rsus” employee stock purchase plans stockbased compensation expense stock options employee stock purchase plan estimated date grant based fair value award using blackscholes optionpricing model stockbased compensation expense rsus estimated date grant based number shares granted quoted price company’s common stock grant date stockbased compensation expense values recognized expense straightline basis requisite service period net estimated forfeitures stockbased compensation costs ultimately expected vest recognized expense ratably awards vest requisite service period generally one four years stock options rsus three months employee stock purchase plan company estimates prevesting forfeitures time grant analyzing historical data revises estimates subsequent periods actual forfeitures differ estimates total expense recognized vesting period awards ultimately vest certain targetstockpricebased options valued using monte carlo simulation options pricing model recognized expense service periods vesting portions awards six eight years refer also note 14 “stockholders’ equity” notes consolidated financial statements information regarding stockbased compensation income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse company provides valuation allowance net deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized company establishes reduces valuation allowance deferred tax assets provision income taxes increase decrease respectively period determination made company’s policy recognize interest penalties related estimated obligations tax positions component income tax expense amount accrued interest related tax positions taken tax returns included accrued current liabilities 08 million 04 million december 31 2012 2011 respectively company records liabilities related uncertain tax positions accordance guidance clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribing minimum recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return company believe uncertain tax positions currently pending material adverse effect consolidated financial statements although adverse resolution one uncertain tax positions period could material impact results operations period net income per share basic net income per share computed dividing net income weightedaverage number shares common stock outstanding period diluted net income per share computed dividing net income weightedaverage number common equivalent shares outstanding period diluted net income per share includes dilutive impact outstanding stock options employee stock purchase plan using treasury stock method following reconciliation numerator denominators basic diluted net income per share computations year ended december 31 thousands except per share amounts years ended december 31 2012 2011 shares common stock outstanding decreased approximately 4709000 781000 shares respectively result stock repurchases years ended december 31 2012 2011 2010 shares common stock outstanding increased approximately 1270000 2288000 730000 shares respectively result stock exercises addition year ended december 31 2011 shares common stock outstanding increased 8298110 shares due acquisition novamed refer note 9 years ended december 31 2012 2011 2010 approximately 3280492 3030664 2872513 shares respectively related outstanding stock options excluded calculation diluted net income per share inclusion would antidilutive addition years ended december 31 2012 2011 2010 118046 35068 155000 shares respectively subject market performance conditions excluded calculation diluted net income per share performance market criteria met segment information company operates two segments refer note 19 note 2 revision previously issued consolidated financial statements company revised consolidated financial statements year ended december 31 2011 revised financial information included 2012 form 10k identified “restated” concurrent filing form 10k company also filing amended quarterly reports form 10qa first second third quarters 2012 restate consolidated financial statements therein consolidated financial statements second third quarters related year date periods 2011 effects restatements reflected items revised herein restatements relate accounting errors originating company’s subsidiary china novamed acquired april 18 2011 accounting errors relate primarily following • timing revenue recognition certain pfizer products sold one distributors company’s subsidiary novamed company’s policy customers’ obligations pay product final product delivered however company determined various factors including override certain controls indicating sales novamed’s distribution arrangement pfizer products distributor date acquisition novamed third quarter 2012 “relevant periods” allowed contingent payment terms dependent upon distributor sold products result review evaluation matter company believes instead recording revenue time sale distributor “sellin” method previously reflected financial statements relevant periods revenue arrangements effect company’s subsidiary novamed recognized company received payment products “sellthrough” “cash receipts” method effective fourth quarter 2012 company entered new agreement distributor clarified “sellin” method revenue recognition provide consistency company’s policy regarding revenue recognition prospective basis december 31 2012 company received payment revenues recognized “sellthrough” method • recognition previously unrecognized product return reserves sales aggrastat sold company’s subsidiary novamed prior date acquisition company concluded liability expired product existed time novamed acquisition related preacquisition sales revisions impact increasing company’s revenues 30 million ninemonths ended september 30 2012 increasing company’s net income 20 million period basic diluted earnings per share increased 004 003 respectively ninemonths ended september 30 2012 september 30 2012 accounts receivable decreased 15 million inventory increased 13 million goodwill related acquisition novamed increased 19 million revisions year ended december 31 2011 impact decreasing company’s revenues 11 million decreasing company’s net income 03 million basic diluted earnings per share decreased 001 december 31 2011 accounts receivable decreased 38 million inventory increased 23 million goodwill related acquisition novamed increased 19 million revisions consolidated statements cash flows material impact amounts previously reported net cash operating activities investing activities financing activities result net impact net change cash equivalents previously reported periods following table presents impact revisions company’s previously issued consolidated balance sheet december 31 2011 thousands 1 accounts receivable decreased 38 million inventory increased 23 million related company changing “sellin” method “sellthrough” method revenue recognition certain pfizer products sold company 2 goodwill increased 10 million accrued current liabilities increased 10 million related company recording liability expired product existed time novamed acquisition related preacquisition aggrastat product sales goodwill also increased 09 million related company changing “sellin” method “sellthrough” method revenue recognition certain pfizer products sold company following table presents impact revisions company’s previously issued consolidated statement income year ended december 31 2011 thousands 3 revenue decreased 11 million cost product sales decreased 06 million mainly related company changing “sellin” method “sellthrough” method revenue recognition certain pfizer products sold company’s novamed subsidiary 4 sales marketing expense decreased 03 million related payment liability expired aggrastat product offset liability sales commissions following table presents impact revisions company’s previously issued consolidated statement cash flows year ended december 31 2011 thousands restatement effect net cash provided operating activities net cash used investing activities net cash used provided financing activities net increase cash equivalents 5 changes net cash used accounts receivable inventory mainly related company changing “sellin” method “sellthrough” method revenue recognition certain pfizer products sold company note 3 available sale investments following summary availableforsale investments thousands cost securities sold based specific identification method company’s restricted italian state bonds secure italian value added tax filing arrangements unrealized losses bonds mainly relate loss foreign currency translation company concluded ability likely hold restricted italian state bond investments maturity recovery cost basis company’s certificate deposit 01 million december 31 2012 secures company’s letter credit required european value added tax filing arrangements company’s money market funds december 31 2012 include 23 million cash restricted account secure letter credit associated loan agreement shanghai pudong development bank co ltd refer also note 11 information regarding company’s loan agreement note 4 fair value measurements following table represents company’s fair value hierarchy financial assets availableforsale investments liability measured fair value recurring basis thousands following table provides summary changes fair value company’s level 3 financial assets liability fiscal 2010 2011 2012 thousands contingent consideration part acquisition novamed company would required pay additional 430 million earnout payments upon successful achievement revenue earnings targets 2011 2012 fiscal years “earnout” “contingent consideration” measurement period contingent consideration ended december 31 2012 payout contingent consideration determined zero terms governing earnout information regarding estimated fair value earnout disclosed note 9 acquistion auction rate securities put option november 2008 company accepted auction rate securities rights offer “settlement agreement” ubs ag return general release claims grant right ubs ag purchase company’s ars time full par value company received right require ubs ag purchase company’s ars beginning june 2010 “rights” entering settlement agreement company 1 received right “put option” sell auction rate securities back investment firm par sole discretion anytime period june 30 2010 july 2 2012 2 gave investment firm right purchase auction rate securities sell company’s behalf par anytime execution settlement agreement july 2 2012 june 30 2010 company exercised put option sold ars back investment firm note 5 inventories consisted following thousands december 31 2012 2011 company 23 million inventory held distributors related products sold novamed subsidiary note 6 property equipment property equipment consisted following thousands depreciation expense 06 million year ended december 31 2012 03 million years ended december 31 2011 2010 note 7 net intangible assets net intangible assets consisted following thousands part acquisition novamed company recorded intangible assets related promotion distribution contract rights included company’s china segment third quarter 2012 company identified impairment indicators related intangible assets company determined undiscounted cash flows estimated generated intangible assets less carrying amounts company performed discounted cash flow analysis related intangible assets determined full impairment recorded estimated fair value determined zero result company recognized noncash impairment loss approximately 427 million consolidated statement income year ended december 31 2012 fair value measurements based threetier hierarchy prioritizes inputs used measure fair value see note 1 significant level 3 unobservable inputs used fair value measurement intangible assets estimates projected revenues earnings discount rate approximately 20 assumptions regarding probability renewal customer contracts significant changes estimated revenues earnings would resulted adjustments fair value measurement change renewal probability rates customer contracts would also resulted significant change fair value measurement acquired promotion distribution contract intangible assets amortized straightline basis 135 years based estimated useful life amortization expense 26 million 25 million 0 years ended december 31 2012 2011 2010 respectively amortization expense recorded future periods related acquired promotion distribution contract intangible assets note 8 accrued liabilities following summary accrued liabilities thousands note 9 acquisition april 18 2011 sciclone acquired outstanding shares novamed pursuant terms share purchase agreement “agreement” dated april 18 2011 sciclone novamed shareholders novamed sciclone pharmaceuticals hong kong limited whollyowned subsidiary sciclone company acquired novamed bring additional broad sales marketing well regulatory extensive business capabilities pharmaceutical assets market well regulatory approval stage growing profitable china focused specialty pharmaceutical business terms agreement purchase price comprised upfront payments approximately 246 million cash 8298110 shares sciclone common stock contingent right receive additional cash consideration 430 million “earn out” “contingent consideration” based upon achievement revenue earnings targets 2011 2012 fiscal years agreement earnout based upon certain financial performance metrics including revenuebased formula adjusted ebitda earnings interest depreciation taxes based formula earnout provisions provide cumulative revenue china legacy novamed products two fiscal years ending december 31 2012 exceed 942 million cash payment ranging 92 million 115 million paid full amount payable revenue 1178 million ii adjusted ebitda two year period ending december 31 2012 exceeds 918 million cash payment 172 million 215 million paid full amount payable adjusted ebitda 1378 million adjusted ebitda defined agreement exclude certain expenses generally related operating results china including sciclone’s us research development expense certain sharebased compensation license fees paid sciclone new products certain legal advisory fees related agreement changeincontrol transactions certain fees expenses including legal fees governmental fines settlements paid respect pending formal nonpublic investigation conducted us securities exchange commission “sec” earnout provisions subject number adjustments acceleration provisions total earnout payments described could increased 100 million total maximum contingent cash consideration 430 million reduced 100 million depending upon whether company able achieve targets relating renewal depakine services agreement sanofi earnout payments would due 20 business days completion company’s audit fiscal year ending december 31 2012 earnout provisions subject various limitations conditions specified agreement fair value earnout remeasured period changes fair value recorded “contingent consideration” operating expenses december 31 2012 earnout determined zero september 30 2012 company used assistance thirdparty valuation expert estimate fair value contingent consideration using monte carlo simulation model estimated fair value contingent consideration subject fluctuations result adjustments certain performance metric projections used estimate fair value december 31 2011 significant unobservable inputs used fair value measurement contingent consideration revenue volatility 40 revenue discount rate 20 risk free rate 015 earnout discount rate including counterparty risk 5 estimates projected revenues earnings taxes assumptions regarding customer conditions employment termination considerations significant increases decreases estimated revenues earnings taxes customer conditions revenue volatility would resulted significantly higher lower fair value measurement generally increase decrease assumption used revenue discount rate accompanied decrease increase fair value contingent consideration company initially recorded 189 million estimated fair value contingent consideration fair value contingent consideration remeasured quarter changes fair value recorded contingent consideration expense gain december 31 2012 2011 company estimated fair value contingent consideration 0 154 million resulting noncash gain 154 million 35 million years ended december 31 2012 2011 respectively significant reduction valuation contingent consideration expense 2012 primarily due revenue ebitda targets achieved reduced probability renewal relating novamed’s product distribution agreements including particular target renewing depakine services agreement sanofi fiveyear term depakine services agreement extended december 31 2013 term less five years total purchase price novamed approximately 750 million comprised follows thousands purchase method accounting total acquisitiondate fair value assets liabilities recognized closing date excess consideration transferred acquisition date fair value net assets acquired recorded goodwill total purchase price net assets acquired included company’s consolidated balance sheet follows thousands restated fair value acquired promotion distribution contract intangible assets estimated using income approach income approach uses valuation techniques convert future amounts single present amount discounted company’s measurement based value indicated current market expectations future amounts fair value considered company’s estimates time acquisition future incremental earnings could achieved promotion distribution contract intangible assets included estimated acquired useful lives approximately 135 years discount rate 29 goodwill calculated excess consideration transferred net assets recognized represents future economic benefits arising assets acquired could individually identified separately recognized specifically goodwill recorded part acquisition novamed includes benefits company believes result combining operations novamed operations sciclone intangible assets qualify separate recognition well future yet unidentified products goodwill amortized deductible tax purposes following table represents changes goodwill years ended december 31 2012 2011 thousands restated deferred tax liabilities december 31 2011 reflected nondeductible amortization expenses associated promotion distribution contract intangible assets recognized part acquisition results operations novamed included company’s financial statements april 18 2011 date acquisition following summary prepared unaudited proforma basis reflects consolidated results operations year ended december 31 2011 2010 assuming novamed acquired january 1 2010 pro forma results continuing operations prepared comparative purposes necessarily reflect results would occurred acquisition occurred beginning years presented results may occur future thousands except per share data following table presents information novamed included sciclone’s consolidated statement income april 18 2011 december 31 2011 2012 thousands year ended december 31 2011 company recorded acquisitionrelated transaction costs 38 million included general administrative expense consolidated statements income note 10 commitments leases may 2007 company entered noncancelable operating lease agreement corporate headquarters “the lease” effective july 1 2007 june 30 2014 option renew additional five year period september 2008 company entered amendment lease additional office space “the expansion agreement” expires june 30 2014 option renew additional five year period lease expansion agreements contain rent escalations approximately 4 6 per year respectively company recognizing rental expense straightline basis lease terms lease expansion agreements company provided allowances amounts approximately 02 million 05 million respectively towards cost leasehold improvements incentive rent respectively company recorded allowances deferred rent amortized lease terms reduction rent expense leases require company pay insurance taxes prorata share operating expenses october 2011 company entered two noncancelable operating lease agreements primary office space china “the china lease” fixed lease terms october 15 2011 october 14 2014 options renew company recognize rental expense straightline basis lease term leases require company pay insurance prorata share operating expenses company also leases office facilities equipment outside us noncancelable operating lease agreements subleases certain office facilities third party rent expense years ended december 31 2012 2011 2010 29 million 21 million 16 million respectively future minimum lease payments sublease rental income noncancelable facility equipment operating lease agreements december 31 2012 follows thousands note 11 credit facilities line credit loan security agreement silicon valley bank “svb” “the credit facility” financing facility 15 million expired october 1 2012 credit facility bore interest borrowed funds bank’s prime rate plus 125 525 2012 outstanding balances loan agreement august 2012 company’s subsidiary novamed pharmaceuticals shanghai co ltd entered loan agreement shanghai pudong development bank co ltd 125 million renminbi approximately 20 million usd december 31 2012 90 million renminbi approximately 14 million usd borrowings outstanding loan secured 23 million letter credit company required maintain 23 million cash restricted bank account secure letter credit loan bears interest borrowed funds 75 expires august 29 2013 amounts borrowed must repaid expiration date note 12 reduction workforce march 2012 company implemented reduction workforce 11 fulltime employees primarily research development included company’s rest world including us segment restructuring follows discontinuation company’s scv07 phase 2b clinical trial reduction workforce resulted severancerelated charges approximately 11 million 01 million 10 million recognized general administrative research development expense respectively consolidated statement income year ended december 31 2012 december 31 2012 company paid 09 million accrued 02 million severancerelated charges company substantially completed restructuring activities december 31 2012 note 13 income taxes company recorded income tax benefit expense 33 million 07 million 22 million years ended december 31 2012 2011 2010 respectively related operations china company’s statutory tax rate china 25 2012 2425 2011 22 year ended 2010 company recorded us federal state income tax expense years ended december 31 2012 2011 2010 undistributed earnings company’s foreign subsidiaries considered permanently invested outside us taxes provided amounted approximately 450 million december 31 2012 upon distribution earnings company may subject us federal state income taxes although determining amount practical dependent amount us tax losses time repatriation domestic foreign components income loss benefit provision tax years ended december 31 follows thousands reconciliation statutory federal income tax rate 34 actual tax rate years ended december 31 follows thousands benefit provision income taxes years ended december 31 consisted following thousands deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components company’s deferred tax assets liabilities december 31 follows thousands realization deferred tax assets dependent upon company generating future taxable income timing amount uncertain accordingly deferred tax assets largely offset valuation allowance valuation allowance decreased approximately 77 million 49 million 07 million years ended december 31 2012 2011 2010 respectively december 31 2012 company federal net operating loss carryforwards approximately 874 million expire years 2020 2030 federal research development orphan drug investment tax credit carryforwards approximately 117 million expire years 2018 2031 december 31 2012 company state net operating loss carryforwards approximately 189 million expire years 2028 2030 utilized state research development tax credit carryforwards approximately 21 million expire approximately 42 million operating loss carryforwards relate benefits associated stock option deductions recognized credited directly stockholders’ equity utilization company’s net operating loss credit carryforwards may subject substantial annual limitation due ownership change limitations provided internal revenue code similar state provisions annual limitation could result expiration net operating loss credit carryforwards utilization december 31 2012 unrecognized tax benefit 61 million 25 million recognized would affect effective tax rate 36 million would offset valuation allowance reconciliation beginning ending amount unrecognized tax benefit follows thousands tax years 19952012 remain open examination major taxing jurisdictions company subject although 2012 internal revenue service concluded examination company’s 2008 2009 us federal tax returns additional tax assessments proposed adjustments relating taxable income years although timing income tax examinations uncertain amounts ultimately paid upon resolution issues raised taxing authorities may differ materially amounts accrued year anticipate material change amount unrecognized tax benefits next 12 months january 2013 united states enacted extension federal research tax credit december 31 2013 result company expects income tax provision first quarter 2013 include increase gross deferred tax assets 03 million reflecting full year 2012 federal research tax credit however due company’s full valuation allowance deferred tax assets impact company’s provision increase gross deferred tax asset offset increase valuation allowance note 14 stockholders’ equity stock award plans company’s 1995 equity incentive plan reserved 6100000 shares common stock issuance permits grant incentive stock options nonstatutory stock options forms equity compensation although 1995 plan expired outstanding stock options relating fully valid company’s 2005 equity incentive plan “2005 plan” reserved 13600000 shares common stock issuance 2005 plan permits grant incentive stock options nonstatutory stock options restricted stock units performance shares forms equity compensation december 31 2012 approximately 4167000 shares common stock available future issuance 2005 plan 1995 2005 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years upon achievement certain market service conditions see stockbased compensation company’s 1995 nonemployee director stock option plan “1995 director plan” reserved 750000 shares common stock issuance 1995 director plan permits grant nonqualified stock options nonemployee directors although 1995 directors plan expired outstanding stock options relating fully valid company’s 2004 outside directors stock option plan “2004 director plan” reserved 1765000 shares common stock issuance 2004 director plan automatically grants nonqualified stock options nonemployee directors upon appointment first election company’s board directors “initial grant” annually upon reelection board directors company’s annual meeting stockholders “annual grant” december 31 2012 approximately 184000 shares common stock available future issuance 2004 director plan 1995 2004 director plans options granted fair market value date grant expire ten years date grant initial grants become exercisable three equal annual installments beginning first anniversary date grant annual grants become exercisable twelve equal monthly installments date grant subject case director’s continuous service company’s board directors certain stock option awards subject accelerated vesting change control stockbased compensation following table summarizes stockbased compensation expenses included consolidated statements income thousands compensation cost capitalized inventory 01 million 01 million 44000 respectively years ended december 31 2012 2011 2010 income tax benefit recognized income statement sharebased compensation arrangements valuation assumptions fair value granted company’s stock option espp plans estimated date grant using blackscholes option valuation model single option approach following weightedaverage assumptions years ended december 31 riskfree interest rate based us treasury yield curve effect time grant expected dividend yield based company’s history expectations dividend payouts expected volatility based historical volatility company’s stock expected term options granted derived historical data employee exercises terminations stock options following table summarizes stock option activity december 31 2012 changes year ended presented thousands except per share term amounts 2008 company granted chief executive officer targetstockpricebased options purchase 600000 300000 shares company’s common stock exercise price per share 249 181 respectively options term 10 years shares option vest upon company’s common stock trading least 30 consecutive calendar days greater target closing stock price reported nasdaq stock market 450 june 2 2009 150000 shares b 600 june 2 2010 150000 shares c 800 june 2 2011 150000 shares 1000 june 2 2012 150000 shares e 1200 june 2 2013 150000 shares f 1400 june 2 2014 150000 shares price adjusted stock dividends stock splits similar changes company’s capital structure grants considered awards market service conditions compensation expense recognized options long service requirements met even market conditions reached market conditions grants monte carlo simulation option pricing model used calculate grant date fair value per share 170 088 respectively related six vesting portions awards assumptions riskfree interest rate 510 388 respectively volatility factor 94 8914 respectively dividend yield 0 expected life 10 years related compensation costs expensed service periods six vesting portions awards may 2010 company amended targetstockpricebased options purchase aggregate 750000 shares company’s common stock still subject vesting granted chief executive officer amendment modified vesting provisions options 136th unvested stock options vest monthly threeyear period initial vesting occurring june 1 2010 fair value modified award estimated using blackscholes option valuation model assumptions riskfree rate 228 volatility factor 7183 dividend yield 0 expected life 507 years incremental compensation cost resulting modification remaining unrecognized compensation expense original award recognized ratably threeyear vesting period company recorded expense 04 million 04 million 03 million years ended december 31 2012 2011 2010 respectively related options company granted certain performancebased options purchase shares company’s common stock exercise price equal closing price share company’s common stock grant date options fully vest upon meeting performance goal within established time frame performance goal met option within established time frame option generally tenyear term measured date grant performance goal met within established time frame option expires entirety company recognizes expense related performancebased option period time company determines probable performance goal achieved subsequently determined performance goal probable achievement expense related performancebased option reversed years ended december 31 2012 2011 2010 company recognized approximately 36000 02 million 04 million respectively expense related performancebased options weightedaverage fair value stock options granted years ended december 31 2012 2011 2010 336 279 210 respectively intrinsic value options time exercise 45 million 58 million 13 million years ended december 31 2012 2011 2010 respectively estimated fair value shares vested years ended december 31 2012 2011 2010 41 million 33 million 19 million respectively december 31 2012 unamortized compensation expense related unvested options approximately 50 million net forfeitures weighted average period compensation expense related options recognized approximately 247 years cash received stock option exercises 34 million 62 million 14 million years ended december 31 2012 2011 2010 respectively rsus following table summarizes rsu activity december 31 2012 changes year ended presented thousands rsus generally vest 25 approximately one year grant date remaining shares vesting either approximately annually quarterly equal installments three year period depending terms grant weighted average fair value grant date rsus 649 581 years ended december 31 2012 2011 respectively rsus granted company period prior 2011 december 31 2012 approximately 09 million unrecognized compensation cost net forfeitures related nonvested rsus expected recognized weighted average remaining period approximately 142 years employee stock purchase plan december 31 2012 1300000 shares common stock reserved issuance company’s employee stock purchase plan “espp” terms espp eligible employees may choose 15 salary withheld purchase company’s common stock may purchase 1000 shares per offering period offering espp threemonth period commencing offering period beginning june 1 2010 purchase price stock issued espp equal 85 lower fair market value share common stock first day offering final day offering period december 31 2012 approximately 505821 shares common stock available issuance espp repurchase common stock may november 2012 company’s board directors approved increase approximately 105 million 100 million respectively existing 20 million share repurchase program initiated october 2011 bringing total authorized program since inception approximately 405 million company repurchased retired approximately 781000 4709000 shares cost 35 million 248 million respectively years ended december 31 2011 2012 december 31 2012 124 million 405 million share repurchase program authorized board available future share repurchases repurchased shares retired constitute authorized unissued shares stockholder rights agreement december 18 2006 company’s board directors declared dividend distribution one preferred stock purchase right collectively “rights” outstanding share company’s common stock right entitles registered holder purchase company one onethousandth share company’s series preferred stock 0001 par value price 2500 pursuant rights agreement dated december 19 2006 company mellon investor services llc “rights agreement” rights initially trade common stock become exercisable person group acquires 15 company’s common stock without prior board approval event rights permit company’s stockholders acquirer purchase company’s common stock market value twice exercise price rights lieu preferred stock alternatively rights become exercisable company’s board directors may authorize issuance one share company’s common stock exchange right exercisable addition event certain business combinations rights permit purchase common stock acquirer 50 discount rights held acquirer become null void case prior person group acquiring 15 rights redeemed 0001 action board rights agreement contains exception 15 ownership threshold shares currently beneficially owned sigmatau finanziaria spa rights expire december 19 2016 rights agreement includes requirement committee independent directors evaluate rights agreement least every three years note 15 accumulated comprehensive income loss changes composition accumulated comprehensive income loss years ended december 31 2012 2011 2012 follows thousands note 16 401k plan company pretax savings plan covering us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions company contributions terminated company’s discretion approximately 02 million 03 million 02 million years ended december 31 2012 2011 2010 respectively note 17 income year ended december 31 2010 included approximately 10 million nontaxable grants awarded company november 2010 related research development activities scv07 zadaxin part us department treasury’s therapeutic discovery project program note 18 corporate matters august 5 2010 sciclone contacted sec advised sec initiated formal nonpublic investigation sciclone sec issued subpoena sciclone requesting variety documents information subpoena requests documents relating range matters including limited potential payments transfers anything value regulators governmentowned entities china bids contracts state governmentowned entities china joint venture partner intermediary local agent company china company’s ethics anticorruption policies training audits certain company financial disclosures august 6 2010 company received letter us department justice “doj” indicating doj investigating foreign corrupt practices act “fcpa” issues pharmaceutical industry generally doj information company’s practices suggesting possible violations company continue cooperate fully sec doj conduct investigations response matters company’s board appointed special committee independent directors “special committee” oversee company’s response government inquiry based initial review special committee decided undertake independent investigation matters reflected arising sec doj investigations including limited certain sales marketing matters china order evaluate whether violation fcpa laws occurred investigation special committee instructed management evaluate expand company’s training employees regarding understanding compliance laws including fcpa antibribery laws regulations ii evaluate existing compliance antibribery policies guidelines prepare new detailed policies guidelines implementation review sciclone’s board andor committees board iii implement preapproval policy certain expenses including payments reimbursement travel entertainment expenses sponsorships certain third party events iv hire vice president compliance internal audit monitor enforce compliance company’s policies special committee substantially concluded investigation matters may 4 5 2011 reported findings recommendations board directors special committee also reported findings sec doj special committee company continued cooperate ongoing sec doj investigations company’s form 10q period ended september 30 2012 filed sec november 9 2012 company disclosed among things noncash impairment loss fully write value intangible assets recorded part novamed acquisition remeasurement valuation contingent consideration expense recorded part novamed acquisition significant increase zadaxin channel inventory levels internal control issues primarily within novamed organization concluded material weakness internal control financial reporting following disclosure items company received subpoena sec requesting documents related various matters regarding novamed acquisition company’s operations china review subpoena order respond inquiries doj sec determine wrongdoing occurred audit committee determined undertake additional independent investigation additional matters including limited matters related acquisition novamed fcpa matters company unable predict consequences investigation regulatory agency audit committee special committee may company’s cooperation investigations resulted substantial legal accounting expenses diverted management’s attention business concerns could harm business ongoing investigations regulatory investigations might initiated future result similar substantial expenses management diversion harm business company fails comply regulations carry controls chinese foreign operations manner satisfies applicable laws business would harmed civil criminal action commenced us regulatory agency could result administrative orders company imposition significant penalties andor fines andor imposition civil criminal sanctions certain officers directors andor employees investigations results investigations remedial actions company taken may take result investigations may adversely affect business china company subject adverse findings resulting sec doj investigations independent investigation could required pay damages penalties remedies imposed upon addition company incur additional expenses related remedial measures undertaking could incur fines penalties period time necessary resolve investigations doj sec uncertain matters could require significant management financial resources could otherwise devoted operation business sec’s doj’s formal investigations continuing company cannot predict outcome investigations timing resolution however due significant uncertainty outcome investigation company unable reasonably estimate loss range loss may incurred december 31 2012 company therefore accrued liability contingent loss related fcpa investigation fines penalties may imposed losses may realized related investigations could materially impact company’s financial statements company continue reassess potential liability related investigations adjust estimates accordingly future periods following company’s announcement investigations purported class actions naming sciclone certain officers defendants filed derivate lawsuits purportedly behalf company filed naming certain officers directors defendants january 13 2011 derivative lawsuits consolidated single action “the consolidated derivative action” october 3 2011 parties consolidated action reached agreement settle lawsuit december 13 2011 court granted final approval settlement including payment approximately 25 million attorney’s fees entered final judgment dismissing claims settlement provides actions defendants dismissed prejudice release certain known unknown claims could brought later court arising allegations company agreed adopt certain corporate governance measures effect least three years agreed payment approximately 25 million attorney’s fees counsel plaintiffs 25 million paid sciclone’s insurers director officer liability policy march 11 2013 adam crum filed derivative lawsuit purportedly name sciclone friedhelm blobel gary titus jon saxe peter barrett richard hawkins gregg lapointe ira lawrence california superior court san mateo county captioned crum v blobel et al case civ520331 lawsuit alleges based restatement board management breached fiduciary duties company exercising oversight way allowed company file financial statements materially inaccurate plaintiff asserts claims breach fiduciary duty abuse control mismanagement plaintiff seeks among things injunctive relief disgorgement undisclosed damages attorneys’ fees costs company believes claims lack merit vigorously defend note 19 segment information geographic data company reports segment information based internal reporting used management evaluating segment performance based management’s estimates appropriate allocation resources segments company operates manages business primarily geographic basis accordingly company determined operating segments reporting units generally based nature location customers 1 china 2 rest world including us company evaluates performance operating segments based revenues operating income loss revenues geographic segments generally based location customers operating income segment includes revenues related cost sales operating expenses directly attributable segment operating income loss segment excludes nonoperating income expense summary information operating segments follows thousands 1 operating income china segment year ended december 31 2012 includes 427 million impairment charge intangible assets 2 operating income loss rest world segment includes change fair value contingent consideration research development expense company’s scv07 trial discontinued first quarter 2012 note 20 selected quarterly financial data unaudited information presented three months ended march 31 june 30 september 30 2012 three months ended june 30 september 30 december 31 2011 restated refer company’s march 31 june 30 september 30 2012 forms 10qa filed securities exchange commission note 2 information regarding restatement 1 three months ended march 2012 restatement revisions impact increasing revenues cost product sales net income 19 million 06 million 10 million respectively increasing basic diluted earnings per share 002 001 respectively 2 three months ended june 30 2012 restatement revisions impact increasing revenues cost product sales net income 11 million 04 million 06 million respectively increasing basic diluted earnings per share 001 3 three months ended september 30 2012 restatement revisions impact increasing revenues decreasing cost product sales increasing net income 7000 1000 04 million respectively increasing basic diluted earnings per share 001 4 three months ended september 30 2012 company identified impairment indicator respect intangible assets related promotion distribution contract rights recorded losses approximately 427 million recognize full impairment recorded benefit income tax approximately 68 million due impairment intangible assets resulted reversal deferred tax liabilities partially offset impact recognizing full valuation allowance remaining novamed deferred tax assets addition period company recorded noncash gain 128 million primarily related decrease estimated probability achieving targets relating novamed’s product distributor agreements including renewal agreement sanofi fiveyear term 5 three months ended june 30 2011 restatement revisions impact decreasing revenues cost product sales net income 12 million 10 million 01 million respectively decreasing diluted earnings per share 001 6 april 18 2011 sciclone acquired novamed commencing april 18 2011 company’s financial statements include assets liabilities operating results cash flows novamed 7 three months ended september 30 2011 restatement revisions impact increasing revenues cost product sales net income 19 million 12 million 06 million respectively increasing basic diluted earnings per share 001 8 three months ended december 31 2011 restatement revisions impact decreasing revenues cost product sales net income 18 million 09 million 09 million respectively decreasing basic diluted earnings per share 001 002 respectively following table presents impact revisions company’s previously issued selected quarterly financial data three months ended december 31 2011 thousands 9 changes selected quarterly financial data three months ended december 31 2011 mainly related company changing “sellin” method “sellthrough” method revenue recognition certain pfizer products sold company note 21 subsequent event company repurchased retired 502400 shares cost 25 million january 1 2013 march 27 2013 share repurchase program march 27 2013 99 million 405 million share repurchase program authorized board directors available future share repurchase item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc index consolidated financial statements report independent registered public accounting firm board directors shareholders sciclone pharmaceuticals inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position sciclone pharmaceuticals inc subsidiaries december 31 2013 results operations cash flows year ended december 31 2013 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 relates information year ended december 31 2013 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintain material respects effective internal control financial reporting december 31 2013 based criteria established internal controlintegrated framework 1992 issued committee sponsoring organizations treadway commission coso material weakness internal control financial reporting related effectiveness certain monitoring controls existed date material weakness deficiency combination deficiencies internal control financial reporting reasonable possibility material misstatement annual interim financial statements prevented detected timely basis material weakness referred described management’s annual report internal control financial reporting appearing item 9a considered material weakness determining nature timing extent audit tests applied audit 2013 consolidated financial statements opinion regarding effectiveness company’s internal control financial reporting affect opinion consolidated financial statements company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report referred responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audit financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audit also included performing procedures considered necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers zhong tian llp shanghai people’s republic china march 17 2014 report independent registered public accounting firm board directors stockholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheet sciclone pharmaceuticals inc december 31 2012 related consolidated statements income comprehensive income stockholders’ equity cash flows years twoyear period ended december 31 2012 audit also included financial statement schedule item 15a2 years twoyear period ended december 31 2012 financial statements schedule responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 2012 consolidated results operations cash flows years twoyear period ended december 31 2012 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp redwood city california april 1 2013 sciclone pharmaceuticals inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements income thousands except per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements comprehensive income thousands see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements stockholders’ equity thousands see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows thousands see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies description business sciclone pharmaceuticals inc “sciclone” “company” incorporated 1990 united states usheadquartered chinafocused specialty pharmaceutical company substantial commercial business china product portfolio therapies oncology infectious diseases cardiovascular disorders company’s lead product zadaxin® thymalfasin approved 30 countries may used treatment hepatitis b hbv hepatitis c hcv vaccine adjuvant certain cancers according local regulatory approvals addition zadaxin sciclone markets approximately 10 mostly partnered products china including aggrastat® interventional cardiology product sciclone also pursuing registration several therapeutic products china presentation consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidated financial statements april 18 2011 sciclone acquired novamed pharmaceuticals inc “novamed” see note 8 commencing april 18 2011 company’s financial statements include assets liabilities operating results cash flows novamed use estimates preparation financial statements conformity us generally accepted accounting principles requires management make informed estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ materially estimates cash equivalents investments cash equivalents consist highly liquid investments original maturities three months less date purchase company records investments fair value determined available information consolidated balance sheet date company’s availableforsale portfolio december 31 2013 consisted money market funds included cash equivalents certificate deposit included restricted cash investments unrealized gains losses availableforsale securities included accumulated comprehensive income consolidated balance sheet realized gains losses declines value judged otherthantemporary availableforsale securities included earnings gains losses declines value judged otherthantemporary trading securities included earnings amortized cost securities adjusted amortization premiums accretion discounts maturity included earnings cost securities sold based specific identification method availableforsale investments evaluated impairment reporting period investment considered impaired fair value investment less cost consideration available evidence evaluate realizable value investment impairment determined otherthantemporary impairment loss recognized consolidated statement income fair value financial instruments fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs fair value measurements based threetier hierarchy prioritizes inputs used measure fair value three levels input level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities quoted prices available active market company determines fair value based quoted market prices classifies values level 1 valuation hierarchy quoted market prices available fair values based observable inputs quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities classified level 2 valuation hierarchy quoted prices observable inputs unavailable fair values based cash flow models classified level 3 valuation hierarchy cash flow models use inputs specific asset liabilities including estimates interest rates discount rates including yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods assets liabilities inputs reflect company’s assumptions market participants would use pricing assets liabilities including assumptions risk developed based best information available circumstances company’s assessment significance particular input fair value measurements requires judgment may materially affect valuation assets liabilities measured placement within fair value hierarchy financial instruments including accrued shortterm liabilities carried cost company believes approximates fair value shortterm maturity instruments concentration risk financial instruments potentially subject company concentration credit risk consist cash equivalents investments accounts receivable company exposed credit risk event default institutions holding cash equivalents investments extent amounts recorded consolidated balance sheet company’s cash equivalents held financial institutions company believes high credit quality times deposits may exceed government insured limits company experienced losses deposits cash equivalents china pharmaceutical products imported distributed tiered method distribution company’s proprietary product zadaxin® company manufactures product using us european contract manufacturers generates product sales revenue sales zadaxin products sinopharm lingyun biopharmaceutical shanghai co ltd “sinopharm” sinopharm affiliates act importer also top “tier” distribution system “tier 1” china company’s zadaxin sales occur importer purchases product company without right return except damaged product quality control issues passage title risk loss transferred sinopharm time shipment company’s sale sinopharm clears products china import customs sells directly large hospitals holds additional product purchased inventory sale next tier distribution system secondtier distributors responsible sale distribution products purchase importer either sales product directly retail level hospitals pharmacies thirdtier local regional distributors turn sell products hospitals pharmacies company’s product sales revenues result sale company’s inlicensed products importing agents distributors promotion services revenues result fees received exclusively promoting products certain pharmaceutical partners importing agents distributors partners company’s customers exceeded 10 company’s total net revenue related china segment follows third party holds majority interest company’s largest customer december 31 2013 approximately 383 million 88 company’s gross accounts receivable attributable two customers china including 311 million 71 attributable largest customer company generally require collateral customers company maintains reserves potential credit losses actual losses may vary significantly estimates company currently relies two suppliers provide key components zadaxin manufacturing supply although limited number manufacturers would able meet requirements manufacture components company believes suppliers could provide similar components comparable terms change suppliers however could cause delay manufacturing possible loss sales would affect operating results adversely majority company’s product sales us dollars however significant portion company’s revenues expenses denominated renminbi “rmb” significant portion company’s assets liabilities denominated rmb exposed foreign exchange risk rmb freely convertible foreign currencies china foreign exchange transactions required law transacted authorized financial institutions exchange rates quoted people’s bank china remittances currencies rmb company china require certain supporting documentation order affect remittance accounts receivable reserve company records receivable reserve based specific review overdue invoices company’s estimate reserve determined considering existing contractual payment terms payment patterns customers individual customer circumstances age outstanding receivables current customer relationships accounts receivable charged point considered uncollectible december 31 2013 company 37 million accounts receivable past due ninety days december 31 2013 2012 company receivable reserve approximately 35 million 10 million respectively related gross accounts receivable 35 million one customer december 31 2013 one year past due company increased accounts receivable reserve 2013 result continual negotiations indicate accounts receivable balance may recoverable receivable reserve reflects company’s best estimate ultimate collection though actual collections may vary company continues pursue full amount accounts receivables company also additional receivable reserve 01 million december 31 2013 related another customer due company’s uncertainty collecting portion outstanding accounts receivable balance reserve product returns company maintains reserve product returns based estimates amount product returned customers may result expired damaged product delivery price reductions related sales based historical patterns analysis market demand andor percentage sales based industry trends management’s evaluation specific factors may increase risk product returns importing agents distributors contractual rights return except limited terms regarding product quality however company expected replace products expired delivery deemed damaged defective delivered calculation product returns reserve requires estimates involves high degree subjectivity judgment result uncertainties involved estimating product returns reserve possibility materially different amounts could reported different conditions using different assumptions december 31 2013 2012 company estimated product returns reserve 0 01 million respectively consolidated balance sheets related sales oncology products aggrastat® reserve product returns existed december 31 2013 december 31 2012 company recorded 03 million liability expired product existed time novamed acquisition related preacquisition sales paid 2013 company concluded liability expired product existed time novamed acquisition related preacquisition sales company evaluates need returns reserve quarterly adjusts events indicate change estimate appropriate changes estimates could materially affect company’s results operations financial position possible company may need adjust estimates future periods inventories consist raw materials work progress finished goods products inventories valued lower cost market net realizable value cost determined firstin firstout basis include amounts related materials labor overhead company periodically reviews inventory order identify excess obsolete items obsolete excess items observed alternate uses inventory company record writedown net realizable value period impairment first recognized property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets straightline basis office furniture fixtures generally amortized five years office equipment computer software generally amortized three years company’s vehicle amortized 4 years leasehold improvements amortized shorter estimated useful life lease term straightline basis company’s policy identify record impairment losses necessary property equipment events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets intangible assets intangible assets reviewed impairment changes facts circumstances suggest carrying value assets may recoverable company’s policy identify record impairment losses necessary intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets company’s policy expense costs incurred connection renewal extension intangible assets part acquisition novamed company recorded intangible assets related promotion distribution contract rights year ended december 31 2012 company identified impairment indicators related intangible assets determined full impairment recorded refer net intangible assets note 6 information goodwill company accounted acquisition novamed acquisition method accounting accordance financial accounting standards board accounting standards codification “asc” topic 805 business combinations acquisition method accounting total acquisitiondate fair value assets liabilities recognized closing date total consideration paid sciclone novamed consisted cash sciclone common stock contingent consideration excess fair value total consideration transferred acquisitiondate fair value net tangible intangible assets liabilities assumed allocated goodwill tested impairment least annually whenever events circumstances occur indicate impairment might occurred accordance asc topic 350 intangibles goodwill assigned company’s china segment focuses company’s primary pharmaceutical distribution market consisting acquired novamed business legacy china business company determined represent single reporting unit years ended december 31 2013 2012 2011 company tested goodwill impairment quantitatively comparing fair value reporting unit carrying amountstep one twostep impairment test addition third quarter fiscal 2013 company performed interim goodwill impairment analysis determine goodwill impaired result nonrenewal sanofi promotion agreement december 31 2013 comparing fair value reporting unit carrying amount company estimated fair value china reporting unit using discounted cash flow model valuation approach considers number factors include limited expected future cash flows growth rates discount rates requires us make certain assumptions estimates regarding industry economic factors future profitability business company determines carrying value reporting unit exceeds fair value company would calculate implied fair value reporting unit goodwill compared carrying value determine appropriate impairment charge completing company’s impairment review reporting unit third quarter 2013 fourth quarters 2013 2012 2011 company concluded goodwill impaired years contingent consideration part acquisition novamed company would required pay additional 430 million earnout successful achievement revenue earnings targets 2011 2012 fiscal years “earnout” “contingent consideration” fair value earnout remeasured period changes fair value recorded “contingent consideration” operating expenses december 31 2012 earnout determined zero september 30 2012 company used assistance thirdparty valuation expert estimate fair value contingent consideration using monte carlo simulation model refer contingent consideration note 3 acquisition note 8 escrow settlement agreement note 9 information accrued expenses company makes estimates accrued expenses balance sheet date consolidated financial statements based facts circumstances known examples estimated accrued expenses include fees paid contract research organizations investigative sites connection clinical trials fees paid contract manufacturers connection production clinical trial materials professional services company periodically confirms accuracy estimates selected service providers makes adjustments necessary periods identified expenses related clinical trials generally accrued based estimates work performed level patient enrollment activities according protocols agreements company makes adjustments necessary periods identified reflect actual levels work performed adjustments historically material financial terms agreements subject negotiation vary contract may result uneven payment flows payments certain contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective company’s accrual policy match recording expenses actual services received efforts expended company monitors planned protocols work performed patient enrollment levels related activities extent possible adjusts estimates accordingly company records liabilities estimated amounts litigation claims legal actions probable reasonably estimated likelihood material change estimated reserves dependent possible outcome settlement negotiations regulatory judicial review development facts circumstances extended litigation could change claims assessments amount range loss outstanding litigation uncertain company discloses footnotes financial statements unable make reasonable estimate material liability reasonably possible result unfavorable outcomes events occur company assesses potential liability related pending litigation claims legal actions adjusts estimates accordingly adjustments could materially impact financial statements foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using average rates exchange effect period intangible assets goodwill generally recorded local currency functional currency company’s subsidiaries located china result carrying values intangible assets prior write intangible assets goodwill may fluctuate value renminbi compared us dollar gains losses translation financial statements denominated foreign currencies included separate component accumulated comprehensive income statement stockholders’ equity company records foreign currency transactions exchange rate prevailing date transaction resultant gains losses included results operations foreign currency transaction gains losses significant period presented revenue recognition company recognizes revenue persuasive evidence arrangement exists services rendered delivery occurred price buyer fixed determinable collectability reasonably assured product revenue company recognizes product revenue selling manufactured zadaxin product time delivery sales zadaxin sinopharm affiliates recognized time shipment title product transferred company also earns product revenue purchasing medical products pharmaceutical companies selling directly importers distributors sales pfizer international trading shanghai ltd “pfizer” products date acquisition novamed pharmaceuticals shanghai co ltd “novamed” subsidiary april 2011 october 2012 based “sellthrough” method company’s distribution arrangement products allowed payment terms dependent distributor sold product company maintain information timing “sellthrough” pfizer products distributor period therefore company applied cash receipts approach application “sellthrough” method reliable information available accordingly period time revenue sales pfizer products recognized receipt cash distributor october 21 2012 company amended agreement distributor amendment removed contingent payment terms prior amendment agreement allowed delayed payment based timing sales distributor next tier customer amendment changed payment terms 60 days thus ensuring distributor could withhold payment distributor received payment sale product next tier customer combination revised payment terms together contractual restrictions distributor eg return rights terms may raise question whether taken title assumed “risk loss” permitted revenue recognized “sellin” basis upon amendment therefore october 21 2012 onward “sellin” method used company recognition related revenue product sales also recognized “sellin” method medical products delivered importers distributors promotion services revenue company recognizes promotion services revenue designated medical products delivered distributors specified promotion services contract marks period marketing promotion services rendered revenue recognition criteria met certain arrangements company required return refund portion promotion services fees received interim periods pharmaceutical customers defined annual sales targets achieved company’s agreements customers agreement terminated provided targets met “pro rata” basis date contract termination company entitled retain amounts paid due ability retain amounts paid upon contract termination provided applicable targets met “pro rata” basis interim date company elected recognize revenue interim periods without reduction amounts subject refund based method 2 accounting standards codification 60520s991 “accounting management fees based formula” company’s promotion agreements sanofi aventis sa “sanofi” consisting individual promotional agreements certain pharmaceutical products supplementary agreements extending terms thereof renewed expired december 31 2013 company received initial notification nonrenewal sanofi early october 2013 subsequent thereto company believes sanofi breached obligations agreements among things failing place orders supply product fourth quarter 2013 relation sales company generated failing pay promotion fees due novamed agreements december 31 2013 company 43 million uncollected receivables due sanofi related revenue recognized first three quarters 2013 company demanded sanofi make full payment promotional fees due novamed matter resolved company’s satisfaction company intends vigorously pursue claims sanofi arbitration company’s agreements sanofi contain provisions identical regardless individual product promotion agreement required refund portion promotion services fees received interim periods defined annual sales targets achieved consistent company’s past practice consistent achievement excess achievement annual revenue targets prior period based method 2 accounting standards codification 60520s991 “accounting management fees based formula” company recognized revenue interim periods without reduction amounts subject refund met substantially exceeded targets “pro rata” basis interim dates treatment subjecttorefund portion consistent contractual provisions provide sales targets measured prorated basis agreement hypothetically terminate given date due sanofi’s failure place orders shipment fourth quarter fully meet demand company generated company’s actual promotional fees receivable fourth quarter 2013 negatively impacted due failure company achieve defined annual sales targets fiscal 2013 company’s agreements sanofi failure reach annual sales target would result approximately 62 million subject refund related performance first three quarters 2013 however company’s agreements required sanofi continue support company’s sales efforts continuing provide product end terms agreements company believes obligation refund amounts subject provision inability achieve defined annual sales result failure perform sanofi company dispute sanofi concerning sanofi’s performance company therefore deferred revenue recognition approximately 29 million sanofi promotion fees fourth quarter 2013 pending resolution dispute company legally entitled least 29 million recorded receivable nonrecognition revenue resulted equal offsetting amount deferred revenue company’s revenues 2013 2012 2011 sanofi approximately 250 million 308 million 197 million respectively sales tax surcharge expense sales taxes surcharge costs expensed incurred included sales marketing expense company generally subject 5642 business tax surcharge promotion services medical products relevant taxation laws china sales tax surcharge costs amounted approximately 35 million 38 million 26 million years ended december 31 2013 2012 2011 respectively research development expenses research development costs expensed incurred costs consist primarily salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment licenserelated fees services performed clinical research organizations research institutions outside service providers expenses related clinical trials generally accrued based estimates work performed level patient enrollment activities according protocols agreements company monitors planned protocols work performed patient enrollment levels related activities extent possible adjusts estimates accordingly company makes adjustments necessary periods identified reflect actual levels work performed adjustments historically material nonrefundable advance payments research development goods services recognized expense related goods delivered related services provided shipping handling costs shipping handling costs incurred inventory purchases product shipments included cost product sales periods presented advertising expenses advertising costs expensed incurred included sales marketing expenses periods presented advertising expenses years ended december 31 2013 2012 2011 01 million 02 million 02 million respectively legal costs legal costs related loss contingencies expensed general administrative expense incurred stockbased compensation company records stockbased compensation costs relating sharebased payment transactions including stock options restricted stock units “rsus” employee stock purchase plans stockbased compensation expense stock options employee stock purchase plan estimated date grant based fair value award using blackscholes optionpricing model stockbased compensation expense rsus estimated date grant based number shares granted quoted price company’s common stock grant date stockbased compensation expense values recognized expense straightline basis requisite service period net estimated forfeitures stockbased compensation costs ultimately expected vest recognized expense ratably awards vest requisite service period generally one four years stock options rsus three months employee stock purchase plan company estimates prevesting forfeitures time grant analyzing historical data revises estimates subsequent periods actual forfeitures differ estimates total expense recognized vesting period awards ultimately vest income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse company provides valuation allowance net deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized company establishes reduces valuation allowance deferred tax assets provision income taxes increase decrease respectively period determination made company records liabilities related uncertain tax positions accordance guidance clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribing minimum recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return company believe uncertain tax positions currently pending material adverse effect consolidated financial statements although adverse resolution one uncertain tax positions period could material impact results operations period company’s policy recognize interest penalties related estimated obligations tax positions component income tax expense amount accrued interest related tax positions taken company’s tax returns included accrued current liabilities 12 million 08 million 04 million december 31 2013 2012 2011 respectively net income per share basic net income per share computed dividing net income weightedaverage number shares common stock outstanding period diluted net income per share computed dividing net income weightedaverage number common equivalent shares outstanding period diluted net income per share includes dilutive impact outstanding stock options employee stock purchase plan using treasury stock method following reconciliation numerator denominators basic diluted net income per share computations years ended december 31 thousands except per share amounts years ended december 31 2013 2012 2011 approximately 3378063 3280492 3030664 shares respectively related outstanding stock options excluded calculation diluted net income per share inclusion would antidilutive addition years ended december 31 2013 2012 2011 50171 118046 35068 shares respectively subject market performance conditions excluded calculation diluted net income per share performance market criteria met segment information company operates two segments refer note 19 reclassifications company reclassified restructuring charges 10 million 01 million research development expense general administrative expense respectively year ended december 31 2012 restructuring charges conform current year presentation reclassifications effect prior years’ net income stockholders’ equity new accounting standards february 2013 financial accounting standards board “fasb” issued accounting standard update require reclassification adjustments comprehensive income presented either financial statements notes financial statements accounting standard update effective company’s first quarter fiscal 2014 time company include required disclosures march 2013 fasb issued accounting standards update requiring entity release net income entire amount cumulative translation adjustment related investment foreign entity parent either sells part investment foreign entity longer holds controlling financial interest subsidiary group assets within foreign entity accounting standard update effective fiscal year beginning december 15 2013 company currently evaluating impact accounting standard update financial statements july 2013 financial accounting standards board issued accounting standards update 201311 income taxes topic 740 presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists “asu 201311” certain exceptions asu 201311 requires entities present unrecognized tax benefit portion unrecognized tax benefit reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward guidance effective interim annual periods beginning december 15 2013 either prospective retrospective basis early adoption permitted company plans adopting guidance commencing 2014 prospective basis company expect adoption guidance material impact consolidated results operations financial condition note 2 available sale investments following summary availableforsale investments thousands company realized 01 million losses related maturity italian state bonds year ended december 31 2013 amounts reclassified comprehensive income included expense net income company’s certificate deposit 01 million december 31 2013 secures company’s letter credit required european value added tax filing arrangements note 3 fair value measurements following tables represent company’s fair value hierarchy financial assets availableforsale investments measured fair value recurring basis thousands following table provides summary changes fair value company’s level 3 liability fiscal 2012 2011 thousands contingent consideration part acquisition novamed company would required pay additional 430 million earnout payments successful achievement revenue earnings targets 2011 2012 fiscal years “earnout” “contingent consideration” measurement period contingent consideration ended december 31 2012 payout contingent consideration determined zero terms governing earnout information regarding estimated fair value earnout disclosed note 8 acquisition note 4 inventories consisted following thousands december 31 2013 2012 company 24 million 23 million respectively inventory held distributors related products sold novamed subsidiary note 5 property equipment property equipment consisted following thousands depreciation expense 09 million 06 million 03 million years ended december 31 2013 2012 2011 respectively note 6 net intangible assets part acquisition novamed company recorded intangible assets related promotion distribution contract rights included company’s china segment third quarter 2012 company identified impairment indicators related intangible assets company determined undiscounted cash flows estimated generated intangible assets less carrying amounts company performed discounted cash flow analysis related intangible assets determined full impairment recorded estimated fair value determined zero result company recognized noncash impairment loss approximately 427 million consolidated statement income year ended december 31 2012 recorded intangible asset impairment fair value measurements based threetier hierarchy prioritizes inputs used measure fair value see note 1 significant level 3 unobservable inputs used fair value measurement intangible assets estimates projected revenues earnings discount rate approximately 20 assumptions regarding probability renewal customer contracts significant changes estimated revenues earnings would resulted adjustments fair value measurement change renewal probability rates customer contracts would also resulted significant change fair value measurement acquired promotion distribution contract intangible assets amortized straightline basis 135 years based estimated useful life amortization expense 0 26 million 25 million years ended december 31 2013 2012 2011 respectively amortization expense recorded future periods related acquired promotion distribution contract intangible assets note 7 accrued liabilities following summary accrued liabilities thousands note 8 acquisition april 18 2011 sciclone acquired outstanding shares novamed pursuant terms share purchase agreement “agreement” dated april 18 2011 sciclone novamed shareholders novamed sciclone pharmaceuticals hong kong limited whollyowned subsidiary sciclone company acquired novamed bring additional broad sales marketing well regulatory extensive business capabilities pharmaceutical assets market well regulatory approval stage growing profitable china focused specialty pharmaceutical business terms agreement purchase price comprised upfront payments approximately 246 million cash 8298110 shares sciclone common stock company would required pay additional 430 million earnout payments successful achievement revenue earnings targets 2011 2012 fiscal years “earn out” “contingent consideration” agreement earnout based certain financial performance metrics including revenuebased formula adjusted ebitda earnings interest depreciation taxes based formula earnout provisions provided cumulative revenue china legacy novamed products two fiscal years ended december 31 2012 exceeded 942 million cash payment ranging 0 115 million would paid full amount payable revenue 1178 million ii adjusted ebitda two year period ended december 31 2012 exceeded 918 million cash payment 172 million 215 million would paid full amount payable adjusted ebitda 1378 million adjusted ebitda defined agreement exclude certain expenses generally related operating results china including sciclone’s us research development expense certain sharebased compensation license fees paid sciclone new products certain legal advisory fees related agreement changeincontrol transactions certain fees expenses including legal fees governmental fines settlements paid respect pending formal nonpublic investigation conducted us securities exchange commission “sec” earnout provisions subject number adjustments acceleration provisions total earnout payments described could increased 100 million total maximum contingent cash consideration 430 million reduced 100 million depending upon whether company able achieve targets relating renewal depakine services agreement sanofi earnout payments would due 20 business days completion company’s audit fiscal year ended december 31 2012 earnout provisions subject various limitations conditions specified agreement fair value earnout remeasured period changes fair value recorded “change fair value contingent consideration” operating expenses december 31 2012 earnout determined zero september 30 2012 company used assistance thirdparty valuation expert estimate fair value contingent consideration using monte carlo simulation model estimated fair value contingent consideration subject fluctuations result adjustments certain performance metric projections used estimate fair value december 31 2011 significant unobservable inputs used fair value measurement contingent consideration revenue volatility 40 revenue discount rate 20 risk free rate 015 earnout discount rate including counterparty risk 5 estimates projected revenues earnings taxes assumptions regarding customer conditions employment termination considerations significant changes estimated revenues earnings taxes customer conditions revenue volatility would resulted changes fair value measurement generally change assumptions used revenue discount rate accompanied change fair value contingent consideration company initially recorded 189 million estimated fair value contingent consideration fair value contingent consideration remeasured quarter changes fair value recorded contingent consideration expense gain december 31 2012 2011 company estimated fair value contingent consideration 0 154 million resulting noncash gain 154 million 35 million years ended december 31 2012 2011 respectively earnout period closed december 31 2012 company contingent consideration recorded subsequent date significant reduction valuation contingent consideration expense 2012 primarily due revenue ebitda targets achieved reduced probability renewal relating novamed’s product distribution agreements including particular target renewing depakine services agreement sanofi fiveyear term depakine services agreement extended december 31 2013 term less five years acquisition method accounting total acquisitiondate fair value assets liabilities recognized closing date excess consideration transferred acquisition date fair value net assets acquired recorded goodwill total purchase price net assets acquired included company’s consolidated balance sheet follows thousands goodwill included company’s china segment calculated excess consideration transferred net assets recognized represents future economic benefits arising assets acquired could individually identified separately recognized specifically goodwill recorded part acquisition novamed reflected planned benefits combining operations novamed operations sciclone intangible assets qualify separate recognition well future yet unidentified products goodwill amortized deductible tax purposes following table represents changes goodwill years ended december 31 2013 2012 2011 thousands deferred tax liabilities december 31 2011 reflected nondeductible amortization expenses associated promotion distribution contract intangible assets recognized part acquisition results operations novamed included company’s financial statements april 18 2011 date acquisition following summary prepared unaudited proforma basis reflects consolidated results operations year ended december 31 2011 assuming novamed acquired january 1 2011 pro forma results continuing operations prepared comparative purposes necessarily reflect results would occurred acquisition occurred beginning year presented results may occur future thousands except per share data following table presents information novamed included sciclone’s consolidated statement income april 18 2011 december 31 2011in thousands year ended december 31 2011 company recorded acquisitionrelated transaction costs 38 million included general administrative expense consolidated statement income note 9 escrow settlement agreement october 16 2012 company made claim former stockholders novamed pursuant acquisition agreement relating acquisition novamed result company’s claim approximately 14 million cash held escrow 622363 shares company’s common stock held escrow released former novamed stockholders pending outcome company’s claim related damages company incurred result misrepresentations made novamed regarding various matters including estimated product return reserves aggrastat product date acquisition related expenses damages july 8 2013 company representatives former stockholders novamed entered “confidential escrow settlement agreement” pursuant company retained approximately 08 million cash 342300 shares common stock combined value approximately 26 million settlement date recorded income year ended december 31 2013 december 31 2013 company canceled retired shares note 10 commitments purchase obligations agreements certain company’s pharmaceutical partners company committed certain annual minimum product purchases contract subject termination annual minimum order met december 31 2013 company material unmet purchase obligations leases may 2007 company entered noncancelable operating lease agreement corporate headquarters “the lease” effective july 1 2007 june 30 2014 september 2008 company entered amendment lease additional office space “the expansion agreement” expires june 30 2014 lease expansion agreements contain rent escalations approximately 4 6 per year respectively company recognizing rental expense straightline basis lease terms lease expansion agreements company provided allowances amounts approximately 02 million 05 million respectively towards cost leasehold improvements incentive rent respectively company recorded allowances deferred rent amortized lease terms reduction rent expense leases require company pay insurance taxes prorata share operating expenses december 2013 company entered second amendment lease extending term lease additional four years june 30 2018 option renew additional five year period beginning july 1 2014 second amendment reduce amount leased office space approximately 21517 square feet currently leased portion currently subleased subtenant approximately 11886 square feet also reduce base rent current monthly base rent 120824 initial base rent 51704 first year rent escalations approximately 3 per year addition company receive rent abatement first four months extended lease term october 2011 company entered two noncancelable operating lease agreements primary office space china “the china lease” fixed lease terms october 15 2011 october 14 2014 options renew company recognizing rental expense straightline basis lease term leases require company pay insurance prorata share operating expenses company also leases office facilities equipment outside us noncancelable operating lease agreements subleases certain office facilities third party rent expense years ended december 31 2013 2012 2011 29 million 29 million 21 million respectively future minimum lease payments sublease rental income noncancelable facility equipment operating lease agreements december 31 2013 follows thousands note 11 credit facilities credit facility december 2013 company’s subsidiary novamed pharmaceuticals shanghai co ltd entered 100 million renminbi revolving line credit facility approximately 17 million usd maximum 150 million renminbi loan facility approximately 25 million usd secured accounts receivable shanghai pudong development bank co ltd “the credit facility” december 31 2013 100 million renminbi approximately 17 million usd borrowings outstanding revolving line credit facility must repaid june 4 2014 early repayment allowed credit facility bears interest borrowed funds people’s bank china 6month base rate plus 15 644 december 31 2013 credit facility expires november 30 2014 amounts borrowed must repaid expiration date loan agreement company’s 2012 loan agreement 125 million renminbi approximately 20 million shanghai pudong development bank co ltd expired august 29 2013 amounts borrowed repaid expiration date loan bore interest borrowed funds 75 years ended december 31 2013 2012 company paid interest approximately 81000 11000 respectively related loan agreement silicon valley bank “svb” line credit company’s loan security agreement svb “the credit facility” financing facility 15 million expired october 1 2012 credit facility bore interest borrowed funds bank’s prime rate plus 125 525 2012 outstanding balances note 12 restructuring charges december 2013 company announced plan significantly reduce workforce approximately 175 employees approximately 650 fulltime employees primarily sales marketing included company’s china segment restructuring decided result nonrenewal company’s distribution agreement sanofi december 31 2013 decision resulted severancerelated charges approximately 12 million recognized restructuring expense consolidated statement income year ended december 31 2013 december 31 2013 company paid 06 million restructuring related charges accrued 06 million severancerelated charges anticipates paying 2014 company anticipates reduction approximately 32 million sales marketing expenses year ended december 31 2014 related restructuring reduction workforce march 2012 company implemented reduction workforce 11 fulltime employees primarily research development included company’s rest world including us segment restructuring followed discontinuation company’s scv07 phase 2b clinical trial reduction workforce resulted severancerelated charges approximately 11 million recognized restructuring expense consolidated statement income year ended december 31 2012 december 31 2013 company completed scv07 restructuring activities note 13 income taxes company recorded income tax expense benefit 22 million 33 million 07 million years ended december 31 2013 2012 2011 respectively related operations china company’s statutory tax rate china 25 2013 2012 2425 year ended 2011 company recorded significant us federal state income tax expense years ended december 31 2013 2012 2011 undistributed earnings company’s foreign subsidiaries considered permanently invested outside us taxes provided amounted approximately 904 million december 31 2013 upon distribution earnings company may subject us federal state income taxes although determining amount practicable dependent amount us tax losses time repatriation domestic foreign components income loss provision benefit tax years ended december 31 follows thousands reconciliation statutory federal income tax rate 34 actual tax rate years ended december 31 follows thousands provision benefit income taxes years ended december 31 consisted following thousands deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components company’s deferred tax assets liabilities december 31 follows thousands realization deferred tax assets dependent upon company generating future taxable income timing amount uncertain accordingly deferred tax assets largely offset valuation allowance valuation allowance increased decreased approximately 44 million 77 million 49 million years ended december 31 2013 2012 2011 respectively december 31 2013 company federal net operating loss carryforwards approximately 1028 million expire years 2020 2033 federal research development orphan drug investment tax credit carryforwards approximately 121 million expire years 2018 2033 december 31 2013 company state net operating loss carryforwards approximately 281 million expire years 2014 2030 utilized state research development tax credit carryforwards approximately 21 million expire approximately 37 million valuation allowance relates benefits associated stock option deductions recognized credited directly stockholders’ equity utilization company’s net operating loss credit carryforwards may subject substantial annual limitation due ownership change limitations provided internal revenue code similar state provisions annual limitation could result expiration net operating loss credit carryforwards utilization december 31 2013 unrecognized tax benefit 61 million 29 million recognized would affect effective tax rate 32 million would offset valuation allowance reconciliation beginning ending amount unrecognized tax benefit follows thousands tax years 19952013 remain open examination major taxing jurisdictions company subject furthermore company notified internal revenue service 2011 us federal tax return selected examination 2012 internal revenue service concluded examination company’s 2008 2009 us federal tax returns additional tax assessments proposed adjustments relating taxable income years although outcome income tax examinations uncertain amounts ultimately paid resolution issues raised taxing authorities may differ materially amounts accrued year company anticipate material change amount unrecognized tax benefits next 12 months note 14 stockholders’ equity stock award plans company’s 1995 equity incentive plan reserved approximately 6100000 shares common stock issuance permits grant incentive stock options nonstatutory stock options forms equity compensation although 1995 plan expired outstanding stock options relating fully valid company’s 2005 equity incentive plan “2005 plan” reserved 13600000 shares common stock issuance 2005 plan permits grant incentive stock options nonstatutory stock options restricted stock units performance shares forms equity compensation december 31 2013 approximately 3342000 shares common stock available future issuance 2005 plan 1995 2005 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years achievement certain market service conditions see stockbased compensation company’s 2004 outside directors stock option plan “2004 director plan” reserved 1765000 shares common stock issuance 2004 director plan automatically grants nonqualified stock options nonemployee directors appointment first election company’s board directors “initial grant” annually reelection board directors company’s annual meeting stockholders “annual grant” december 31 2013 approximately 48000 shares common stock available future issuance 2004 director plan 2004 director plan options granted fair market value date grant expire ten years date grant initial grants become exercisable three equal annual installments beginning first anniversary date grant annual grants become exercisable twelve equal monthly installments date grant subject case director’s continuous service company’s board directors certain stock option awards subject accelerated vesting change control company issues new shares exercise release restricted stock units issuance stock employee stock ownership plan stockbased compensation following table summarizes stockbased compensation expenses included company’s consolidated statements income thousands compensation cost capitalized inventory approximately 01 million years ended december 31 2013 2012 2011 income tax benefit recognized income statement sharebased compensation arrangements valuation assumptions fair value granted company’s stock option espp plans estimated date grant using blackscholes option valuation model single option approach following weightedaverage assumptions years ended december 31 riskfree interest rate based us treasury yield curve effect time grant expected dividend yield based company’s history expectations dividend payouts expected volatility based historical volatility company’s stock expected term options granted derived historical data employee exercises terminations stock options following table summarizes stock option activity december 31 2013 changes year ended presented thousands except per share term amounts may 2010 company amended targetstockpricebased options purchase aggregate 750000 shares company’s common stock still subject vesting granted chief executive officer amendment modified vesting provisions options 136th unvested stock options vest monthly threeyear period initial vesting occurring june 1 2010 fair value modified award estimated using blackscholes option valuation model assumptions riskfree rate 228 volatility factor 7183 dividend yield 0 expected life 507 years incremental compensation cost resulting modification remaining unrecognized compensation expense original award recognized ratably threeyear vesting period company recorded expense approximately 01 million 04 million 04 million years ended december 31 2013 2012 2011 respectively related options 2013 company extended period two company’s board members could exercise outstanding vested stock options following cessation service company ninety days second anniversary date cessation service ceased june 27 2013 company recorded expense approximately 02 million year ended december 31 2013 related modifications addition company extended period two former employees company could exercise outstanding vested stock options following cessation service company ninety days one year anniversary date cessation services company recorded expense approximately 01 million year ended december 31 2013 related modifications company granted certain performancebased options purchase shares company’s common stock exercise price equal closing price share company’s common stock grant date options fully vest meeting performance goal within established time frame performance goal met option within established time frame option generally tenyear term measured date grant performance goal met within established time frame option expires entirety company recognizes expense related performancebased option period time company determines probable performance goal achieved subsequently determined performance goal probable achievement expense related performancebased option reversed years ended december 31 2013 2012 2011 company recognized approximately 39000 36000 02 million respectively expense related performancebased options weightedaverage fair value stock options granted years ended december 31 2013 2012 2011 256 336 279 respectively intrinsic value options time exercise 13 million 45 million 58 million years ended december 31 2013 2012 2011 respectively estimated fair value shares vested years ended december 31 2013 2012 2011 38 million 41 million 33 million respectively december 31 2013 unamortized compensation expense related unvested options approximately 42 million net forfeitures weighted average period compensation expense related options recognized approximately 255 years cash received stock option exercises 16 million 34 million 62 million years ended december 31 2013 2012 2011 respectively rsus following table summarizes rsu activity december 31 2013 changes year ended presented thousands rsus generally vest 25 approximately one year grant date remaining shares vesting either approximately annually quarterly equal installments threeyear period depending terms grant weighted average fair value grant date rsus 498 649 581 years ended december 31 2013 2012 2011 respectively rsus granted company period prior 2011 december 31 2013 approximately 08 million unrecognized compensation cost net forfeitures related nonvested rsus expected recognized weighted average remaining period approximately 130 years employee stock purchase plan december 31 2013 1300000 shares company’s common stock reserved issuance company’s employee stock purchase plan “espp” terms espp eligible employees may choose 15 salary withheld purchase company’s common stock may purchase 1000 shares per offering period offering espp threemonth period purchase price stock issued espp equal 85 lower fair market value share common stock first day offering final day offering period december 31 2013 484213 shares common stock available issuance espp repurchase common stock august 2013 company’s board directors approved increase 100 million existing 405 million share repurchase program initiated october 2011 bringing total authorized program since inception approximately 505 million addition board directors approved extending repurchase program december 31 2014 company repurchased retired 2404034 4709651 780892 shares cost 125 million 248 million 35 million years ended december 31 2013 2012 2011 respectively december 31 2013 97 million 505 million share repurchase program authorized board available future share repurchases repurchased shares retired constitute authorized unissued shares stockholder rights agreement december 18 2006 company’s board directors declared dividend distribution one preferred stock purchase right collectively “rights” outstanding share company’s common stock right entitles registered holder purchase company one onethousandth share company’s series preferred stock 0001 par value price 2500 pursuant rights agreement dated december 19 2006 company mellon investor services llc “rights agreement” rights initially trade common stock become exercisable person group acquires 15 company’s common stock without prior board approval event rights permit company’s stockholders acquirer purchase company’s common stock market value twice exercise price rights lieu preferred stock alternatively rights become exercisable company’s board directors may authorize issuance one share company’s common stock exchange right exercisable addition event certain business combinations rights permit purchase common stock acquirer 50 discount rights held acquirer become null void case prior person group acquiring 15 rights redeemed 0001 action board rights agreement contains exception 15 ownership threshold shares currently beneficially owned sigmatau finanziaria spa rights expire december 19 2016 rights agreement includes requirement committee independent directors evaluate rights agreement least every three years note 15 accumulated comprehensive income loss changes composition accumulated comprehensive income loss years ended december 31 2013 2012 2011 follows thousands note 16 401k plan company pretax savings plan covering us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions company contributions terminated company’s discretion approximately 02 million 02 million 03 million years ended december 31 2013 2012 2011 respectively note 17 licensing agreements zensun shanghai science technology co ltd “zensun” may 13 2013 company designated affiliate entered framework agreement zensun exclusive promotion marketing distribution sale neucardintm china hong kong macau neucardin novel firstinclass therapeutic treatment patients intermediate advanced heart failure new drug application submitted accepted review china food drug administration “cfda” 2012 zensun agreement provides principal terms arrangement company negotiating supplemental license supply agreement zensun subject certain conditions company agreed make payments 185 million zensun consisting upfront payment amount amounts achievement certain milestones including approval new drug application neucardin™ granting manufacturing license good manufacturing practices certificate drug approval number china company agreed certain conditions make milestone payments zensun 10 million approval received new device deliver neucardin™ 25 million approval received use neucardin™ additional indications addition company agreed subject entry mutually acceptable definitive agreements satisfaction certain conditions provide collateralized loan zensun approximately 120 million company anticipates funding approximately 23 million loan first half 2014 zensun required refund return upfront payment received company zensun terminates agreement failure company fund loan zensun responsible manufacture product company agreed purchase product exclusively zensun duration agreement taiwan liposome company “tlc” june 2013 company entered agreement tlc granting company license exclusive rights china hong kong macau promote market distribute sell proflow® treatment peripheral arterial disease “pad” indications terms agreement tlc responsible continued development including potential clinical trials regulatory activities well manufacture supply proflow company responsible aspects commercialization including preand postlaunch activities proflow submitted cfda clinical trial approval expected additional clinical testing may required prior approval financial terms agreement include clinical regulatory milestone payments sales milestone payments aggregate 395 million agreement provides principal terms arrangement sciclone tlc march 2014 companies entered collaboration license agreement tlc year ended december 31 2013 company recorded upfront payments totaling 50 million research development expense related licensing arrangements tlc zensun note 18 contingencies legal matters company party various legal proceedings subject government investigations noted section legal proceedings government investigations subject inherent uncertainties unfavorable rulings adverse events could occur unfavorable outcomes could include substantial monetary damages awards injunctions remedies occur possibility exists material adverse impact company’s business results operations financial position overall trends company might also conclude settling one matters best interests stockholders business settlement could include substantial payments august 5 2010 sciclone contacted sec advised sec initiated formal nonpublic investigation sciclone sec issued subpoena sciclone requesting variety documents information including limited potential payments transfers anything value regulators governmentowned entities china bids contracts state governmentowned entities china joint venture partner intermediary local agent company china company’s ethics anticorruption policies training audits certain company financial disclosures august 6 2010 company received letter us department justice “doj” indicating doj investigating foreign corrupt practices act “fcpa” issues pharmaceutical industry generally doj information company’s practices suggesting possible violations company received subpoena sec fourth quarter fiscal 2012 additional matters including limited matters related acquisition novamed fcpa matters certain sales marketing expenses response matters company’s board directors appointed special committee independent directors “special committee” oversee company’s response government inquiry special committee undertaken independent investigations matters reflected arising sec doj investigations order evaluate whether violation fcpa laws occurred company continue cooperate fully sec doj conduct investigations company cannot predict outcome investigations timing resolution however company determined payment 20 million government penalties fines andor remedies probable accordingly company recorded 20 million operating expense 2013 results operations reflect company’s estimate probable loss incurred related potential penalties fines andor remedies ongoing investigations sec doj actual fines penalties may imposed losses may realized related investigations could materially differ could higher amount company’s estimated loss could materially impact company’s financial statements company continue reassess potential liability related investigations adjust estimates accordingly future periods novamed party distribution supply agreement meda pharma gmbh co kg “meda” following company’s acquisition novamed meda claimed right terminate agreement change control provision novamed believe meda right termination agreement provided agreement disputes including disputes regarding termination must resolved binding arbitration novamed filed application binding arbitration china international economic trade arbitration commission “cietac” july 26 2012 october 10 2012 meda filed initial response counterclaim cietac claiming meda’s termination valid demanding transfer certain information rights well demanding award damages including attorneys’ fees unspecified amount april 16 2013 meda filed response stating claims facts support initial response counterclaim hearings merits matter held august december 2013 shanghai arbitral panel made number procedural preliminary decisions dispute resolved arbitration proceeding continuing additional potentially final briefs submitted arbitral tribunal parties january 2014 company anticipates arbitral panel make final ruling first quarter 2014 given procedural process nature case company unable make reasonable estimate potential gain loss range gain losses might arise matter certainty final ruling may delayed beyond first quarter 2014 march 11 2013 adam crum filed derivative lawsuit purportedly name sciclone friedhelm blobel gary titus jon saxe peter barrett richard hawkins gregg lapointe ira lawrence california superior court san mateo county captioned crum v blobel et al case civ520331 lawsuit alleges based restatement company’s consolidated financial statements year ended december 31 2011 certain quarters 2011 2012 board directors management breached fiduciary duties company exercising oversight way allowed company file consolidated financial statements materially inaccurate plaintiff asserts claims breach fiduciary duty abuse control mismanagement plaintiff seeks among things injunctive relief disgorgement undisclosed damages attorneys’ fees costs company defendants filed motions dismiss complaint court granted motions dismiss allowed plaintiff amend complaint amended complaint yet filed given procedural process nature case including motion dismiss filed company unable make reasonable estimate potential loss range losses might arise matter november 20 2013 counsel company sent letter behalf company’s subsidiary novamed pharmaceuticals shanghai co ltd “novamed” sanofi hangzhou pharmaceuticals co ltd sanofi beijing pharmaceuticals co ltd collectively “sanofi” asserting sanofi breached obligations various agreements “promotion agreements” parties promotion depakine® stilnox® tritace® xatral® collectively “products” among things failing place orders supply products fourth quarter 2013 failing pay promotion fees due novamed promotion agreements ii demanding sanofi make full payment promotional fees due novamed sanofi cause orders placed products november december 2013 specified quantities december 4 2013 counsel sanofi responded demand letter denying wrongful action breach failure supply products promotion agreements ii demanding novamed provide certain inmarket sales data january november 2013 provide sales forecast december 2013 cooperate audit sanofi december 23 2013 counsel novamed responded sanofi’s request additional data proposed potential settlement dispute december 2013 january 2014 parties met discuss potential settlement dispute however dispute resolved parties novamed communicated sanofi dispute resolved satisfaction intends exercise legal rights remedies promotion agreements including pursuing arbitration dispute cietac pursuant terms promotion agreements formal legal proceeding initiated filed company connection matter note 19 segment information geographic data company reports segment information based internal reporting used management evaluating segment performance based management’s estimates appropriate allocation resources segments company operates manages business primarily geographic basis accordingly company determined operating segments reporting units generally based nature location customers 1 china 2 rest world including us hong kong company evaluates performance operating segments based revenues operating income loss revenues geographic segments generally based location customers operating income loss segment includes revenues related cost sales operating expenses directly attributable segment operating income loss segment excludes nonoperating income expense summary information operating segments follows thousands 1 operating income china segment year ended december 31 2013 includes upfront payments totaling 50 million related company’s licensing arrangements tlc zensun 12 million restructuring charges related nonrenewal company’s distribution agreement sanofi 2 operating income china segment year ended december 31 2012 includes 427 million impairment charge intangible assets 3 operating income loss rest world segment includes change fair value contingent consideration 2012 2011 research development expense company’s scv07 trial discontinued first quarter 2012 4 operating loss rest world segment includes 20 million expense company recorded year ended december 31 2013 reflect company’s estimate probable loss incurred related potential penalties fines andor remedies related sec doj ongoing investigations company determined payment 20 million government penalties fines andor remedies probable 5 nonoperating income expense rest world segment year ended december 31 2013 includes escrow settlement 26 million recorded income longlived assets december 31 2013 operating segment follows thousands note 20 selected quarterly financial data unaudited 1 three months ended june 30 2013 company recorded upfront payments totaling 50 million research development expense related licensing arrangements tlc zensun 2 july 8 2013 company representatives former stockholders novamed entered “confidential escrow settlement agreement” pursuant company retained approximately 08 million cash 342300 shares common stock combined value approximately 26 million settlement date recorded income three months ended september 30 2013 3 three months ended december 31 2013 company recorded 20 million operating expense reflect company’s estimate probable loss incurred related potential penalties fines andor remedies related sec doj ongoing investigations company determined payment 20 million government penalties fines andor remedies probable 4 three months ended september 30 2012 company identified impairment indicator respect intangible assets related promotion distribution contract rights recorded losses approximately 427 million recognize full impairment recorded benefit income tax approximately 68 million due impairment intangible assets resulted reversal deferred tax liabilities partially offset impact recognizing full valuation allowance remaining novamed deferred tax assets addition period company recorded noncash gain 128 million primarily related decrease estimated probability achieving targets relating novamed’s product distributor agreements including renewal agreement sanofi fiveyear term note 21 subsequent events stock repurchases company repurchased retired 485003 shares cost 25 million january 1 2014 march 14 2014 share repurchase program march 14 2014 72 million total 505 million available future share repurchase amendment articles incorporation bylaws january 16 2014 board directors company adopted revisions section 19 bylaws approved amended restated bylaws company incorporate revision section 19 amended change vote standard election directors uncontested elections plurality votes cast majority votes cast majority votes cast means number “for” votes director receives must exceed number “withhold” votes ignoring abstentions broker nonvotes director contested elections number nominees exceeds number directors elected vote standard continue plurality votes cast addition nominee already serves director must submit conditional resignation company revised section 19 provides director receive majority votes cast corporate governance committee board directors make recommendation board whether accept reject resignation board determines resignation best interests company stockholders board promptly accept resignation company promptly disclose decision board item 9item 8financial statements supplementary data sciclone pharmaceuticals inc index consolidated financial statements report independent registered public accounting firm board directors shareholders sciclone pharmaceuticals inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position sciclone pharmaceuticals inc subsidiaries december 31 2014 december 31 2013 results operations cash flows two years period ended december 31 2014 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 relates information two years period ended december 31 2014 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2014 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s annual report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers zhong tian llp shanghai people’s republic china march 12 2015 report independent registered public accounting firm board directors stockholders sciclone pharmaceuticals inc audited accompanying consolidated statement income comprehensive income stockholders’ equity cash flows sciclone pharmaceuticals inc year ended december 31 2012 audit also included financial statement schedule item 15a2 year ended december 31 2012 financial statements schedule responsibility company’s management responsibility express opinion financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provided reasonable basis opinion financial statements referred present fairly material respects consolidated financial results operations sciclone pharmaceuticals inc cash flows year ended december 31 2012 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp redwood city california april 1 2013 sciclone pharmaceuticals inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements income thousands except per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements comprehensive income thousands see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements stockholders’ equity thousands see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows thousands see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies description business sciclone pharmaceuticals inc “sciclone” “company” incorporated 1990 united states “us”headquartered chinafocused specialty pharmaceutical company substantial commercial business china product portfolio therapies oncology infectious diseases cardiovascular disorders company’s lead product zadaxin® thymalfasin approved 30 countries may used treatment hepatitis b hbv hepatitis c hcv vaccine adjuvant certain cancers according local regulatory approvals addition zadaxin sciclone markets approximately 7 partnered inlicensed products china including aggrastat® interventional cardiology product sciclone also pursuing registration several therapeutic products china presentation consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidated financial statements use estimates preparation financial statements conformity us generally accepted accounting principles requires management make informed estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ materially estimates cash equivalents investments cash equivalents consist highly liquid investments original maturities three months less date purchase company records investments fair value determined available information consolidated balance sheet date company’s investment portfolio december 31 2014 consisted money market funds included cash equivalents certificate deposit included shortterm investments unrealized gains losses availableforsale securities included accumulated comprehensive income consolidated balance sheets realized gains losses declines value judged otherthantemporary availableforsale securities included earnings amortized cost securities adjusted amortization premiums accretion discounts maturity included earnings cost securities sold based specific identification method availableforsale investments evaluated impairment reporting period investment considered impaired fair value investment less cost consideration available evidence evaluate realizable value investment impairment determined otherthantemporary impairment loss recognized consolidated statement income losses recorded periods presented fair value financial instruments fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs fair value measurements based threetier hierarchy prioritizes inputs used measure fair value three levels input level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities quoted prices available active market company determines fair value based quoted market prices classifies values level 1 valuation hierarchy quoted market prices available fair values based observable inputs quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities classified level 2 valuation hierarchy quoted prices observable inputs unavailable fair values based cash flow models classified level 3 valuation hierarchy cash flow models use inputs specific asset liabilities including estimates interest rates discount rates including yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods assets liabilities inputs reflect company’s assumptions market participants would use pricing assets liabilities including assumptions risk developed based best information available circumstances company’s assessment significance particular input fair value measurements requires judgment may materially affect valuation assets liabilities measured placement within fair value hierarchy financial instruments including accrued shortterm liabilities carried cost company believes approximates fair value shortterm maturity instruments concentration risk financial instruments potentially subject company concentration credit risk consist cash equivalents investments accounts receivable loans receivable company exposed credit risk event default institutions holding cash equivalents investments customers partners event default customer partner pay amounts due us receivables loans receivables respectively extent amounts recorded consolidated balance sheet company’s cash equivalents held financial institutions company believes high credit quality times deposits may exceed government insured limits company experienced losses deposits cash equivalents china pharmaceutical products imported distributed tiered method distribution company’s proprietary product zadaxin® company manufactures product using us european contract manufacturers generates product sales revenue sales zadaxin products sinopharm holding hong kong co ltd “sinopharm” sinopharm affiliates act importer also top “tier” distribution system “tier 1” china company’s zadaxin sales occur importer purchases product company without right return except damaged product quality control issues passage title risk loss transferred sinopharm time shipment company’s sale sinopharm clears products china import customs sells directly large hospitals holds additional product purchased inventory sale next tier distribution system secondtier distributors responsible sale distribution products purchase importer either sales product directly retail level hospitals pharmacies thirdtier local regional distributors turn sell products hospitals pharmacies company’s product sales revenues result sale company’s inlicensed products importing agents distributors promotion services revenues result fees received exclusively promoting products certain pharmaceutical partners importing agents distributors partners company’s customers exceeded 10 company’s total net revenue related china segment follows december 31 2014 approximately 389 million 94 companys gross accounts receivable attributable one customer china company generally require collateral customers company maintains reserves potential credit losses actual losses may vary significantly estimates company currently relies two suppliers provide key components zadaxin manufacturing supply although limited number manufacturers would able meet requirements manufacture components company believes suppliers could provide similar components comparable terms change suppliers however could cause delay manufacturing possible loss sales would affect operating results adversely majority company’s product sales us dollars however significant portion company’s revenues expenses denominated chinese yuan renminbi “rmb” significant portion company’s assets liabilities denominated rmb exposed foreign exchange risk rmb freely convertible foreign currencies china foreign exchange transactions required law transacted authorized financial institutions exchange rates quoted people’s bank china remittances currencies rmb company china require certain supporting documentation order affect remittance accounts receivable reserve company records receivable reserve based specific review overdue invoices company’s estimate reserve determined considering existing contractual payment terms payment patterns customers individual customer circumstances age outstanding receivables current customer relationships accounts receivable charged point considered uncollectible december 31 2013 company 35 million fully reserved accounts receivable one customer one year past due result negotiations customer company collected 05 million july 2014 october 2014 company’s subsidiary sciclone pharmaceuticals international china holding ltd “spil china” executed agreement customer providing settlement 19 million remaining outstanding 30 million due installments settlement agreement provided customer pay spil china 19 million installment payments made follows 500000 october 31 2014 500000 november 30 2014 400000 may 31 2015 remaining balance 500000 made december 31 2015 terms settlement agreement resulted writeoff 11 million previously fully reserved accounts receivable equivalent chargeoff allowance bad debt impact net income 2014 subsequent agreement provided direct evidence 11 million previously reserved collected future company received first second payments terms settlement agreement october december 2014 totaling 10 million gains recovery well 05 million payment received july 2014 recorded 15 million reductions general administrative expense year ended december 31 2014 remaining outstanding receivable balance 09 million december 31 2014 remain fully reserved payments received inventories consist raw materials work progress finished goods products inventories valued lower cost market net realizable value cost determined firstin firstout basis include amounts related materials labor overhead company periodically reviews inventory order identify excess obsolete items obsolete excess items observed alternate uses inventory company record writedown net realizable value period impairment first recognized years ended december 31 2014 2013 2012 company recorded inventory writedowns 16 million 0 respectively principally related carrying value reductions excess aggrastat product property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets straightline basis office furniture fixtures generally amortized five years office equipment computer software generally amortized three years company’s vehicle amortized four years leasehold improvements amortized shorter estimated useful life lease term straightline basis company’s policy identify record impairment losses necessary property equipment events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets intangible assets intangible assets reviewed impairment changes facts circumstances suggest carrying value assets may recoverable companys policy identify record impairment losses necessary intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets company’s policy expense costs incurred connection renewal extension intangible assets part acquisition novamed pharmaceuticals ltd “novamed” april 2011 company recorded intangible assets related promotion distribution contract rights year ended december 31 2012 company identified impairment indicators related intangible assets fully wrote intangible assets refer net intangible assets note 7 information goodwill company accounted acquisition novamed acquisition method accounting accordance financial accounting standards board accounting standards codification “asc” topic 805 business combinations acquisition method accounting total acquisitiondate fair value assets liabilities recognized closing date total consideration paid sciclone novamed consisted cash sciclone common stock contingent consideration excess fair value total consideration transferred acquisitiondate fair value net tangible intangible assets liabilities assumed allocated goodwill tested impairment least annually whenever events circumstances occur indicate impairment might occurred accordance asc topic 350 intangibles goodwill relates company’s china segment focuses company’s primary pharmaceutical distribution market consisting novamed business legacy china business represent single reporting unit december 31 2014 2013 2012 company tested goodwill impairment quantitatively comparing fair value reporting unit carrying amount step one twostep impairment test addition third quarter fiscal 2013 company performed interim goodwill impairment analysis determine goodwill impaired result nonrenewal sanofi aventis sa “sanofi” promotional agreements december 31 2013 comparing fair value reporting unit carrying amount company estimated fair value china reporting unit using discounted cash flow model valuation approach considers number factors include limited expected future cash flows growth rates discount rates requires us make certain assumptions estimates regarding industry economic factors future profitability business company determines carrying value reporting unit exceeds fair value company would calculate implied fair value reporting unit goodwill compared carrying value determine appropriate impairment charge completing company’s impairment review reporting unit third quarter 2013 december 31 2014 2013 2012 company concluded goodwill impaired years loans receivable loans receivable consist two loans one third party see note 6 loans initially recorded continue carried unpaid principal balances “other assets” consolidated balance sheet carried balances subsequently adjusted payments principal adjustments allowance loan losses account impairment interest income recognized term loans calculated using simpleinterest method loans associated premium discount loans experience impairment interest income would recognized unless likelihood loss remote although measurement basis unpaid principal adjusted subsequent payments impairment fair value loans receivable would qualify level 3 measurements fair value hierarchy note 3 due presence significant unobservable inputs related counterparty private entity management considers impairment exist based current information factors payment history value collateral assessment counterparty’s current creditworthiness probable principal interest payments collected according contractual agreements management considers loan payment delinquent received due date december 31 2014 management concluded loans receivable impaired allowance loan losses contingent consideration part acquisition novamed company would required pay additional 430 million earnout successful achievement revenue earnings targets 2011 2012 fiscal years “earnout” “contingent consideration” fair value earnout remeasured period changes fair value recorded “contingent consideration” operating expenses december 31 2012 earnout determined zero september 30 2012 company used assistance thirdparty valuation expert estimate fair value contingent consideration using monte carlo simulation model refer contingent consideration note 3 escrow settlement agreement note 10 information accrued expenses company makes estimates accrued expenses balance sheet date consolidated financial statements based facts circumstances known examples estimated accrued expenses include fees paid contract research organizations investigative sites connection clinical trials fees paid contract manufacturers connection production clinical trial materials professional services company periodically confirms accuracy estimates selected service providers makes adjustments necessary periods identified expenses related clinical trials charged research development expense generally accrued based estimates work performed level patient enrollment activities according protocols agreements company makes adjustments necessary periods identified reflect actual levels work performed adjustments historically material financial terms agreements subject negotiation vary contract may result uneven payment flows payments certain contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective company’s accrual policy match recording expenses actual services received efforts expended company monitors planned protocols work performed patient enrollment levels related activities extent possible adjusts estimates accordingly company records liabilities estimated amounts litigation claims legal actions probable reasonably estimated likelihood material change estimated reserves dependent possible outcome settlement negotiations regulatory judicial review development facts circumstances extended litigation could change claims assessments amount range loss outstanding litigation uncertain company discloses footnotes financial statements unable make reasonable estimate material liability reasonably possible result unfavorable outcomes events occur company assesses potential liability related pending litigation claims legal actions adjusts estimates accordingly adjustments could materially impact financial statements foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using average rates exchange effect period goodwill certain balances generally recorded local currency functional currency company’s subsidiaries located china result carrying value goodwill certain balances may fluctuate value rmb compared us dollar gains losses translation financial statements denominated foreign currencies included separate component accumulated comprehensive income statement stockholders equity company records foreign currency transactions exchange rate prevailing date transaction resultant gains losses included results operations foreign currency transaction gains losses significant period presented revenue recognition company recognizes revenue persuasive evidence arrangement exists services rendered delivery occurred price buyer fixed determinable collectability reasonably assured product revenue company recognizes product revenue selling manufactured zadaxin product time delivery sales zadaxin sinopharm affiliates recognized time shipment title product transferred company also earns product revenue purchasing medical products pharmaceutical companies selling directly importers distributors sales pfizer international trading shanghai ltd “pfizer” products october 2012 based “sellthrough” method company’s distribution arrangement products allowed payment terms dependent distributor sold product company maintain information timing “sellthrough” pfizer products distributor period therefore company applied cash receipts approach application “sellthrough” method reliable information available accordingly period time revenue sales pfizer products recognized receipt cash distributor october 21 2012 company amended agreement distributor amendment removed contingent payment terms prior amendment agreement allowed delayed payment based timing sales distributor next tier customer amendment changed payment terms 60 days thus ensuring distributor could withhold payment distributor received payment sale product next tier customer combination revised payment terms together contractual restrictions distributor eg return rights terms may raise question whether taken title assumed “risk loss” permitted revenue recognized “sellin” basis upon amendment therefore october 21 2012 onward “sellin” method used company recognition related revenue product sales also recognized “sellin” method medical products delivered importers distributors promotion services revenue company recognizes promotion services revenue designated medical products delivered distributors specified promotion services contract marks period marketing promotion services rendered revenue recognition criteria met certain arrangements company required return refund portion promotion services fees received interim periods pharmaceutical customer defined annual sales targets achieved company’s agreements customer agreement terminated provided targets met “pro rata” basis date contract termination company entitled retain amounts paid due ability retain amounts paid upon contract termination provided applicable targets met “pro rata” basis interim date company elected recognize revenue interim periods without reduction amounts subject refund based method 2 accounting standards codification 60520s991 “accounting management fees based formula” company’s promotion agreements sanofi consisting individual promotional agreements certain pharmaceutical products supplementary agreements extending terms thereof renewed expired december 31 2013 novamed pharmaceuticals shanghai co ltd “novamed shanghai” sanofi negotiated settlement certain amounts dispute effective july 14 2014 novamed shanghai received approximately 22 million rmb approximately 35 million august 2014 final payment sanofi terms settlement resulted recognition promotion services revenue second quarter 2014 approximately 02 million sanofi revenue deferred fourth quarter 2013 remaining approximately 26 million deferred revenue recorded fourth quarter 2013 reversed equivalent writedown accounts receivable contemporaneous writedown accounts receivable deferred revenue impact net income second quarter 2014 year ended december 31 2014 revenue reserve company generally maintains revenue reserve product returns based estimates amount product returned customers may result expired damaged product delivery price reductions related sales based historical patterns analysis market demand andor percentage sales based industry trends management’s evaluation specific factors may increase risk product returns importing agents distributors contractual rights return except limited terms regarding product quality however company expected replace products expired delivery deemed damaged defective delivered calculation revenue reserve requires estimates involves high degree subjectivity judgment result uncertainties involved estimating revenue reserve possibility materially different amounts could reported different conditions using different assumptions december 31 2014 2013 company’s revenue reserves 01 million 0 respectively consolidated balance sheets company evaluates need returns reserve quarterly adjusts events indicate change estimate appropriate changes estimates could materially affect company’s results operations financial position possible company may need adjust estimates future periods sales tax surcharge expense sales taxes surcharge costs expensed incurred included sales marketing expense company generally subject 5642 business tax surcharge services provided related marketing products relevant taxation laws china sales tax surcharge costs amounted approximately 25 million 35 million 38 million years ended december 31 2014 2013 2012 respectively research development expenses research development costs expensed incurred costs include salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment upfront payments inlicensing agreements certain business partners licenserelated fees services performed clinical research organizations research institutions outside service providers shipping handling costs shipping handling costs incurred inventory purchases product shipments included cost product sales periods presented advertising expenses advertising costs expensed incurred included sales marketing expenses periods presented advertising expenses years ended december 31 2014 2013 2012 05 million 01 million 02 million respectively legal costs legal costs related loss contingencies expensed general administrative expense incurred stockbased compensation company records stockbased compensation costs relating sharebased payment transactions including stock options restricted stock units “rsus” employee stock purchase plan stockbased compensation expense stock options employee stock purchase plan estimated date grant based fair value award using blackscholes optionpricing model stockbased compensation expense rsus estimated date grant based number shares granted quoted price company’s common stock grant date stockbased compensation expense values recognized expense straightline basis requisite service period net estimated forfeitures stockbased compensation costs ultimately expected vest recognized expense ratably awards vest requisite service period generally one four years stock options rsus three months employee stock purchase plan company estimates prevesting forfeitures time grant analyzing historical data revises estimates subsequent periods actual forfeitures differ estimates total expense recognized vesting period awards ultimately vest income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse company provides valuation allowance net deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized company establishes reduces valuation allowance deferred tax assets provision income taxes increase decrease respectively period determination made company records liabilities related uncertain tax positions accordance guidance clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribing minimum recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return company believe uncertain tax positions currently pending material adverse effect consolidated financial statements although adverse resolution one uncertain tax positions period could material impact results operations period company’s policy recognize interest penalties related liabilities uncertain tax positions component income tax expense amount accrued interest related tax positions taken company’s tax returns included accrued current liabilities 15 million 12 million december 31 2014 2013 respectively amount interest recognized tax expense related uncertain tax positions consolidated statements income 03 million 04 million years ended december 31 2014 2013 respectively net income per share basic net income per share computed dividing net income weightedaverage number shares common stock outstanding period diluted net income per share computed dividing net income weightedaverage number common equivalent shares outstanding period diluted net income per share includes dilutive impact outstanding stock options employee stock purchase plan using treasury stock method following reconciliation numerator denominators basic diluted net income per share computations years ended december 31 thousands except per share amounts years ended december 31 2014 2013 2012 approximately 3541071 3378063 3280492 shares respectively related outstanding stock options excluded calculation diluted net income per share inclusion would antidilutive addition years ended december 31 2014 2013 2012 50000 50171 118046 shares respectively subject performance conditions excluded calculation diluted net income per share performance criteria met segment information company operates two segments refer note 20 reclassifications company reclassified approximately 04 million deferred tax balances december 31 2013 conform current year presentation permitted optional retrospective presentation provisions accounting standards update asu 201311 “income taxes presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists” reclassifications effect prior years’ net income stockholders’ equity company revised december 31 2013 consolidated balance sheet consolidated statement cash flows reducing accounts receivable increasing prepaid expenses current assets 02 million conform current year presentation reclassified 05 million accrued liabilities accounts payable conform current year presentation addition company revised consolidated statement income year ended december 31 2013 reducing sales marketing expense increasing research development expense 06 million costs incurred related premarket research activities accounting standards updates recently effective accounting standards march 2013 financial accounting standards board “fasb” issued accounting standards update “asu” 201311 “income taxes topic 740 presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists” amendments asu clarify unrecognized tax benefit portion unrecognized tax benefit generally presented financial statements reduction deferred tax asset net operating loss similar tax loss tax credit carryforward certain limited exceptions amendments effective company beginning january 1 2014 applied since first quarter 2014 company also retrospectively applied guidance deferred tax unrecognized tax benefit amounts december 31 2013 retrospective application optional required see reclassifications adoption asu immaterial impact consolidated deferred tax balances december 31 2014 2013 accounting standards issued yet effective may 2014 fasb issued asu 201409 revenue contracts customers asu 201409 contains new accounting literature relating company recognizes revenue asu 201409 company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services asu 201409 effective company’s fiscal year beginning january 1 2017 early application permitted company process determining impact adoption asu 201409 financial statements related disclosures standard permits use either full retrospective modified retrospective transition method company yet selected transition method determined effect standard ongoing financial reporting note 2 availableforsale investments company realized 01 million losses related maturity italian state bonds year ended december 31 2013 reclassified accumulated comprehensive income included nonoperating expenses company’s certificate deposit 01 million included shortterm investments december 31 2014 2013 secures company’s letter credit required european valueadded tax filing arrangements note 3 fair value measurements following tables represent company’s fair value hierarchy financial assets measured fair value recurring basis thousands following table provides summary changes fair value company’s level 3 liability fiscal 2012 thousands contingent consideration part acquisition novamed occurred april 18 2011 company would required pay additional 430 million earnout payments successful achievement revenue earnings targets 2011 2012 fiscal years “earn out” “contingent consideration” earnout period ended december 31 2012 none targets met september 30 2012 company used assistance thirdparty valuation expert estimate fair value contingent consideration using monte carlo simulation model fair value contingent consideration remeasured period changes fair value recorded expense gains december 31 2012 company estimated fair value contingent consideration 0 given none performance targets met resulting noncash gain 154 million year ended december 31 2012 company subsequently settled various matters former stockholders novamed confirming among things company liability earnout contingent payments note 4 inventories consisted following thousands december 31 2014 2013 company 31 million 24 million respectively net inventory held distributors related products sold novamed subsidiary note 5 property equipment property equipment consisted following thousands depreciation expense 09 million 09 million 06 million years ended december 31 2014 2013 2012 respectively note 6 loans receivable part company’s may 2013 license supply agreement zensun shanghai science technology co ltd “zensun” company previously agreed loan 12 million zensun entry license supply agreement second quarter 2013 pursuant company licensed exclusive rights promote market distribute sell neucardintm chronic heart failure product development zensun rights licensed people’s republic china hong kong macao fully described note 18 pursuant agreement loan funds company loaned 475 million zensun second half 2014 extension credit funding zensun accomplished two companys subsidiaries sciclone pharmaceuticals international china holding ltd “spil china” sciclone pharmaceuticals china ltd “sciclone china” respect lender spil china zensun request usdollar denominated borrowings 1175 million december 31 2014 borrowings totaling 45 million requested zensun paid spil china 225 million lent third quarter 2014 225 million lent fourth quarter 2014 borrowings bear interest fixed rate 75 per annum payable annually arrears interest payment date defined overall loan agreement borrowings mature september 26 2017 option electable zensun extend two additional years provided certain conditions met outstanding balances must repaid maturity date prepayments permitted without penalty upon prior notice respect lender sciclone china zensun make rmbdenominated borrowings rmb 1550000 using entrustment mechanism bank intermediary third quarter 2014 sciclone china entered entrusted loan agreement rmb 1550000 approximately us250000 december 31 2014 zensun using major chinese bank lending agent sciclone china principal ultimately bears credit risk bank loan bears interest fixed rate 75 per annum zensun subject obligations borrower specified loan agreements loan term sixtysix months outstanding principal interest balances must repaid maturity date prepayments permitted without penalty upon prior notice proceeds separate related loans used working capital general corporate purposes zensun secure loans zensun pledged entire equity interest subsidiary shanghai dongxin biochemical technology co ltd whose assets include real property spil china management basis creditworthiness evaluation using recent zensun financial information ii consideration market value pledged security iii consideration zensun’s compliance terms loans timely payment interest concluded indications loan impairment december 31 2014 accordingly allowance losses two loans included “other assets” company’s consolidated balance sheet december 31 2014 interest income loans amounted 01 million year ended december 31 2014 included interest investment income statement operations company estimates fair value loans receivable approximates 52 million december 31 2014 based upon prevailing market rates interest published major chinese banks note 7 net intangible assets part acquisition novamed company recorded intangible assets related promotion distribution contract rights included company’s china segment third quarter 2012 company identified impairment indicators related intangible assets company determined undiscounted cash flows estimated generated intangible assets less carrying amounts company performed discounted cash flow analysis related intangible assets recorded full impairment charge estimated fair value determined zero result company recognized noncash impairment loss approximately 427 million consolidated statement operations year ended december 31 2012 fair value measurements based threetier hierarchy prioritizes inputs used measure fair value see note 1 significant level 3 unobservable inputs used fair value measurement intangible assets estimates projected revenues earnings discount rate approximately 20 assumptions regarding probability renewal customer contracts significant changes estimated revenues earnings would resulted adjustments fair value measurement change renewal probability rates customer contracts would also resulted significant change fair value measurement acquired promotion distribution contract intangible assets amortized straightline basis 135 years based estimated useful life amortization expense 0 26 million years ended december 31 2014 2013 2012 respectively note 8 goodwill following table represents changes goodwill years ended december 31 2014 2013 2012 thousands note 9 accrued liabilities following summary accrued liabilities thousands note 10 escrow settlement agreement october 16 2012 company made claim former stockholders novamed pursuant acquisition agreement relating acquisition novamed result company’s claim approximately 14 million cash held escrow 622363 shares company’s common stock held escrow released former novamed stockholders pending outcome company’s claim related damages company incurred result misrepresentations made novamed regarding various matters including estimated product return reserves aggrastat product date acquisition related expenses damages july 8 2013 company representatives former stockholders novamed entered “confidential escrow settlement agreement” pursuant company retained approximately 08 million cash 342300 shares common stock combined value approximately 26 million settlement date recorded income year ended december 31 2013 december 31 2013 company canceled retired shares note 11 commitments purchase obligations agreements certain company’s pharmaceutical partners company committed certain annual minimum product purchases contract subject termination annual minimum order met december 31 2014 company material unmet purchase obligations leases may 2007 company entered noncancelable operating lease agreement corporate headquarters lease” effective july 1 2007 june 30 2014 september 2008 company entered amendment lease additional office space “the amendment” expired june 30 2014 lease amendment contained rent escalations approximately 4 6 per year respectively december 2013 company entered second amendment lease extending term lease additional four years june 30 2018 option renew additional five year period beginning july 1 2014 second amendment reduced amount leased office space approximately 21517 square feet leased approximately 11886 square feet also reduced monthly base rent 120824 51704 first year rent escalations approximately 3 per year addition company received rent abatement first four months extended lease term company recognizing rental expense straightline basis lease term terms lease amendment company provided allowances amounts approximately 02 million 05 million respectively towards cost leasehold improvements incentive rent respectively company recorded allowances deferred rent amortized lease term reduction rent expense lease requires company pay insurance taxes prorata share operating expenses june 2014 company entered noncancelable operating lease agreement primary office space china “the china lease” fixed lease term october 15 2014 april 14 2018 options renew additional two years company recognizing rental expense straightline basis lease term leases require company pay insurance prorata share operating expenses company also leases office facilities equipment outside us noncancelable operating lease agreements may 2014 company also subleased certain office facilities third party rent expense years ended december 31 2014 2013 2012 22 million 29 million 29 million respectively net sublease income future minimum lease payments noncancelable facility equipment operating lease agreements december 31 2014 follows thousands note 12 credit facilities credit facility december 2013 company’s subsidiary novamed pharmaceuticals shanghai co ltd “novamed shanghai” entered 100 million rmb revolving line credit facility approximately 16 million usd maximum 150 million rmb loan facility approximately 24 million usd shanghai pudong development bank co ltd “the credit facility” secured accounts receivable credit facility bore interest borrowed funds people’s bank china 6month base rate plus 15 644 2014 2013 outstanding balances credit facility expired november 30 2014 amounts borrowed repaid expiration date year ended december 31 2014 company paid interest approximately 48000 related credit facility loan agreement company’s 2012 loan agreement 125 million rmb approximately 20 million shanghai pudong development bank co ltd expired august 29 2013 amounts borrowed repaid expiration date loan bore interest borrowed funds 75 years ended december 31 2013 2012 company paid interest approximately 81000 11000 respectively related loan agreement note 13 restructuring charges december 2013 company announced plan significantly reduce workforce approximately 175 employees approximately 650 fulltime employees primarily sales marketing included companys china segment restructuring decided result nonrenewal company’s distribution agreement sanofi december 31 2013 decision resulted severancerelated charges approximately 12 million recognized restructuring expense consolidated statement income year ended december 31 2013 december 31 2014 company paid insignificant portion restructuring related charges march 2012 company implemented reduction workforce 11 fulltime employees primarily research development included company’s rest world including us hong kong segment restructuring followed discontinuation company’s scv07 phase 2b clinical trial reduction workforce resulted severancerelated charges approximately 11 million recognized restructuring expense consolidated statement income year ended december 31 2012 december 31 2013 company completed scv07 restructuring activities note 14 income taxes company recorded income tax provision benefit 12 million 22 million 33 million years ended december 31 2014 2013 2012 respectively related operations china company’s statutory tax rate china 25 2014 2013 2012 company recorded significant us federal state income taxes years ended december 31 2014 2013 2012 undistributed earnings company’s foreign subsidiaries considered indefinitely reinvested outside us taxes provided amounted approximately 1383 million december 31 2014 upon distribution earnings company may subject us federal state income taxes although determining amount practicable dependent variety factors including limited amounts us tax loss carryforwards tax credit carryforwards available time repatriation based current operating plan company anticipate need repatriate cash equivalents held foreign subsidiaries foreseeable future circumstances change becomes apparent undistributed earnings remitted company accrue income taxes previously recognized domestic foreign components income loss provision benefit tax years ended december 31 follows thousands reconciliation tax statutory federal income tax rate 34 actual tax provision benefit years ended december 31 follows thousands provision benefit income taxes years ended december 31 consisted following thousands year ended december 31 2012 company identified impairment indicator respect intangible assets related promotion distribution contract rights recorded charge 427 million recognize full impairment assets company recorded income tax benefit 68 million due impairment intangible assets result reversal deferred tax liabilities associated intangible assets deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components company’s deferred tax assets liabilities december 31 follows thousands realization deferred tax assets dependent upon company generating future taxable income timing amount uncertain accordingly deferred tax assets largely offset valuation allowance valuation allowance increased decreased approximately 34 million 44 million 77 million years ended december 31 2014 2013 2012 respectively december 31 2014 company federal net operating loss carryforwards approximately 1103 million expire years 2020 2034 federal research development orphan drug investment tax credit carryforwards approximately 122 million expire years 2018 2034 december 31 2014 company state net operating loss carryforwards approximately 269 million expire years 2015 2030 utilized state research development tax credit carryforwards approximately 22 million expire approximately 37 million valuation allowance relates benefits associated stock option deductions recognized credited directly stockholders equity utilization company’s net operating loss credit carryforwards may subject substantial annual limitation due ownership change limitations provided internal revenue code similar state provisions annual limitation could result expiration net operating loss credit carryforwards utilization december 31 2014 unrecognized tax benefit 59 million 22 million recognized would affect effective tax rate 37 million recognized would offset change valuation allowance reconciliation beginning ending amount unrecognized tax benefit years ended december 31 follows thousands tax years 19952014 remain open examination major us taxing jurisdictions company subject internal revenue service concluded examinations company’s 2011 2009 2008 us federal tax returns additional tax assessments proposed adjustments relating taxable income years company’s china operations generally subject examination china tax law period five years five years remain open examination although outcome income tax examinations uncertain amounts ultimately paid resolution issues raised taxing authorities may differ materially amounts accrued year company anticipate material change amount unrecognized tax benefits next 12 months note 15 stockholders’ equity stock award plans company’s 2005 equity incentive plan “2005 plan” reserved 13600000 shares common stock issuance 2005 plan permits grant incentive stock options nonstatutory stock options restricted stock units performance shares forms equity compensation december 31 2014 approximately 2241000 shares common stock available future issuance 2005 plan 2005 plan options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years achievement certain performance conditions see stockbased compensation company’s 2004 outside directors stock option plan “2004 director plan” reserved 1765000 shares common stock issuance 2004 director plan automatically granted nonqualified stock options nonemployee directors appointment first election company’s board directors “initial grant” annually reelection board directors company’s annual meeting stockholders “annual grant” 2004 director plan options granted fair market value date grant expire ten years date grant initial grants become exercisable three equal annual installments beginning first anniversary date grant annual grants become exercisable twelve equal monthly installments date grant subject case director’s continuous service company’s board directors december 31 2014 shares common stock available future issuance 2004 director plan although 2004 director plan expired outstanding stock options relating fully valid certain stock option awards subject accelerated vesting change control company issues new shares exercise release restricted stock units issuance stock employee stock ownership plan stockbased compensation following table summarizes stockbased compensation expenses included company’s consolidated statements income thousands compensation cost capitalized inventory approximately 01 million years ended december 31 2014 2013 2012 income tax benefit recognized income statement sharebased compensation arrangements valuation assumptions fair value awards granted company’s stock option espp plans estimated date grant using blackscholes option valuation model following weightedaverage assumptions years ended december 31 riskfree interest rate based us treasury yield curve effect time grant expected dividend yield based company’s history expectations dividend payouts expected volatility based historical volatility company’s stock expected term options granted derived historical data employee exercises terminations stock options following table summarizes stock option activity december 31 2014 2013 2012 changes years ended presented thousands except per share term amounts 2013 company extended period two company’s board members could exercise outstanding vested stock options following cessation service company ninety days second anniversary date cessation service june 27 2013 company recorded expense approximately 02 million year ended december 31 2013 related modifications addition company extended period two former employees company could exercise outstanding vested stock options following cessation service company ninety days one year anniversary date cessation services company recorded expense approximately 01 million year ended december 31 2013 related modifications company granted certain performancebased options purchase shares company’s common stock exercise price equal closing price share company’s common stock grant date options fully vest meeting performance goal within established time frame performance goal met option within established time frame option generally tenyear term measured date grant performance goal met within established time frame option expires entirety company recognizes expense related performancebased option period time company determines probable performance goal achieved subsequently determined performance goal probable achievement expense related performancebased option reversed years ended december 31 2014 2013 2012 company recognized approximately 01 million 39000 36000 respectively expense related performancebased options weightedaverage fair value stock options granted years ended december 31 2014 2013 2012 243 256 336 respectively intrinsic value options time exercise 24 million 13 million 45 million years ended december 31 2014 2013 2012 respectively estimated fair value options vested years ended december 31 2014 2013 2012 32 million 38 million 41 million respectively december 31 2014 unamortized compensation expense related unvested options approximately 44 million net forfeitures weighted average period compensation expense related options recognized approximately 258 years cash received stock option exercises 55 million 16 million 34 million years ended december 31 2014 2013 2012 respectively rsus following table summarizes rsu activity december 31 2014 2013 2012 changes years ended presented thousands rsus generally vest 25 approximately one year grant date remaining shares vesting either approximately annually quarterly equal installments threeyear period depending terms grant weighted average fair value grant date rsus 452 498 649 years ended december 31 2014 2013 2012 respectively december 31 2014 approximately 03 million unrecognized compensation cost net forfeitures related nonvested rsus expected recognized weighted average remaining period approximately 128 years employee stock purchase plan december 31 2014 1300000 shares company’s common stock reserved issuance company’s employee stock purchase plan “espp” terms espp eligible employees may choose 15 salary withheld purchase companys common stock may purchase 1000 shares per offering period offering espp threemonth period purchase price stock issued espp equal 85 lower fair market value share common stock first day offering final day offering period december 31 2014 456819 shares common stock available issuance espp repurchase common stock july 2014 company’s board directors approved increase 150 million existing 505 million share repurchase program initiated october 2011 bringing total authorized program since inception approximately 655 million addition board directors approved extending repurchase program december 31 2015 company repurchased retired 3822434 2404034 4709651 shares cost 244 million 125 million 248 million years ended december 31 2014 2013 2012 respectively december 31 2014 03 million 655 million share repurchase program authorized board available future share repurchases repurchased shares retired constitute authorized unissued shares upon repurchase company eliminates par value associated retired shares excess price repurchase par value charged retained earnings accumulated deficit stockholder rights agreement december 18 2006 company’s board directors declared dividend distribution one preferred stock purchase right collectively “rights” outstanding share company’s common stock right entitles registered holder purchase company one onethousandth share company’s series preferred stock 0001 par value price 2500 pursuant rights agreement dated december 19 2006 company mellon investor services llc “rights agreement” rights initially trade common stock become exercisable person group acquires 15 company’s common stock without prior board approval event rights permit company’s stockholders acquirer purchase company’s common stock market value twice exercise price rights lieu preferred stock alternatively rights become exercisable company’s board directors may authorize issuance one share company’s common stock exchange right exercisable addition event certain business combinations rights permit purchase common stock acquirer 50 discount rights held acquirer become null void case prior person group acquiring 15 rights redeemed 0001 action board rights agreement contains exception 15 ownership threshold shares currently beneficially owned sigmatau finanziaria spa rights expire december 19 2016 rights agreement includes requirement committee independent directors evaluate rights agreement least every three years note 16 accumulated comprehensive income loss changes composition accumulated comprehensive income loss years ended december 31 2014 2013 2012 follows thousands note 17 401k plan company pretax savings plan covering us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions company contributions terminated companys discretion approximately 01 million 02 million 02 million years ended december 31 2014 2013 2012 respectively note 18 licensing agreements medicines company december 2014 company entered strategic partnership two cardiovascular products china partnership includes agreement granting sciclone license exclusive rights china promote two products medicines company including angiomax® bivalirudin injection phase 3 registration trial completed china currently review china food drug administration marketing approval cleviprex® clevidipine injectable emulsion clinical trial application cta china filed 2013 terms agreement sciclone responsible aspects commercialization including preand postlaunch activities products china market excluding hong kong macao sciclone also agreed participate china registration process products financial terms agreement addition net sales royalties payable medicines company include following additional payments medicines company upfront payment product support services fee regulatorycommercial success milestone payments aggregate 505 million zensun may 13 2013 company designated affiliate entered framework agreement zensun exclusive promotion marketing distribution sale neucardintm china hong kong macao neucardin novel firstinclass therapeutic treatment patients intermediate advanced heart failure new drug application submitted accepted review china food drug administration “cfda” 2012 china food drug administration informed zensun 2014 phase 2 clinical study data insufficient asked zensun submit new drug application ongoing phase 3 clinical study reaches endpoints zensun framework agreement provides principal terms arrangement two parties also entered supplemental license supply agreement subject certain conditions company agreed make payments 185 million zensun consisting upfront payment amount amounts achievement certain milestones including approval new drug application neucardin™ granting manufacturing license good manufacturing practices certificate drug approval number china company agreed certain conditions make milestone payments zensun 10 million approval received new device deliver neucardin™ 25 million approval received use neucardin™ additional indications zensun responsible manufacture product company agreed purchase product exclusively zensun duration agreement addition company agreed provide collateralized loan zensun approximately 120 million refer note 6 “loans receivable” information loans zensun taiwan liposome company “tlc” june 2013 company entered agreement tlc granting company license exclusive rights china hong kong macao promote market distribute sell proflow® treatment peripheral arterial disease “pad” indications terms agreement tlc responsible continued development including potential clinical trials regulatory activities well manufacture supply proflow company responsible aspects commercialization including preand postlaunch activities tlc recently notified cfda proflow receive clinical trial approval tlc process appealing decision agreement provides principal terms arrangement sciclone tlc march 2014 companies entered collaboration license agreement financial terms agreement include clinical regulatory milestone payments sales milestone payments aggregate 395 million years ended december 31 2014 2013 company recorded upfront payments totaling 110 million 50 million respectively research development expense related licensing arrangements note 19 contingencies legal matters company party various legal proceedings subject government investigations noted section legal proceedings government investigations subject inherent uncertainties unfavorable rulings adverse events could occur unfavorable outcomes could include substantial monetary damages awards injunctions remedies occur possibility exists material adverse impact company’s business results operations financial position overall trends company might also conclude settling one matters best interests stockholders business settlement could include substantial payments august 5 2010 sciclone contacted sec advised sec initiated formal nonpublic investigation sciclone sec issued subpoena sciclone requesting variety documents information including limited potential payments transfers anything value regulators governmentowned entities china bids contracts state governmentowned entities china joint venture partner intermediary local agent company china companys ethics anticorruption policies training audits certain company financial disclosures august 6 2010 company received letter us department justice “doj” indicating doj investigating foreign corrupt practices act “fcpa” issues pharmaceutical industry generally doj information company’s practices suggesting possible violations company received subpoena sec fourth quarter fiscal 2012 additional matters including limited matters related acquisition novamed pharmaceuticals inc ”novamed” april 18 2011 fcpa matters certain sales marketing expenses response matters company’s board directors appointed special committee independent directors “special committee” oversee company’s response government inquiry special committee undertaken independent investigations matters reflected arising sec doj investigations order evaluate whether violation fcpa laws occurred company continue cooperate fully sec doj conduct investigations company cannot predict outcome investigations timing resolution however company previously determined payment least 20 million government penalties fines andor remedies probable accordingly company recorded 20 million operating expense fourth quarter 2013 results operations reflect company’s estimate probable loss incurred related potential penalties fines andor remedies ongoing investigations sec doj company monitored developments investigations since time determined adjustments estimated loss probable reasonable estimable actual fines penalties may imposed losses may realized related investigations could materially differ could higher amount 20 million estimated loss could materially impact company’s financial statements company reassess potential liability quarter may adjust estimates accordingly future periods determines different amount probable incurred reasonably estimable novamed party distribution supply agreement meda pharma gmbh co kg “meda” following company’s acquisition novamed meda claimed right terminate agreement change control provision novamed believe meda right termination agreement novamed filed application binding arbitration china international economic trade arbitration commission “cietac” july 26 2012 april 3 2014 cietac issued final award arbitral tribunal arbitral tribunal found meda right terminate agreement upon change control meda must make reasonable reimbursement novamed products rights returned meda amount must paid includes 333333 “unjust enrichment” plus amount reasonable compensation services provided novamed meda amount payment services determined arbitral tribunal left determined novamed april 30 2014 novamed informed meda determination reasonable compensation services 3314629 including 333333 unjust enrichment meda made counter offer parties attempting resolve matter without additional arbitration proceeding december 2014 novamed filed “request second arbitration” cietac order enforce right compensation arbitration case pending cietac hearing taken place yet amount final payment novamed remains uncertain company recognized gain contingency march 11 2013 adam crum filed derivative lawsuit purportedly name sciclone friedhelm blobel gary titus jon saxe peter barrett richard hawkins gregg lapointe ira lawrence california superior court san mateo county captioned crum v blobel et al case civ520331 lawsuit alleges based restatement company’s consolidated financial statements year ended december 31 2011 certain quarters 2011 2012 board directors management breached fiduciary duties company exercising oversight way allowed company file consolidated financial statements materially inaccurate plaintiff asserts claims breach fiduciary duty abuse control mismanagement plaintiff seeks among things injunctive relief disgorgement undisclosed damages attorneys’ fees costs company defendants filed motions dismiss complaint court granted motions dismiss allowed plaintiff amend complaint amended complaint filed september 19 2014 october 24 2014 defendants filed motions dismiss amended complaint december 5 2014 court dismissed lawsuit entirety plaintiff file appeal matter finally resolved note 20 segment information geographic data company reports segment information based internal reporting used management evaluating segment performance based management’s estimates appropriate allocation resources segments company operates manages business primarily geographic basis accordingly company determined operating segments reporting units generally based nature location customers 1 china 2 rest world including us hong kong company evaluates performance operating segments based revenues operating income loss revenues geographic segments generally based location customers operating income loss segment includes revenues related cost sales operating expenses directly attributable segment operating income loss segment excludes nonoperating income expense summary information operating segments follows thousands 1 operating income china segment year ended december 31 2014 includes upfront payments totaling 110 million related company’s licensing arrangements 2 operating income china segment year ended december 31 2013 includes upfront payments totaling 50 million related company’s licensing arrangements 12 million restructuring charges related nonrenewal company’s promotional agreements sanofi 3 operating loss rest world segment includes 20 million expense company recorded year ended december 31 2013 reflect company’s estimate probable loss incurred related potential penalties fines andor remedies related sec doj ongoing investigations 4 nonoperating income expense rest world segment year ended december 31 2013 includes escrow settlement 26 million recorded income 5 operating income china segment year ended december 31 2012 includes 427 million impairment charge intangible assets 6 operating income loss rest world segment includes change fair value contingent consideration 2012 longlived assets december 31 2014 operating segment follows thousands note 21 selected quarterly financial data unaudited 1 three months ended december 31 2014 company recorded upfront payments totaling 110 million research development expense related licensing arrangements 2 three months ended june 30 2013 company recorded upfront payments totaling 50 million research development expense related licensing arrangements 3 july 8 2013 company representatives former stockholders novamed entered “confidential escrow settlement agreement” pursuant company retained approximately 08 million cash 342300 shares common stock combined value approximately 26 million settlement date recorded income three months ended september 30 2013 4 three months ended december 31 2013 company recorded 20 million operating expense reflect company’s estimate probable loss incurred related potential penalties fines andor remedies related sec doj ongoing investigations note 22 subsequent event february 2015 company’s board directors approved increase 15 million existing 655 million share repurchase program initiated october 2011 bringing total authorized program since inception approximately 805 million company repurchased retired 28651 shares cost 03 million january 1 2015 march 10 2015 share repurchase program march 10 2015 15 million available future share repurchase item 9item 8financial statements supplementary data sciclone pharmaceuticals inc index consolidated financial statements report independent registered public accounting firm board directors shareholders sciclone pharmaceuticals inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position sciclone pharmaceuticals inc subsidiaries december 31 2015 december 31 2014 results operations cash flows three years period ended december 31 2015 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2015 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s annual report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers zhong tian llp shanghai people’s republic china march 11 2016 sciclone pharmaceuticals inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements income thousands except per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements comprehensive income thousands see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements stockholders’ equity thousands see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows thousands see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies description business sciclone pharmaceuticals inc “sciclone” “company” incorporated 1990 united states “us”headquartered chinafocused specialty pharmaceutical company substantial commercial business china product portfolio therapies oncology infectious diseases company’s lead product zadaxin® thymalfasin approved 30 countries may used treatment hepatitis b hbv hepatitis c hcv certain cancers according local regulatory approvals use immune system enhancer addition zadaxin sciclone markets approximately 7 partnered inlicensed products china sciclone also pursuing registration several therapeutic products china presentation consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidated financial statements use estimates preparation financial statements conformity us generally accepted accounting principles requires management make informed estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ materially estimates cash equivalents investments cash equivalents consist highly liquid investments original maturities three months less date purchase company records investments fair value determined available information consolidated balance sheet date company’s investment portfolio december 31 2015 consisted money market funds included cash equivalents unrealized gains losses availableforsale securities included accumulated comprehensive income consolidated balance sheets realized gains losses declines value judged otherthantemporary availableforsale securities included earnings amortized cost securities adjusted amortization premiums accretion discounts maturity included earnings cost securities sold based specific identification method availableforsale investments evaluated impairment reporting period investment considered impaired fair value investment less cost consideration available evidence evaluate realizable value investment impairment determined otherthantemporary impairment loss recognized consolidated statement income losses recorded periods presented fair value financial instruments fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs fair value measurements based threetier hierarchy prioritizes inputs used measure fair value three levels input level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities quoted prices available active market company determines fair value based quoted market prices classifies values level 1 valuation hierarchy quoted market prices available fair values based observable inputs quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities classified level 2 valuation hierarchy quoted prices observable inputs unavailable fair values based cash flow models classified level 3 valuation hierarchy cash flow models use inputs specific asset liabilities including estimates interest rates discount rates including yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods assets liabilities inputs reflect company’s assumptions market participants would use pricing assets liabilities including assumptions risk developed based best information available circumstances company’s assessment significance particular input fair value measurements requires judgment may materially affect valuation assets liabilities measured placement within fair value hierarchy financial instruments including accrued shortterm liabilities carried cost company believes approximates fair value shortterm maturity instruments concentration risk financial instruments potentially subject company concentration credit risk consist cash equivalents investments accounts receivable loans receivable company exposed credit risk event default institutions holding cash equivalents investments customers partners event default customer partner pay amounts due company receivables loans receivables respectively extent amounts recorded consolidated balance sheet company’s cash equivalents held financial institutions company believes high credit quality times deposits may exceed government insured limits company experienced losses deposits cash equivalents china pharmaceutical products imported distributed tiered method distribution company’s proprietary product zadaxin company manufactures product using us european contract manufacturers generates product sales revenue sales zadaxin products sinopharm holding lingyun biopharmaceutical shanghai co limited “sinopharm” sinopharm acts importer also top “tier” distribution system “tier 1” china company’s zadaxin sales occur importer purchases product company without right return except replacement product events damaged product quality control issues company bears risk loss delivery occurred revenue recognized shipment reaches destination company’s sale zadaxin importer sinopharm clears products china import customs sells directly large hospitals holds additional product purchased inventory sale next tier distribution system secondtier “tier 2” distributors responsible sale distribution products purchase importer either sales product directly retail level hospitals pharmacies thirdtier “tier 3” local regional distributors turn sell products hospitals pharmacies company’s product sales revenues result sale company’s inlicensed products importing agents distributors promotion services revenues result fees received exclusively promoting products certain pharmaceutical partners importing agents distributors partners company’s customers exceeded 10 company’s total net revenue related china segment follows product sales 1461 million 95 1261 million 96 963 million 97 years ended december 31 2015 2014 2013 respectively related sales zadaxin december 31 2015 approximately 383 million 96 companys gross accounts receivable attributable one customer sinopharm china company generally require collateral customers company maintains reserves potential credit losses actual losses may vary significantly estimates company currently relies two suppliers provide key components zadaxin manufacturing supply although limited number manufacturers would able meet requirements manufacture components company believes suppliers could provide similar components comparable terms change suppliers however could cause delay manufacturing possible loss sales would affect operating results adversely per company’s previous contractual arrangement sinopharm december 31 2015 renewed contractual arrangement sinopharm company’s sole distributor zadaxin china took effect january 1 2016 company’s sales zadaxin sinopharm continue denominated us dollars however established importer price may adjusted quarterly based upon exchange rate fluctuations us dollar chinese yuan renminbi “rmb” significant portion company’s revenues expenses denominated rmb significant portion company’s assets liabilities denominated rmb exposed foreign exchange risk recent months rmb experienced devaluation may negatively affect us dollar value revenues albeit lagging basis pursuant periodic adjustments described rmb freely convertible foreign currencies china foreign exchange transactions required law transacted authorized financial institutions exchange rates quoted people’s bank china remittances currencies rmb company china require certain supporting documentation order affect remittance accounts receivable reserve company records receivable reserve based specific review overdue invoices company’s estimate reserve determined considering existing contractual payment terms payment patterns customers individual customer circumstances age outstanding receivables current customer relationships accounts receivable charged point considered uncollectible december 31 2015 company receivable reserve 06 million october 2014 company’s subsidiary sciclone pharmaceuticals international china holding ltd “spil china” executed agreement particular customer providing settlement 30 million receivable balance terms settlement agreement resulted writeoff 11 million previously fully reserved accounts receivable equivalent chargeoff allowance bad debt impact net income 2014 remaining 19 million receivable balance 04 million 10 million collected 2015 2014 respectively per terms settlement agreement gains recovery recorded reductions general administrative expense years ended december 31 2015 2014 respectively december 31 2015 balance 05 million remained uncollected customer remained fully reserved company recognized 05 million bad debt expense general administrative expense first quarter 2015 related past due receivables another customer due uncertainty regarding collectability customer’s outstanding receivable balance company wroteoff 05 million past due accounts receivable customer fourth quarter 2015 uncollectible inventories consist raw materials work progress finished goods products inventories valued lower cost market net realizable value cost determined firstin firstout basis include amounts related materials labor overhead company periodically reviews inventory order identify excess obsolete items obsolete excess items observed alternate uses inventory company record writedown net realizable value period impairment first indicated years ended december 31 2015 2014 2013 company recorded inventory writedowns 0 21 million 0 respectively principally related carrying value reductions excess aggrastat® product december 31 2015 zero remaining aggrastat product inventory following discontinuation product refer note 17 information regarding discontinuation aggrastat property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets straightline basis office furniture fixtures generally amortized five years office equipment computer software generally amortized three years company’s vehicle amortized four years leasehold improvements amortized shorter estimated useful life lease term straightline basis company’s policy identify record impairment losses necessary property equipment events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets goodwill company accounted acquisition novamed pharmaceuticals inc “novamed” 2011 acquisition method accounting accordance financial accounting standards board accounting standards codification “asc” topic 805 business combinations acquisition method accounting total acquisitiondate fair value assets liabilities recognized closing date excess fair value total consideration transferred acquisitiondate fair value net tangible intangible assets liabilities assumed allocated goodwill tested impairment least annually whenever events circumstances occur indicate impairment might occurred accordance asc topic 350 intangibles goodwill relates company’s china segment focuses company’s primary pharmaceutical distribution market consisting novamed business legacy china business represent single reporting unit december 31 2015 2014 2013 company tested goodwill impairment quantitatively comparing fair value reporting unit carrying amount step one twostep impairment test company bypassed optional qualitative screening test proceeding directly step one twostep impairment test addition third quarter fiscal 2013 company performed interim goodwill impairment analysis determine goodwill impaired result nonrenewal sanofi aventis sa “sanofi” promotional agreements december 31 2013 comparing fair value reporting unit carrying amount company estimates fair value china reporting unit using discounted cash flow model valuation approach considers number factors include limited expected future cash flows growth rates discount rates requires company make certain assumptions estimates regarding industry economic factors future profitability company’s business company determines carrying value reporting unit exceeds fair value company would calculate implied fair value reporting unit goodwill compared carrying value determine appropriate impairment charge completing company’s impairment review reporting unit third quarter 2013 december 31 2015 2014 2013 company concluded goodwill impaired years loans receivable loans receivable due single third party see note 6 loans initially recorded continue carried unpaid principal balances “other assets” consolidated balance sheet carried balances subsequently adjusted payments principal adjustments allowance loan losses account impairment interest income recognized term loans calculated using simpleinterest method loans associated premium discount loans experience impairment interest income would recognized unless likelihood loss remote although measurement basis unpaid principal adjusted subsequent payments impairment fair value loans receivable would qualify level 3 measurements fair value hierarchy due presence significant unobservable inputs related counterparty private entity management considers impairment exist based current information factors payment history value collateral assessment counterparty’s current creditworthiness probable principal interest payments collected according contractual agreements management considers loan payment delinquent received due date december 31 2015 2014 management concluded loans receivable impaired allowance loan losses accrued expenses company makes estimates accrued expenses balance sheet date consolidated financial statements based facts circumstances known examples estimated accrued expenses include fees paid contract research organizations investigative sites connection clinical trials fees paid contract manufacturers connection production materials professional services company periodically confirms accuracy estimates selected service providers makes adjustments necessary periods identified expenses related clinical trials charged research development expense generally accrued based estimates work performed level patient enrollment activities according protocols agreements company makes adjustments necessary periods identified reflect actual levels work performed adjustments historically material financial terms agreements subject negotiation vary contract may result uneven payment flows payments certain contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective company’s accrual policy match recording expenses actual services received efforts expended company monitors planned protocols work performed patient enrollment levels related activities extent possible adjusts estimates accordingly company records liabilities estimated amounts litigation claims legal actions probable reasonably estimated likelihood material change estimated reserves dependent possible outcome settlement negotiations regulatory judicial review development facts circumstances extended litigation could change claims assessments amount range loss outstanding litigation uncertain company discloses footnotes financial statements unable make reasonable estimate material liability reasonably possible result unfavorable outcomes events occur company assesses potential liability related pending litigation claims legal actions adjusts estimates accordingly adjustments could materially impact financial statements foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using average rates exchange effect period goodwill certain balances generally recorded local currency functional currency company’s subsidiaries located china result carrying value goodwill certain balances may fluctuate value rmb compared us dollar gains losses translation financial statements denominated foreign currencies included separate component accumulated comprehensive income statement stockholders equity company records foreign currency transactions exchange rate prevailing date transaction resultant gains losses included results operations foreign currency transaction losses 04 million year ended december 31 2015 years ended december 31 2014 2013 foreign currency transaction gains losses significant revenue recognition company recognizes revenue persuasive evidence arrangement exists services rendered delivery occurred price buyer fixed determinable collectability reasonably assured product revenue company recognizes product revenue selling manufactured zadaxin product time delivery sales zadaxin sinopharm recognized upon arrival shipment destination title risk loss product transferred company also earns product revenue purchasing medical products pharmaceutical companies selling directly importers distributors company recognizes revenue related products based “sellin” method medical products delivered importers distributors payments importing agents distributors contingent upon sale end user importing agents distributors promotion services revenue company recognizes promotion services revenue designated medical products delivered distributors specified promotion services contract marks period marketing promotion services rendered revenue recognition criteria met per company’s arrangement sanofi company required return refund portion promotion services fees received interim periods defined annual sales targets achieved company’s agreements customer agreement terminated provided targets met “pro rata” basis date contract termination company entitled retain amounts paid due ability retain amounts paid upon contract termination provided applicable targets met “pro rata” basis interim date company elected recognize revenue interim periods without reduction amounts subject refund based method 2 accounting standards codification 60520s991 “accounting management fees based formula” company’s promotion agreements sanofi consisting individual promotional agreements certain pharmaceutical products supplementary agreements extending terms thereof renewed expired december 31 2013 novamed pharmaceuticals shanghai co ltd “novamed shanghai” sanofi negotiated settlement certain amounts dispute effective july 14 2014 novamed shanghai received approximately 22 million rmb approximately 35 million august 2014 final payment sanofi terms settlement resulted recognition promotion services revenue second quarter 2014 approximately 02 million sanofi revenue deferred fourth quarter 2013 remaining approximately 26 million deferred revenue originally recorded fourth quarter 2013 reversed equivalent writedown accounts receivable contemporaneous writedown accounts receivable deferred revenue impact net income second quarter 2014 year ended december 31 2014 revenue reserve company generally maintains revenue reserve product returns based estimates amount product returned customers based historical patterns analysis market demand andor percentage sales based industry trends management’s evaluation specific factors may increase risk product returns importing agents distributors contractual rights return except limited terms regarding product quality however company expected replace products expired deemed damaged defective delivered calculation revenue reserve requires estimates involves high degree subjectivity judgment result uncertainties involved estimating revenue reserve possibility materially different amounts could reported different conditions using different assumptions december 31 2015 2014 company’s revenue reserves 01 million consolidated balance sheets company evaluates need returns reserve quarterly adjusts events indicate change estimate appropriate changes estimates could materially affect company’s results operations financial position possible company may need adjust estimates future periods sales tax surcharge expense sales taxes surcharge costs expensed incurred included sales marketing expense company generally subject 5642 business tax surcharge services provided related marketing products relevant taxation laws china sales tax surcharge costs amounted approximately 34 million 25 million 35 million years ended december 31 2015 2014 2013 respectively research development expenses research development costs expensed incurred costs include salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment upfront payments inlicensing agreements certain business partners licenserelated fees services performed clinical research organizations research institutions outside service providers shipping handling costs shipping handling costs incurred inventory purchases product shipments included cost product sales periods presented advertising expenses advertising costs expensed incurred included sales marketing expenses periods presented advertising expenses years ended december 31 2015 2014 2013 41 million 26 million 11 million respectively legal costs legal costs related loss contingencies expensed general administrative expense incurred stockbased compensation company records stockbased compensation costs relating sharebased payment transactions including stock options restricted stock units “rsus” performance restricted stock units “psus” employee stock purchase plan “espp” stockbased compensation expense stock options employee stock purchase plan estimated date grant based fair value award using blackscholes optionpricing model stockbased compensation expense rsus psus estimated date grant based number shares granted quoted price company’s common stock grant date stockbased compensation expense values stock options rsus espp recognized expense straightline basis requisite service period net estimated forfeitures stockbased compensation costs ultimately expected vest recognized expense ratably awards vest requisite service period generally one four years stock options rsus three months espp company estimates prevesting forfeitures time grant analyzing historical data revises estimates subsequent periods actual forfeitures differ estimates total expense recognized vesting period awards ultimately vest company recognizes expense related psus performance stock options implicit service period probable performance goals achieved subsequently determined performance goals probable achievement expense related psus performance stock options reversed income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse company provides valuation allowance net deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized company establishes reduces valuation allowance deferred tax assets provision income taxes increase decrease respectively period determination made company records liabilities related uncertain tax positions accordance guidance clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribing minimum recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return company believe uncertain tax positions currently pending material adverse effect consolidated financial statements although adverse resolution one uncertain tax positions period could material impact results operations period company’s policy recognize interest penalties related liabilities uncertain tax positions component income tax expense amount accrued interest related tax positions taken company’s tax returns included accrued current liabilities 17 million 15 million december 31 2015 2014 respectively amount interest recognized tax expense related uncertain tax positions consolidated statements income 02 million 03 million 04 million years ended december 31 2015 2014 2013 respectively net income per share basic net income per share computed dividing net income weightedaverage number shares common stock outstanding period diluted net income per share computed dividing net income weightedaverage number common equivalent shares outstanding period diluted net income per share includes dilutive impact outstanding stock options stock awards espp using treasury stock method following reconciliation numerator denominators basic diluted net income per share computations years ended december 31 thousands except per share amounts years ended december 31 2015 2014 2013 approximately 1151537 3541071 3378063 shares respectively related outstanding stock options excluded calculation diluted net income per share effect assumed exercise options calculated treasury stock method would antidilutive addition years ended december 31 2015 2014 2013 outstanding stock options awards 312500 50000 50171 shares respectively subject performance conditions excluded calculation diluted net income per share performance criteria probable met segment information company operates two segments refer note 20 revision consolidated statement cash flows company reduced line item “inventories” increased line item “provision expiring inventory” amount 05 million within reconciling adjustments arrive net cash provided operating activities year ended december 31 2014 correct error prior year presentation revision impact cash provided operating activities amount error material annual period 2014 new accounting standards updates may 2014 financial accounting standards board “fasb” issued accounting standards update 201409 revenue contracts customers “asu 201409” contains new accounting literature relating company recognizes revenue asu 201409 company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services asu 201409 effective company’s fiscal year beginning january 1 2018 reflects one year deferral approved fasb july 2015 early application permitted provided effective date earlier original effective date company process determining impact adoption asu 201409 financial statements related disclosures standard permits use either full retrospective modified retrospective transition method company yet selected transition method determined effect standard ongoing financial reporting july 2015 fasb issued asu 201511 inventory topic 330 simplifying measurement inventory “asu 201511” applies inventory measured using firstin firstout fifo average cost updated guidance entity measure inventory within scope lower cost net realizable value estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation subsequent measurement unchanged inventory measured using lastin firstout lifo asu effective annual interim periods beginning december 15 2016 applied prospectively early adoption permitted beginning interim annual reporting period company evaluated impact adopting guidance concluded likely effect financial statements company’s adjustments already reflect concept net realizable value inventory provisions generally full writedowns affected inventory november 2015 fasb issued asu 201517 balance sheet classification deferred taxes” asu amends existing guidance require deferred income tax liabilities assets classified noncurrent classified balance sheet eliminates prior guidance required entity separate deferred tax liabilities assets current amount noncurrent amount classified balance sheet amendments asu effective annual reporting periods beginning december 15 2016 interim periods within annual periods earlier application permitted beginning interim annual period additionally new guidance may applied either prospectively deferred tax liabilities assets retrospectively periods presented company yet selected adoption method impact adopting guidance expected material consolidated financial statements given company’s deferred tax amounts february 2016 fasb issued asu 201602 “leases” new guidance lessees required recognize lease liability lease asset leases including operating leases term greater 12 months balance sheet update also expands required quantitative qualitative disclosures surrounding leases update effective fiscal years beginning december 15 2018 interim periods within fiscal years earlier application permitted company evaluating impact adoption update consolidated financial statements related disclosures note 2 availableforsale investment company realized 01 million losses related maturity italian state bonds year ended december 31 2013 reclassified accumulated comprehensive income included nonoperating expenses note 3 fair value measurements following tables represent company’s fair value hierarchy financial assets measured fair value recurring basis thousands note 4 inventories consisted following thousands december 31 2015 2014 company 33 million 31 million respectively inventory held distributors related nonzadaxin products note 5 property equipment property equipment consisted following thousands depreciation expense 09 million years ended december 31 2015 2014 2013 note 6 loans receivable part company’s may 2013 license supply agreement zensun shanghai science technology co ltd “zensun” company previously agreed loan 12 million zensun entry license supply agreement second quarter 2013 pursuant company licensed exclusive rights promote market distribute sell neucardintm chronic heart failure product development zensun rights licensed people’s republic china hong kong macao fully described note 16 pursuant agreement loan funds company loaned 12 million zensun extension credit funding zensun accomplished two companys subsidiaries spil china sciclone pharmaceuticals china ltd “sciclone china” respect lender sciclone china zensun make rmbdenominated borrowings rmb 1550000 using entrustment mechanism bank intermediary third quarter 2014 sciclone china entered entrusted loan agreement rmb 1550000 approximately us239000 december 31 2015 zensun using major chinese bank lending agent sciclone china principal ultimately bears credit risk bank loan bears interest fixed rate 75 per annum zensun subject obligations borrower specified loan agreements loan term sixtysix months outstanding principal interest balances must repaid maturity date prepayments permitted without penalty upon prior notice respect lender spil china zensun could request usdollar denominated borrowings 1175 million december 31 2015 borrowings totaling 1175 million requested zensun paid spil china 45 million lent second half 2014 725 million lent second quarter 2015 borrowings bear interest fixed rate 75 per annum payable annually arrears interest payment date defined overall loan agreement borrowings mature september 26 2017 option electable zensun extend two additional years provided certain conditions met outstanding balances must repaid maturity date prepayments permitted without penalty upon prior notice proceeds separate related loans used working capital general corporate purposes zensun secure loans zensun pledged entire equity interest subsidiary shanghai dongxin biochemical technology co ltd whose assets include real property spil china management basis creditworthiness evaluation using recent zensun financial information ii consideration evidence market value pledged security indicating market value exceeded outstanding loan principal iii consideration zensun’s compliance terms loans timely payments interest concluded indications loan impairment december 31 2015 2014 accordingly allowance losses two loans included “other assets” company’s consolidated balance sheet december 31 2015 2014 interest income loans amounted 08 million 01 million years ended december 31 2015 2014 respectively included interest investment income consolidated statements income company estimates fair value loans receivable approximates 127 million december 31 2015 based upon prevailing market rates interest published major chinese banks note 7 goodwill following table represents changes goodwill years ended december 31 2015 2014 2013 thousands note 8 accrued liabilities following summary accrued liabilities thousands note 9 escrow settlement agreement october 16 2012 company made claim former stockholders novamed pursuant acquisition agreement relating acquisition novamed result company’s claim approximately 14 million cash held escrow 622363 shares company’s common stock held escrow released former novamed stockholders pending outcome company’s claim related damages company incurred result misrepresentations made novamed regarding various matters including estimated product return reserves aggrastat product date acquisition related expenses damages july 8 2013 company representatives former stockholders novamed entered “confidential escrow settlement agreement” pursuant company retained approximately 08 million cash 342300 shares common stock combined value approximately 26 million settlement date recorded income year ended december 31 2013 december 31 2013 company canceled retired shares note 10 commitments purchase obligations agreements certain company’s pharmaceutical partners company committed certain annual minimum product purchases contract subject termination annual minimum order met december 31 2015 company material unmet purchase obligations leases may 2007 company entered noncancelable operating lease agreement corporate headquarters lease” effective july 1 2007 june 30 2014 september 2008 company entered amendment lease additional office space “the amendment” expired june 30 2014 lease amendment contained rent escalations approximately 4 6 per year respectively december 2013 company entered second amendment lease extending term lease additional four years june 30 2018 option renew additional five year period beginning july 1 2014 second amendment reduced amount leased office space approximately 21517 square feet leased approximately 11886 square feet also reduced monthly base rent 120824 51704 first year rent escalations approximately 3 per year addition company received rent abatement first four months extended lease term company recognizing rental expense straightline basis lease term terms lease amendment company provided allowances amounts approximately 02 million 05 million respectively towards cost leasehold improvements incentive rent respectively company recorded allowances deferred rent amortized lease term reduction rent expense lease requires company pay insurance taxes prorata share operating expenses june 2014 company entered noncancelable operating lease agreement primary office space china “the china lease” fixed lease term october 15 2014 april 14 2018 options renew additional two years company recognizing rental expense straightline basis lease term leases require company pay insurance prorata share operating expenses company also leases office facilities equipment outside us noncancelable operating lease agreements may 2014 company also subleased certain office facilities third party rent expense years ended december 31 2015 2014 2013 21 million 22 million 29 million respectively net sublease income future minimum lease payments noncancelable facility equipment operating lease agreements december 31 2015 follows thousands note 11 restructuring charges december 2013 company announced plan significantly reduce workforce approximately 175 employees approximately 650 fulltime employees primarily sales marketing included companys china segment restructuring decided result nonrenewal company’s distribution agreement sanofi december 31 2013 decision resulted severancerelated charges approximately 12 million recognized restructuring expense consolidated statement income year ended december 31 2013 note 12 income taxes company recorded income tax provisions 08 million 12 million 22 million years ended december 31 2015 2014 2013 respectively related operations china tax expense decreased years ended december 31 2015 2014 compared 2013 mainly related reduction company’s liabilities associated accrued interest uncertain tax positions china due certain tax years becoming closed assessment due statute limitations result lower taxable income related china operations company’s statutory tax rate china 25 2015 2014 2013 company recorded significant us federal state income taxes years ended december 31 2015 2014 2013 fourth quarter fiscal 2015 company repatriated special dividend distribution 128 million foreign subsidiary related sec settlement expense described note 18 current year earnings profits foreign subsidiaries part cumulative pool undistributed earnings foreign subsidiaries december 31 2014 company recorded us federal income taxes income component 2015 income tax provision however net effect special dividend distribution 2015 income tax provision zero incremental taxable income well nondeductible applicable sec settlement expenses fully offset deductible operating expenses company determined december 31 2015 1762 million accumulated undistributed earnings foreign subsidiaries exclusive dividend repatriation entirely satisfied current year earnings profits continues indefinitely reinvested outside us accordingly taxes provided amount accumulated undistributed earnings upon distribution accumulated undistributed earnings company may subject us federal state income taxes although determining amount practicable dependent variety factors including limited amounts us tax loss carryforwards tax credit carryforwards available time repatriation based company’s current liquid resources future operating plan need repatriate undistributed earnings held foreign subsidiaries accumulated december 31 2015 however meet future operating needs company anticipate repatriating portion future annual foreign earnings forthcoming annual period company plans accrue us income taxes future foreign earnings anticipates repatriating foreign subsidiaries beginning 2016 however company significant accumulated net operating loss tax credit carryforwards available offset tax liability dividend distribution foreign subsidiaries domestic foreign components income loss provision tax years ended december 31 follows thousands reconciliation tax statutory federal income tax rate 34 actual tax provision years ended december 31 follows thousands provision income taxes years ended december 31 consisted following thousands deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components company’s deferred tax assets liabilities december 31 follows thousands realization deferred tax assets dependent upon company generating future taxable income timing amount uncertain accordingly deferred tax assets largely offset valuation allowance valuation allowance increased approximately 14 million 34 million 44 million years ended december 31 2015 2014 2013 respectively approximately 38 million valuation allowance relates benefits associated stock option deductions recognized credited directly stockholders equity december 31 2015 company us federal net operating loss carryforwards approximately 1142 million expire years 2020 2035 us federal research development orphan drug investment tax credit carryforwards approximately 122 million expire years 2018 2035 december 31 2015 company approximately 52 million net operating loss carryforwards related novamed shanghai subsidiary expire years 2016 2020 december 31 2015 company state net operating loss carryforwards approximately 259 million expire years 2016 2030 utilized state research development tax credit carryforwards approximately 22 million expire utilization company’s net operating loss credit carryforwards may subject substantial annual limitation due ownership change limitations provided internal revenue code similar state provisions annual limitation could result expiration net operating loss credit carryforwards utilization december 31 2015 unrecognized tax benefit 55 million 18 million recognized would affect effective tax rate 37 million recognized would offset change valuation allowance accrued interest associated liability unrecognized tax benefits 17 million december 31 2015 reconciliation beginning ending amount unrecognized tax benefit years ended december 31 follows thousands tax years 19952015 remain open examination major us taxing jurisdictions company subject internal revenue service concluded examinations company’s 2011 2009 2008 us federal tax returns additional tax assessments proposed adjustments relating taxable income years company’s china operations generally subject examination china tax law period five years five years remain open examination outcome income tax examinations uncertain amounts ultimately paid resolution issues raised taxing authorities may differ materially amounts accrued year company anticipates liability unrecognized tax benefits decrease next 12 months account expiries statutes limitations associated certain tax jurisdictions decreases favorably impact effective tax rate note 13 stockholders’ equity stock award plans company’s 2015 equity incentive plan “2015 plan” became effective june 11 2015 superseded 2005 equity incentive plan “2005 plan” 2004 outside directors stock option plan “2004 director plan” plans terminated upon adoption 2015 plan 2015 plan authorizes company issue 6550000 shares increased 3000000 additional shares subject options awards outstanding 2005 plan 2004 director plan extent awards expire forfeited reason effective date 2015 plan 2015 plan permits grant incentive stock options nonstatutory stock options rsus psus forms equity compensation 2015 plan options exercisable upon conditions determined board directors expire ten years date grant options exercise prices equal grant date fair market value share company common stock vest time generally four years achievement certain performance conditions see stockbased compensation company’s 2005 plan authorized 13600000 shares common stock issuance 2005 plan permitted grant incentive stock options nonstatutory stock options rsus psus forms equity compensation terms 2005 plan options exercisable upon conditions determined board directors expire ten years date grant options exercise prices equal grant date fair market value share company common stock vest time generally four years achievement certain performance conditions see stockbased compensation december 31 2015 shares common stock available future issuance new awards 2005 plan although 2005 plan terminated outstanding stock options relating fully valid governed terms 2005 plan company’s 2004 director plan authorized 1765000 shares common stock issuance 2004 director plan automatically granted nonqualified stock options nonemployee directors appointment first election company’s board directors “initial grant” annually reelection board directors company’s annual meeting stockholders “annual grant” 2004 director plan options exercise prices equal grant date fair market value share company common stock expire ten years date grant initial grants became exercisable three equal annual installments beginning first anniversary date grant annual grants became exercisable twelve equal monthly installments date grant subject case director’s continuous service company’s board directors december 31 2015 shares common stock available future issuance new awards 2004 director plan although 2004 director plan terminated outstanding stock options relating fully valid governed terms 2004 director plan certain stock option awards subject accelerated vesting change control company issues new shares exercise stock options release rsus psus issuance stock espp stockbased compensation following table summarizes stockbased compensation expenses included company’s consolidated statements income thousands compensation cost capitalized inventory approximately 01 million years ended december 31 2015 2014 2013 income tax benefit recognized income statement sharebased compensation arrangements relate entity accumulated ongoing tax net operating losses valuation assumptions fair value awards granted company’s stock option espp plans estimated date grant using blackscholes option valuation model following weightedaverage assumptions years ended december 31 riskfree interest rate based us treasury yield curve effect time grant expected dividend yield based company’s history expectations dividend payouts expected volatility based historical volatility company’s stock expected term options granted derived historical data employee exercises terminations stock options following table summarizes stock option activity december 31 2015 2014 2013 changes years ended presented thousands except per share term amounts 2013 company extended period two company’s board members could exercise outstanding vested stock options following cessation service company ninety days second anniversary date cessation service june 27 2013 company recorded expense approximately 02 million year ended december 31 2013 related modifications addition company extended period two former employees company could exercise outstanding vested stock options following cessation service company ninety days one year anniversary date cessation services company recorded expense approximately 01 million year ended december 31 2013 related modifications company granted certain performancebased options purchase shares company’s common stock exercise price equal closing price share company’s common stock grant date options fully vest meeting performance goal within established time frame performance goal met option within established time frame option generally tenyear term measured date grant performance goal met within established time frame option expires entirety company recognizes expense related performancebased option period time company determines probable performance goal achieved subsequently determined performance goal probable achievement expense related performancebased option reversed years ended december 31 2015 2014 2013 company recognized approximately 20000 01 million 39000 respectively expense related performancebased options weightedaverage fair value stock options granted years ended december 31 2015 2014 2013 418 243 256 respectively intrinsic value options time exercise 47 million 24 million 13 million years ended december 31 2015 2014 2013 respectively estimated fair value options vested years ended december 31 2015 2014 2013 39 million 32 million 38 million respectively december 31 2015 unamortized compensation expense related unvested options approximately 55 million net forfeitures weighted average period compensation expense related options recognized approximately 245 years cash received stock option exercises 46 million 55 million 16 million years ended december 31 2015 2014 2013 respectively rsus psus following table summarizes rsu psu activity december 31 2015 2014 2013 changes years ended presented thousands rsus generally vest 25 approximately one year grant date remaining shares vesting either approximately annually quarterly equal installments threeyear period depending terms grant psus vest released meeting specified performance goals including revenue product expansion targets within established time frame performance goals met within established time frame psus expire company recognizes expense related psus implicit service period probable performance goals achieved subsequently determined performance goals probable achievement expense related psus reversed years ended december 31 2015 2014 2013 company recorded approximately 01 million 0 respectively expense related psus weighted average fair value grant date rsus psus 895 452 498 years ended december 31 2015 2014 2013 respectively december 31 2015 approximately 25 million unrecognized compensation cost net forfeitures related nonvested rsus psus expected recognized weighted average remaining period approximately 21 years espp december 31 2015 1300000 shares company’s common stock reserved issuance company’s espp expires july 25 2016 terms espp eligible employees may choose 15 salary withheld purchase companys common stock may purchase 1000 shares per offering period offering espp threemonth period purchase price stock issued espp equal 85 lower fair market value share common stock first day offering final day offering period december 31 2015 432795 shares common stock available issuance espp repurchase common stock company’s board directors authorized 805 million share repurchase program expired december 31 2015 company repurchased retired 1526306 3822434 2404034 shares cost 128 million 244 million 125 million years ended december 31 2015 2014 2013 respectively december 31 2015 company repurchased 781 million 805 million share repurchase program authorized board share repurchases repurchased shares retired constitute authorized unissued shares upon repurchase company eliminated par value associated retired shares excess price repurchase par value charged retained earnings accumulated deficit stockholder rights agreement december 18 2006 company’s board directors declared dividend distribution one preferred stock purchase right collectively “rights” outstanding share company’s common stock right entitles registered holder purchase company one onethousandth share company’s series preferred stock 0001 par value price 2500 pursuant rights agreement dated december 19 2006 company mellon investor services llc “rights agreement” rights initially trade common stock become exercisable person group acquires 15 company’s common stock without prior board approval event rights permit company’s stockholders acquirer purchase company’s common stock market value twice exercise price rights lieu preferred stock alternatively rights become exercisable company’s board directors may authorize issuance one share company’s common stock exchange right exercisable addition event certain business combinations rights permit purchase common stock acquirer 50 discount rights held acquirer become null void case prior person group acquiring 15 rights redeemed 0001 action board rights expire december 19 2016 rights agreement includes requirement committee independent directors evaluate rights agreement least every three years note 14 accumulated comprehensive income loss changes composition accumulated comprehensive income loss years ended december 31 2015 2014 2013 follows thousands note 15 401k plan company pretax savings plan covering us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions company contributions terminated companys discretion approximately 02 million 01 million 02 million years ended december 31 2015 2014 2013 respectively note 16 licensing agreements theravance biopharma inc “theravance biopharma” may 2015 theravance biopharma granted company exclusive development commercialization rights vibativ® telavancin china well hong kong sar macau sar taiwan vietnam exchange upfront regulatory milestone payments totaling 6 million sciclone responsible aspects development commercialization partnered regions including pre postlaunch activities product registration theravance biopharma sell sciclone clinical commercial product required develop commercialize vibativ china company’s licensed territories medicines company december 2014 company entered strategic partnership two cardiovascular products china partnership includes agreement granting sciclone license exclusive rights china promote two products medicines company including angiomax® bivalirudin injection phase 3 registration trial completed china currently review china food drug administration marketing approval cleviprex® clevidipine injectable emulsion clinical trial application cta china filed 2013 terms agreement sciclone responsible aspects commercialization including preand postlaunch activities products china market excluding hong kong macao sciclone also agreed participate china registration process products financial terms agreement addition net sales royalties payable medicines company include following additional payments medicines company upfront payment product support services fee regulatorycommercial success milestone payments aggregate 505 million zensun may 13 2013 company designated affiliate entered framework agreement zensun exclusive promotion marketing distribution sale neucardintm china hong kong macao neucardin novel firstinclass therapeutic treatment patients intermediate advanced heart failure new drug application submitted accepted review china food drug administration “cfda” 2012 china food drug administration informed zensun 2014 phase 2 clinical study data insufficient asked zensun submit new drug application ongoing phase 3 clinical study reaches endpoints zensun framework agreement provides principal terms arrangement two parties also entered supplemental license supply agreement subject certain conditions company agreed make payments 185 million zensun consisting upfront payment amount amounts achievement certain milestones including approval new drug application neucardin™ granting manufacturing license good manufacturing practices certificate drug approval number china company agreed certain conditions make milestone payments zensun 10 million approval received new device deliver neucardin™ 25 million approval received use neucardin™ additional indications zensun responsible manufacture product company agreed purchase product exclusively zensun duration agreement addition company agreed provide collateralized loan zensun approximately 120 million refer note 6 “loans receivable” information loans zensun taiwan liposome company “tlc” june 2013 company entered agreement tlc granting company license exclusive rights china hong kong macao promote market distribute sell proflow® treatment peripheral arterial disease “pad” indications terms agreement tlc responsible continued development including potential clinical trials regulatory activities well manufacture supply proflow company responsible aspects commercialization including preand postlaunch activities november 2014 tlc notified cfda proflow receive clinical trial approval tlc process appealing decision agreement provides principal terms arrangement sciclone tlc march 2014 companies entered collaboration license agreement financial terms agreement include clinical regulatory milestone payments sales milestone payments aggregate 395 million years ended december 31 2015 2014 2013 company recorded upfront milestone payments totaling 75 million 110 million 50 million respectively research development expense related licensing arrangements note 17 termination collaboration cardiome pharma corp “cardiome” august 2015 cardiome company licensed marketing commercialization rights heart medication aggrastat® company mutually agreed end collaboration aggrastat terminate company’s exclusive distributorship china product resulting company’s obligation return rights product cardiome company recorded aggrastat revenues 18 million 11 million 0 million years ended december 31 2015 2014 2013 respectively company expect generate aggrastat revenues terms agreement include 750000 transition payments received company cardiome approximately one year period require cardiome repurchase aggrastat inventory held company original purchase price transition payments amount 450000 collected cardiome second half fiscal 2015 recorded credit general administrative expenses fourth quarter 2015 company received 11 million cardiome repurchased inventory company recorded 11 million reimbursement inventory returned reduction cost product sales since inventory previously written zero year ended december 31 2015 company recorded liability 06 million corresponding offset revenue cost goods sold related aggrastat product due expire mid2016 expects repurchase customer connection termination agreement cardiome terms agreement cardiome obliged repurchase inventory already sold company’s distributors company expect resell inventory note 18 contingencies legal matters company party various legal proceedings subject government investigations noted section legal proceedings government investigations subject inherent uncertainties unfavorable rulings adverse events could occur unfavorable outcomes could include substantial monetary damages awards injunctions remedies occur possibility exists material adverse impact company’s business results operations financial position overall trends company might also conclude settling one matters best interests stockholders business settlement could include substantial payments previously disclosed since 2010 sec us department justice “doj” conducting formal investigations company regarding range matters including possibility violations foreign corrupt practices act “fcpa” primarily related certain historical sales marketing activities respect company’s china operations response matters company’s board appointed special committee independent directors “special committee” oversee response government inquiry based initial review special committee decided undertake independent investigation matters reflected arising sec doj investigations order evaluate whether violation fcpa laws occurred company previously recorded charge operating expenses fourth quarter 2013 amount 20 million accrual estimated loss associated sec doj investigations based available information time second quarter 2015 company recorded additional charge operating expenses 108 million based agreement principle reached sec yet finalized bringing accrued liability 128 million october 7 2015 company deposited 128 million interestbearing escrow account established related agreement principle regarding proposed settlement fcparelated matters staff sec creating cash restriction time deposit february 4 2016 company announced entered settlement agreement sec fully resolving sec’s investigation possible violations fcpa terms settlement agreement february 2016 company paid sec total 128 million released escrow account including disgorgement prejudgment interest penalty final settlement payment line charges company previously recorded disclosed summarized part agreement company neither admitted denied engagement wrongdoing company agreed give status reports sec next three years continued remediation implementation anticorruption compliance measures doj also completed related investigation declined pursue action novamed party distribution supply agreement meda pharma gmbh co kg “meda” following company’s acquisition novamed meda claimed right terminate agreement change control provision novamed believe meda right termination agreement novamed filed application binding arbitration china international economic trade arbitration commission “cietac” july 26 2012 april 2 2014 cietac issued final award arbitral tribunal arbitral tribunal found meda right terminate agreement upon change control meda must make reasonable reimbursement novamed product rights returned meda amount must paid includes 333333 “unjust enrichment” plus amount reasonable compensation services provided novamed meda amount payment services determined arbitral tribunal left determined novamed april 30 2014 novamed informed meda determination reasonable compensation services 3314629 including 333333 unjust enrichment meda made counter offer parties attempting resolve matter without additional arbitration proceeding december 2014 novamed filed “request second arbitration” cietac order enforce right compensation arbitration case pending cietac hearing taken place yet amount final payment novamed remains uncertain company recognized gain contingency note 19 credit facility december 2013 company’s subsidiary novamed shanghai entered 100 million rmb revolving line credit facility approximately 16 million usd maximum 150 million rmb loan facility approximately 24 million usd shanghai pudong development bank co ltd “the credit facility” secured accounts receivable credit facility bore interest borrowed funds people’s bank china 6month base rate plus 15 644 2014 2013 outstanding balances credit facility expired november 30 2014 amounts borrowed repaid expiration date year ended december 31 2014 company paid interest approximately 48000 related credit facility note 20 segment information geographic data company reports segment information based internal reporting used management evaluating segment performance based management’s estimates appropriate allocation resources segments company operates manages business primarily geographic basis accordingly company determined operating segments reporting units generally based nature location customers 1 china 2 rest world including us hong kong company evaluates performance operating segments based revenues operating income loss revenues geographic segments generally based location customers operating income loss segment includes revenues related cost sales operating expenses directly attributable segment operating income loss segment excludes nonoperating income expense summary information operating segments follows thousands 1 operating income china segment year ended december 31 2015 includes upfront milestone payments totaling 55 million related company’s licensing arrangements 2 operating loss rest world segment year ended december 31 2015 includes milestone payment totaling 20 million related company’s licensing arrangements operating loss rest world segment also includes 108 million expense company recorded year ended december 31 2015 associated sec settlement related company’s investigations sec doj refer part ii item 8 note 18 “contingencies” note 22 “subsequent events” information regarding sec doj investigations 3 operating income china segment year ended december 31 2014 includes upfront payments totaling 110 million related company’s licensing arrangements 4 operating income china segment year ended december 31 2013 includes upfront payments totaling 50 million related company’s licensing arrangements 12 million restructuring charges related nonrenewal company’s promotional agreements sanofi 5 operating loss rest world segment includes 20 million expense company recorded year ended december 31 2013 reflect company’s estimate probable loss incurred related potential penalties fines andor remedies related sec doj investigations 6 nonoperating income expense rest world segment year ended december 31 2013 includes escrow settlement 26 million recorded income longlived assets operating segment follows thousands note 21 selected quarterly financial data unaudited 1 three months ended june 30 2015 company recorded upfront payments totaling 55 million research development expense related licensing arrangements addition three months ended june 30 2015 company recorded additional charge 108 million operating expense addition 20 million charge recorded fourth quarter 2013 reflect company’s total sec settlement expense incurred related penalties fines andor remedies related sec doj investigations 128 million refer also notes 18 22 information sec doj investigations 2 three months ended december 31 2015 company recorded milestone payment totaling 20 million research development expense related licensing arrangements recorded 11 million 03 million reduction cost product sales general administrative expense respectively related return inventory items part termination collaboration cardiome refer also note17 information related termination 3 three months ended december 31 2014 company recorded upfront payments totaling 110 million research development expense related licensing arrangements note 22 subsequent events sec settlement doj investigation update february 4 2016 company announced entered settlement agreement sec fully resolving sec’s investigation possible violations fcpa terms settlement agreement february 2016 company paid total 128 million including disgorgement prejudgment interest penalty final settlement released restricted escrow account funded fourth quarter 2015 payment line charges company previously recorded disclosed described note 18 part agreement company neither admitted denied engagement wrongdoing company agreed give status reports sec next three years continued remediation implementation anticorruption compliance measures doj also completed related investigation declined pursue action sinopharm agreement effective january 1 2016 company’s new contractual arrangement china importer distributor zadaxin sinopharm result later recognition relative practices prevailing december 31 2015 portion company’s revenue invoiced sinopharm related situations provincial tender price greater relative referenced baseline tender price due mechanism new contractual arrangement whereby customer invoiced lower base price relative prevailing previous agreement lower base price well estimated price compensation payable due distributor situations provincial tender price lower referenced baseline tender price recorded revenue sale completed distributor invoiced portion price may result situations provincial tender price greater referenced baseline tender price later time amount recognized revenue amount agreed distributor new arrangement may impact quarterly revenue amounts timing especially first quarter 2016 item 9item 8financial statements supplementary data sciclone pharmaceuticals inc index consolidated financial statements ﻿ ﻿ ﻿ report independent registered public accounting firm board directors shareholders sciclone pharmaceuticals inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position sciclone pharmaceuticals inc subsidiaries december 31 2016 december 31 2015 results operations cash flows three years period ended december 31 2016 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2016 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s annual report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers zhong tian llp shanghai people’s republic china march 9 2017 ﻿ sciclone pharmaceuticals inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements income thousands except per share amounts ﻿ ﻿ ﻿ see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements comprehensive income thousands ﻿ ﻿ see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements stockholders’ equity thousands ﻿ ﻿ see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows thousands ﻿ see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies description business sciclone pharmaceuticals inc “sciclone” “company” incorporated 1990 united states “us”headquartered chinafocused specialty pharmaceutical company substantial commercial business product portfolio therapies oncology infectious diseases cardiovascular disorders company’s lead product zadaxin® thymalfasin approved 30 countries may used treatment hepatitis b hbv hepatitis c hcv certain cancers according local regulatory approvals use immune system enhancer addition zadaxin sciclone markets approximately 7 partnered inlicensed products china sciclone also pursuing registration several therapeutic products china presentation consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidated financial statements use estimates preparation financial statements conformity us generally accepted accounting principles requires management make informed estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ materially estimates cash equivalents investments cash equivalents consist highly liquid investments original maturities three months less date purchase company records investments fair value determined available information consolidated balance sheet date company’s cash investment portfolio december 31 2016 consisted money market funds included cash equivalents december 31 2016 company’s investment portfolio also included availableforsale investment common stock third party note 5 categorized within level 2 fair value hierarchy company records unrealized gains losses availableforsale equity investments comprehensive income loss realized gains losses declines value judged otherthantemporary availableforsale equity investments included earnings availableforsale investments evaluated impairment reporting period investment considered impaired fair value investment less cost consideration available evidence evaluate realizable value investment impairment determined otherthantemporary impairment loss recognized consolidated statement operations losses recorded periods presented fair value financial instruments fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs fair value measurements based threetier hierarchy prioritizes inputs used measure fair value three levels input level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities quoted prices available active market company determines fair value based quoted market prices classifies values level 1 valuation hierarchy quoted market prices available fair values based observable inputs quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities classified level 2 valuation hierarchy quoted prices observable inputs unavailable fair values based cash flow models classified level 3 valuation hierarchy cash flow models use inputs specific asset liabilities including estimates interest rates discount rates including yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods assets liabilities inputs reflect company’s assumptions market participants would use pricing assets liabilities including assumptions risk developed based best information available circumstances company’s assessment significance particular input fair value measurements requires judgment may materially affect valuation assets liabilities measured placement within fair value hierarchy company’s policy recognize transfers levels date event change circumstance caused transfer financial instruments including accrued shortterm liabilities carried cost company believes approximates fair value shortterm maturity instruments concentration risk financial instruments potentially subject company concentration credit risk consist cash equivalents accounts receivable loans receivable company exposed credit risk event default institutions holding cash equivalents customers partners event default customer partner pay amounts due company receivables loans receivables respectively extent amounts recorded consolidated balance sheet company’s cash equivalents held financial institutions company believes high credit quality times deposits may exceed government insured limits company experienced losses deposits cash equivalents company exposed risk investment common stock third party losing market value china pharmaceutical products imported distributed tiered method distribution company’s proprietary product zadaxin company manufactures product using us european contract manufacturers generates product sales revenue sales zadaxin products sinopharm holding lingyun biopharmaceutical shanghai co limited “sinopharm” sinopharm acts importer also top “tier” distribution system “tier 1” china company’s zadaxin sales occur importer purchases product company without right return except replacement product events damaged product quality control issues company bears risk loss delivery occurred revenue recognized shipment reaches destination company’s sale zadaxin importer sinopharm clears products china import customs sells directly large hospitals holds additional product purchased inventory sale next tier distribution system secondtier “tier 2” distributors responsible sale distribution products purchase importer either sales product directly retail level hospitals pharmacies thirdtier “tier 3” local regional distributors turn sell products hospitals pharmacies company’s product sales revenues result sale company’s inlicensed products importing agents distributors promotion services revenues result fees received exclusively promoting products certain pharmaceutical partners importing agents distributors partners company’s customers sinopharm contributed 93 97 94 company’s total net revenue years ended december 31 2016 2015 2014 respectively revenues related company’s china segment customers exceeded 10 company’s total net revenue years total zadaxin product sales 1501 million 96 1461 million 95 1261 million 96 total product sales years ended december 31 2016 2015 2014 respectively december 31 2016 approximately 395 million 95 companys gross accounts receivable attributable one customer sinopharm china company generally require collateral customers company maintains reserves potential credit losses actual losses may vary significantly estimates company currently relies two suppliers provide key components zadaxin manufacturing supply although limited number manufacturers would able meet requirements manufacture components company believes suppliers could provide similar components comparable terms change suppliers however could cause delay manufacturing possible loss sales would affect operating results adversely per company’s previous contractual arrangement sinopharm december 31 2015 renewed contractual arrangement sinopharm company’s sole distributor zadaxin china took effect january 1 2016 company’s sales zadaxin sinopharm denominated us dollars june 30 2016 however established importer price adjusted quarterly based upon exchange rate fluctuations us dollar chinese yuan renminbi “rmb” effective july 1 2016 company’s sales zadaxin sinopharm denominated rmb significant portion company’s revenues expenses also denominated rmb significant portion company’s assets liabilities denominated rmb exposed foreign exchange risk recent year months rmb experienced devaluation negatively affects us dollar value revenues positively affects us dollar value china operating expenses rmb freely convertible foreign currencies china foreign exchange transactions required law transacted authorized financial institutions exchange rates quoted people’s bank china remittances currencies rmb company china require certain supporting documentation order process remittance accounts receivable reserve company records receivable reserve based specific review overdue invoices company’s estimate reserve determined considering existing contractual payment terms payment patterns customers individual customer circumstances age outstanding receivables current customer relationships accounts receivable charged point considered uncollectible december 31 2016 company determined bad debt reserve necessary december 31 2015 company receivable reserve 05 million related accounts receivable one customer one year past due 2014 company’s subsidiary sciclone pharmaceuticals international china holding ltd “spil china” executed agreement customer providing settlement receivable balance time 30 million terms settlement agreement resulted writeoff 11 million previously fully reserved accounts receivable equivalent chargeoff allowance bad debt impact net income 2014 remaining 19 million receivable balance 05 million 04 million 10 million collected 2016 2015 2014 respectively per terms settlement agreement gains recovery recorded reductions general administrative expense years company recognized 05 million bad debt expense general administrative expense first quarter 2015 related past due receivables another customer due uncertainty regarding collectability customer’s outstanding receivable balance company wroteoff 05 million past due accounts receivable customer fourth quarter 2015 uncollectible inventories consist raw materials work progress finished goods products inventories valued lower cost market net realizable value cost determined firstin firstout basis include amounts related materials labor overhead company periodically reviews inventory order identify excess obsolete items obsolete excess items observed alternate uses inventory company record writedown net realizable value period impairment first indicated years ended december 31 2016 2015 2014 company recorded inventory writedowns 34000 0 21 million respectively principally related carrying value reductions excess aggrastat® product 2014 period december 31 2016 zero remaining aggrastat product inventory following discontinuation product refer note 14 information regarding discontinuation aggrastat property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets straightline basis office furniture fixtures generally amortized five years office equipment computer software generally amortized three years company’s vehicle amortized four years leasehold improvements amortized shorter estimated useful life lease term straightline basis company’s policy identify record impairment losses necessary property equipment events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets goodwill company accounted acquisition novamed pharmaceuticals inc “novamed” 2011 acquisition method accounting accordance financial accounting standards board accounting standards codification “asc” topic 805 business combinations acquisition method accounting total acquisitiondate fair value assets liabilities recognized closing date excess fair value total consideration transferred acquisitiondate fair value net tangible intangible assets liabilities assumed allocated goodwill tested impairment least annually whenever events circumstances occur indicate impairment might occurred accordance asc topic 350 intangibles goodwill relates company’s china segment focuses company’s primary pharmaceutical distribution market consisting novamed business legacy china business represent single reporting unit december 31 2016 2015 2014 company tested goodwill impairment quantitatively comparing fair value reporting unit carrying amount step one twostep impairment test company bypassed optional qualitative screening test proceeding directly step one twostep impairment test company estimates fair value china reporting unit using discounted cash flow model valuation approach considers number factors include limited expected future cash flows growth rates discount rates requires company make certain assumptions estimates regarding industry economic factors future profitability company’s business company determines carrying value reporting unit exceeds fair value company would calculate implied fair value reporting unit goodwill compared carrying value determine appropriate impairment charge completing company’s impairment review reporting unit december 31 2016 2015 2014 company concluded goodwill impaired years loans receivable loans receivable due single third party see note 6 loans initially recorded continue carried unpaid principal balances “other assets” consolidated balance sheet carried balances subsequently adjusted payments principal adjustments allowance loan losses account impairment interest income recognized term loans calculated using simpleinterest method loans associated premium discount loans experience impairment interest income would recognized unless likelihood loss remote although measurement basis unpaid principal adjusted subsequent payments impairment fair value loans receivable would qualify level 3 measurements fair value hierarchy note 2 due presence significant unobservable inputs related counterparty private entity management considers impairment exist based current information factors payment history value collateral assessment counterparty’s current creditworthiness probable principal interest payments collected according contractual agreements management considers loan payment delinquent received due date december 31 2016 2015 management concluded loans receivable impaired allowance loan losses accrued expenses company makes estimates accrued expenses balance sheet date consolidated financial statements based facts circumstances known examples estimated accrued expenses include fees paid contract research organizations investigative sites connection clinical trials fees paid contract manufacturers connection production materials professional services company periodically confirms accuracy estimates selected service providers makes adjustments necessary periods identified expenses related clinical trials charged research development expense generally accrued based estimates work performed level patient enrollment activities according protocols agreements company makes adjustments necessary periods identified reflect actual levels work performed adjustments historically material financial terms agreements subject negotiation vary contract may result uneven payment flows payments certain contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective company’s accrual policy match recording expenses actual services received efforts expended company monitors planned protocols work performed patient enrollment levels related activities extent possible adjusts estimates accordingly company records liabilities estimated amounts litigation claims legal actions probable reasonably estimated likelihood material change estimated reserves dependent possible outcome settlement negotiations regulatory judicial review development facts circumstances extended litigation could change claims assessments amount range loss outstanding litigation uncertain company discloses footnotes financial statements unable make reasonable estimate material liability reasonably possible result unfavorable outcomes events occur company assesses potential liability related pending litigation claims legal actions adjusts estimates accordingly adjustments could materially impact financial statements foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using average rates exchange effect period goodwill certain balances generally recorded local currency functional currency company’s subsidiaries located china result carrying value goodwill certain balances may fluctuate value rmb compared us dollar gains losses translation financial statements denominated foreign currencies included separate component accumulated comprehensive income loss statement stockholders equity company records foreign currency transactions exchange rate prevailing date transaction resultant gains losses included results operations foreign currency transaction losses 22 million 04 million year ended december 31 2016 2015 respectively year ended december 31 2014 foreign currency transaction gains losses significant revenue recognition company recognizes revenue persuasive evidence arrangement exists services rendered delivery occurred price buyer fixed determinable collectability reasonably assured product revenue company recognizes product revenue selling manufactured zadaxin product time delivery sales zadaxin sinopharm recognized upon arrival shipment destination marks point title risk loss product transferred company also earns product revenue purchasing medical products pharmaceutical companies selling directly importers distributors company recognizes revenue related products based “sellin” method medical products delivered importers distributors payments importing agents distributors contingent upon sale end user importing agents distributors effective january 1 2016 company’s new contractual arrangement china importer distributor zadaxin sinopharm resulting later recognition relative practices prevailing old contractual arrangement december 31 2015 portion company’s revenue due sinopharm related situations provincial tender price greater relative reference baseline tender price tender price ultimate retail end price approved provincial authorities price mechanism new contractual arrangement whereby sinopharm invoiced lower base price relative prevailing previous agreement lower base price reduced estimated price compensation payable sinopharm situations provincial tender price lower reference baseline tender price recorded revenue time sale completed upon arrival destination date situations provincial tender price less reference baseline tender price sinopharm invoiced portion price results situations provincial tender price greater reference baseline tender price later time amount recognized revenue amount agreed expected price compensation due company related sales quarter price adjustment mechanism provinces tender prices reference baseline tender price continue recognized rolling onetotwo quarter delayed basis relative originating sales quarter promotion services revenue company recognizes promotion services revenue designated medical products delivered distributors specified promotion services contract marks period marketing promotion services rendered revenue recognition criteria met revenue reserve company generally maintains revenue reserve product returns based estimates amount product returned customers based historical patterns analysis market demand andor percentage sales based industry trends management’s evaluation specific factors may increase risk product returns importing agents distributors contractual rights return except limited terms regarding product quality however company expected replace products expired deemed damaged defective delivered upon arrival destination calculation revenue reserve requires estimates involves high degree subjectivity judgment result uncertainties involved estimating revenue reserve possibility materially different amounts could reported different conditions using different assumptions december 31 2016 2015 company’s revenue reserves 03 million 01 million respectively consolidated balance sheets company evaluates need returns reserve quarterly adjusts events indicate change estimate appropriate changes estimates could materially affect company’s results operations financial position possible company may need adjust estimates future periods sales tax surcharge expense sales taxes surcharge costs expensed incurred included sales marketing expense company generally subject 5642 business tax surcharge services provided related marketing products relevant taxation laws china sales tax surcharge costs amounted approximately 38 million 34 million 25 million years ended december 31 2016 2015 2014 respectively research development expenses research development costs expensed incurred costs include salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment upfront milestone payments inlicensing agreements certain business partners licenserelated fees services performed clinical research organizations research institutions outside service providers shipping handling costs shipping handling costs incurred inventory purchases product shipments included cost product sales periods presented advertising expenses advertising costs expensed incurred included sales marketing expenses periods presented advertising expenses years ended december 31 2016 2015 2014 17 million 41 million 26 million respectively legal costs legal costs related loss contingencies expensed general administrative expense incurred stockbased compensation company records stockbased compensation costs relating sharebased payment transactions including stock options restricted stock units “rsus” performance restricted stock units “psus” employee stock purchase plan “espp” stockbased compensation expense stock options employee stock purchase plan estimated date grant based fair value award using blackscholes optionpricing model stockbased compensation expense rsus psus estimated date grant based number shares granted quoted price company’s common stock grant date stockbased compensation expense values stock options rsus espp recognized expense straightline basis requisite service period net estimated forfeitures stockbased compensation costs ultimately expected vest recognized expense ratably awards vest requisite service period generally one four years stock options rsus three months espp company estimates prevesting forfeitures time grant analyzing historical data revises estimates subsequent periods actual forfeitures differ estimates total expense recognized vesting period awards ultimately vest company recognizes expense related psus performance stock options implicit service period probable performance goals achieved subsequently determined performance goals probable achievement expense related psus performance stock options reversed income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse company provides valuation allowance net deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized company establishes reduces valuation allowance deferred tax assets provision income taxes increase decrease respectively period determination made company records liabilities related uncertain tax positions accordance guidance clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribing minimum recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return company believe uncertain tax positions currently pending material adverse effect consolidated financial statements although adverse resolution one uncertain tax positions period could material impact results operations period company’s policy recognize interest penalties related liabilities uncertain tax positions component income tax expense amount accrued interest related tax positions taken company’s tax returns included accrued current liabilities 17 million december 31 2016 2015 amount interest recognized tax expense related uncertain tax positions consolidated statements income 01 million 02 million 03 million years ended december 31 2016 2015 2014 respectively net income per share basic net income per share computed dividing net income weightedaverage number shares common stock outstanding period diluted net income per share computed dividing net income weightedaverage number common equivalent shares outstanding period diluted net income per share includes dilutive impact outstanding stock options stock awards espp using treasury stock method following reconciliation numerator denominators basic diluted net income per share computations years ended december 31 thousands except per share amounts ﻿ ﻿ years ended december 31 2016 2015 2014 approximately 2207440 1151537 3541071 shares respectively related outstanding stock options awards excluded calculation diluted net income per share effect assumed exercise issuance options awards calculated treasury stock method would antidilutive addition years ended december 31 2016 2015 2014 outstanding stock options awards 275000 312500 50000 shares respectively subject performance conditions excluded calculation diluted net income per share performance criteria probable met segment information company operates two segments refer note 17 error correction company provided 13 million additional income tax expense recorded corresponding accrual accrued current liabilities year ended december 31 2016 correct error correction reflected recognition previously unrecognized liability uncertain tax positions related potential nondeductibility people’s republic china “prc” tax regulations certain marketing costs related company’s china operations adjustment related tax years 2013 2015 reflected estimated tax exposure year well accrued interest thereon tax interest amounts 04 million 05 million 04 million full years 2013 2014 2015 respectively company’s management evaluated effects error prior annual interim period well total error accumulated end respective prior period concluded approaches effects error material previously issued annual interim financial statements company’s management also evaluated total amount error correction relation actual results full year 2016 concluded impact material 2016 financial statements accordingly total adjustment recorded outofperiod adjustment 2016 new accounting standards updates may 2014 financial accounting standards board “fasb” issued accounting standards update “asu” 201409 revenue contracts customers topic 606 contains new accounting literature relating company recognizes revenue asu 201409 company recognize revenue transfers promised goods services customers amount reflects consideration company expects entitled exchange goods services asu 201409 effective company’s fiscal year beginning january 1 2018 reflects one year deferral approved fasb july 2015 early application permitted provided effective date earlier original effective date company currently undertaking assessment revenue contracts determine impact adoption asu 201409 financial statements related disclosures company anticipates impact asu 201409 likely limited timing recognition variable consideration variable consideration arises situations company’s exclusive distributor china invoiced portion price results situations provincial tender price greater reference baseline tender price later time subsequent original sale amount currently recognized revenue amount agreed distributor later quarter relative originating sales quarter timing recognition amounts may earlier new guidance company plans finalize assessment early 2017 standard permits use either full retrospective modified retrospective transition method company yet selected transition method november 2015 fasb issued asu 201517 income taxes topic 740 balance sheet classification deferred taxes” asu amends existing guidance require deferred income tax liabilities assets classified noncurrent classified balance sheet eliminates prior guidance required entity separate deferred tax liabilities assets current amount noncurrent amount classified balance sheet amendments asu effective annual reporting periods beginning december 15 2016 interim periods within annual periods earlier application permitted beginning interim annual period additionally new guidance may applied either prospectively deferred tax liabilities assets retrospectively periods presented company plans apply new guidance retrospectively impact adopting guidance expected material consolidated financial statements given company’s deferred tax amounts january 2016 fasb issued asu 201601 “financial instruments topic 825 recognition measurement financial assets liabilities” amended guidance requires equity investments except accounted equity method accounting result consolidation investee measured fair value changes fair value recognized net income ii eliminates requirement disclose methods significant assumptions used estimate fair value currently required disclosed financial instruments measured fair value iii requires entity present separately comprehensive income portion total change fair value liability resulting change instrumentspecific credit risk entity elected measure liability fair value accordance fair value option financial instruments iv requires separate presentation financial assets financial liabilities measurement category form financial asset securities loans receivables balance sheet accompanying notes financial statements asu 201601 effective fiscal years beginning december 15 2017 including interim periods within fiscal years calendar 2018 company amended guidance applied means cumulativeeffect adjustment balance sheet beginning fiscal year adoption company evaluated impact adoption guidance consolidated financial statements concluded impact limited cumulativeeffect adjustment investment common stock thirdparty currently classified availableforsale equity investment well prospective recognition changes fair value investment extent company continues investment component net income february 2016 fasb issued asu 201602 “leases topic 842” new guidance lessees required recognize lease liability lease asset leases including operating leases term greater 12 months balance sheet update also expands required quantitative qualitative disclosures surrounding leases update effective company calendar 2019 first interim period calendar 2019 earlier application permitted company evaluating impact adoption update consolidated financial statements related disclosures march 2016 fasb issued asu 201609 “compensation stock compensation topic 718 improvements employee sharebased payment accounting” outlines new provisions intended simplify various aspects related accounting sharebased payments presentation financial statements company currently plans implement asu required first quarter calendar 2017 company expect adoption material impact consolidated financial statements june 2016 fasb issued asu 201613 “financial instruments credit losses topic 326 measurement credit losses financial instruments” asu requires financial asset group financial assets measured amortized cost basis presented net amount expected collected allowance credit losses valuation account deducted amortized cost basis financial assets present net carrying value amount expected collected financial asset standard effective company calendar 2020 early adoption permitted calendar 2019 company yet commence evaluation impact adoption standard consolidated financial statements august 2016 fasb issued asu 201615 “classification certain cash receipts cash payments topic 230 current gaap unclear include specific guidance classify certain transactions statement cash flows asu intended reduce diversity practice eight particular transactions classified statement cash flows asu 201615 effective interim annual reporting periods beginning december 15 2017 early adoption permitted provided amendments adopted period entities required apply guidance retrospectively impracticable apply guidance retrospectively issue amendments related issue would applied prospectively likelihood company experiencing one eight particular specified transactions low asu 201615 expected material impact companys consolidated financial statements january 2017 fasb issued asu 201704 intangibles goodwill topic 350 simplifying accounting goodwill impairment topic 350 removes requirement perform “step 2” hypothetical purchase price allocation measure goodwill impairment “step 1” traditional twostep goodwill impairment model failed goodwill impairment amount reporting unit’s carrying value exceeds fair value determination “step 1” exceed carrying amount goodwill asu 201704 effective us annual interim periods beginning january 1 2020 early adoption permitted applied prospectively asu 201704 impact goodwill balance extent goodwill balance exists adoption date extent fair value china reporting unit less carrying value ﻿ note 2 fair value measurements following tables represent company’s fair value hierarchy financial assets measured fair value recurring basis thousands ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ note 3 inventories consisted following thousands december 31 2016 2015 company 46 million 33 million respectively inventory held distributors related nonzadaxin products note 4 property equipment property equipment consisted following thousands depreciation expense 10 million 09 million 09 million years ended december 31 2016 2015 2014 respectively note 5 investment third party september 9 2016 company soligenix inc publiclytraded entity entered exclusive license agreement “license agreement” including common stock purchase agreement pursuant soligenix granted rights company develop promote market distribute sell oral mucositistargeted drug candidate “sgx942” people’s republic china hong kong macau taiwan south korea vietnam “territory” terms license agreement company responsible aspects development product registration commercialization territory access data generated soligenix exchange exclusive rights beyond upfront payment company pay soligenix royalties net sales soligenix supply commercial drug product company costplus basis maintaining worldwide manufacturing rights exclusive agreement builds existing collaboration two companies established 2013 company provided complete oral mucositis clinical regulatory data library soligenix exchange certain previously undisclosed commercialization rights oral mucositis drug candidate greater china market company obtained rights greater china mainland china hong kong macau earlier 2013 exchange september 2016 agreement substance represented acquisition additional rights taiwan south korea vietnam part license agreement company entered common stock purchase agreement soligenix pursuant company bought 3529412 shares soligenix common stock common shares unregistered company demand registration rights compel registration securities reasonably short time event company plans sell shares total cash consideration 3000000 paid soligenix time transaction reflected purchase price common stock consideration expanded territorial rights south korea taiwan vietnam transaction date common stock recorded initial fair value 27 million representing publicly quoted closing share prices otcqb overthecounter market soligenix’s securities listed time residual cash consideration 03 million related expanded territorial rights recorded research development expense third quarter fiscal 2016 company holding soligenix shares context business relationship classified availableforsale common stock investment adjusted fair value reporting date unrealized gains losses reported component comprehensive income loss october 2016 connection uplisting stock otcqb market nasdaq common market soligenix declared 1 10 reverse stock split converting company’s ownership soligenix 3529412 shares 352942 shares december 31 2016 fair value soligenix common stock investment 08 million unrealized holding loss investment 19 million recorded component comprehensive loss net tax zero entity holding security zerotax jurisdiction company determined writedown fair value otherthantemporary considering volatility common stock investeespecific facts circumstances note 6 loans receivable part company’s may 2013 license supply agreement zensun shanghai science technology co ltd “zensun” company previously agreed loan 12 million zensun entry license supply agreement second quarter 2013 pursuant company licensed exclusive rights promote market distribute sell neucardintm chronic heart failure product development zensun rights licensed people’s republic china hong kong macao fully described note 13 pursuant agreement loan funds company loaned 12 million zensun extension credit funding zensun accomplished two companys subsidiaries spil china sciclone pharmaceuticals china ltd “sciclone china” respect lender sciclone china zensun make rmbdenominated borrowings rmb 1550000 using entrustment mechanism bank intermediary third quarter 2014 sciclone china entered entrusted loan agreement rmb 1550000 approximately us 223000 december 31 2016 zensun using major chinese bank lending agent sciclone china principal ultimately bears credit risk bank loan bears interest fixed rate 75 per annum zensun subject obligations borrower specified loan agreements loan term sixtysix months outstanding principal interest balances must repaid maturity date prepayments permitted without penalty upon prior notice respect lender spil china zensun could request usdollar denominated borrowings 1175 million december 31 2016 borrowings totaling 1175 million requested zensun paid spil china 45 million lent second half 2014 725 million lent second quarter 2015 borrowings bear interest fixed rate 75 per annum payable annually arrears interest payment date defined overall loan agreement borrowings originally scheduled mature september 26 2017 option granted loan origination electable zensun extend two additional years provided certain conditions met december 31 2016 borrower notified company intent exercise option extend borrowings two additional years september 26 2019 outstanding balances must repaid maturity date prepayments permitted without penalty upon prior notice proceeds separate related loans used working capital general corporate purposes zensun secure loans zensun pledged entire equity interest subsidiary shanghai dongxin biochemical technology co ltd whose assets include real property spil china management basis creditworthiness evaluation using recent zensun financial information ii consideration evidence market value pledged security indicating market value exceeded outstanding loan principal iii consideration zensun’s compliance terms loans timely payments interest concluded indications loan impairment december 31 2016 accordingly allowance losses two loans included “other assets” company’s consolidated balance sheet december 31 2016 2015 interest income loans amounted 09 million 08 million 01 million years ended december 31 2016 2015 2014 respectively included interest investment income consolidated statements income company estimates fair value loans receivable approximates 124 million december 31 2016 based upon prevailing market rates interest published major chinese banks note 7 goodwill following table represents changes goodwill years ended december 31 2016 2015 2014 thousands ﻿ ﻿ ﻿ note 8 accrued liabilities following summary accrued liabilities thousands ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ note 9 commitments purchase obligations agreements certain company’s pharmaceutical partners company committed certain annual minimum product purchases contract subject termination annual minimum order met december 31 2016 company material unmet purchase obligations leases may 2007 company entered noncancelable operating lease agreement corporate headquarters lease” effective july 1 2007 june 30 2014 september 2008 company entered amendment lease additional office space “the amendment” expired june 30 2014 lease amendment contained rent escalations approximately 4 6 per year respectively december 2013 company entered second amendment lease extending term lease additional four years june 30 2018 option renew additional five year period beginning july 1 2014 second amendment reduced amount leased office space approximately 21517 square feet leased approximately 11886 square feet also reduced monthly base rent 120824 51704 first year rent escalations approximately 3 per year addition company received rent abatement first four months extended lease term company recognizing rental expense straightline basis lease term terms lease amendment company provided allowances amounts approximately 02 million 05 million respectively towards cost leasehold improvements incentive rent respectively company recorded allowances deferred rent amortized lease term reduction rent expense lease requires company pay insurance taxes prorata share operating expenses june 2014 company entered noncancelable operating lease agreement primary office space china “the china lease” fixed lease term october 15 2014 april 14 2018 options renew additional two years company recognizing rental expense straightline basis lease term lease requires company pay insurance prorata share operating expenses company also leases office facilities equipment outside us noncancelable operating lease agreements may 2014 company also subleased certain office facilities third party rent expense years ended december 31 2016 2015 2014 21 million 21 million 22 million respectively net sublease income future minimum lease payments noncancelable facility equipment operating lease agreements december 31 2016 follows thousands ﻿ ﻿ note 10 income taxes company recorded income tax provisions 34 million 08 million 12 million years ended december 31 2016 2015 2014 respectively related operations china tax expense increased 26 million year ended december 31 2016 compared 2015 related 13 million additional tax expense representing correction error related previously unrecognized liability uncertain tax positions china refer also note 1 “error correction” due higher sales related marketing activities company’s china business year ended december 31 2016 tax expense decreased year ended december 31 2015 compared 2014 mainly related reduction company’s liabilities associated accrued interest uncertain tax positions china due certain tax years becoming closed assessment due expiration statute limitations well result lower taxable income related restructuring company’s china operations company’s statutory tax rate china 25 2016 2015 2014 company recorded significant us federal state income taxes years ended december 31 2016 2015 2014 company concluded offshore undistributed accumulated earnings december 31 2016 211 million exclusive dividend repatriations entirely satisfied fiscal 2016 2015 earnings profits respectively explained continues indefinitely reinvested outside us therefore provided taxes thereon upon distribution accumulated undistributed earnings company may subject us federal state income taxes although determining amount practicable dependent variety factors including limited amounts us tax loss carryforwards tax credit carryforwards available time repatriation 2016 10 million dividend distributions made parent company address parent company’s liquidity needs fiscal 2016 earnings profits foreign subsidiaries part cumulative pool undistributed earnings foreign subsidiaries december 31 2015 repatriation result additional us federal state tax liability 2016 taxdeductible corporate expenses incurred consumption available accumulated net operating loss fully offset amount taxable income represented dividend distributions accordingly related tax provided zero fourth quarter fiscal 2015 company also repatriated special dividend distribution 128 million related sec settlement expense described note 15 fiscal 2015 earnings profits foreign subsidiaries part cumulative pool undistributed earnings foreign subsidiaries december 31 2014 company recorded us federal income taxes income component 2015 income tax provision however net effect special dividend distribution 2015 income tax provision zero incremental taxable income well nondeductible applicable sec settlement expenses fully offset taxdeductible corporate expenses based company’s current liquid resources future operating plan need repatriate undistributed earnings held foreign subsidiaries accumulated december 31 2016 however meet future operating needs company may repatriate portion future annual foreign earnings forthcoming annual period company plans accrue us income taxes future foreign earnings anticipates repatriating foreign subsidiaries company significant going corporate expenses accumulated net operating loss tax credit carryforwards available offset tax liability dividend distribution foreign subsidiaries domestic foreign components income loss provision tax years ended december 31 follows thousands ﻿ reconciliation tax statutory federal income tax rate 34 actual tax provision years ended december 31 follows thousands ﻿ provision income taxes years ended december 31 consisted following thousands deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components company’s deferred tax assets liabilities december 31 follows thousands ﻿ realization deferred tax assets dependent upon company generating future taxable income timing amount uncertain accordingly deferred tax assets fully offset valuation allowance exception net operating loss carryforward foreign jurisdiction end 2015 used offset taxable income 2016 valuation allowance decreased increased approximately 14 million 14 million 34 million years ended december 31 2016 2015 2014 respectively approximately 44 million valuation allowance relates benefits associated stock option deductions recognized credited directly stockholders equity december 31 2016 company us federal net operating loss carryforwards approximately 1129 million expire years 2020 2035 us federal research development orphan drug investment tax credit carryforwards approximately 123 million expire years 2018 2036 december 31 2016 company approximately rmb 408 million net operating loss carryforwards related novamed pharmaceuticals shanghai co ltd “novamed shanghai” subsidiary expire years 2019 2021 december 31 2016 company state net operating loss carryforwards approximately 259 million expire years 2017 2030 utilized state research development tax credit carryforwards approximately 22 million expire utilization company’s net operating loss credit carryforwards may subject substantial annual limitation due ownership change limitations provided internal revenue code similar state provisions annual limitation could result expiration net operating loss credit carryforwards utilization december 31 2016 unrecognized tax benefit 58 million 22 million recognized would affect effective tax rate 36 million recognized would offset change valuation allowance accrued interest associated liability unrecognized tax benefits 17 million december 31 2016 reconciliation beginning ending amount unrecognized tax benefit years ended december 31 follows thousands ﻿ tax years 19952016 remain open examination major us taxing jurisdictions company subject internal revenue service concluded examinations company’s 2011 2009 2008 us federal tax returns additional tax assessments proposed adjustments relating taxable income years company’s china operations generally subject examination china tax law period five years five years remain open examination outcome income tax examinations uncertain amounts ultimately paid resolution issues raised taxing authorities may differ materially amounts accrued year company anticipates liability unrecognized tax benefits decrease next 12 months account expiries statutes limitations associated certain tax jurisdictions decreases favorably impact effective tax rate note 11 stockholders’ equity stock award plans company’s 2015 equity incentive plan “2015 plan” became effective june 11 2015 superseded 2005 equity incentive plan “2005 plan” 2004 outside directors stock option plan “2004 director plan” plans terminated upon adoption 2015 plan 2015 plan authorizes company issue 6550000 shares increased 3000000 additional shares subject options awards outstanding 2005 plan 2004 director plan extent awards expire forfeited reason effective date 2015 plan 2015 plan permits grant incentive stock options nonstatutory stock options rsus psus forms equity compensation 2015 plan options exercisable upon conditions determined board directors expire ten years date grant options exercise prices equal grant date fair market value share company common stock vest time generally four years achievement certain performance conditions see stockbased compensation company’s 2005 plan authorized 13600000 shares common stock issuance 2005 plan permitted grant incentive stock options nonstatutory stock options rsus psus forms equity compensation terms 2005 plan options exercisable upon conditions determined board directors expire ten years date grant options exercise prices equal grant date fair market value share company common stock vest time generally four years achievement certain performance conditions see stockbased compensation december 31 2016 shares common stock available future issuance new awards 2005 plan although 2005 plan terminated outstanding stock options relating fully valid governed terms 2005 plan company’s 2004 director plan authorized 1765000 shares common stock issuance 2004 director plan automatically granted nonqualified stock options nonemployee directors appointment first election company’s board directors “initial grant” annually reelection board directors company’s annual meeting stockholders “annual grant” 2004 director plan options exercise prices equal grant date fair market value share company common stock expire ten years date grant initial grants became exercisable three equal annual installments beginning first anniversary date grant annual grants became exercisable twelve equal monthly installments date grant subject case director’s continuous service company’s board directors december 31 2016 shares common stock available future issuance new awards 2004 director plan although 2004 director plan terminated outstanding stock options relating fully valid governed terms 2004 director plan certain stock option awards subject accelerated vesting change control company issues new shares exercise stock options release rsus psus issuance stock espp stockbased compensation following table summarizes stockbased compensation expenses included company’s consolidated statements income thousands ﻿ compensation cost capitalized inventory approximately 02 million 01 million 01 million years ended december 31 2016 2015 2014 respectively income tax benefit recognized income statement sharebased compensation arrangements relate entity accumulated ongoing tax net operating losses valuation assumptions fair value awards granted company’s stock option espp plans estimated date grant using blackscholes option valuation model following weightedaverage assumptions years ended december 31 riskfree interest rate based us treasury yield curve effect time grant expected dividend yield based company’s history expectations dividend payouts expected volatility based historical volatility company’s stock expected term options granted derived historical data employee exercises terminations stock options following table summarizes stock option activity december 31 2016 2015 2014 changes years ended presented thousands except per share term amounts ﻿ company granted certain performancebased options purchase shares company’s common stock exercise price equal closing price share company’s common stock grant date options fully vest meeting performance goal within established time frame performance goal met option within established time frame option generally tenyear term measured date grant performance goal met within established time frame option expires entirety company recognizes expense related performancebased option period time company determines probable performance goal achieved subsequently determined performance goal probable achievement expense related performancebased option reversed years ended december 31 2016 2015 2014 company recognized approximately 0 20000 01 million respectively expense related performancebased options weightedaverage fair value stock options granted years ended december 31 2016 2015 2014 433 418 243 respectively intrinsic value options time exercise 146 million 47 million 24 million years ended december 31 2016 2015 2014 respectively estimated fair value options vested years ended december 31 2016 2015 2014 44 million 39 million 32 million respectively december 31 2016 unamortized compensation expense related unvested options approximately 66 million net forfeitures weighted average period compensation expense related options recognized approximately 241 years cash received stock option exercises 56 million 46 million 55 million years ended december 31 2016 2015 2014 respectively addition company withheld 411407 shares representing value 34 million cover taxes exercise price connection exercise certain stock options rsus psus following table summarizes rsu psu activity december 31 2016 2015 2014 changes years ended presented thousands ﻿ ﻿ rsus generally vest 25 approximately one year grant date remaining shares vesting approximately annually equal installments one fouryear period depending terms grant psus vest released meeting specified performance goals including revenue product expansion targets within established time frame performance goals met within established time frame psus expire company recognizes expense related psus implicit service period probable performance goals achieved subsequently determined performance goals probable achievement expense related psus reversed years ended december 31 2016 2015 2014 company recorded approximately 03 million 01 million 0 respectively expense related psus weighted average fair value grant date rsus psus 1004 895 452 years ended december 31 2016 2015 2014 respectively fair value rsus psus vested years ended december 31 2016 2015 2014 16 million 10 million 10 million respectively december 31 2016 approximately 37 million unrecognized compensation cost net forfeitures related nonvested rsus psus expected recognized weighted average remaining period approximately 131 years espp december 31 2016 2400000 shares company’s common stock reserved issuance company’s espp terms espp eligible employees may choose 15 salary withheld purchase companys common stock may purchase 999 shares maximum dollar limit 6250 per offering period offering espp threemonth period purchase price stock issued espp equal 85 lower fair market value share common stock first day offering final day offering period december 31 2016 2398138 shares common stock available issuance espp repurchase common stock company’s board directors authorized 805 million share repurchase program expired december 31 2015 company repurchased retired 1526306 3822434 shares cost 128 million 244 million years ended december 31 2015 2014 respectively cumulative amount 781 million share repurchases repurchased repurchase program repurchased shares retired constitute authorized unissued shares upon repurchase company eliminated par value associated retired shares excess price repurchase par value charged retained earnings accumulated deficit ﻿ ﻿ ﻿ ﻿ ﻿ note 12 401k plan company pretax roth savings plan covering us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax aftertax salary subject certain limitations company contributes matches 50 employee contributions company contributions terminated companys discretion approximately 02 million 02 million 01 million years ended december 31 2016 2015 2014 respectively note 13 licensing agreements theravance biopharma inc “theravance biopharma” may 2015 theravance biopharma granted company exclusive development commercialization rights vibativ® telavancin china hong kong macau taiwan vietnam exchange upfront regulatory milestone payments totaling 6 million sciclone responsible aspects development commercialization partnered regions including pre postlaunch activities product registration theravance biopharma sell sciclone clinical commercial product required develop commercialize vibativ china company’s licensed territories medicines company december 2014 company entered strategic partnership agreement grants sciclone license exclusive rights two cardiovascular products china medicines company including 1 angiomax® bivalirudin injection phase 3 registration trial completed china company received clinical trial application “cta” approval clinical trial waiver china food drug administration “cfda” december 2016 process preparing new drug application “nda” 2 cleviprex® clevidipine injectable emulsion cta china filed 2013 company received cta approval cfda early 2016 preparing clinical study chiesi usa inc parent company chiesi farmaceutici spa “chiesi” acquired rights cleviprex june 2016 medicines company sciclone working together chiesi medicines company progress cleviprex clinical study going forward terms agreement apply chiesi cleviprex company responsible aspects commercialization including preand postlaunch activities products cleviprex angiomax china market excluding hong kong macao company also agreed participate china registration process products financial terms agreements two products addition net sales royalties payable medicines company andor chiesi include following additional payments medicines company andor chiesi upfront payment made fourth quarter 2014 project support services fee regulatorycommercial success milestone payments aggregate 505 million zensun may 13 2013 company designated affiliate entered framework agreement zensun exclusive promotion marketing distribution sale neucardin china hong kong macao neucardin novel firstinclass therapeutic treatment patients intermediate advanced heart failure nda submitted accepted review cfda 2012 cfda informed zensun 2014 phase 2 clinical study data insufficient asked zensun submit nda ongoing phase 3 clinical study reaches endpoints zensun framework agreement provides principal terms arrangement two parties also entered supplemental license supply agreement subject certain conditions company agreed make payments 185 million zensun consisting upfront payment amount amounts achievement certain milestones including approval nda neucardin granting manufacturing license good manufacturing practices certificate drug approval number china company agreed certain conditions make milestone payments zensun 10 million approval received new device deliver neucardin 25 million approval received use neucardin additional indications zensun responsible manufacture product company agreed purchase product exclusively zensun duration agreement addition company agreed provide collateralized loan zensun approximately 120 million refer note 6 “loans receivable” information loans zensun years ended december 31 2016 2015 2014 company recorded upfront milestone payments totaling 45 million 75 million 110 million respectively research development expense related licensing arrangements note 14 termination collaboration cardiome pharma corp “cardiome” august 2015 cardiome company licensed marketing commercialization rights heart medication aggrastat® company mutually agreed end collaboration aggrastat terminate company’s exclusive distributorship china product resulting company’s obligation return rights product cardiome company recorded aggrastat revenues 18 million 11 million years ended december 31 2015 2014 respectively company expect generate aggrastat revenues terms agreement include 750000 transition payments received company cardiome approximately one year period require cardiome repurchase aggrastat inventory held company original purchase price transition payments amount 300000 450000 collected cardiome third quarter fiscal 2016 second half fiscal 2015 respectively recorded credit general administrative expenses fourth quarter 2015 company received 11 million cardiome repurchased inventory company recorded 11 million reimbursement inventory returned reduction cost product sales since inventory previously written zero year ended december 31 2015 company recorded liability 06 million corresponding offset revenue cost goods sold related aggrastat product later repurchased customer connection termination agreement cardiome terms agreement cardiome obliged repurchase inventory already sold company’s distributors note 15 contingencies legal matters company party various legal proceedings subject government investigations noted section legal proceedings government investigations subject inherent uncertainties unfavorable rulings adverse events could occur unfavorable outcomes could include substantial monetary damages awards injunctions remedies occur possibility exists material adverse impact company’s business results operations financial position overall trends company might also conclude settling one matters best interests stockholders business settlement could include substantial payments previously disclosed since 2010 sec us department justice “doj” conducting formal investigations company regarding range matters including possibility violations foreign corrupt practices act “fcpa” primarily related certain historical sales marketing activities respect company’s china operations response matters company’s board appointed special committee independent directors “special committee” oversee response government inquiry based initial review special committee decided undertake independent investigation matters reflected arising sec doj investigations order evaluate whether violation fcpa laws occurred company previously recorded charge operating expenses fourth quarter 2013 amount 20 million accrual estimated loss associated sec doj investigations based available information time second quarter 2015 company recorded additional charge operating expenses 108 million based agreement principle reached sec yet finalized bringing accrued liability 128 million october 7 2015 company deposited 128 million interestbearing escrow account established related agreement principle regarding proposed settlement fcparelated matters staff sec creating cash restriction time deposit february 4 2016 company announced entered settlement agreement sec fully resolving sec’s investigation possible violations fcpa terms settlement agreement february 2016 company paid sec total 128 million released escrow account including disgorgement prejudgment interest penalty final settlement payment line charges company previously recorded disclosed summarized part agreement company neither admitted denied engagement wrongdoing company agreed give status reports sec next three years continued remediation implementation anticorruption compliance measures doj also completed related investigation declined pursue action novamed shanghai party distribution supply agreement meda pharma gmbh co kg “meda” following company’s acquisition novamed shanghai meda claimed right terminate agreement change control provision novamed shanghai believe meda right termination agreement february 24 2017 novamed shanghai entered settlement agreement meda resolve outstanding claims party distribution supply agreement including related china international economic trade arbitration commission “cietac” arbitration novamed shanghai claiming remuneration services certain reimbursement amounts per terms settlement agreement meda shall pay novamed shanghai 83333 novamed shanghai shall withdraw “request second arbitration” cietac note 16 credit facility december 2013 company’s subsidiary novamed shanghai entered 100 million rmb revolving line credit facility approximately 16 million usd maximum 150 million rmb loan facility approximately 24 million usd shanghai pudong development bank co ltd “the credit facility” secured accounts receivable credit facility bore interest borrowed funds people’s bank china 6month base rate plus 15 644 2014 outstanding balances credit facility expired november 30 2014 amounts borrowed repaid expiration date year ended december 31 2014 company paid interest approximately 48000 related credit facility note 17 segment information geographic data company reports segment information based internal reporting used management evaluating segment performance based management’s estimates appropriate allocation resources segments company operates manages business primarily geographic basis accordingly company determined operating segments reporting units generally based nature location customers 1 china 2 rest world including us hong kong company evaluates performance operating segments based revenues operating income loss revenues geographic segments generally based location customers operating income loss segment includes revenues related cost sales operating expenses directly attributable segment operating income loss segment excludes nonoperating income expense summary information operating segments follows thousands 1 operating loss rest world segment year ended december 31 2016 includes upfront milestone payments totaling 45 million related company’s licensing arrangements 2 operating income china segment year ended december 31 2015 includes upfront milestone payments totaling 55 million related company’s licensing arrangements 3 operating loss rest world segment year ended december 31 2015 includes milestone payment totaling 20 million related company’s licensing arrangements operating loss rest world segment also includes 108 million expense company recorded year ended december 31 2015 associated sec settlement related company’s investigations sec doj refer note 15 information regarding sec doj investigations 4 operating income china segment year ended december 31 2014 includes upfront payments totaling 110 million related company’s licensing arrangements ﻿ longlived assets operating segment follows thousands ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ note 18 selected quarterly financial data unaudited ﻿ ﻿ ﻿ ﻿ 1 three months ended june 30 2016 company recorded upfront payments totaling 20 million research development expense related licensing arrangements 2 three months ended september 30 2016 company recorded milestone payment totaling 02 million research development expense related licensing arrangements 3 three months ended december 31 2016 company recorded milestone payments totaling 23 million research development expense related licensing arrangements 4 three months ended june 30 2015 company recorded upfront payments totaling 55 million research development expense related licensing arrangements addition three months ended june 30 2015 company recorded additional charge 108 million operating expense addition 20 million charge recorded fourth quarter 2013 reflect company’s total sec settlement expense 128 million refer note 15 information sec doj investigations 5 three months ended december 31 2015 company recorded milestone payment totaling 20 million research development expense related licensing arrangements recorded 11 million 03 million reduction cost product sales general administrative expense respectively related return inventory items part termination collaboration cardiome refer also note 14 information related termination ﻿ note 19 subsequent event february 24 2017 novamed shanghai entered settlement agreement meda resolve outstanding claims party distribution supply agreement including related cietac arbitration novamed shanghai claiming remuneration services certain reimbursement amounts per terms settlement agreement meda shall pay novamed shanghai 83333 novamed shanghai shall withdraw “request second arbitration” cietac part settlement agreement neither party admitted liability wrongdoing information matter refer note 15 regarding meda item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc financial statements december 31 1997 1996 three years ended december 31 1997 1996 1995 sciclone pharmaceuticals inc consolidated balance sheets see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements operations see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statement shareholders equity see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financials note 1 company summary significant accounting policies company sciclone pharmaceuticals inc sciclone company international biopharmaceutical company acquires develops commercializes specialistoriented proprietary drugs treating chronic lifethreatening diseases including hepatitis b hepatitis c cancer immune system disorders cystic fibrosis currently company two products clinical development zadaxin hepatitis b hepatitis c cancer immune system disorders cpx cystic fibrosis company drug candidates preclinical development date companys principal focus development commercialization zadaxin development cpx basis presentation consolidated financial statements include accounts company whollyowned subsidiaries principal office companys subsidiary located hong kong significant intercompany accounts transactions eliminated use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents investments cash equivalents consist highly liquid investments remaining maturities three months less cash equivalents carried cost plus accrued interest approximates market company classified entire investments portfolio availableforsale records investments fair value determined available market information balance sheet portfolio primarily consists us government securities shortterm longterm debt instruments unrealized holding gains losses carried separate component shareholders equity amortized cost debt securities classified availableforsale adjusted amortization premiums accretion discounts maturity amortization included investment income along interest earned realized gains losses declines value judged temporary also included investment income management believes credit risk associated investments limited due nature investments year ended december 31 1997 net unrealized gains approximately 154000 charged shareholders equity leaving balance december 31 1997 approximately 18000 net unrealized losses year ended december 31 1996 net unrealized losses approximately 621000 charged shareholders equity leaving balance december 31 1996 approximately 171000 net unrealized losses property equipment property equipment stated cost less accumulated depreciation provided estimated useful lives respective assets three five years straightline basis sciclone pharmaceuticals inc notes consolidated financials continued notes receivable officers august 1996 company extended loan one executive officers aggregate principal amount 1000000 used finance purchase primary residence loan secured first deed trust property bears interest 8 per annum payable july 2000 june 1995 company extended loan one executive officers aggregate principal amount 1365000 used finance purchase renovation primary residence loan secured first deed trust property 20000 shares sciclone common stock owned executive officer bears interest 75 per annum payable july 2000 july 1995 company extended loan one former board members former executive officers principal amount 95000 carries interest rate 7375 december 1995 company extended additional loan individual principal amount 600000 carries interest rate 750 loans due payable december 1997 became subject additional 35 accelerated interest loans secured second deed trust residential property owned individual december 31 1997 loans repaid company expects loans repaid principal accrued interest 1998 december 31 1997 1996 fair value notes receivable officers 2320000 2710000 respectively fair value estimated using discounted cash flow analyses using interest rates currently offered loans similar terms borrowers similar credit quality foreign currency translation company determined us dollar functional currency wholly owned subsidiaries adjustments resulting translation included results operations significant revenue recognition company recognizes revenue product sales time shipment research development research development expenditures charged operations incurred income taxes income tax expense based reported results operations extraordinary items income taxes deferred income taxes reflect impact temporary differences amount assets liabilities recognized financial reporting purposes amounts recognized tax purposes deferred taxes measured applying current tax laws based companys lack earnings history deferred tax assets fully offset valuation allowance retirement benefits company pretax savings plan covering substantially us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 20 employee contributions 6 employees salary company contributions terminated companys discretion 26000 25000 24000 years ended december 31 1997 1996 1995 respectively plan commenced january 1 1991 sciclone pharmaceuticals inc notes consolidated financials continued net loss per share effective december 31 1997 company adopted statement financial accounting standards 128 earnings per share sfas 128 sfas 128 requires presentation basic earnings loss per share diluted earnings loss per share dilutive periods presented accordance sfas 128 basic net loss per share computed using weighted average number shares common stock outstanding period weighted average number shares different disclosed prior press release due exclusion shares held collateral former officers loan see note 8 diluted net loss per share presented result would antidilutive given companys history net losses company net income position diluted earnings per share would included shares used computation basic net loss per share well additional 3058734 2991260 3026392 shares 1997 1996 1995 respectively related outstanding options warrants included calculation basic net loss per share accounting employee stockbased compensation permitted sfas 123 company accounts stock option employee stock purchase plans provisions accounting principles board opinion 25 apb 25 related interpretations accordingly company recognize compensation expense accounting stock option employee stock purchase plans awards exercise price equal fair value companys common stock date grant recent accounting pronouncements june 1997 financial accounting standards board issued statement financial accounting standards 130 sfas 130 reporting comprehensive income statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information require additional disclosures adopted beginning first quarter 1998 december 31 1998 respectively sfas 130 company required display comprehensive income components part companys full set financial statements sfas 131 requires company report financial descriptive information reportable operating segments company evaluating impact sfas 130 sfas 131 future financial statement disclosures believe additional disclosure material financial statements reclassifications certain prior year amounts reclassified conform current years presentation impact year 2000 year 2000 approaches issue impacting companies emerged regarding existing application software programs operating systems accommodate date value brief many existing application software products marketplace designed accommodate two digit date position represents year eg 95 stored system represents year 1995 result year 1999 ie 99 could maximum date value systems able accurately process management process working software vendors assure company prepared year 2000 management anticipate company incur significant operating expenses required invest heavily computer system improvements year 2000 compliant sciclone pharmaceuticals inc notes consolidated financials continued note 2 investments following summary availableforsale securities amortized cost estimated fair value debt investments december 31 1997 contractual maturity shown note 3 inventories stated lower cost firstin firstout basis market inventories consisted following sciclone pharmaceuticals inc notes consolidated financials continued note 4 property equipment property equipment consisted following note 5 license agreements pursuant 1994 license agreement alpha 1 biomedicals inc a1b company obtained worldwide marketing development manufacturing rights thymosin alpha 1 exception italy spain portugal april 1997 sciclone entered arrangement a1b administer sublicense activities a1b licensee italy spain portugal 1997 agreement company also acquired control a1bs patent portfolio thymosin alpha 1 december 1997 sciclone a1b entered asset purchase agreement pursuant company acquire a1bs worldwide rights thymosin alpha 1 rights a1b licensed hoffmannlaroche inc f hoffmannlaroche ag collectively roche eliminated companys current future sublicensees royalty obligations a1b respect future sales thymosin alpha 1 company agreed asset purchase agreement issue 600000 shares common stock make loans aggregate amount 280000 a1b exchange assets described agreement subject approval a1bs stockholders a1bs 1998 annual meeting stockholders receipt consents roche october 1996 company entered expanded amended license supply agreement scheringplough kk spkk giving spkk exclusive development marketing rights zadaxin japan amended agreement company expects spkk continue development zadaxin monotherapy treatment hepatitis b hepatitis c initiate investigation combination zadaxin plus spkks intronr interferon alfa2b treatment hepatitis c parties sharing certain development expenses spkk undertake development registration marketing zadaxin japan contingent upon product approval sciclone receive milestone payments date license fee revenue recognized company april 1996 company acquired exclusive license cpx synthetic compound national institutes health nih developed cpx potential treatment cystic fibrosis license agreement company obligated pay nih minimum annual royalty payment upon product approval receive milestone payment addition royalties based percentage cpx net sales revenue december 1994 company acquired rights develop manufacture commercialize thymosin alpha 1 south korea pharmaceutical company sciclone pharmaceuticals inc notes consolidated financials continued note 6 income taxes domestic foreign components loss income tax follows significant components companys deferred tax assets liabilities december 31 1997 1996 1995 follows deferred tax assets relating net operating loss carryforwards december 31 1997 1996 include 3400000 3300000 respectively associated stock option activity subsequently recognized tax benefits credited directly shareholders equity december 31 1997 company net operating loss carryforwards us tax purposes totaling approximately 34000000 expiring 20062012 approximately 10000000 state net operating losses expiring 19982002 difference current years loss financial reporting purposes federal income tax purposes primarily attributable losses incurred companys foreign subsidiaries due change ownership provisions tax reform act 1986 utilization net operating loss carryforwards may limited taxable income future periods note 7 commitments contingencies leases company leases main office facility noncancelable lease agreement expires april 2000 lease period five years requires company pay insurance taxes prorata share operating expenses company also leases various office facilities abroad noncancelable lease agreements expiring 2002 rental expense 1997 1996 1995 462000 397000 391000 respectively minimum future rental commitments amount 494000 1998 509000 1999 147000 2000 139000 2001 145000 2002 sciclone pharmaceuticals inc notes consolidated financials continued royalties april 1996 cpx license agreement nih company obligated pay nih minimum annual royalty upon commercialization cpx obligated pay royalty based percentage cpx net sales revenue 1997 company paid 10000 related minimum annual royalty royalties paid 1996 october 1992 company amended services agreement japanese trading company upon receipt sciclone revenues japan zadaxin japanese trading company receive royalty percentage revenues specified period time date royalty amounts paid due japanese trading company respect agreement note 8 shareholders equity common stock warrants january 1994 company sold 2000000 shares common stock underwritten public offering 2325 per share company received approximately 43600000 net proceeds offering conjunction initial public offering ipo company granted ipo investment banker warrants purchase 300000 shares common stock 300000 nonredeemable warrants exerciseable fouryear period ending march 16 1997 exercise price 300000 shares common stock 600 per share nonredeemable warrants 033 per warrant nonredeemable warrants exerciseable one common share 1555 per share march 1997 164995 warrants exerciseable 600 per share remained outstanding exercised companys ipo investment banker resulting proceeds approximately 990000 exchange exercising outstanding warrants 600 per share company lowered exercise price nonredeemable warrants 1555 per share 400 per share october 1997 300000 warrants exercised 400 per share companys ipo investment banker resulting proceeds approximately 1200000 july 1997 company loaned one former board members former executive officers 5944 million secured approximately 19 million shares companys common stock owned individual loan carries interest 7 period loan outstanding immediately prior closing offering companys common stock company may convert loan noncash exchange individuals sciclone common stock retiring sciclone common stock fixed discount rate offering price date company retired individuals sciclone common stock december 31 1997 balance loan 5944 million classified offset shareholders equity repurchase common stock 1995 1994 companys board directors authorized repurchase 10 million 15 million shares companys common stock respectively year ended december 31 1997 1996 1995 company repurchased 684500 78000 346000 shares common stock aggregate cost 4267000 659000 1925000 respectively stock award plans august 1991 board directors shareholders company approved 1991 stock plan 1991 plan reserved 1300000 shares issuance thereunder may 1993 board directors shareholders company approved 2150000 share increase shares reserved 1991 plan 1991 plan permits award incentive nonqualified stock options shares common stock restricted stock purchase agreements january 1992 board directors sciclone pharmaceuticals inc notes consolidated financials continued shareholders company approved 1992 stock plan 1992 plan reserved 240000 shares issuance thereunder 1992 plan permits award incentive nonqualified stock options must exercised cash june 1995 board directors shareholders company approved 1995 equity incentive plan 1995 plan reserved 1250000 shares issuance thereunder 1995 plan permits award incentive nonqualified stock options shares common stock restricted stock awards 1991 1992 1995 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years june 1995 board directors shareholders company approved nonemployee director stock option plan nonemployee director plan reserved 250000 shares issuance thereunder nonemployee director plan automatically grants nonqualified stock options nonemployee directors upon appointment first election companys board directors initial grant annually upon reelection board directors companys annual meeting shareholders annual grant options granted fair market value date grant initial grants vest annually period three years annual grants vest monthly period one year july 1996 board directors shareholders company approved 1996 employee stock purchase plan espp reserved 500000 shares issuance thereunder fulltime employees eligible participate espp terms espp employees choose 15 salary withheld purchase companys common stock purchase price stock lower 85 fair market value first trading day quarterly participation period last trading day quarterly participation period espp company sold 20432 5675 shares employees 1997 1996 respectively following table summarizes stock option activity 1991 1992 1995 plans nonemployee director plan sciclone pharmaceuticals inc notes consolidated financials continued following table summarizes information concerning outstanding exercisable options december 31 1997 permitted sfas 123 company applies apb 25 related interpretations accounting stock award plans accordingly recognize compensation expense awards exercise price equal fair value companys common stock date grant pro forma information regarding net loss net loss per share required sfas 123 determined company accounted stock awards fair value method statement fair value options estimated date grant using blackscholes option pricing model following weightedaverage assumptions 1997 1996 1995 riskfree interest rates 616 514 681 respectively dividend yields 0 volatility factors expected market price companys stock 83 1997 84 1996 1995 weighted average expected life option 431 years 1997 437 years 1996 1995 fair value employee stock purchases also estimated using blackscholes model following assumptions 1997 1996 riskfree interest rate 523 53 respectively dividend yield 0 expected volatility 74 84 respectively expected life 25 years blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock awards characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate companys opinion existing models necessarily provide reliable single measure fair value employee stock options stock purchases company recorded deferred compensation approximately 24 million related 1992 stock option grants deferred compensation amortized vesting period ranged two five years ended december 31 1996 1995 approximately 205000 555000 deferred compensation related stock option grants charged compensation expense respectively deferred compensation charged compensation expense year ended december 31 1997 sciclone pharmaceuticals inc notes consolidated financials continued compensation expense companys option employee purchase plans determined based fair value grant date awards 1997 1996 1995 consistent provisions sfas 123 companys net loss net loss per share would adjusted pro forma amounts indicated effects applying sfas 123 pro forma disclosures likely representative effects reported net loss future years pro forma net loss year ended december 31 1997 reflects compensation expense three years vesting year ended december 31 1998 reflect compensation expense four years vesting outstanding stock awards note 9 significant geographic information approximate foreign sources revenues follows year ended december 31 1997 one customer china accounted 66 companys product sales customer represents 86 accounts receivable balance december 31 1997 note 10 subsequent events march 1998 company received 754000 one executive officers partial payment 1000000 loan payment reduced loan 236500 including accrued interest see note 1 notes receivable officers april 1998 company sold 661157 shares series c convertible preferred stock 605 per share received approximately 4000000 offering deducting expenses preferred stock convertible common stock scheduled basis next five years prices based market price common stock pricing period preceding conversion conjunction offering company granted investor warrants purchase 100000 shares common stock warrants exercisable five year period ending march 2003 exercise price 567 per share see business recent developments sciclone pharmaceuticals inc report ernst young llp independent auditors board directors shareholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 1997 1996 related consolidated statements operations shareholders equity cash flows three years period ended december 31 1997 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 1997 1996 consolidated results operations cash flows three years period ended december 31 1997 conformity generally accepted accounting principles ernst young llp palo alto california january 16 1998 except note 10 date april 2 1998 item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc financial statements december 31 2000 1999 three years ended december 31 2000 1999 1998 report ernst young llp independent auditors board directors shareholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 2000 1999 related consolidated statements operations shareholders equity cash flows three years period ended december 31 2000 audits also include financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 2000 1999 consolidated results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp palo alto california january 26 2001 sciclone pharmaceuticals inc consolidated balance sheets assets see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements operations see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statement shareholders equity see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financials note 1 company summary significant accounting policies company sciclone pharmaceuticals inc sciclone company global biopharmaceutical company develops commercializes novel medicines treating broad range worlds serious diseases companys current product development commercial activities focused hepatitis b hepatitis c cancer cystic fibrosis basis presentation consolidated financial statements include accounts company wholly owned subsidiary principal office companys subsidiary located hong kong significant intercompany accounts transactions eliminated use estimates preparation financial statements conformity accounting principles generally accepted us requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents investments cash equivalents consist highly liquid investments original maturities three months less cash equivalents carried cost plus accrued interest approximates market companys lease agreement required line credit amount 317000 line credit secured certificate deposits total 317000 company classified entire investment portfolio availableforsale records investments fair value determined available market information balance sheet portfolio primarily consists us government securities shortterm longterm debt instruments unrealized holding gains losses included accumulated comprehensive income amortized cost debt securities classified availableforsale adjusted amortization premiums accretion discounts maturity amortization included investment income along interest earned realized gains losses declines value judged temporary also included investment income management believes credit risk associated investments limited due nature investments years ended december 31 2000 1999 1998 net unrealized gains loss approximately 6000 7000 27000 respectively charged accumulated comprehensive income property equipment property equipment stated cost less accumulated depreciation provided estimated useful lives respective assets three five years straightline basis depreciation expense years ended december 31 2000 1999 1998 120000 184000 194000 respectively assets availableforsale july 1995 company extended loan one former board members former executive officers principal amount 95000 carries interest rate 7375 december 1995 company extended additional loan individual principal amount 600000 carried sciclone pharmaceuticals inc notes consolidated financials continued interest rate 750 loans due payable december 1997 became subject additional 35 accelerated interest loans secured second deed trust residential property owned individual december 31 1998 loans repaid company fully reserved loan january 1999 company foreclosed loans possession underlying property company recorded net value property assets availableforsale approximately 1184000 related assumed mortgage liability current liabilities approximately 942000 income approximately 242000 november 2000 company sold property recorded additional 21000 income sale assets include following product rights acquired amortized six years beginning september 1998 see note 5 company identifies records impairment losses circumstances dictate intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets july 1998 company acquired worldwide rights zadaxin alpha 1 biomedicals inc a1b original developer zadaxin approximately 1800000 transaction eliminated companys royalty obligation a1b respect sales zadaxin acquisition date a1b transaction allowed sciclone market zadaxin worldwide except italy spain portugal sclavo spa sclavo international pharmaceutical entity owned exclusive marketing rights april 1998 company acquired zadaxin rights italy spain portugal sclavo spa approximately 1400000 connection foregoing transactions company estimated fair market value intangible assets purchased approximately 2500000 wrote remaining 700000 although company history operating cash flow losses company believes impairment intangible assets zadaxin approved sale 21 countries march 22 2001 principally treatment hepatitis b hepatitis c based companys anticipated financial results zadaxin sales 2000 2004 determined net present value future cash flows exceed carrying amount asset foreign currency translation company determined us dollar functional currency wholly owned subsidiary adjustments resulting translation included results operations significant sciclone pharmaceuticals inc notes consolidated financials continued revenue recognition company recognizes revenue product sales time shipment recognizes contract grant revenue services performed sales distributors recognized time shipment titles products transferred distributors contractual right return 2000 company adopted staff accounting bulletin 101 revenue recognition financial statements sab 101 summarizes certain areas staffs views applying generally accepted accounting principles revenue recognition financial statements management believes company complied guidance sab 101 adoption certain provisions sab 101 material impact companys financial position results operations research development research development expenditures charged operations incurred income taxes income tax expense based reported results operations extraordinary items income taxes deferred income taxes reflect impact temporary differences amount assets liabilities recognized financial reporting purposes amounts recognized tax purposes deferred taxes measured applying current tax laws based companys lack earnings history deferred tax assets fully offset valuation allowance retirement benefits company pretax savings plan covering substantially us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions 15 employees salary company contributions terminated companys discretion 58000 17000 24000 years ended december 31 2000 1999 1998 respectively plan commenced january 1 1991 net loss per share company computes net loss per share accordance statement financial accounting standards 128 earnings per share sfas 128 sfas 128 requires presentation basic earnings loss per share diluted earnings loss per share dilutive periods presented accordance sfas 128 basic net loss per share computed using weighted average number shares common stock outstanding period weighted average number shares excludes shares held collateral former officers loan diluted net loss per share presented result would antidilutive given companys history net losses company net income position diluted earnings per share would included shares used computation basic net loss per share well additional 6396577 9822008 4223978 shares 2000 1999 1998 respectively related outstanding options warrants included calculation basic net loss per share accounting stockbased compensation permitted statement financial accounting standards 123 accounting stockbased compensation sfas 123 company accounts stock option employee stock purchase plans provisions accounting principles board opinion 25 apb 25 related interpreta sciclone pharmaceuticals inc notes consolidated financials continued tions accordingly company recognize compensation expense accounting stock option employee stock purchase plans awards exercise price equal fair value companys common stock date grant company accounts equity instruments issued nonemployees accordance provisions sfas 123 emerging issues task force eitf 9618 warrants issued connection equity debt arrangements valued using blackscholes option valuation model warrants issued placement agents similar parties connection equity financing accounted stock issuance cost equal amount recorded additional paidin capital warrants issued purchasers companys equities specifically accounted value subcomponent additional paidin capital fair value warrants issued connection debt arrangements material accounted debt discount amortized additional interest expense term related debt march 2000 fasb issued interpretation 44 fin 44 accounting certain transactions involving stock compensation interpretation opinion 25 definition employee purposes applying opinion 25 b criteria determining whether plan qualifies noncompensatory plan c accounting consequences various modifications terms previously fixed stock option award accounting exchange stock compensation awards business combination fin 44 became effective july 1 2000 certain conclusions cover specific events occur either december 15 1998 january 12 2000 adoption certain provisions fin 44 material impact companys financial position results operations reporting comprehensive income loss company reports unrealized gains losses companys availableforsale securities foreign currency translation adjustments comprehensive income loss year periods ended december 31 2000 1999 1998 total comprehensive loss attributable common shareholders amounted 1711000 5474000 21044000 respectively segment information statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 establishes standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports sfas 131 also establishes standards related disclosures products services geographic areas major customers company operates one segment see note 9 concentration credit risk peoples republic china like japan certain asian markets uses tiered method import distribute products distributors make sales country product imported licensed importers 1997 company sold one principal importeragent resold four distributors inside peoples republic china reflecting expansion stability companys sales peoples republic china 1998 company began working extensively second importing agent addition agent used 1997 enabled expansion sales four distributors year ended december 31 2000 distributors china accounted 86 companys product sales company performs ongoing credit evaluations customers financial condition generally require collaterals customers company maintains reserves credit losses within managements expectation sciclone pharmaceuticals inc notes consolidated financials continued recent accounting pronouncement june 1998 financial accounting standards board issued statement 133 accounting derivative instruments hedging activities sfas 133 required adopted year ending december 31 2001 company anticipate adoption sfas 133 significant effect results operations financial position company reclassifications certain prior year amounts reclassified conform current years presentation note 2 investments following summary availableforsale securities december 31 2000 average portfolio duration less one year note 3 inventories stated lower cost firstin firstout basis market inventories consisted following sciclone pharmaceuticals inc notes consolidated financials continued note 4 property equipment property equipment consisted following note 5 collaborative agreements april 1999 company licensed sigmatau semiexclusive zadaxin development marketing rights italy spain exclusive rights switzerland march 2000 license expanded amended include switzerland countries european union sigmatau made exclusive licensee countries september 1998 company acquired rights sclavo spa zadaxin italy spain portugal including sclavos marketing approval zadaxin italy influenza vaccine adjuvant purchase price consisted 297000 cash 375000 shares companys common stock warrants purchase 375000 shares common stock exercise price 4125 per share warrants exercised january 2000 pursuant 1994 license agreement a1b company obtained worldwide marketing development manufacturing rights zadaxin exception italy spain portugal april 1997 sciclone entered arrangement a1b administer sublicense activities a1b licensee italy spain portugal 1997 agreement company also acquired control a1bs patent portfolio zadaxin december 1997 sciclone a1b entered asset purchase agreement pursuant company acquired a1bs worldwide rights zadaxin rights a1b licensed hoffmannlaroche inc f hoffmannlaroche ag eliminated companys current future sublicensees royalty obligations a1b respect future sales zadaxin july 1998 company a1b closed asset purchase agreement accordance agreement company issued a1b 600000 shares common stock loaned a1b 210000 exchange assets described connection foregoing transactions sclavo a1b company estimated fair market value intangible assets purchased approximately 2500000 wrote remaining 700000 october 1996 company entered agreement scheringplough kk giving scheringplough kk exclusive marketing rights zadaxin japan agreement scheringplough kk initiated development zadaxin monotherapy treatment hepatitis b hepatitis c historically scheringplough kk managed development process parties shared certain development expenses company right participate directly development process manages process using japanese clinical research organization scheringplough kk consultant scheringplough kk continues exclusive marketing rights zadaxin japan april 1996 company acquired exclusive license cpx synthetic compound national institutes health nih developed cpx potential treatment cystic fibrosis sciclone pharmaceuticals inc notes consolidated financials continued license agreement company obligated pay nih minimum annual royalty payment upon product approval nih receive milestone payment addition royalties based percentage cpx net sales revenue note 6 income taxes company uses liability method account income taxes required fasb statement 109 accounting income taxes method deferred tax assets liabilities determined based differences financial reporting tax bases assets liabilities deferred tax assets liabilities measured using enacted tax rates laws effect differences expected reverse domestic foreign components loss income tax follows december 31 significant components companys deferred tax assets liabilities december 31 valuation allowance increased approximately 3774000 1200000 5670000 years ended december 31 2000 1999 1998 respectively deferred tax assets relating carryforwards december 31 2000 include approximately 8067000 associated stock option activity subsequently recognized tax benefits credited directly shareholders equity december 31 2000 company net operating loss carryforwards federal income tax purposes approximately 56485000 expire years 2006 2020 difference cumulative losses financial reporting purposes federal income tax purposes primarily attributable losses incurred companys foreign subsidiaries december 31 2000 company federal tax credit carryforwards approximately 2600000 expire years 2009 2020 change ownership provisions internal revenue code portion companys net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual sciclone pharmaceuticals inc notes consolidated financials continued limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities note 7 commitments contingencies leases company leases main office facility noncancelable lease agreement expires august 2005 lease period five years requires company pay insurance taxes prorata share operating expenses company also leases various office facilities abroad noncancelable lease agreements expiring 2001 rental expense 2000 1999 1998 498000 398000 461000 respectively minimum future rental commitments amount 1280000 2001 1289000 2002 1236000 2003 1225000 2004 1260000 2005 royalties august 1997 zadaxin patent license agreement fitzsimons army medical center us army company obligated pay army minimum annual royalty upon commercialization zadaxin company obligated pay army royalty based percentage zadaxin net sales revenue april 1996 cpx license agreement nih company obligated pay nih minimum annual royalty upon commercialization cpx company obligated pay nih royalty based percentage cpx net sales revenue 2000 1999 1998 company paid 10000 related minimum annual royalty convertible notes payable december 2000 completed 4 million senior unsecured convertible note investment affiliate ubs ag one worlds five largest financial institutions new 4 million note convertible 407610 shares common stock fixed conversion price 98133 per share note accrue interest rate 6 per year mature december 2005 note convertible prior december 2001 also received 900000 granting investor right purchase approximately 59 million senior unsecured convertible notes due december 2005 issued notes bear interest zero coupon convertible 407610 shares common stock fixed conversion price 145066 per share note 8 shareholders equity common stock preferred stock warrants march 2000 company licensed sigmatau exclusive development marketing rights zadaxin europe sciclone retains rights zadaxin us agreement sigmatau fund paneuropean pivotal phase 3 hepatitis c trial zadaxin also fund onethird companys clinical expenses complementary pivotal phase 3 hepatitis c trial us european zadaxin pivotal phase 3 hepatitis c trials planned start year march 2000 company completed 3100000 million selfplaced private placement sigmatau consisting 198072 shares common stock fiveyear warrants purchase 200000 shares common stock 1567 per share fiveyear warrants purchase 200000 shares common stock 3133 per share sigma tau registration rights respect shares purchased issuable upon exercise warrants december 31 2000 none foregoing redeemable warrants exercised sciclone pharmaceuticals inc notes consolidated financials continued january 2000 company completed 6100000 private placement brown simpson asset management strategic institutional investor brown simpson purchased 1000000 shares companys common stock price 600 per share slight premium market fiveyear warrants purchase 800000 shares companys common stock exercise price 700 per share shares issued upon exercise warrants may sold prior october 18 2000 market price less 1000 per share december 31 2000 none foregoing redeemable warrants exercised july 21 1999 company completed 3620000 private placement strategic institutional investors led brown simpson asset management new york life insurance company offering consisted units 2515934 shares common stock redeemable warrants purchase 2515934 shares common stock unit priced 159 consisted one share common stock one fiveyear redeemable warrant purchase one share common stock exercise price 172 per share connection private placement companys placement agents received fiveyear redeemable warrants purchase 345933 shares common stock exercise price 183 per share december 31 2000 2515934 investor warrants exercised aggregate proceeds company approximately 4327000 july 2 1999 company completed 1810000 private placement strategic institutional accredited investors offering consisted units 1370145 shares common stock redeemable warrants purchase 1370145 shares common stock unit priced 146 consisted one share common stock one fiveyear redeemable warrant purchase one share common stock exercise price 133 per share connection private placement companys placement agents received fiveyear redeemable warrants purchase 183179 shares common stock exercise price 166 per share december 31 2000 1370145 investor warrants exercised aggregate proceeds company approximately 1822000 may 1999 company issued 411330 shares common stock companys employees lieu cash bonuses april 1999 sigmatau paid 1000000 445000 shares companys unregistered common stock sigmatau group may sell shares april 12 2001 addition sigmatau group granted registration rights covering resale shares june 1998 company entered agreement institutional investor equity line allowed company access 32 million sales common stock twoyear period subject certain limitations decision draw funds timing draw solely companys discretion company obligated draw minimum amount equity line draw amounts equity line commitment fee investor company issued fiveyear warrants purchase 300000 shares common stock exercise price 350 per share fiveyear warrants purchase 200000 shares common stock exercise price 553 per share company cancelled equity line november 1999 december 31 2000 none foregoing warrants exercised april 1998 company sold 661157 shares series c preferred stock 605 per share received 3931000 net proceeds offering second quarter ended june 30 1998 company recognized deemed dividend amount 3143000 connection issuance series c preferred stock amount computed accordance eitf appendix d60 accounting issuance convertible preferred stock debt securities nondetachable conversion feature eitf d60 series c preferred stock beneficial conversion feature date issue allowed converted common stock discount common stocks market price date conversion amount increased net loss per share attributable common shareholders calculated required sec december 31 1998 58356 shares series c preferred stock sciclone pharmaceuticals inc notes consolidated financials continued converted 3168404 shares common stock january 1999 46922 remaining 58536 shares converted 299483 shares common stock 11434 remaining shares series c preferred stock redeemed conversion price approximately 095 per common share result shares series c preferred stock outstanding conjunction offering company granted investors fiveyear warrants purchase 100000 shares common stock exercise price 567 per share december 31 2000 37500 100000 investor warrants exercised aggregate proceeds company approximately 213000 stock award plans august 1991 board directors shareholders company approved 1991 stock plan 1991 plan reserved 1300000 shares issuance thereunder may 1993 board directors shareholders company approved 2150000 share increase shares reserved 1991 plan 1991 plan permits award incentive nonqualified stock options shares common stock restricted stock purchase agreements january 1992 board directors shareholders company approved 1992 stock plan 1992 plan reserved 240000 shares issuance thereunder 1992 plan permits award incentive nonqualified stock options must exercised cash june 1995 board directors shareholders company approved 1995 equity incentive plan 1995 plan reserved 1250000 shares issuance thereunder 1995 plan permits award incentive nonqualified stock options shares common stock restricted stock awards may 1997 board directors shareholders company approved 750000 share increase shares reserved 1995 plan june 1998 board directors shareholders company approved 1500000 share increase shares reserved 1995 plan 1991 1992 1995 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years june 1995 board directors shareholders company approved nonemployee director stock option plan nonemployee director plan reserved 250000 shares issuance thereunder nonemployee director plan automatically grants nonqualified stock options nonemployee directors upon appointment first election companys board directors initial grant annually upon reelection board directors companys annual meeting shareholders annual grant options granted fair market value date grant initial grants vest annually period three years annual grants vest monthly period one year july 1996 board directors shareholders company approved 1996 employee stock purchase plan espp reserved 500000 shares issuance thereunder fulltime employees eligible participate espp terms espp employees choose 15 salary withheld purchase companys common stock purchase price stock lower 85 fair market value first trading day quarterly participation period last trading day quarterly participation period espp company sold 144505 47038 46738 shares employees 2000 1999 1998 respectively sciclone pharmaceuticals inc notes consolidated financials continued following table summarizes stock option activity 1991 1992 1995 plans nonemployee director plan following table summarizes information concerning outstanding exercisable options december 31 2000 pro forma information regarding net loss net loss per share required sfas 123 determined company accounted stock awards fair value method statement fair value options estimated date grant using blackscholes option pricing model following weightedaverage assumptions 2000 1999 1998 riskfree interest rates 600 473 respectively dividend yields 0 volatility factors expected market price companys stock 097 2000 091 1999 087 1998 weighted average expected life option 390 years 2000 392 years 1999 430 years 1998 fair value employee stock purchases also estimated using blackscholes model following assumptions 2000 1999 1998 riskfree interest rate 600 473 respectively dividend yield 0 expected volatility 097 091 080 respectively expected life 025 years sciclone pharmaceuticals inc notes consolidated financials continued blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock awards characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate companys opinion existing models necessarily provide reliable single measure fair value employee stock options stock purchases compensation expense companys option employee purchase plans determined based fair value grant date awards 2000 1999 1998 consistent provisions sfas 123 companys net loss net loss per share would adjusted pro forma amounts indicated effects applying sfas 123 pro forma disclosures likely representative effects reported net loss future years pro forma net loss year ended december 31 1997 reflects compensation expense three years vesting years ended december 31 1998 1999 2000 reflect compensation expense four years vesting outstanding stock awards reserved shares december 31 2000 company reserved shares common stock future issuance follows note 9 significant geographic information company operates one business segment development commercialization specialistoriented proprietary drugs treatment chronic life threatening diseases currently companys principal focus development commercialization zadaxin development cpx chief executive officer identified chief operating decision maker codm final authority resource allocation decisions performance assessment codm receive discrete financial information individual components companys domestic operations primarily consist product development companys wholly owned international subsidiary sciclone pharmaceuticals international ltd based hong kong engaged sales marketing product distribution worldwide sciclone pharmaceuticals inc notes consolidated financials continued information regarding geographic areas follows note 10 selected quarterly financial data unaudited item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc index consolidated financial statements page report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statement stockholders’ equity consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 2007 2006 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2007 audits also included financial statement schedule listed item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 2007 2006 consolidated results operations cash flows three years period ended december 31 2007 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements january 1 2006 sciclone pharmaceuticals inc changed method accounting stockbased compensation accordance guidance provided statement financial accounting standards 123r “sharebased payment” also audited accordance standards public company accounting oversight board united states sciclone pharmaceuticals inc’s internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 13 2008 expressed unqualified opinion thereon ernst young llp palo alto california march 13 2008 sciclone pharmaceuticals inc consolidated balance sheets see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements operations see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statement stockholders’ equity see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies company sciclone pharmaceuticals inc “sciclone” “company” biopharmaceutical company engaged development commercialization therapeutics treat lifethreatening diseases company’s lead product zadaxin® currently evaluated melanoma hepatitis c virus “hcv” clinical trials currently approved sale certain international locations sold primarily china company’s whollyowned subsidiary sciclone pharmaceuticals international ltd “spil” 2007 company acquired exclusive rights united states canada develop commercialize rp101 clinicalstage compound treatment cancer initiated phase 2 rp101 clinical trial first patient phase 2 rp101 clinical trial dosed january 2008 2006 company inlicensed chinese marketing rights dc beadtm product treatment liver cancer hepatocellular carcinoma submitted regulatory application chinese state food drug administration related product presentation consolidated financial statements include accounts company wholly owned subsidiaries spil sciclone italy srl sciclone japan kk sciclone brasilprodutos farmaceuticos ltda sciclone pharmaceuticals international holding ltd sciclone pharmaceuticals china ltd spil registered cayman islands principal office located hong kong sciclone italy srl registered italy principal office located rome sciclone japan kk registered japan principal office located tokyo sciclone brasil registered brazil principal office located sao paulo sciclone pharmaceuticals international holding ltd registered cayman islands principal office located hong kong sciclone pharmaceuticals china ltd registered china principal office located shanghai significant intercompany accounts transactions eliminated revenue recognition company recognizes revenue product sales time delivery significant customer acceptance requirements post shipment obligations part company sales importing agents distributors recognized time shipment title product transferred contractual rights return except limited terms regarding product quality however company expected replace products expired deemed damaged defective delivered company estimates expected returns primarily historical patterns historically company product returns damaged defective expired product amount accrued product returns december 31 2007 2006 consolidated balance sheets payments importing agents distributors contingent upon sale end user importing agents distributors contract revenue research development recorded earned based performance requirements contract nonrefundable contract fees performance obligations exist continuing involvement company recognized earlier payments received collection assured revenue associated substantive performance milestones recognized based achievement milestones defined respective agreements provided milestone event substantive achievement reasonably assured inception agreement ii future performance obligations associated milestone payment amounts invoiced relating arrangements revenue cannot recognized reflected company’s balance sheet deferred revenue recognized applicable revenue recognition criteria satisfied use estimates preparation financial statements conformity us generally accepted accounting principles requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates cash equivalents investments cash equivalents consist highly liquid investments maturities three months less date purchase company classifies investment portfolio availableforsale heldtomaturity company records availableforsale investments fair value determined available market information balance sheet portfolio primarily consists certificates deposit shortterm municipal securities corporate equity securities unrealized gains losses availableforsale securities included accumulated comprehensive income consolidated balance sheet realized gains losses declines value judged temporary determined basis specific identification included interest investment income company also held investments classified heldtomaturity investments december 31 2006 recorded amortized cost company performs assessment reporting period determine whether investment impaired due recent adverse development credit markets company may experience reduced liquidity respect shortterm student loan related aaa rated adjustable rate securities developments could result reclassification securities longterm investments december 31 2007 company held 2825000 adjustable rate securities reflected shortterm investments february 29 2008 company held 1800000 adjustable rate securities february march 2008 auctionrate securities experienced failed auction issuers unable successfully close future auctions credit ratings deteriorate company may future required record impairment charge investments company believes able liquidate investments without significant loss within next year currently believes securities significantly impaired primarily due government guarantee underlying securities however could take final maturity underlying notes realize investments’ recorded value company believes even allowing reclassification securities long term possible requirement hold securities indefinite period time based company’s expected operating cash flows sources cash anticipate potential lack liquidity investments affect ability execute current business plan next 12 months european value added tax filing arrangements company letter credit secured certificate deposit 72000 restricted shortterm investments accompanying balance sheet december 31 2007 years ended december 31 2007 2006 2005 net change unrealized gains approximately 22000 25000 15000 availableforsale securities respectively included accumulated comprehensive income loss 2007 foreign currency translation losses 18000 included accumulated comprehensive income loss years ended december 31 2007 2006 2005 realized gains losses fair value financial instruments fair value company’s cash equivalents availableforsale marketable securities based quoted market prices carrying amounts equal respective fair values december 31 2007 2006 amortized cost heldtomaturity securities approximated fair value december 31 2006 financial instruments including accounts receivable accounts payable accrued liabilities carried cost company believes approximates fair value shortterm maturity instruments inventories consist principally raw materials work progress finished goods products inventories stated lower cost market cost determined firstin firstout basis company periodically reviews inventory order identify obsolete items obsolete items observed alternate uses inventory company record writedown net realizable value period impairment first recognized property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets three five years straightline basis leasehold improvements amortized shorter estimated useful life lease term straightline basis intangible assets intangible assets definite lives amortized estimated useful lives reviewed impairment facts circumstances suggest carrying value assets may recoverable company’s policy identify record impairment losses necessary intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets company date identified impairment losses assets although company history operating losses negative cash flow company believes impairment intangible assets zadaxin approved sale several countries principally treatment hepatitis b virus based company’s anticipated financial results future zadaxin sales determined expected future cash flows exceed carrying amount assets foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using rates exchange effect period gains losses translation financial statements denominated foreign currencies included separate component accumulated comprehensive income loss statement stockholders’ equity company records foreign currency transactions exchange rate prevailing date transaction resultant gains losses included results operations foreign currency transaction gains losses significant period presented research development expenses research development expenditures charged operations incurred major components research development expenses consist clinical development performed company’s behalf institutions contract research organizations sharing certain costs sigmatau’s clinical development zadaxin personnel costs including salaries benefits preclinical work pharmaceutical development materials supplies third party research funding overhead allocations consisting various administrative facilities related costs sciclone’s research development activities also separated three main categories research clinical development pharmaceutical development research costs typically consist business development patent costs preclinical toxicology work clinical development costs primarily relate clinical trials pharmaceutical development costs consist product formulation chemical analysis zadaxin rp101 clinical trials largest significant impact company’s research development expenses cost accruals clinical trials based estimates services received efforts expended pursuant contracts numerous institutions conduct clinical trials company’s behalf financial terms agreements subject negotiation vary contract may result uneven payment flows payments contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective accrual policy match recording expenses actual services received efforts expended expenses related grants institutions conduct clinical trials company’s behalf accrued based level patient enrollment activity according protocol general company’s us hcv clinical trials expenses higher initial final months patient’s scheduled treatments observation expenses relating clinical research organization entities managing trials laboratory direct expenses recognized period estimated incurred services performed company monitors active patient enrollment levels related activity extent possible adjusts estimates accordingly shipping handling costs related shipping handling included cost sales periods presented advertising expenses company expenses advertising costs incurred costs included sales marketing expenses periods presented advertising expenses years ended december 31 2007 2006 2005 403000 221000 150000 respectively income taxes income taxes accounted liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date deferred tax assets reduced valuation allowance opinion management likely deferred tax assets may realized accordingly net deferred tax assets fully offset valuation allowance net loss income per share basic net loss income per share computed dividing net loss income weightedaverage number shares common stock outstanding period diluted net loss income per share computed dividing net loss income weightedaverage number common equivalent shares outstanding period diluted net loss income per share includes dilutive impact stock options outstanding using treasury stock method following reconciliation numerator denominators basic diluted net loss income per share computations years ended december 31 2007 2006 2005 approximately 7324688 6903336 7080186 shares respectively related convertible notes payable outstanding options excluded calculation diluted net loss income per share inclusion would antidilutive accounting stockbased compensation effective january 1 2006 company adopted fair value recognition provisions financial accounting standards board “fasb” statement 123r sharebased payment “fas 123r” prior january 1 2006 company accounted sharebased payments recognition measurement provisions accounting principles board opinion 25 “apb 25” related interpretations permitted fasb statement 123 accounting stockbased compensation “fas 123” accordingly company recognize compensation expense accounting employee stock purchase plan stock option plans options employees directors granted exercise prices fair market value company adopted fas 123r using modifiedprospective transition method compensation cost recognized year ended december 31 2007 2006 includes compensation cost sharebased payments granted prior yet vested january 1 2006 based grantdate fair value estimated accordance provisions fas 123 compensation cost also includes sharebased payments granted subsequent january 1 2006 based grantdate fair value estimated accordance provisions fas 123r compensation cost calculated date grant using fair value option determined using black scholes option valuation model single option approach company amortizes compensation cost vesting period generally four years using straight line attribution method results year ended december 31 2005 restated reflect impact fas 123r november 2005 fasb issued fasb staff position 123r3 “transition election related accounting tax effects sharebased payment awards” company adopted simplified method calculate beginning balance additional paidincapital “apic” pool excess tax benefit determine subsequent effect apic pool consolidated statements cash flows tax effects stockbased compensation awards outstanding upon company’s adoption fas 123r stockbased compensation expense recognized consolidated statements operations years ended december 31 2007 2006 based awards ultimately expected vest fas 123r requires forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates company uses historical data estimate prevesting option forfeitures company’s pro forma information required fas 123 year ended december 31 2005 company accounted forfeitures occurred company recognized expect recognize near future tax benefit related employee stockbased compensation cost company’s former chief executive officer “ceo” granted target stock price award see note 14 ceo agreements therefore grant date fair values related four vesting portions award calculated related expense included sfas 123 pro forma expense disclosure derived service periods year ended december 31 2005 approximately 232000 included sfas 123 pro forma expense related award following table illustrates effect net loss net loss per share year ended december 31 2005 compensation expense company’s stock option employee stock purchase plans determined based fair value grant date consistent provisions fas 123 comprehensive income loss comprehensive income loss comprised net income loss comprehensive income loss following table summarizes components accumulated comprehensive income loss segment information company operates one segment see note 17 concentration credit risk people’s republic china uses tiered method import distribute products distributors make sales country product imported licensed importers year ended december 31 2007 sales three importing agents china accounted 92 company’s product sales year ended december 31 2006 sales four importing agents china accounted 92 company’s product sales year ended december 31 2005 sales three importing agents china accounted 91 company’s product sales 2007 two largest customers accounted 63 21 sales respectively customer accounted 10 sales 2007 2006 two largest customers accounted 66 15 sales respectively customer accounted 10 sales 2006 2005 three largest customers accounted 57 19 15 sales respectively customer accounted 10 sales 2005 december 31 2007 approximately 11941000 94 company’s accounts receivable attributable two importing agents china company performs ongoing credit evaluations customers’ financial condition generally require collateral customers company maintains reserves credit losses within management’s expectation company recognizes reserves bad debts ranging 25 100 based length time receivables past contractual payment due dates company’s collection experience recently issued accounting pronouncements december 2007 fasb released emerging issues task force “eitf” issue 071 accounting collaboration arrangements related development commercialization intellectual property” “eitf 071” focuses parties collaborative arrangement account costs incurred revenue generated sales third parties sharing payments pursuant collaboration agreement presented income statement certain related disclosure questions eitf 071 effective fiscal years ending december 15 2008 company expect impact adoption eitf 071 results operations financial position july 2007 fasb released eitf issue 073 “eitf 073” “accounting nonrefundable advance payments goods services used future research development activities” accordance eitf 073 nonrefundable advance payments goods services received future use research development activities deferred capitalized amounts expensed related goods delivered services performed eitf 073 effective new contracts entered fiscal years beginning december 15 2007 including interim periods within fiscal years company currently assessing impact eitf 073 results operations financial position september 2006 fasb issued statement financial accounting standards “sfas” 157 fair value measurements “sfas 157” sfas 157 defines fair value establishes framework gives guidance regarding methods used measuring fair value expands disclosures fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years fasb staff position fas 1572 effective date fasb statement 157 delays effective date sfas 157 fair value measurements nonfinancial assets nonfinancial liabilities except items recognized disclosed fair value financial statements recurring basis least annually company currently assessing impact sfas 157 results operations financial position february 2007 fasb issued sfas 159 fair value option financial assets financial liabilitiesincluding amendment fasb statement 115 “sfas 159” sfas 159 expands use fair value accounting affect existing standards require assets liabilities carried fair value objective sfas 159 improve financial reporting providing companies opportunity mitigate volatility reported earnings caused measuring related assets liabilities differently without apply complex hedge accounting provisions sfas 159 company may elect use fair value measure eligible items specified election dates report unrealized gains losses items fair value option elected earnings subsequent reporting date eligible items include limited accounts loans receivable availableforsale heldtomaturity securities equity method investments accounts payable guarantees issued debt firm commitments elected sfas 159 effective fiscal years beginning november 15 2007 company currently assessing whether fair value accounting appropriate eligible items cannot estimate impact results operations financial position reclassifications company reclassified 220000 assets prepaid expenses current assets reclassified 1599000 accrued clinical trials expense accrued clinical trials expense due related party consolidated balance sheet december 31 2006 conform current period presentation company also reclassified 229000 492000 contract revenue related party contract revenue 1750000 1203000 research development related party research development consolidated statements operations years ended december 31 2006 2005 respectively addition company reclassified certain amounts related shortterm investments reclassified 811000 436000 accrued clinical trials expense accrued clinical trials expense due related party consolidated statements cash flows years ended december 31 2006 2005 respectively conform current year presentation note 2 marketable securities following summary cash equivalents availableforsale heldto maturity securities december 31 2007 72000 restricted shortterm investments 3392000 shortterm investments held availablefor sale securities december 31 2006 698000 restricted shortterm investments 5876000 shortterm investments held availablefor sale securities shortterm municipals included availableforsale securities auction rate securities long final maturities however highly rated highly liquid interest rate reset auction every 30 days included availableforsale securities note 3 inventories consisted following note 4 prepaid expenses current assets following summary prepaid expenses current assets note 5 property equipment property equipment consisted following depreciation expense years ended december 31 2007 2006 2005 178000 157000 133000 respectively note 6 intangible assets intangible assets included following acquired zadaxin product rights amortized straightline basis estimated useful lives amortization expense years ended december 31 2007 2006 2005 70000 per year years 2008 2012 expected 70000 per year based upon progress zadaxin clinical trials company’s actual experience product sales company assessed acquired product rights useful company 2012 first european patent use zadaxin treatment hepatitis c expires company reassesses useful life assets accordance current facts circumstances note 7 assets following summary assets note 8 accrued expenses following summary accrued expenses note 9 collaborative agreements related party transactions company licensed largest shareholder sigmatau exclusive zadaxin development marketing rights include countries european union march 2000 company entered agreement sigmatau whereby sigmatau conducting multicenter phase 3 hepatitis c triple therapy clinical trial europe 553 patients objective european trial provide data zadaxin’s use part triple therapy treating hcv patients company providing sigmatau approximately 2509000 funding support course patient enrollment trial period 2009000 paid december 31 2007 remaining 500000 paid upon completion trial company also pay 1500000 milestone payment upon completion final report based level activity trial company recorded approximately 507000 1750000 1203000 research development expense related trial years ended december 31 2007 2006 2005 respectively december 31 2007 2006 company accrued clinical trial expenses 1620000 1599000 respectively due sigmatau company also entered agreement sigmatau related clinical development zadaxin company received 2685000 first quarter 2002 related agreement contract revenue recognized estimated time complete zadaxin us phase 3 hcv clinical trials deliver clinical data substantive performance requirements contact years ended december 31 2006 2005 company recognized contract revenue 229000 492000 respectively related agreement contract revenue recognized 2007 related agreement october 2003 company wayne state university “wsu” amended license agreement wsu a1b entered 1994 subsequently assigned a1b sciclone 2003 amendment allows company maintain exclusive license certain wsu patents regarding use thymosin alpha 1 treatment hepatitis b hepatitis c addition certain minimum royalty payments following sales zadaxin certain territories company paid wsu total 1400000 december 31 2007 nonrefundable prepaid royalties company offset annual royalties due sales zadaxin prepaid royalties extent 50 annual royalties one year december 31 2007 233000 655000 included prepaid expenses current assets respectively accompanying balance sheet representing remaining prepaid royalties december 31 2006 220000 780000 royalties included prepaid expenses current assets respectively accompanying balance sheet august 1997 company entered zadaxin patent license agreement fitzsimons army medical center us army “us army” company obligated pay us army minimum annual royalty based percentage zadaxin net sales revenue upon commercialization zadaxin treatment chronic hepatitis c certain countries including us european union japan including china note 10 longterm liabilities following summary longterm liabilities longterm deferred rent relates company’s noncancelable office lease agreement entered may 2007 refer note 12 “commitments contingencies” information matter note 11 income taxes company adopted provisions fasb interpretation 48 accounting uncertainty income taxes “fin 48” interpretation fasb statement 109 “sfas 109” january 1 2007 implementation fin 48 material impact company’s consolidated financial statements january 1 2007 december 31 2007 company unrecognized tax benefits company’s policy recognize accrued interest penalties unrecognized tax benefits component tax expense years ended december 31 2007 2006 2005 interest penalties included component tax expense unrecognized tax benefits tax years 19962006 remain open examination major taxing jurisdictions company subject company recorded federal state income tax expense years ended december 31 2007 2006 2005 provision income tax 301000 year ended december 31 2007 relates foreign income taxes undistributed earnings company’s foreign subsidiaries amounted approximately 9328000 6126000 6673000 december 31 2007 2006 2005 respectively earnings considered permanently reinvested accordingly deferred us income taxes provided thereon domestic foreign components pretax loss income years ended december 31 follows reconciliation statutory federal income tax rate 34 actual tax rate years ended december 31 follows significant components company’s deferred tax assets december 31 follows valuation allowance increased approximately 811000 3353000 5818000 years ended december 31 2007 2006 2005 respectively deferred tax assets relating net operating loss carryforwards december 31 2007 2006 include approximately 3054000 3014000 associated stock option activity subsequently recognized tax benefits credited directly stockholders’ equity company deferred tax liabilities december 31 2007 2006 december 31 2007 company net operating loss carryforwards federal income tax purposes approximately 122000000 expire years 2008 2027 december 31 2007 company federal tax credit carryforwards approximately 8000000 expire years 2009 2027 december 31 2007 company state net operating loss carryforwards approximately 7000000 available reduce future taxable income carryforwards begin expire 2008 utilized addition company research development tax credit carryforwards approximately 1000000 state tax purposes december 31 2007 tax credit carryforwards carried forward indefinitely utilized “change ownership” provisions internal revenue code portion company’s net operating loss carryforwards tax credit carryforwards may subject annual limitation regarding utilization taxable income future periods result annual limitation portion carryforwards may expire ultimately becoming available reduce future income tax liabilities note 12 commitments contingencies leases may 2007 company entered noncancelable operating lease agreement main office facility “the lease” lease space july 1 2007 june 30 2014 terms lease include base rent approximately 42000 rent escalations approximately 4 per year payable lease term company recognizing rental expense straightline basis lease term terms lease company provided allowance amount approximately 206000 towards cost leasehold improvements accordance fasb technical bulletin 881 issues relating accounting leases time pattern physical use property operating lease incentives operating lease applicability leveraged lease accounting existing assets lessor moneyovermoney lease transactions wrap lease transactions company recorded allowance deferred rent amortizing amount lease term reduction rent expense lease requires company pay insurance taxes prorata share operating expenses december 31 2007 company recorded 29000 194000 shortterm longterm deferred rent respectively company also leases various office facilities abroad equipment noncancelable lease agreements rent expense 2007 2006 2005 1408000 1625000 1458000 respectively minimum future rental payments facility equipment operating leases agreements december 31 2007 amount total 4359000 consists 927000 2008 718000 2009 572000 2010 595000 2011 608000 2012 939000 thereafter company’s lease previous office facility expired september 2007 obligations arising expiration lease company moved new main office facility september 2007 purchase obligations december 31 2007 company obligated pay research development fees amount 2000000 sigmatau upon completion hcv clinical trial europe amount expected paid 2008 license royalty obligations april 26 2007 company announced acquired exclusive rights united states canada develop commercialize rp101 clinicalstage compound treatment cancer terms agreements resistys inc whollyowned subsidiary avantogen oncology inc resprotect gmbh “resprotect” company paid approximately 1700000 upfront fees 1320000 milestone payment upon dosage first patient phase 2 clinical trial january 2008 may required pay post phase 3 successbased regulatory commercial milestone payments 22000000 royalties future sales 1700000 upfront fees expensed incurred included research development expense year ended december 31 2007 company intends initially develop rp101 treatment pancreatic cancer combination therapy gemcitabine standard care pancreatic cancer therapy entered amended agreement pharmaceuticals research associates inc “pra” assume terms certain agreement clinical trials management services randomized double blind placebo controlled phase 2 study evaluating efficacy safety rp101 previously entered avantogen oncology inc pra estimated cost pra’s management services passthrough costs 8000000 4000000 respectively 2184000 paid pra company another 52000 due payable december 31 2007 company also entered supply agreement resprotect purchase rp101 resprotect clinical trials commercial purposes following regulatory approval terms supply agreement company resprotect share scaleup costs required manufacture rp101 prior fda approval company’s share scaleup costs estimated 1448000 june 2010 455000 paid company resprotect december 31 2007 october 2003 amendment patent license agreement wsu company obligated pay wsu royalty subject minimum amounts percentage zadaxin net sales revenue treatment hepatitis b hepatitis c certain countries including united states european union japan including china years ended december 31 2006 2005 company paid wsu 500000 400000 respectively nonrefundable prepaid royalties company certain rights offset annual minimum royalties due sales zadaxin prepaid royalties august 1997 zadaxin patent license agreement us army company obligated pay us army minimum annual royalty payments 2010 royalty based percentage zadaxin net sales revenue upon commercialization zadaxin treatment chronic hepatitis c certain countries including us european union japan including china 2007 2006 2005 company paid 20000 per year us army related minimum annual royalty convertible notes payable march 2001 company issued 1600000 convertible note investment affiliate ubs ag 1600000 note convertible 276530 shares common stock fixed conversion price 57860 per share march 2006 1600000 note repaid december 2000 company issued 4000000 convertible note investment affiliate ubs ag 4000000 note convertible 407610 shares common stock fixed conversion price 98133 per share december 2005 4000000 note repaid note 13 stockholders’ equity july 18 2003 company reincorporated california corporation delaware corporation merging company california corporation sciclone pharmaceuticals inc delaware corporation whollyowned subsidiary company share outstanding stock california corporation automatically exchanged like share stock delaware corporation stock award plans 1991 stock plan “1991 plan” reserved 3450000 shares issuance thereunder 1991 plan permits award incentive nonqualified stock options shares common stock restricted stock purchase agreements 1992 stock plan “1992 plan” reserved 240000 shares issuance thereunder 1992 plan permits award incentive nonqualified stock options must exercised cash 1995 equity incentive plan “1995 plan” reserved 6100000 shares issuance thereunder 1995 plan permits award incentive nonqualified stock options shares common stock restricted stock awards 2004 stock option plan “2004 plan” reserved 4800000 shares issuance thereunder board directors stockholders also approved amendments 2004 plan expand types stockbased incentives authorized 2004 plan restate 2004 plan 2005 equity incentive plan “2005 plan” 2005 equity incentive plan permits grant incentive stock options nonstatutory stock options stock appreciation rights stock purchase rights stock bonuses restricted stock units performance shares performance units options granted fair market value date grant expire ten years date grant june 2007 board directors stockholders company approved increase 3000000 shares reserved 2005 plan 1991 1992 1995 2005 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years although 1991 1992 1995 plans expired outstanding options relating fully valid june 1995 board directors stockholders company approved 1995 nonemployee director stock option plan “nonemployee director plan” reserved 250000 shares issuance thereunder june 2000 june 2002 board directors stockholders company approved increase 250000 shares reserved issuance nonemployee director plan may 2004 board directors stockholders company approved 2004 outside directors stock option plan reserved 465000 shares issuance thereunder nonemployee director stock option plan canceled 2004 outside directors stock option plan automatically grants nonqualified stock options nonemployee directors upon appointment first election company’s board directors “initial grant” annually upon reelection board directors company’s annual meeting stockholders “annual grant” options granted fair market value date grant expire ten years date grant initial grants become exercisable three equal annual installments beginning first anniversary date grant annual grants become exercisable twelve equal monthly installments date grant subject case outside director’s continuous service company’s board directors june 2005 2007 board directors stockholders company approved increase maximum number shares issuable 2004 outside directors stock option plan 550000 750000 shares respectively total 1765000 shares company entered change control agreements certain employees provide accelerated vesting options change control occur following table summarizes stock option activity 1991 1992 1995 2005 stock option plans nonemployee director plan 2004 outside director stock option plan aggregate intrinsic value table represents value company’s closing stock price last trading day fiscal year excess exercise price multiplied number options outstanding exercisable intrinsic value options time exercise 114000 112000 1668000 years ended december 31 2007 2006 2005 respectively estimated fair value shares vested years ended december 31 2007 2006 2005 1916000 2674000 2744000 respectively following table summarizes information concerning outstanding exercisable options december 31 2007 weightedaverage assumptions used blackscholes option valuation model calculate estimated fair values date grant 2007 2006 2005 resulting weightedaverage expected life weightedaverage fair value stock options granted periods follows expected term options granted derived historical data employee exercises terminations riskfree interest rate based us treasury yield curve effect time grant expected volatility based historical volatility company’s stock expected dividend assumption based company’s history expectations dividend payouts december 31 2007 unamortized compensation expense related unvested options approximately 3251000 weighted average period compensation expense related options recognized 340 years july 1996 board directors stockholders company approved 1996 employee stock purchase plan “espp” reserved 500000 shares issuance thereunder june 2003 board directors stockholders company approved increase 500000 shares reserved issuance 1996 employee stock purchase plan fulltime employees eligible participate espp terms espp employees could choose 15 salary withheld purchase company’s common stock purchase price stock 85 lower fair market value first last trading day quarterly participation period january 2006 board directors amended espp provide offering period commencing january 31 2006 purchase price stock shall equal 95 fair market value share company’s common stock purchase date amount may established board accordingly fair value calculation performed purchases subsequent january 31 2006 amended plan noncompensatory fas 123r espp company sold 22454 80113 shares employees 2006 2005 respectively shares sold espp company 2007 fair value stock award estimated date grant using blackscholes option valuation model weighted average assumptions noted following table following table illustrates allocation compensation cost related stock options employee stock purchases income statement line items year december 31 result adopting fas 123r january 1 2006 company’s income operations net loss income year ended december 31 2007 2006 approximately 2243000 2446000 higher lower respectively company continued account sharebased compensation apb 25 basic diluted loss income per share year ended december 31 2007 2006 005 higher lower respectively company continued account sharebased compensation apb 25 total compensation cost capitalized inventory approximately 85000 108000 respectively years ended december 31 2007 2006 reserved shares december 31 2007 company reserved shares common stock future issuance follows stockholder rights agreement december 18 2006 company’s board directors declared dividend distribution one preferred stock purchase right collectively “rights” outstanding share company’s common stock right entitles registered holder purchase company one onethousandth share company’s series preferred stock 0001 par value price 2500 pursuant rights agreement dated december 19 2006 company mellon investor services llc “rights agreement” rights initially trade common stock become exercisable person group acquires 15 company’s common stock without prior board approval event rights permit company’s stockholders acquiror purchase company’s common stock market value twice exercise price rights lieu preferred stock alternatively rights become exercisable company’s board directors may authorize issuance one share company’s common stock exchange right exercisable addition event certain business combinations rights permit purchase common stock acquiror 50 discount rights held acquiror become null void case prior person group acquiring 15 rights redeemed 0001 action board rights agreement contains exception 15 ownership threshold shares currently beneficially owned sigmatau finanziaria spa rights expire december 19 2016 rights agreement includes requirement committee independent directors evaluate rights agreement least every three years “tide” provision note 14 ceo agreements june 2 2006 dr friedhelm blobel became company’s president ceo joined board directors dr ira lawrence resigned president ceo became consultant company dr lawrence also continues serve director company serves member business development committee nominating corporate governance committee board directors accordance dr lawrence’s separation agreement unvested stock options cancelled options purchase 200000 shares vested time services ceo exercisable term provided dr lawrence continues service consultant director company entered employment agreement dr lawrence effective june 1 2005 employment agreement included award option purchase 400000 shares company’s common stock 297 per share closing price nasdaq stock market share company’s common stock june 1 2005 option term 10 years shares second option would vest upon company’s common stock trading june 1 2005 least 30 consecutive calendar days greater target closing stock price reported nasdaq stock market 450 june 1 2008 100000 shares b 600 june 1 2009 100000 shares c 800 june 1 2010 100000 shares 1000 june 1 2011 100000 shares price adjusted stock dividends stock splits similar changes company’s capital structure apb 25 company recognized noncash expense related stock price performance based option granted dr lawrence june 1 2005 date commenced employment terms option required application variable accounting related noncash expense recognized effected price level trading activity company’s stock company recognized noncash expense vesting portion option determined probable year ended december 31 2005 market price company’s common stock price closed 450 least 30 consecutive calendar days thus triggering vesting 25 shares underlying option therefore company recognized 423000 noncash expense attributable vesting 2005 year ended december 31 2007 2006 expense related option recognized company remaining unvested shares forfeited upon dr lawrence’s departure company sfas 123 option considered target stock price award therefore grant date fair values related four vesting portions award calculated related expense included sfas 123 pro forma expense disclosure derived service periods four vesting portions award aggregate fair value award estimated 691000 date grant using monte carlo simulation option pricing model following assumptions riskfree interest rate 4097 dividend yield 0 volatility factor 74 expected life 10 years fair values four vesting portions awards 186000 173000 166000 amortized related derived service periods 13 21 28 36 months respectively year ended december 31 2005 approximately 232000 expense included sfas 123 pro forma expense see note 1 significant accounting policies accounting stockbased compensation new ceo agreement dr blobel effective june 2 2006 board directors obligated 2008 consider award dr blobel special cash bonus 300000 based achievement previously agreed upon performance targets years 20062008 company estimate probable amount longterm incentive bonus quarterly basis order accrue bonus related performance period december 31 2007 company accrued approximately 147000 relating special cash bonus expenses related agreement dr blobel recorded general administrative expenses employment agreement dr blobel also includes two option awards first option award purchase 400000 shares company’s common stock exercise price per share equal closing price nasdaq stock market share company’s common stock june 2 2006 option term ten years vest annual installments first four anniversaries june 2 2006 company recognizing compensation cost options based grantdate fair value estimated accordance provision fas 123r company amortizing compensation cost vesting period four years using straight line attribution method second option award granted dr blobel purchase 600000 shares company’s common stock exercise price per share equal closing price nasdaq stock market share company’s common stock june 2 2006 option term 10 years shares option vest upon company’s common stock trading june 2 2006 least 30 consecutive calendar days greater target closing stock price reported nasdaq stock market 450 june 2 2009 100000 shares b 600 june 2 2010 100000 shares c 800 june 2 2011 100000 shares 1000 june 2 2012 100000 shares e 1200 june 2 2013 100000 shares f 1400 june 2 2014 100000 shares price adjusted stock dividends stock splits similar changes company’s capital structure second option grant considered award market service conditions market conditions considered performance conditions therefore compensation expense recognized option market conditions long service requirements met even market condition reached therefore grant date fair values related six vesting portions award calculated related compensation costs expensed service periods six vesting portions award years ended december 31 2007 2006 company recorded 448000 265000 respectively compensation expense related award note 15 401k plan company pretax savings plan covering substantially us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions 15 employee’s salary company contributions terminated company’s discretion approximately 202000 200000 170000 years ended december 31 2007 2006 2005 respectively note 16 income april 3 2006 company announced resolution dispute schering plough kk spkk concerning clinical trials conducted japan zadaxin terms settlement spkk paid sciclone 8000000 april 18 2006 recorded income year ended december 31 2006 note 17 significant geographic information company operates one business segment development commercialization novel therapeutics treat chronic life threatening diseases december 31 2007 company’s product revenues generated sale zadaxin president ceo identified chief operating decision maker “codm” final authority resource allocation decisions performance assessment codm receive discrete financial information level business segment company’s domestic operations primarily consist product development company’s wholly owned international subsidiary sciclone pharmaceuticals international ltd engaged sales marketing product distribution worldwide information regarding geographic areas follows two customers accounted 10 total revenues 63 21 aggregate 84 total revenues year ended december 31 2007 two customers accounted 10 total revenues 66 15 aggregate 81 total revenues year ended december 31 2006 three customers accounted 10 total revenues 57 19 15 aggregate 91 total revenues year ended december 31 2005 customer accounted 10 total revenues years note 18 selected quarterly financial data unaudited 1 three months ended december 31 2006 company recorded 929000 royalty expense related license agreement 2 april 2006 company received 8000000 resolution dispute schering plough kk 3 three months ended june 30 2007 company acquired exclusive rights united states canada develop commercialize rp101 clinicalstage compound treatment cancer expensed approximately 2200000 acquisition legal costs related acquisition 4 three months ended september 30 2007 december 31 2007 research development expenses increased result companys phase 2 trial rp101 proposed phase 3 trial melanoma note 19 subsequent event february 2008 first patient dosed company’s phase 2 clinical trial using rp101 1320000 milestone payment paid resprotect company item 9item 8 financial statements supplementary data sciclone pharmaceuticals inc index consolidated financial statements report independent registered public accounting firm board directors stockholders sciclone pharmaceuticals inc audited accompanying consolidated balance sheets sciclone pharmaceuticals inc december 31 2011 2010 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2011 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position sciclone pharmaceuticals inc december 31 2011 2010 consolidated results operations cash flows three years period ended december 31 2011 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states sciclone pharmaceuticals inc’s internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 15 2012 expressed unqualified opinion thereon ernst young llp redwood city california march 15 2012 sciclone pharmaceuticals inc consolidated balance sheets thousands except share per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements income thousands except per share amounts see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements stockholders’ equity thousands see notes consolidated financial statements sciclone pharmaceuticals inc consolidated statements cash flows thousands see notes consolidated financial statements sciclone pharmaceuticals inc notes consolidated financial statements note 1 company summary significant accounting policies description business sciclone pharmaceuticals inc “sciclone” “company” incorporated 1990 revenuegenerating specialty pharmaceutical company substantial commercial business china product portfolio therapies oncology infectious diseases cardiovascular urological respiratory central nervous system disorders company’s lead product zadaxin® thymalfasin approved 30 countries may used treatment hepatitis b hbv hepatitis c hcv vaccine adjuvant certain cancers according local regulatory approvals addition zadaxin sciclone markets nearly 20 mostly partnered products china including depakine® widely prescribed broadspectrum anticonvulsant china tritace® ace inhibitor treatment hypertension stilnox® fastacting hypnotic shortterm treatment insomnia marketed ambien® us aggrastat® recentlylaunched interventional cardiology product 2011 sciclone developing scv07 phase 2b trial delayed onset oral mucositis patients head neck cancer sciclone also pursuing registration several therapeutic products china presentation consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidated financial statements april 18 2011 sciclone acquired novamed pharmaceuticals inc “novamed” see note 8 commencing april 18 2011 company’s financial statements include assets liabilities operating results cash flows novamed use estimates preparation financial statements conformity us generally accepted accounting principles requires management make informed estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ materially estimates cash equivalents investments cash equivalents consist highly liquid investments original maturities three months less date purchase company records investments fair value determined available information consolidated balance sheet date company’s availableforsale portfolio december 31 2011 consisted money market funds restricted longterm italian state bonds unrealized gains losses availableforsale securities included accumulated comprehensive income consolidated balance sheet realized gains losses declines value judged otherthantemporary availableforsale securities included earnings gains losses declines value judged otherthantemporary trading securities included earnings amortized cost securities adjusted amortization premiums accretion discounts maturity included earnings cost securities sold based specific identification method availableforsale investments evaluated impairment reporting period investment considered impaired fair value investment less cost consideration available evidence evaluate realizable value investment impairment determined otherthantemporary impairment loss recognized consolidated statement income years ended december 31 2011 2010 2009 net change unrealized loss gains including foreign currency translation foreigndenominated securities approximately 16000 38000 30000 availableforsale securities respectively included accumulated comprehensive income years ended december 31 2011 2010 2009 company realized gains auction rate securities 0 02 million 01 million respectively classified trading securities fair value financial instruments fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date valuation techniques used measure fair value must maximize use observable inputs minimize use unobservable inputs fair value measurements based threetier hierarchy prioritizes inputs used measure fair value three levels input level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities quoted prices available active market company determines fair value based upon quoted market prices classifies values level 1 valuation hierarchy quoted market prices available fair values based upon observable inputs quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities classified level 2 valuation hierarchy quoted prices observable inputs unavailable fair values based cash flow models classified level 3 valuation hierarchy cash flow models use inputs specific asset liability including estimates interest rates discount rates including yields comparable traded instruments adjusted illiquidity risk factors amount cash flows expected holding periods assets liabilities inputs reflect company’s assumptions market participants would use pricing assets liability including assumptions risk developed based best information available circumstances company’s assessment significance particular input fair value measurements requires judgment may affect valuation assets liability measured placement within fair value hierarchy financial instruments including accrued shortterm liabilities carried cost company believes approximates fair value shortterm maturity instruments concentration risk financial instruments potentially subject company concentration credit risk consist cash equivalents investments accounts receivable company exposed credit risk event default institutions holding cash equivalents investments extent amounts recorded consolidated balance sheet company’s cash equivalents held financial institutions company believes high credit quality times deposits may exceed government insured limits company experienced losses deposits cash equivalents people’s republic china “china” uses tiered method import distribute products promoted products distributors make sales country product imported licensed importers year ended december 31 2011 sales six importing distributor agents china accounted 96 company’s product sales years ended december 31 2010 2009 four importing distributor agents china accounted 96 company’s product sales 2011 three largest importers distributors accounted 61 15 14 sales respectively 2010 two largest importers distributors accounted 74 14 sales respectively 2009 two largest importers distributors accounted 66 27 sales respectively importer accounted 10 sales 2011 2010 2009 two company’s largest importers distributors years ending december 31 2011 2010 2009 last year third party acquired majority interest two largest importers distributors december 31 2011 approximately 297 million 70 company’s accounts receivable attributable two importing agents china 48 million 11 company’s accounts receivable attributable third importing agent distributor company generally require collateral customers company currently relies two suppliers provide key components zadaxin manufacturing supply although limited number manufacturers would able meet requirements manufacture components management believes suppliers could provide similar components comparable terms change suppliers however could cause delay manufacturing possible loss sales would affect operating results adversely majority company’s product sales us dollars however significant portion company’s revenues expenses denominated renminbi “rmb” significant portion company’s assets liabilities denominated rmb exposed foreign exchange risk rmb freely convertible foreign currencies china foreign exchange transactions required law transacted authorized financial institutions exchange rates quoted people’s bank china remittances currencies rmb company china require certain supporting documentation order affect remittance accounts receivable accounts receivable recorded net allowance doubtful accounts net allowance product returns established time sale allowance doubtful accounts company maintains allowances doubtful accounts estimated losses resulting inability customers make required payments appropriate company records allowance doubtful accounts based assessment various factors estimating need allowance doubtful accounts company considers historical payment patterns customers circumstances individual customer contracted credit terms customers assess amounts past due delinquent geographic region including review local economic environment age accounts receivable balances credit quality customers factors may affect customers’ ability pay december 31 2011 2010 allowance doubtful accounts considered necessary company charges uncollectible trade receivables collectability considered unlikely collections efforts exhausted allowance product returns company maintains allowance product returns based estimates amount product returned customers may result expired product price reductions related sales based historical patterns analysis market demand andor percentage sales based industry trends management’s evaluation specific factors may increase risk product returns importing agents distributors contractual rights return except limited terms regarding product quality however company expected replace products expired deemed damaged defective delivered calculation product returns allowance requires estimates involves high degree subjectivity judgment result uncertainties involved estimating product returns allowance possibility materially different amounts could reported different conditions using different assumptions december 31 2011 company estimated product returns allowance 02 million consolidated balance sheet related oncology products aggrastat product sales recorded expense 02 million year ended december 31 2011 related estimated product returns product returns allowance considered necessary december 31 2010 2009 expense recorded years ended december 2010 2009 product returns company evaluates returns allowance quarterly adjusts events indicate change estimate appropriate changes estimate could materially affect results operations financial position however date material possible company may need adjust estimates future periods inventories consist raw materials work progress finished goods products inventories stated lower cost market net realizable value cost determined firstin firstout basis include amounts related materials labor overhead company periodically reviews inventory order identify excess obsolete items obsolete excess items observed alternate uses inventory company record writedown net realizable value period impairment first recognized property equipment property equipment stated cost less accumulated depreciation recorded estimated useful lives respective assets generally three five years straightline basis leasehold improvements amortized shorter estimated useful life lease term straightline basis company’s policy identify record impairment losses necessary property equipment events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets intangible assets intangible assets reviewed impairment facts circumstances suggest carrying value assets may recoverable company’s policy identify record impairment losses necessary intangible product rights events circumstances indicate assets might impaired undiscounted cash flows estimated generated assets less carrying amounts assets company’s policy expense costs incurred connection renewal extension intangible assets part acquisition novamed company recorded intangible assets related promotion distribution contract rights promotion distribution contracts expire one ten years majority expiring one two years subject renewal extension estimated useful life approximately 135 years refer notes 6 8 information regarding company’s intangible assets goodwill company accounted acquisition novamed purchase method accounting accordance financial accounting standards board accounting standards codification “asc” topic 805 business combinations purchase method accounting total acquisitiondate fair value assets liabilities recognized closing date total consideration paid sciclone novamed consisted cash sciclone common stock contingent consideration excess fair value total consideration transferred acquisitiondate fair value net tangible intangible assets liabilities assumed allocated goodwill tested impairment least annually whenever events circumstances occur indicate impairment might occurred accordance asc topic 350 intangibles goodwill contingent consideration part acquisition novamed company may pay additional 430 million earnout upon successful achievement revenue earnings targets 2011 2012 fiscal years “earnout” “contingent consideration” company estimated fair value earnout acquisition date using monte carlo simulation model fair value earnout remeasured period changes fair value recorded “contingent consideration” operating expenses refer contingent consideration note 3 information accrued expenses company’s management makes estimates accrued expenses balance sheet date consolidated financial statements based facts circumstances known examples estimated accrued expenses include fees paid contract research organizations investigative sites connection clinical trials fees paid contract manufacturers connection production clinical trial materials professional services company periodically confirms accuracy estimates selected service providers makes adjustments necessary expenses related clinical trials generally accrued based estimates work performed level patient enrollment activities according protocols agreements financial terms agreements subject negotiation vary contract may result uneven payment flows payments certain contracts depend factors achievement certain events successful enrollment patients completion portions clinical trial similar conditions objective company’s accrual policy match recording expenses actual services received efforts expended company’s management monitors planned protocols work performed patient enrollment levels related activities extent possible adjusts estimates accordingly company records liabilities estimated amounts litigation claims legal actions probable reasonably estimated likelihood material change estimated reserves dependent possible outcome settlement negotiations regulatory judicial review development facts circumstances extended litigation could change claims assessments amount range loss outstanding litigation uncertain company discloses footnotes financial statements unable make reasonable estimate material liability could result unfavorable outcomes events occur company assesses potential liability related pending litigation claims legal actions adjusts estimates accordingly adjustments could materially impact financial statements foreign currency translation company translates assets liabilities foreign subsidiaries stated local functional currencies us dollars rates exchange effect end period revenues expenses translated using rates exchange effect period intangible assets goodwill generally recorded local currency functional currency subsidiaries located china result carrying values intangible assets goodwill may fluctuate value renminbi compared us dollar gains losses translation financial statements denominated foreign currencies included separate component accumulated comprehensive income statement stockholders’ equity company records foreign currency transactions exchange rate prevailing date transaction resultant gains losses included results operations foreign currency transaction gains losses significant period presented revenue recognition company recognizes revenue persuasive evidence arrangement exists services rendered delivery occurred price buyer fixed determinable collectability reasonably assured product revenue company earns product revenue selling manufactured zadaxin product time delivery sales zadaxin importing agents distributors recognized time shipment title product transferred company also earns product revenue purchasing medical products pharmaceutical companies selling directly importers distributors sales recognized medical products delivered importers distributors payments importing agents distributors contingent upon sale end user importing agents distributors promotion services revenue company recognizes promotion services revenue designated medical products delivered distributors specified promotional contract marks period marketing promotional services rendered revenue recognition criteria met sales tax surcharge expense sales taxes surcharge costs expensed incurred included sales marketing expense company generally subject 5 business tax surcharge promotion services medical products relevant taxation laws china business tax surcharge costs amounted approximately 12 million year ended december 31 2011 sales tax surcharge expenses recorded years ended december 31 2010 1009 research development expenses research development costs expensed incurred costs consist primarily salaries personnelrelated expenses including associated stockbased compensation facilityrelated expenses depreciation facilities equipment licenserelated fees services performed clinical research organizations research institutions outside service providers expenses related clinical trials generally accrued based estimates work performed level patient enrollment activities according protocols agreements company monitors planned protocols work performed patient enrollment levels related activities extent possible adjusts estimates accordingly nonrefundable advance payments research development goods services recognized expense related goods delivered related services provided shipping handling costs shipping handling costs incurred inventory purchases product shipments included cost product sales periods presented advertising expenses advertising costs expensed incurred included sales marketing expenses periods presented advertising expenses years ended december 31 2011 2010 2009 02 million 02 million 03 million respectively stockbased compensation company records stockbased compensation costs relating sharebased payment transactions including stock options restricted stock units “rsus” employee stock purchase plans stockbased compensation expense stock options employee stock purchase plan estimated date grant based fair value award using blackscholes optionpricing model stockbased compensation expense rsus estimated date grant based number shares granted quoted price company’s common stock grant date stockbased compensation expense values recognized expense straightline basis requisite service period net estimated forfeitures stockbased compensation costs ultimately expected vest recognized expense ratably awards vest requisite service period generally one four years stock options rsus three months employee stock purchase plan company estimates prevesting forfeitures time grant analyzing historical data revises estimates subsequent periods actual forfeitures differ estimates total expense recognized vesting period awards ultimately vest certain targetstockpricebased options valued using monte carlo simulation options pricing model recognized expense service periods vesting portions awards six eight years refer also note 13 “stockholders’ equity” notes consolidated financial statements information regarding stockbased compensation income taxes income taxes accounted liability method deferred tax assets liabilities determined based difference financial statement tax bases assets liabilities measured enacted tax rates effect differences reverse company provides valuation allowance net deferred tax assets based upon available evidence morelikelythannot deferred tax assets realized company establishes reduces valuation allowance deferred tax assets provision income taxes increase decrease respectively period determination made company’s policy recognize interest penalties related estimated obligations tax positions component income tax expense amount accrued interest related tax positions taken tax returns included accrued liabilities 04 million 02 million december 31 2011 2010 respectively company records liabilities related uncertain tax positions accordance guidance clarifies accounting uncertainty income taxes recognized enterprise’s financial statements prescribing minimum recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return company believe uncertain tax positions currently pending material adverse effect consolidated financial statements although adverse resolution one uncertain tax positions period could material impact results operations period comprehensive income comprehensive income comprised net income comprehensive income loss following table summarizes components accumulated comprehensive income thousands net income per share basic net income per share computed dividing net income weightedaverage number shares common stock outstanding period diluted net income per share computed dividing net income weightedaverage number common equivalent shares outstanding period diluted net income per share includes dilutive impact outstanding stock options warrants employee stock purchase plan using treasury stock method following reconciliation numerator denominators basic diluted net income per share computations year ended december 31 thousands except per share amounts year ended december 31 2011 shares common stock outstanding increased 8298110 shares due acquisition novamed refer note 8 approximately 2288000 shares due stock option exercises years ended december 31 2011 2010 2009 approximately 3030664 2872513 6107498 shares respectively related outstanding stock options warrants excluded calculation diluted net income per share inclusion would antidilutive addition years ended december 31 2011 2010 2009 35068 155000 710959 shares respectively subject market performance conditions excluded calculation diluted net income per share performance market criteria met segment information company operates two segments refer note 17 recent accounting guidance may 12 2011 financial accounting standards board “fasb” issued accounting standards update “asu” 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrs new guidance changes fair value measurement principles disclosure requirements disclosure requirements enhanced certain exceptions us nonpublic companies significant change require entities recurring level 3 fair value measurements disclose quantitative information unobservable inputs used description valuation processes used entity qualitative discussion sensitivity measurements new disclosures required use nonfinancial asset measured disclosed fair value use differs highest best use addition entities must report level fair value hierarchy assets liabilities recorded fair value fair value disclosed amendments update applied prospectively public entities amendments effective interim annual periods beginning december 15 2011 early application public entities permitted company currently assessing impact adoption update consolidated financial statements disclosures june 2011 fasb issued asu 201105 comprehensive income topic 220 presentation comprehensive income asu 201105 requires nonowner changes stockholders’ equity presented either single continuous statement comprehensive income two separate consecutive statements eliminating option present comprehensive income statement changes equity either choice items reclassified comprehensive income net income required presented face financial statements components net income components comprehensive income presented guidance effective company’s interim annual periods beginning january 1 2012 company believe adoption guidance material impact consolidated financial statements requires change format presentation september 2011 fasb issued asu 201108 intangibles goodwill topic 350 testing goodwill impairment revised guidance provides entity option make qualitative evaluation likelihood goodwill impairment revised guidance entity permitted first assess qualitative factors determine whether goodwill impairment exists prior performing analyses comparing fair value reporting unit carrying amount assessing totality events circumstances entity determines likely fair value reporting unit less carrying amount performing twostep impairment test unnecessary guidance effective company beginning january 1 2012 however early adoption permitted believe adoption guidance significantly impact financial position results operations cash flows note 2 cash equivalents investments following summary cash equivalents investments thousands company’s restricted longterm italian state bonds secure italian value added tax filing arrangements unrealized losses bonds mainly relate loss foreign currency translation company concluded likely hold restricted italian state bond investments maturity recovery cost basis note 3 fair value measurements following table represents company’s fair value hierarchy financial assets cash equivalents investments liability measured fair value recurring basis thousands following table provides summary changes fair value company’s level 3 financial assets liability fiscal 2009 2010 2011 thousands contingent consideration part acquisition novamed company may required pay additional 430 million earnout payments upon successful achievement revenue earnings targets 2011 2012 fiscal years “earnout” “contingent consideration” company initially recorded 189 million estimated fair value contingent consideration acquisition date using monte carlo simulation model included riskadjusted discount rate 20 volatility 40 terms governing determination earnout disclosed note 8 acquisition december 31 2011 estimated fair value contingent consideration 154 million decrease 35 million primarily result adjustments certain performance metric projections used estimate fair value auction rate securities put option november 2008 company accepted auction rate securities rights offer “settlement agreement” ubs ag return general release claims grant right ubs ag purchase company’s ars time full par value company received right require ubs ag purchase company’s ars beginning june 2010 “rights” entering settlement agreement company 1 received right “put option” sell auction rate securities back investment firm par sole discretion anytime period june 30 2010 july 2 2012 2 gave investment firm right purchase auction rate securities sell company’s behalf par anytime execution settlement agreement july 2 2012 june 30 2010 company exercised put option sold ars back investment firm note 4 inventories consisted following thousands note 5 property equipment property equipment consisted following thousands depreciation expense 03 million years ended december 31 2011 2010 2009 note 6 intangible assets net intangible assets net consisted following thousands acquired promotion distribution contract intangible assets amortized straightline basis 135 years based estimated useful life amortization expense approximately 25 million year ended december 31 2011 december 31 2011 annual amortization expense next five years estimated 34 million note 7 accrued liabilities following summary accrued liabilities thousands note 8 acquisition april 18 2011 sciclone acquired outstanding shares novamed pursuant terms share purchase agreement “agreement” dated april 18 2011 sciclone novamed shareholders novamed sciclone pharmaceuticals hong kong limited whollyowned subsidiary sciclone company acquired novamed bring additional broad sales marketing well regulatory extensive business capabilities pharmaceutical assets market well regulatory approval stage growing profitable china focused specialty pharmaceutical business terms agreement purchase price comprised upfront payments approximately 246 million cash 8298110 shares sciclone common stock contingent right receive additional cash consideration 430 million “earn out” “contingent consideration” based upon achievement revenue earnings targets 2011 2012 fiscal years agreement earnout based upon certain financial performance metrics including revenuebased formula adjusted ebitda earnings interest depreciation taxes based formula earnout provisions provide cumulative revenue china legacy novamed products two fiscal years ending december 31 2012 exceed 942 million cash payment ranging 92 million 115 million paid full amount payable revenue 1178 million ii adjusted ebitda two year period ending december 31 2012 exceeds 918 million cash payment 172 million 215 million paid full amount payable adjusted ebitda 1378 million adjusted ebitda defined agreement exclude certain expenses generally related operating results china including sciclone’s us research development expense certain sharebased compensation license fees paid sciclone new products certain legal advisory fees related agreement changeincontrol transactions certain fees expenses including legal fees governmental fines settlements paid respect pending formal nonpublic investigation conducted us securities exchange commission “sec” earnout provisions subject number adjustments acceleration provisions total earnout payments described may increased 100 million total maximum contingent cash consideration 430 million reduced 100 million depending upon whether company able achieve targets relating product distribution agreements earnout payments due 20 business days completion company’s audit fiscal year ending december 31 2012 however earnout payments may accelerated certain conditions changeincontrol company defined agreement april 18 2012 earnout payment would deemed 230 million would become due changeincontrol company april 18 2012 december 31 2012 earnout payment would become due payment would range 115 million 230 million depending upon achievement adjusted ebitda revenue targets date changeincontrol addition either mark lotter terminated without cause defined agreement prior december 31 2012 ii company fails meet certain obligations appoint retain mark lotter peter barrett replacements company’s board december 31 2012 earnout payment would deemed 230 million would due 20 business days completion company’s audit fiscal year ending december 31 2012 earnout obligations accelerated payment specified earnout amount satisfies company’s obligations earnout payment due earnout acceleration provisions subject various limitations conditions specified agreement estimated fair value earnout included total purchase price recorded longterm liability estimated fair value earnout based management’s assessment likelihood whether closing date revenue earnings targets would achieved present value factors associated timing revenue earnings targets 25 shares common stock issued part purchase price may sold threemonth period october 18 2012 shares common stock recorded estimated fair value closing date reflecting estimate discount lack marketability 15 total purchase price novamed approximately 750 million comprised follows thousands purchase method accounting total acquisitiondate fair value assets liabilities recognized closing date excess consideration transferred acquisition date fair value net assets acquired recorded goodwill total purchase price net assets acquired included company’s consolidated balance sheet follows thousands fair value acquired promotion distribution contract intangible assets estimated using income approach income approach uses valuation techniques convert future amounts single present amount discounted company’s measurement based value indicated current market expectations future amounts fair value considered company’s estimates future incremental earnings may achieved promotion distribution contract intangible assets included estimated acquired useful lives approximately 135 years discount rate 29 goodwill calculated excess consideration transferred net assets recognized represents future economic benefits arising assets acquired could individually identified separately recognized specifically goodwill recorded part acquisition novamed includes benefits company believes result combining operations novamed operations sciclone intangible assets qualify separate recognition well future yet unidentified products goodwill amortized deductible tax purposes following table represents changes goodwill year ended december 31 2011 thousands deferred tax liabilities reflect nondeductible amortization expenses associated promotion distribution contract intangible assets recognized part acquisition results operations novamed included company’s financial statements april 18 2011 date acquisition following summary prepared unaudited proforma basis reflects consolidated results operations year ended december 31 2011 2010 assuming novamed acquired january 1 2010 pro forma results continuing operations prepared comparative purposes necessarily reflect results would occurred acquisition occurred beginning years presented results may occur future thousands except per share data following table presents information novamed included sciclone’s consolidated statement operations april 18 2011 december 31 2011 thousands year ended december 31 2011 company recorded acquisitionrelated transaction costs 38 million included general administrative expense consolidated statements operations note 9 commitments leases may 2007 company entered noncancelable operating lease agreement corporate headquarters “the lease” effective july 1 2007 june 30 2014 option renew additional five year period september 2008 company entered amendment lease additional office space “the expansion agreement” expires june 30 2014 option renew additional five year period lease expansion agreements contain rent escalations approximately 4 6 per year respectively company recognizing rental expense straightline basis lease terms lease expansion agreements company provided allowances amounts approximately 02 million 05 million respectively towards cost leasehold improvements incentive rent respectively company recorded allowances deferred rent amortized lease terms reduction rent expense leases require company pay insurance taxes prorata share operating expenses october 2011 company entered two noncancelable operating lease agreements primary office space china “the china lease” fixed lease terms october 15 2011 october 14 2014 options renew company recognize rental expense straightline basis lease term leases require company pay insurance prorata share operating expenses company also leases office facilities equipment outside us noncancelable operating lease agreements subleases certain office facilities third party rent expense years ended december 31 2011 2010 2009 21 million 16 million 16 million respectively future minimum lease payments sublease rental income noncancelable facility equipment operating lease agreements december 31 2011 follows thousands note 10 silicon valley bank lineofcredit october 1 2010 company’s subsidiaries sciclone pharmaceuticals international ltd sciclone pharmaceuticals international china holding ltd borrowers terminated existing 6 million credit facility silicon valley bank “svb” entered 15 million loan security agreement svb “the debt financing facility” debt financing facility bears interest borrowed funds svb’s prime rate plus 125 525 december 31 2011 outstanding balances secured first priority secured interest company’s assets including intellectual property event default company required meet certain financial covenants including minimum liquidity defined subject certain minimum fees interest payments company also required meet certain operating covenants limit ability incur liabilities create liens make capital expenditures pay dividends distributions make investments dispose assets debt financing facility expires october 1 2012 upon termination amounts borrowed must repaid full december 31 2011 company borrowed 25 million debt financing facility required maintain debt coverage ratio 135 1 equal 34 million cash svb cash accounts meet financial liquidity covenant company compliance covenants december 31 2011 company capitalized 01 million costs associated origination 15 million facility amortized interest expense term debt financing facility company recognized expense approximately 01 million unamortized loan origination fees associated initial 6 million credit facility upon termination connection initial credit facility entered november 2008 company issued silicon valley bank fiveyear warrant purchase 60000 shares company’s common stock exercise price 086 per share silicon valley bank exercised warrant full december 8 2010 net share settlement resulting issuance 47132 shares company’s common stock note 11 related party transactions company licensed largest shareholder sigmatau exclusive zadaxin thymalfasin thymosin alpha 1 development marketing rights cover countries european union defined january 1 1995 addition iceland norway switzerland company’s collaboration sigmatau governed agreement entered 2000 term expiring march 2012 unless renewed well amendments agreement regarding particular development efforts addition agreement governed company’s joint collaboration development thymalfasin certain indications sharing intellectual property respective territories agreement also provides sigmatau sells zadaxin licensed territory purchase product sciclone specified price subject certain adjustments company currently anticipate sigmatau sell zadaxin nominal amounts italy pursuant agreement sigmatau conducted trials europe treatment malignant melanoma hepatitis c company conducted certain trials us treatment hepatitis c party agreed provide certain funding support development efforts development obligations completed sigmatau completed phase 3 hepatitis c triple therapy clinical trial europe delivered final report trial october 2009 company paid sigmatau aggregate 40 million funding support course patient enrollment trial period including period completion final report company’s accounting policy recording funding amounts due sigmatau record amounts research development expense trial period including period completion final report based level activity trial company recorded 01 million research development expense related trial year ended december 31 2009 ongoing development reimbursement obligations agreement milestones similar terms currently effect note 12 income taxes company recorded income tax expense 08 million 22 million 06 million years ended december 31 2011 2010 2009 respectively related operations china company’s statutory tax rate china 2425 22 20 years ended december 31 2011 2010 2009 respectively company recorded us federal state income tax expense years ended december 31 2011 2010 2009 undistributed earnings company’s foreign subsidiaries considered permanently invested outside us taxes provided amounted approximately 330 million december 31 2011 upon distribution earnings company may subject us federal state income taxes although determining amount practical dependent amount us tax losses time repatriation domestic foreign components income loss provision tax years ended december 31 follows thousands reconciliation statutory federal income tax rate 34 actual tax rate years ended december 31 follows thousands provision income taxes years ended december 31 consisted following thousands deferred income taxes reflect net tax effects temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components company’s deferred tax assets liabilities december 31 follows thousands realization deferred tax assets dependent upon company generating future taxable income timing amount uncertain accordingly deferred tax assets largely offset valuation allowance valuation allowance decreased approximately 49 million 07 million 67 million years ended december 31 2011 2010 2009 respectively december 31 2011 company federal net operating loss carryforwards approximately 1095 million expire years 2012 2030 federal research development orphan drug investment tax credit carryforwards approximately 130 million expire years 2012 2031 december 31 2011 company state net operating loss carryforwards approximately 336 million begin expire year 2014 utilized state research development tax credit carryforwards approximately 19 million expire approximately 38 million operating loss carryforwards relate benefits associated stock option deductions recognized credited directly stockholders’ equity utilization company’s net operating loss credit carryforwards may subject substantial annual limitation due ownership change limitations provided internal revenue code similar state provisions annual limitation could result expiration net operating loss credit carryforwards utilization december 31 2011 unrecognized tax benefit 57 million 18 million recognized would affect effective tax rate 39 million would offset valuation allowance reconciliation beginning ending amount unrecognized tax benefit follows thousands tax years 19952011 remain open examination major taxing jurisdictions company subject although subsequent december 31 2011 internal revenue service concluded examination company’s 2008 2009 us federal tax returns additional tax assessments proposed adjustments relating taxable income years although timing income tax examinations uncertain amounts ultimately paid upon resolution issues raised taxing authorities may differ materially amounts accrued year anticipate material change amount unrecognized tax benefits next 12 months note 13 stockholders’ equity stock award plans company’s 1995 equity incentive plan reserved 6100000 shares common stock issuance permits grant incentive stock options nonstatutory stock options forms equity compensation although 1995 plan expired outstanding stock options relating fully valid company’s 2005 equity incentive plan “2005 plan” reserved 10600000 shares common stock issuance 2005 plan permits grant incentive stock options nonstatutory stock options restricted stock units performance shares forms equity compensation december 31 2011 approximately 1698000 shares common stock available future issuance 2005 plan 1995 2005 plans options exercisable upon conditions determined board directors expire ten years date grant options generally granted fair market value date grant vest time generally four years upon achievement certain market service conditions see stockbased compensation company’s 1995 nonemployee director stock option plan “1995 director plan” reserved 750000 shares common stock issuance 1995 director plan permits grant nonqualified stock options nonemployee directors although 1995 directors plan expired outstanding stock options relating fully valid company’s 2004 outside directors stock option plan “2004 director plan” reserved 1765000 shares common stock issuance 2004 director plan automatically grants nonqualified stock options nonemployee directors upon appointment first election company’s board directors “initial grant” annually upon reelection board directors company’s annual meeting stockholders “annual grant” december 31 2011 approximately 327000 shares common stock available future issuance 2004 director plan 1995 2004 director plans options granted fair market value date grant expire ten years date grant initial grants become exercisable three equal annual installments beginning first anniversary date grant annual grants become exercisable twelve equal monthly installments date grant subject case director’s continuous service company’s board directors certain stock option awards subject accelerated vesting change control stockbased compensation following table summarizes stockbased compensation expenses included consolidated statements income thousands compensation cost capitalized inventory 70000 44000 35000 respectively years ended december 31 2011 2010 2009 income tax benefit recognized income statement sharebased compensation arrangements valuation assumptions fair value granted company’s stock option espp plans estimated date grant using blackscholes option valuation model single option approach following weightedaverage assumptions years ended december 31 riskfree interest rate based us treasury yield curve effect time grant expected dividend yield based company’s history expectations dividend payouts expected volatility based historical volatility company’s stock expected term options granted derived historical data employee exercises terminations stock options following table summarizes stock option activity december 31 2011 changes year ended presented thousands except per share term amounts 2008 company granted chief executive officer targetstockpricebased options purchase 600000 300000 shares company’s common stock exercise price per share 249 181 respectively options term 10 years shares option vest upon company’s common stock trading least 30 consecutive calendar days greater target closing stock price reported nasdaq stock market 450 june 2 2009 150000 shares b 600 june 2 2010 150000 shares c 800 june 2 2011 150000 shares 1000 june 2 2012 150000 shares e 1200 june 2 2013 150000 shares f 1400 june 2 2014 150000 shares price adjusted stock dividends stock splits similar changes company’s capital structure grants considered awards market service conditions compensation expense recognized options long service requirements met even market conditions reached market conditions grants monte carlo simulation option pricing model used calculate grant date fair value per share 170 088 respectively related six vesting portions awards assumptions riskfree interest rate 510 388 respectively volatility factor 94 8914 respectively dividend yield 0 expected life 10 years related compensation costs expensed service periods six vesting portions awards may 2010 company amended targetstockpricebased options purchase aggregate 750000 shares company’s common stock still subject vesting granted chief executive officer amendment modified vesting provisions options 136th unvested stock options vest monthly threeyear period initial vesting occurring june 1 2010 fair value modified award estimated using blackscholes option valuation model assumptions riskfree rate 228 volatility factor 7183 dividend yield 0 expected life 507 years incremental compensation cost resulting modification remaining unrecognized compensation expense original award recognized ratably threeyear vesting period company recorded expense 04 million 03 million 02 million years ended december 31 2011 2010 2009 respectively related options company granted certain performancebased options purchase shares company’s common stock exercise price equal closing price share company’s common stock grant date options fully vest upon meeting performance goal within established time frame performance goal met option within established time frame option generally tenyear term measured date grant performance goal met within established time frame option expires entirety company recognizes expense related performancebased option period time company determines probable performance goal achieved 2009 company extended period two company’s departed board members could exercise outstanding vested stock options following cessation service company ninety days second anniversary date cessation service ceased june 9 2009 company recorded expense 01 million year ended december 31 2009 related modifications weightedaverage fair value stock options granted years ended december 31 2011 2010 2009 279 210 076 respectively intrinsic value options time exercise 58 million 13 million 17 million years ended december 31 2011 2010 2009 respectively estimated fair value shares vested years ended december 31 2011 2010 2009 33 million 19 million 15 million respectively december 31 2011 unamortized compensation expense related unvested options approximately 65 million net forfeitures weighted average period compensation expense related options recognized approximately 258 years cash received stock option exercises 62 million 14 million 26 million years ended december 31 2011 2010 2009 respectively rsus following table summarizes rsu activity december 31 2011 changes year ended presented thousands rsus vest 25 approximately one year grant date remaining shares vesting either approximately annually quarterly equal installments three year period depending terms grant weighted average fair value grant date rsus 581 year ended december 31 2011 rsus granted company period prior 2011 december 31 2011 approximately 07 million unrecognized compensation cost net forfeitures related nonvested rsus expected recognized weighted average remaining period approximately 328 years employee stock purchase plan december 31 2011 1300000 shares common stock reserved issuance company’s employee stock purchase plan “espp” terms espp eligible employees may choose 15 salary withheld purchase company’s common stock may purchase 1000 shares per offering period offering espp threemonth period commencing offering period beginning june 1 2010 purchase price stock issued espp equal 85 lower fair market value share common stock first day offering final day offering period december 31 2011 approximately 535000 shares common stock available issuance espp repurchase common stock october 2011 company announced board directors approved share repurchase program authorizes company repurchase 20 million outstanding common stock twentyfour months company repurchased retired 781000 shares cost 35 million year ended december 31 2011 december 31 2011 165 million 20 million share repurchase program authorized board available future share repurchases repurchased shares retired constitute authorized unissued shares stockholder rights agreement december 18 2006 company’s board directors declared dividend distribution one preferred stock purchase right collectively “rights” outstanding share company’s common stock right entitles registered holder purchase company one onethousandth share company’s series preferred stock 0001 par value price 2500 pursuant rights agreement dated december 19 2006 company mellon investor services llc “rights agreement” rights initially trade common stock become exercisable person group acquires 15 company’s common stock without prior board approval event rights permit company’s stockholders acquirer purchase company’s common stock market value twice exercise price rights lieu preferred stock alternatively rights become exercisable company’s board directors may authorize issuance one share company’s common stock exchange right exercisable addition event certain business combinations rights permit purchase common stock acquirer 50 discount rights held acquirer become null void case prior person group acquiring 15 rights redeemed 0001 action board rights agreement contains exception 15 ownership threshold shares currently beneficially owned sigmatau finanziaria spa rights expire december 19 2016 rights agreement includes requirement committee independent directors evaluate rights agreement least every three years note 14 401k plan company pretax savings plan covering us employees qualifies section 401k internal revenue code plan eligible employees may contribute portion pretax salary subject certain limitations company contributes matches 50 employee contributions company contributions terminated company’s discretion approximately 03 million 02 million 02 million years ended december 31 2011 2010 2009 respectively note 15 income year ended december 31 2010 included approximately 10 million nontaxable grants awarded company november 2010 related research development activities scv07 zadaxin part us department treasury’s therapeutic discovery project program note 16 corporate matters august 5 2010 sciclone contacted united states “us” securities exchange commission “sec” advised sec initiated formal nonpublic investigation sciclone sec issued subpoena sciclone requesting variety documents information subpoena requests documents relating range matters including limited potential payments transfers anything value regulators governmentowned entities china bids contracts state governmentowned entities china joint venture partner intermediary local agent company china company’s ethics anticorruption policies training audits certain company financial disclosures august 6 2010 company received letter us department justice “doj” indicating doj investigating foreign corrupt practices act “fcpa” issues pharmaceutical industry generally doj information company’s practices suggesting possible violations company continue cooperate fully sec doj conduct investigations response matters company’s board appointed special committee independent directors “special committee” oversee company’s response government inquiry based initial review special committee decided undertake independent investigation matters reflected arising sec doj investigations including limited certain sales marketing matters china order evaluate whether violation fcpa laws occurred investigation special committee instructed management evaluate expand company’s training employees regarding understanding compliance laws including fcpa antibribery laws regulations ii evaluate existing compliance antibribery policies guidelines prepare new detailed policies guidelines implementation review sciclone’s board andor committees board iii implement preapproval policy certain expenses including payments reimbursement travel entertainment expenses sponsorships certain third party events iv hire vice president compliance internal audit monitor enforce compliance company’s policies special committee substantially concluded investigation may 4 5 2011 reported findings recommendations board directors part continuing cooperation ongoing investigation sec doj special committee also reported findings sec doj sec’s doj’s formal investigations continuing investigations could result administrative orders company imposition significant penalties andor fines company andor imposition civil criminal sanctions company certain officers directors andor employees company cannot predict outcome investigations timing resolution based information obtained date company determined potential liability may result investigations probable cannot reasonably estimated therefore accrual made related matters consolidated financial statements december 31 2011 events occur company assess potential liability related pending investigations adjust estimates accordingly adjustments could materially impact company’s financial statements following company’s announcement investigations purported class actions naming sciclone certain officers defendants filed derivate lawsuits purportedly behalf company filed naming certain officers directors defendants january 13 2011 derivative lawsuits consolidated single action “the consolidated derivative action” october 3 2011 parties consolidated action reached agreement settle lawsuit december 13 2011 court granted final approval settlement including payment approximately 25 million attorney’s fees entered final judgment dismissing claims settlement provides actions defendants dismissed prejudice release certain known unknown claims could brought later court arising allegations company agreed adopt certain corporate governance measures effect least three years agreed payment approximately 25 million attorney’s fees counsel plaintiffs 25 million paid sciclone’s insurers director officer liability policy note 17 segment information geographic data company reports segment information based internal reporting used management evaluating segment performance based management’s estimates appropriate allocation resources segments company operates manages business primarily geographic basis accordingly company determined operating segments reporting units generally based nature location customers 1 china 2 rest world including us company evaluates performance operating segments based revenues operating income loss revenues geographic segments generally based location customers operating income segment includes revenues related cost sales operating expenses directly attributable segment operating income loss segment excludes nonoperating income expense summary information operating segments follows thousands note 18 selected quarterly financial data unaudited 1 april 18 2011 sciclone acquired novamed commencing april 18 2011 company’s financial statements include assets liabilities operating results cash flows novamed 2 three months ended december 31 2010 company recorded 15 million income tax expense related foreign operations china including 13 million additional tax expense fourth quarter 2010 08 million establish reserve company’s uncertain tax position china addition three months ended december 31 2010 company awarded approximately 10 nontaxable grants related research development activities scv07 zadaxin part us department treasury’s therapeutic discovery project program note 19 subsequent events stock repurchases company repurchased retired 253480 shares cost 11 million january 1 2012 march 6 2012 share repurchase program march 6 2012 154 million 20 million share repurchase program authorized board available future share repurchase reduction workforce march 2012 company implemented reduction workforce 11 fulltime employees primarily research development restructuring follows discontinuation company’s scv07 phase 2b clinical trial company expects complete restructuring second quarter 2012 reduction workforce anticipated result onetime severancerelated charge approximately 11 million item 9 nannannannanitem 15 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements following financial statements company contained pages 3655 report form 10k report ernst young llp independent auditors consolidated balance sheets december 31 2002 2001 consolidated statements operations three years period ended december 31 2002 consolidated statement shareholders’ equity three years period ended december 31 2002 consolidated statements cash flows three years period ended december 31 2002 notes consolidated financial statements 2 financial statement schedules following schedule contained page 66 report schedule ii valuation qualifying accounts three years period ended december 31 2002 schedules omitted either inapplicable required information given consolidated financial statements notes hereto 3 exhibits refer item 15c b reports form 8k none c exhibits numbered accordance item 601 regulation sk certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s registration statement form sl 3345446 declared effective commission march 17 1992 2 incorporated reference company’s registration statement form s8 3366832 filed commission august 3 1993 7 incorporated reference company’s annual report form 10k year ended december 31 1994 8 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 9 incorporated reference company’s annual report form 10k year ended december 31 1995 10 incorporated reference company’s quarterly report form 10q quarter ended march 31 1996 11 incorporated reference company’s quarterly report form 10q quarter ended june 30 1996 14 incorporated reference company’s current report form 8k filed october 14 1997 15 incorporated reference company’s current report form 8k filed january 26 1998 16 incorporated reference company’s form 8k filed april 20 2000 17 incorporated reference company’s annual report form 10k year ended december 31 1998 18 incorporated reference company’s current report form 8k filed july 23 1998 19 incorporated reference company’s quarterly report form 10q november 17 1998 20 incorporated reference company’s annual report form 10k year ended december 31 1997 21 incorporated reference company’s annual report form 10k year ended december 31 2000 22 incorporated reference company’s quarterly report form 10q may 15 2001 23 incorporated reference company’s annual report form 10k year ended december 31 2001 24 filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc sdonald r sellers donald r sellers president chief executive officer date march 26 2003 power attorney know persons presents person whose signature appears constitutes appoints donald r sellers richard waldron attorneysinfact agents power substitution resubstitution capacities sign report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated certifications donald r sellers certify 1 reviewed annual report form 10k sciclone pharmaceuticals inc registrant 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses sdonald r sellers donald r sellers chief executive officer date march 26 2003 certifications richard waldron certify 1 reviewed annual report form 10k sciclone pharmaceuticals inc registrant 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses richard waldron richard waldron chief financial officer principal financial accounting officer date march 26 2003 schedule ii valuation qualifying accounts sciclone pharmaceuticals inc index exhibits certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s registration statement form sl 3345446 declared effective commission march 17 1992 2 incorporated reference company’s registration statement form s8 3366832 filed commission august 3 1993 7 incorporated reference company’s annual report form 10k year ended december 31 1994 8 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 9 incorporated reference company’s annual report form 10k year ended december 31 1995 10 incorporated reference company’s quarterly report form 10q quarter ended march 31 1996 11 incorporated reference company’s quarterly report form 10q quarter ended june 30 1996 14 incorporated reference company’s current report form 8k filed october 14 1997 15 incorporated reference company’s current report form 8k filed january 26 1998 16 incorporated reference company’s form 8k filed april 20 2000 17 incorporated reference company’s annual report form 10k year ended december 31 1998 18 incorporated reference company’s current report form 8k filed july 23 1998 19 incorporated reference company’s quarterly report form 10q november 17 1998 20 incorporated reference company’s annual report form 10k year ended december 31 1997 21 incorporated reference company’s annual report form 10k year ended december 31 2000 22 incorporated reference company’s quarterly report form 10q may 15 2001 23 incorporated reference company’s annual report form 10k year ended december 31 2001 24 filed herewithitem 15 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements following financial statements company contained pages 36 52 report form 10k report ernst young llp independent auditors consolidated balance sheets december 31 2003 2002 consolidated statements operations three years period ended december 31 2003 consolidated statement stockholders’ equity three years ended december 31 2003 consolidated statements cash flows three years period ended december 31 2003 notes consolidated financial statements 2 financial statement schedules following schedule required filed item 8 form item 15d contained page 60 report schedule ii valuation qualifying accounts three years period ended december 31 2003 schedules omitted either inapplicable required information given consolidated financial statements notes thereto 3 exhibits refer item 15c b reports form 8k filed one current report form 8k last quarter period covered report current report dated october 27 2003 furnished pursuant item 7 item 12 c exhibits numbered accordance item 601 regulation sk signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized power attorney know persons presents person whose signature appears constitutes appoints donald r sellers richard waldron attorneysinfact agents power substitution resubstitution capacities sign report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule ii valuation qualifying accounts sciclone pharmaceuticals inc index exhibitsitem 15 exhibits financial statement schedules item 15 following documents filed part report 1 financial statements following financial statements company contained pages 37 56 report form 10k reports independent registered public accounting firm consolidated balance sheets december 31 2004 2003 consolidated statements operations three years period ended december 31 2004 consolidated statement stockholders equity three years ended december 31 2004 consolidated statements cash flows three years period ended december 31 2004 notes consolidated financial statements 2 financial statement schedules following schedule required filed item 8 form item 15d contained page 64 report schedule ii valuation qualifying accounts three years period ended december 31 2004 schedules omitted either inapplicable required information given consolidated financial statements notes thereto 3 exhibits refer item 15b item 15 b exhibits numbered accordance item 601 regulation sk exhibit number description 3i11 amended restated certificate incorporation 3ii11 bylaws 419 rights agreement dated july 25 1997 registrant chase mellon shareholder services llc 421 first amendment rights agreement dated july 17 2003 registrant mellon investor services llc 4313 6 convertible note dated december 7 2000 registrant favor ubs ag london branch 4413 option agreement dated october 26 2000 registrant ubs ag london branch 4513 amendment 1 option agreement dated december 19 2000 registrant ubs ag london branch 4614 6 convertible note dated march 21 2001 company favor ubs ag london branch 4714 option agreement dated february 16 2001 company ubs ag london branch 4814 amendment 1 option agreement dated march 21 2001 company ubs ag london branch 1013 registrants 1991 stock plan together forms agreements thereunder 1022 registrants 1992 stock plan together forms agreements thereunder 1035 registrants 1995 equity incentive plan together forms agreement thereunder 1045 registrants 1995 nonemployee director stock option plan together forms agreement thereunder 10517 registrants 1996 employee stock purchase plan amended 10620 registrants 2004 stock option plan 10720 registrants 2004 outside directors stock option plan 1082 lease dated september 10 1991 registrant spiekersingleton68 concerning property located 901 mariners island boulevard san mateo california amended spieker lease 1094 amendment 4 spieker lease dated october 4 1994 10106 amendment 7 spieker lease dated november 14 1995 10118 amendment 8 spieker lease dated august 26 1996 101213 amendment 14 spieker lease dated november 21 2000 101319 employment agreement effective february 1 1996 registrant donald r sellers 101419 fifth amendment employment agreement effective november 30 2003 registrant donald r sellers 101513 change control agreement company alfred rudolph dated november 19 1999 101613 change control agreement company donald r sellers dated november 19 1999 101715 change control agreement company richard waldron dated april 30 2001 101817 change control agreement company hans p schmid dated april 22 2003 101918 form indemnity agreement registrant director executive officer sciclone pharmaceuticals inc 102021 agreement regarding consulting resignation general release claims registrant donald r sellers dated july 14 2004 10217 license agreement effective april 19 1996 registrant national institute health office technology transfer 102210 alpha rights acquisition agreement registrant alpha 1 biomedicals inc dated december 17 1997 102311 expanded amended thymosin alpha 1 license distributorship supply agreement company sigmatau industrie farmadeutiche riunite spa dated march 3 2000 102416 amendment 1 expanded amended thymosin alpha 1 license distributorship supply agreement company sigmatau farmadeutiche riunite spa dated december 19 2001 102520 amendment 2 expanded amended thymosin alpha 1 license distributorship supply agreement registrant sigmatau industrie farmacetiche riunite spa dated may 20 2004 102620 amendment 3 expanded amended thymosin alpha 1 license distributorship supply agreement registrant sigmatau industrie farmacetiche riunite spa dated may 21 2004 102712 acquisition agreement company sclavo spa dated april 20 1998 102812 first amendment acquisition agreement company sclavo spa dated april 20 1998 102914 registration rights agreement company ubs ag london branch dated february 16 2001 103016 common stock purchase agreement company defiante farmaceutica lda aptafin spa dated january 21 2003 103119 manufacturing supply agreement sciclone pharmaceuticals international ltd patheon italia spa dated november 1 2002 1032 22 agreement company alfred r rudolph dated september 10 2004 1033 22 agreement company richard waldron dated september 10 2004 211 subsidiaries registrant 23123 consent independent registered public accounting firm 24123 powers attorney see page 63 31123 rule 13a14a certification member office president 31223 rule 13a14a certification chief financial officer member office president 32123 section 1350 certification member office president 32223 section 1350 certification chief financial officer member office president certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference companys current report 8k filed july 28 2003 2 incorporated reference companys registration statement form sl 3345446 declared effective commission march 17 1992 3 incorporated reference companys registration statement form s8 3366832 filed commission august 3 1993 4 incorporated reference companys annual report form 10k year ended december 31 1994 5 incorporated reference companys registration statement form s8 3380911 filed commission december 28 1995 6 incorporated reference companys annual report form 10k year ended december 31 1995 7 incorporated reference companys quarterly report form 10q quarterly period ended june 30 1996 8 incorporated reference companys quarterly report form 10q quarterly period ended september 30 1996 9 incorporated reference companys current report form 8k filed october 14 1997 10 incorporated reference companys current report form 8k filed january 26 1998 11 incorporated reference companys current report form 8k filed april 20 2000 12 incorporated reference companys quarterly report form 10q quarterly period ended september 30 1998 13 incorporated reference companys annual report form 10k year ended december 31 2000 14 incorporated reference companys quarterly report form 10q quarterly period ended march 31 2001 15 incorporated reference companys annual report form 10k year ended december 31 2001 16 incorporated reference companys annual report form 10k year ended december 31 2002 17 incorporated reference companys quarterly report form 10q quarterly period ended june 30 2003 18 incorporated reference companys quarterly report form 10q quarterly period ended september 30 2003 19 incorporated reference companys annual report form 10k year ended december 31 2003 20 incorporated reference companys quarterly report form 10q quarterly period ended june 30 2004 21 incorporated reference companys quarterly report form 10q quarterly period ended september 30 2004 22 incorporated reference companys current report form 8k filed september 15 2004 23 filed herewith item 15 c none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc richard waldron richard waldron chief financial officer principal financial accounting officer date march 15 2005 power attorney know persons presents person whose signature appears constitutes appoints alfred r rudolph richard waldron attorneysinfact agents power substitution resubstitution capacities sign report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date alfred r rudolph md chief operating officer member office president march 15 2005 alfred r rudolph md principal executive officer richard waldron chief financial officer member office president march 15 2005 richard waldron principal executive financial officer ivan hui director finance march 15 2005 ivan b hui principal accounting officer john baxter md director march 15 2005 john baxter md edwin c cadman md director march 15 2005 edwin c cadman md jere e goyan phd chairman emeritus march 15 2005 jere e goyan phd richard j hawkins director march 15 2005 richard j hawkins rolf h henel director march 15 2005 rolf h henel jon saxe director march 15 2005 jon saxe dean woodman chairman board directors march 15 2005 dean woodman schedule ii valuation qualifying accounts sciclone pharmaceuticals inc balance charged balance beginning costs end description period expenses deductions period year ended december 31 2004 reserves allowances deducted asset accounts allowance uncollectable accounts 638000 186000 452000 year ended december 31 2003 reserves allowances deducted asset accounts allowance uncollectable accounts 638000 year ended december 31 2002 reserves allowances deducted asset accounts allowance uncollectable accounts 638000 index exhibits exhibit number exhibit 3i11 amended restated certificate incorporation 3ii11 bylaws 419 rights agreement dated july 25 1997 registrant chase mellon shareholder services llc 421 first amendment rights agreement dated july 17 2003 registrant mellon investor services llc 4313 6 convertible note dated december 7 2000 registrant favor ubs ag london branch 4413 option agreement dated october 26 2000 registrant ubs ag london branch 4513 amendment 1 option agreement dated december 19 2000 registrant ubs ag london branch 4614 6 convertible note dated march 21 2001 company favor ubs ag london branch 4714 option agreement dated february 16 2001 company ubs ag london branch 4814 amendment 1 option agreement dated march 21 2001 company ubs ag london branch 1013 registrants 1991 stock plan together forms agreements thereunder 1022 registrants 1992 stock plan together forms agreements thereunder 1035 registrants 1995 equity incentive plan together forms agreement thereunder 1045 registrants 1995 nonemployee director stock option plan together forms agreement thereunder 10517 registrants 1996 employee stock purchase plan amended 10620 registrants 2004 stock option plan 10720 registrants 2004 outside directors stock option plan 1082 lease dated september 10 1991 registrant spiekersingleton68 concerning property located 901 mariners island boulevard san mateo california amended spieker lease 1094 amendment 4 spieker lease dated october 4 1994 10106 amendment 7 spieker lease dated november 14 1995 10118 amendment 8 spieker lease dated august 26 1996 101213 amendment 14 spieker lease dated november 21 2000 101319 employment agreement effective february 1 1996 registrant donald r sellers 101419 fifth amendment employment agreement effective november 30 2003 registrant donald r sellers 101513 change control agreement company alfred rudolph dated november 19 1999 101613 change control agreement company donald r sellers dated november 19 1999 101715 change control agreement company richard waldron dated april 30 2001 101817 change control agreement company hans p schmid dated april 22 2003 101918 form indemnity agreement registrant director executive officer sciclone pharmaceuticals inc 102021 agreement regarding consulting resignation general release claims registrant donald r sellers dated july 14 2004 10217 license agreement effective april 19 1996 registrant national institute health office technology transfer 102210 alpha rights acquisition agreement registrant alpha 1 biomedicals inc dated december 17 1997 102311 expanded amended thymosin alpha 1 license distributorship supply agreement company sigmatau industrie farmadeutiche riunite spa dated march 3 2000 102416 amendment 1 expanded amended thymosin alpha 1 license distributorship supply agreement company sigmatau farmadeutiche riunite spa dated december 19 2001 102520 amendment 2 expanded amended thymosin alpha 1 license distributorship supply agreement registrant sigmatau industrie farmacetiche riunite spa dated may 20 2004 102620 amendment 3 expanded amended thymosin alpha 1 license distributorship supply agreement registrant sigmatau industrie farmacetiche riunite spa dated may 21 2004 102712 acquisition agreement company sclavo spa dated april 20 1998 102812 first amendment acquisition agreement company sclavo spa dated april 20 1998 102914 registration rights agreement company ubs ag london branch dated february 16 2001 103016 common stock purchase agreement company defiante farmaceutica lda aptafin spa dated january 21 2003 103119 manufacturing supply agreement sciclone pharmaceuticals international ltd patheon italia spa dated november 1 2002 1032 22 agreement company alfred r rudolph dated september 10 2004 1033 22 agreement company richard waldron dated september 10 2004 211 subsidiaries registrant pdf courtesy 23123 consent independent registered public accounting firm pdf courtesy 24123 powers attorney see page 63 31123 rule 13a14a certification member office president pdf courtesy 31223 rule 13a14a certification chief financial officer member office president pdf courtesy 32123 section 1350 certification member office president pdf courtesy 32223 section 1350 certification chief financial officer member office president pdf courtesy certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference companys current report 8k filed july 28 2003 2 incorporated reference companys registration statement form sl 3345446 declared effective commission march 17 1992 3 incorporated reference companys registration statement form s8 3366832 filed commission august 3 1993 4 incorporated reference companys annual report form 10k year ended december 31 1994 5 incorporated reference companys registration statement form s8 3380911 filed commission december 28 1995 6 incorporated reference companys annual report form 10k year ended december 31 1995 7 incorporated reference companys quarterly report form 10q quarterly period ended june 30 1996 8 incorporated reference companys quarterly report form 10q quarterly period ended september 30 1996 9 incorporated reference companys current report form 8k filed october 14 1997 10 incorporated reference companys current report form 8k filed january 26 1998 11 incorporated reference companys current report form 8k filed april 20 2000 12 incorporated reference companys quarterly report form 10q quarterly period ended september 30 1998 13 incorporated reference companys annual report form 10k year ended december 31 2000 14 incorporated reference companys quarterly report form 10q quarterly period ended march 31 2001 15 incorporated reference companys annual report form 10k year ended december 31 2001 16 incorporated reference companys annual report form 10k year ended december 31 2002 17 incorporated reference companys quarterly report form 10q quarterly period ended june 30 2003 18 incorporated reference companys quarterly report form 10q quarterly period ended september 30 2003 19 incorporated reference companys annual report form 10k year ended december 31 2003 20 incorporated reference companys quarterly report form 10q quarterly period ended june 30 2004 21 incorporated reference companys quarterly report form 10q quarterly period ended september 30 2004 22 incorporated reference companys current report form 8k filed september 15 2004 23 filed herewithitem 15 exhibits financial statement schedules item 15 following documents filed part annual report form 10k 1 financial statements following financial statements company contained item 8 part ii pages 43 64 annual report form 10k report independent registered public accounting firm consolidated balance sheets december 31 2005 2004 consolidated statements operations three years period ended december 31 2005 consolidated statement stockholders’ equity three years ended december 31 2005 consolidated statements cash flows three years period ended december 31 2005 notes consolidated financial statements 2 financial statement schedules following schedule required filed item 8 form item 15d contained page 70 report schedule ii valuation qualifying accounts three years period ended december 31 2005 schedules omitted either inapplicable required information given consolidated financial statements notes thereto 3 exhibits refer item 15b item 15 b exhibits numbered accordance item 601 regulation sk certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report 8k filed july 28 2003 2 incorporated reference company’s registration statement form sl 3345446 declared effective commission march 17 1992 3 incorporated reference company’s registration statement form s8 3366832 filed commission august 3 1993 4 incorporated reference company’s annual report form 10k year ended december 31 1994 5 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 6 incorporated reference company’s annual report form 10k year ended december 31 1995 7 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 1996 8 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1996 9 incorporated reference company’s current report form 8k filed october 14 1997 10 incorporated reference company’s current report form 8k filed january 26 1998 11 incorporated reference company’s current report form 8k filed april 20 2000 12 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 13 incorporated reference company’s annual report form 10k year ended december 31 2000 14 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2001 15 incorporated reference company’s annual report form 10k year ended december 31 2001 16 incorporated reference company’s annual report form 10k year ended december 31 2002 17 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2003 18 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 19 incorporated reference company’s annual report form 10k year ended december 31 2003 20 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2004 21 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2004 22 incorporated reference company’s current report form 8k filed september 15 2004 23 incorporated reference company’s annual report form 10k year ended december 31 2004 24 incorporated reference company’s current report form 8k filed april 29 2005 25 incorporated reference company’s current report form 8k filed june 1 2005 26 incorporated reference company’s current report form 8k filed june 20 2005 27 incorporated reference company’s current report form 8k filed february 28 2006 28 filed herewith item 15 c see item 15a signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc ira lawrence md ira lawrence md president chief executive officer principal executive officer date march 15 2006 power attorney know persons presents person whose signature appears constitutes appoints ira lawrence md richard waldron attorneysinfact agents power substitution resubstitution capacities sign report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule ii valuation qualifying accounts sciclone pharmaceuticals inc index exhibits certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report 8k filed july 28 2003 2 incorporated reference company’s registration statement form sl 3345446 declared effective commission march 17 1992 3 incorporated reference company’s registration statement form s8 3366832 filed commission august 3 1993 4 incorporated reference company’s annual report form 10k year ended december 31 1994 5 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 6 incorporated reference company’s annual report form 10k year ended december 31 1995 7 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 1996 8 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1996 9 incorporated reference company’s current report form 8k filed october 14 1997 10 incorporated reference company’s current report form 8k filed january 26 1998 11 incorporated reference company’s current report form 8k filed april 20 2000 12 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 13 incorporated reference company’s annual report form 10k year ended december 31 2000 14 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2001 15 incorporated reference company’s annual report form 10k year ended december 31 2001 16 incorporated reference company’s annual report form 10k year ended december 31 2002 17 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2003 18 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 19 incorporated reference company’s annual report form 10k year ended december 31 2003 20 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2004 21 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2004 22 incorporated reference company’s current report form 8k filed september 15 2004 23 incorporated reference company’s annual report form 10k year ended december 31 2004 24 incorporated reference company’s current report form 8k filed april 29 2005 25 incorporated reference company’s current report form 8k filed june 1 2005 26 incorporated reference company’s current report form 8k filed june 20 2005 27 incorporated reference company’s current report form 8k filed february 28 2006 28 filed herewithitem 15 exhibits financial statement schedules item 15 following documents filed part annual report form 10k 1 financial statements following financial statements company contained item 8 part ii pages 47 71 annual report form 10k report independent registered public accounting firm consolidated balance sheets december 31 2006 2005 consolidated statements operations three years period ended december 31 2006 consolidated statement stockholders’ equity three years ended december 31 2006 consolidated statements cash flows three years period ended december 31 2006 notes consolidated financial statements 2 financial statement schedules following schedule required filed item 8 form item 15d contained page 83 report schedule ii valuation qualifying accounts three years period ended december 31 2006 schedules omitted either inapplicable required information given consolidated financial statements notes thereto 3 exhibits refer item 15b item 15 b exhibits numbered accordance item 601 regulation sk certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report 8k filed july 28 2003 2 incorporated reference company’s registration statement form sl 3345446 declared effective commission march 17 1992 3 incorporated reference company’s registration statement form s8 3366832 filed commission august 3 1993 4 incorporated reference company’s annual report form 10k year ended december 31 1994 5 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 6 incorporated reference company’s annual report form 10k year ended december 31 1995 7 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 1996 8 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1996 9 incorporated reference company’s current report form 8k filed october 14 1997 10 incorporated reference company’s current report form 8k filed january 26 1998 11 incorporated reference company’s current report form 8k filed april 20 2000 12 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 13 incorporated reference company’s annual report form 10k year ended december 31 2000 14 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2001 15 incorporated reference company’s annual report form 10k year ended december 31 2001 16 incorporated reference company’s annual report form 10k year ended december 31 2002 17 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2003 18 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 19 incorporated reference company’s annual report form 10k year ended december 31 2003 20 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2004 21 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2004 22 incorporated reference company’s current report form 8k filed september 15 2004 23 incorporated reference company’s annual report form 10k year ended december 31 2004 24 incorporated reference company’s current report form 8k filed april 29 2005 25 incorporated reference company’s current report form 8k filed june 1 2005 26 incorporated reference company’s current report form 8k filed june 20 2005 27 incorporated reference company’s current report form 8k filed february 28 2006 28 incorporated reference company’s current report form 8k filed april 25 2006 29 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2006 30 incorporated reference company’s current report form 8k filed november 27 2006 31 incorporated reference company’s current report form 8k filed december 22 2006 32 incorporated reference company’s current report form 8k filed december 28 2006 33 filed herewith item 15 c see item 15a signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc friedhelm blobel phd friedhelm blobel phd president chief executive officer principal executive officer date march 16 2007 power attorney know persons presents person whose signature appears constitutes appoints friedhelm blobel phd richard waldron attorneysinfact agents power substitution resubstitution capacities sign report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule ii valuation qualifying accounts sciclone pharmaceuticals inc index exhibits certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report 8k filed july 28 2003 2 incorporated reference company’s registration statement form sl 3345446 declared effective commission march 17 1992 3 incorporated reference company’s registration statement form s8 3366832 filed commission august 3 1993 4 incorporated reference company’s annual report form 10k year ended december 31 1994 5 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 6 incorporated reference company’s annual report form 10k year ended december 31 1995 7 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 1996 8 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1996 9 incorporated reference company’s current report form 8k filed october 14 1997 10 incorporated reference company’s current report form 8k filed january 26 1998 11 incorporated reference company’s current report form 8k filed april 20 2000 12 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 13 incorporated reference company’s annual report form 10k year ended december 31 2000 14 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2001 15 incorporated reference company’s annual report form 10k year ended december 31 2001 16 incorporated reference company’s annual report form 10k year ended december 31 2002 17 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2003 18 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 19 incorporated reference company’s annual report form 10k year ended december 31 2003 20 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2004 21 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2004 22 incorporated reference company’s current report form 8k filed september 15 2004 23 incorporated reference company’s annual report form 10k year ended december 31 2004 24 incorporated reference company’s current report form 8k filed april 29 2005 25 incorporated reference company’s current report form 8k filed june 1 2005 26 incorporated reference company’s current report form 8k filed june 20 2005 27 incorporated reference company’s current report form 8k filed february 28 2006 28 incorporated reference company’s current report form 8k filed april 25 2006 29 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2006 30 incorporated reference company’s current report form 8k filed november 27 2006 31 incorporated reference company’s current report form 8k filed december 22 2006 32 incorporated reference company’s current report form 8k filed december 28 2006 33 filed herewithitem 15 exhibits financial statement schedules item 15 following documents filed part annual report form 10k 1 financial statements following financial statements company contained item 8 part ii pages 5180 annual report form 10k report independent registered public accounting firm consolidated balance sheets december 31 2008 2007 consolidated statements operations three years period ended december 31 2008 consolidated statement stockholders’ equity three years ended december 31 2008 consolidated statements cash flows three years period ended december 31 2008 notes consolidated financial statements 2 financial statement schedules following schedule required filed item 8 form item 15d contained page 89 report schedule ii valuation qualifying accounts three years period ended december 31 2008 schedules omitted either inapplicable required information given consolidated financial statements notes thereto 3 exhibits refer item 15b item 15 b exhibits numbered accordance item 601 regulation sk certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report 8k filed july 28 2003 2 incorporated reference company’s registration statement form sl 3345446 declared effective commission march 17 1992 3 incorporated reference company’s registration statement form s8 3366832 filed commission august 3 1993 4 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 5 incorporated reference company’s current report form 8k filed january 26 1998 6 incorporated reference company’s current report form 8k filed april 20 2000 7 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 8 incorporated reference company’s annual report form 10k year ended december 31 2002 9 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2003 10 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 11 incorporated reference company’s annual report form 10k year ended december 31 2003 12 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2004 13 incorporated reference company’s current report form 8k filed february 28 2006 14 incorporated reference company’s current report form 8k filed april 25 2006 15 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 16 incorporated reference company’s quarterly report form 10qa quarterly period ended june 30 2007 filed october 3 2007 17 incorporated reference company’s current report form 8k filed december 22 2006 18 incorporated reference company’s current report form 8k filed december 28 2006 19 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2008 filed may 8 2008 20 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 21 incorporated reference company’s current report form 8k filed december 4 2008 22 filed herewith item 15 c see item 15a signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc friedhelm blobel phd friedhelm blobel phd president chief executive officer principal executive officer date march 13 2009 power attorney know persons presents person whose signature appears constitutes appoints friedhelm blobel phd gary titus attorneysinfact agents power substitution resubstitution capacities sign report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule ii valuation qualifying accounts sciclone pharmaceuticals inc index exhibits certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report 8k filed july 28 2003 2 incorporated reference company’s registration statement form sl 3345446 declared effective commission march 17 1992 3 incorporated reference company’s registration statement form s8 3366832 filed commission august 3 1993 4 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 5 incorporated reference company’s current report form 8k filed january 26 1998 6 incorporated reference company’s current report form 8k filed april 20 2000 7 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 8 incorporated reference company’s annual report form 10k year ended december 31 2002 9 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2003 10 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 11 incorporated reference company’s annual report form 10k year ended december 31 2003 12 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2004 13 incorporated reference company’s current report form 8k filed february 28 2006 14 incorporated reference company’s current report form 8k filed april 25 2006 15 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 16 incorporated reference company’s quarterly report form 10qa quarterly period ended june 30 2007 filed october 3 2007 17 incorporated reference company’s current report form 8k filed december 22 2006 18 incorporated reference company’s current report form 8k filed december 28 2006 19 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2008 filed may 8 2008 20 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 21 incorporated reference company’s current report form 8k filed december 4 2008 22 filed herewithitem 15 exhibits financial statement schedules item 15 following documents filed part annual report form 10k 1 financial statements following financial statements company contained item 8 part ii pages 5072 annual report form 10k report independent registered public accounting firm consolidated balance sheets december 31 2009 2008 consolidated statements operations three years period ended december 31 2009 consolidated statements stockholders’ equity three years ended december 31 2009 consolidated statements cash flows three years period ended december 31 2009 notes consolidated financial statements 2 financial statement schedules following schedule required filed item 8 form item 15d contained page 82 report schedule ii valuation qualifying accounts three years period ended december 31 2009 schedules omitted either inapplicable required information given consolidated financial statements notes thereto 3 exhibits refer item 15b item 15 b exhibits numbered accordance item 601 regulation sk certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report 8k filed july 28 2003 2 incorporated reference company’s registration statement form sl 3345446 declared effective commission march 17 1992 3 incorporated reference company’s registration statement form s8 3366832 filed commission august 3 1993 4 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 5 incorporated reference company’s current report form 8k filed january 26 1998 6 incorporated reference company’s current report form 8k filed april 20 2000 7 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 8 incorporated reference company’s annual report form 10k year ended december 31 2002 9 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2003 10 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 11 incorporated reference company’s annual report form 10k year ended december 31 2003 12 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2004 13 incorporated reference company’s current report form 8k filed february 28 2006 14 incorporated reference company’s current report form 8k filed april 25 2006 15 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 16 incorporated reference company’s current report form 8k filed december 22 2006 17 incorporated reference company’s current report form 8k filed december 28 2006 18 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 19 incorporated reference company’s current report form 8k filed december 4 2008 20 incorporated reference company’s annual report form 10k year ended december 31 2008 21 incorporated reference company’s current report form 8k filed april 1 2009 22 incorporated reference company’s current report form 8k filed april 8 2009 23 incorporated reference company’s quarterly report form 10q filed may 11 2009 24 filed herewith item 15 c see item 15a signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc friedhelm blobel phd friedhelm blobel phd president chief executive officer principal executive officer date march 16 2010 power attorney know persons presents person whose signature appears constitutes appoints friedhelm blobel phd gary titus attorneysinfact agents power substitution resubstitution capacities sign report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule ii valuation qualifying accounts sciclone pharmaceuticals inc accounts receivable allowances uncollectible accounts thousands index exhibits certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report 8k filed july 28 2003 2 incorporated reference company’s registration statement form sl 3345446 declared effective commission march 17 1992 3 incorporated reference company’s registration statement form s8 3366832 filed commission august 3 1993 4 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 5 incorporated reference company’s current report form 8k filed january 26 1998 6 incorporated reference company’s current report form 8k filed april 20 2000 7 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 8 incorporated reference company’s annual report form 10k year ended december 31 2002 9 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2003 10 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 11 incorporated reference company’s annual report form 10k year ended december 31 2003 12 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2004 13 incorporated reference company’s current report form 8k filed february 28 2006 14 incorporated reference company’s current report form 8k filed april 25 2006 15 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 16 incorporated reference company’s current report form 8k filed december 22 2006 17 incorporated reference company’s current report form 8k filed december 28 2006 18 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 19 incorporated reference company’s current report form 8k filed december 4 2008 20 incorporated reference company’s annual report form 10k year ended december 31 2008 21 incorporated reference company’s current report form 8k filed april 1 2009 22 incorporated reference company’s current report form 8k filed april 8 2009 23 incorporated reference company’s quarterly report form 10q filed may 11 2009 24 filed herewithitem 15 exhibits financial statement schedules item 15 following documents filed part annual report form 10k 1 financial statements following financial statements company contained item 8 part ii pages 5579 annual report form 10k report independent registered public accounting firm consolidated balance sheets december 31 2010 2009 consolidated statements operations three years period ended december 31 2010 consolidated statements stockholders’ equity three years ended december 31 2010 consolidated statements cash flows three years period ended december 31 2010 notes consolidated financial statements 2 financial statement schedules following schedule required filed item 8 form item 15d contained page 92 report schedule ii valuation qualifying accounts three years period ended december 31 2010 schedules omitted either inapplicable required information given consolidated financial statements notes thereto 3 exhibits refer item 15b item 15 b exhibits numbered accordance item 601 regulation sk certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report 8k filed july 28 2003 2 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 3 incorporated reference company’s current report form 8k filed january 26 1998 4 incorporated reference company’s current report form 8k filed april 20 2000 5 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 6 incorporated reference company’s annual report form 10k year ended december 31 2002 7 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2003 8 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 9 incorporated reference company’s annual report form 10k year ended december 31 2003 10 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2004 11 incorporated reference company’s current report form 8k filed february 28 2006 12 incorporated reference company’s current report form 8k filed april 25 2006 13 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 14 incorporated reference company’s current report form 8k filed december 22 2006 15 incorporated reference company’s current report form 8k filed december 28 2006 16 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 17 incorporated reference company’s current report form 8k filed december 4 2008 18 incorporated reference company’s current report form 8k filed april 1 2009 19 incorporated reference company’s current report form 8k filed april 8 2009 20 incorporated reference company’s quarterly report form 10q filed may 11 2009 21 incorporated reference company’s quarterly report form 10q filed august 9 2010 22 incorporated reference company’s quarterly report form 10q filed november 8 2010 23 incorporated reference company’s annual report form 10k filed march 16 2010 24 filed herewith item 15 c see item 15a signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc friedhelm blobel phd friedhelm blobel phd president chief executive officer principal executive officer date march 31 2011 power attorney know persons presents person whose signature appears constitutes appoints friedhelm blobel phd gary titus attorneysinfact agents power substitution resubstitution capacities sign report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule ii valuation qualifying accounts sciclone pharmaceuticals inc accounts receivable allowances uncollectible accounts thousands index exhibits certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report 8k filed july 28 2003 2 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 3 incorporated reference company’s current report form 8k filed january 26 1998 4 incorporated reference company’s current report form 8k filed april 20 2000 5 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 6 incorporated reference company’s annual report form 10k year ended december 31 2002 7 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2003 8 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 9 incorporated reference company’s annual report form 10k year ended december 31 2003 10 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2004 11 incorporated reference company’s current report form 8k filed february 28 2006 12 incorporated reference company’s current report form 8k filed april 25 2006 13 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 14 incorporated reference company’s current report form 8k filed december 22 2006 15 incorporated reference company’s current report form 8k filed december 28 2006 16 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 17 incorporated reference company’s current report form 8k filed december 4 2008 18 incorporated reference company’s current report form 8k filed april 1 2009 19 incorporated reference company’s current report form 8k filed april 8 2009 20 incorporated reference company’s quarterly report form 10q filed may 11 2009 21 incorporated reference company’s quarterly report form 10q filed august 9 2010 22 incorporated reference company’s quarterly report form 10q filed november 8 2010 23 incorporated reference company’s annual report form 10k filed march 16 2010 24 filed herewithitem 15 exhibits financial statement schedules item 15 following documents filed part annual report form 10k 1 financial statements following financial statements company contained item 8 part ii pages 68103 annual report form 10k report independent registered public accounting firm consolidated balance sheets december 31 2012 2011 consolidated statements income three years period ended december 31 2012 consolidated statements comprehensive income three years period ended december 31 2012 consolidated statements stockholders’ equity three years ended december 31 2012 consolidated statements cash flows three years period ended december 31 2012 notes consolidated financial statements 2 financial statement schedules following schedule required filed item 8 form item 15d contained page 114 report schedule ii valuation qualifying accounts three years period ended december 31 2012 schedules omitted either inapplicable required information given consolidated financial statements notes thereto 3 exhibits refer item 15b item 15 b exhibits numbered accordance item 601 regulation sk certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement xbrl information furnished filed part registration statement prospectus purposes sections 11 12 securities exchange act 1933 amended deemed filed purposes section 18 securities exchange act 1934 amended otherwise subject liability sections 1 incorporated reference company’s current report form 8k filed july 28 2003 2 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 3 incorporated reference company’s current report form 8k filed january 26 1998 4 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 5 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 6 incorporated reference company’s annual report form 10k year ended december 31 2003 7 incorporated reference company’s current report form 8k filed april 25 2006 8 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 9 incorporated reference company’s current report form 8k filed december 22 2006 10 incorporated reference company’s current report form 8k filed december 28 2006 11 incorporated reference company’s current report form 8k filed december 21 2007 12 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 13 incorporated reference company’s current report form 8k filed december 4 2008 14 incorporated reference company’s current report form 8k filed april 8 2009 15 incorporated reference company’s quarterly report form 10q filed may 11 2009 16 incorporated reference company’s quarterly report form 10q filed august 9 2010 17 incorporated reference company’s annual report form 10k filed march 31 2011 18 incorporated reference company’s quarterly report form 10q filed may 10 2011 19 incorporated reference company’s current report form 8k filed july 6 2011 20 incorporated reference company’s quarterly report form 10q filed november 9 2011 21 incorporated reference company’s quarterly report form 10q filed may 10 2012 22 incorporated reference company’s quarterly report form 10q filed august 8 2012 23 incorporated reference company’s quarterly report form 10q filed november 9 2012 24 incorporated reference company’s current report form 8k filed june 7 2012 25 filed herewith item 15 c see item 15a signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc friedhelm blobel phd friedhelm blobel phd president chief executive officer principal executive officer date april 1 2013 power attorney know persons presents person whose signature appears constitutes appoints friedhelm blobel phd gary titus attorneysinfact agents power substitution resubstitution capacities sign report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule ii valuation qualifying accounts sciclone pharmaceuticals inc receivable product returns reserves thousands 1 includes 11 million reserve aggrastat product related preacquisition sales acquired novamed date acquisition april 18 2011 index exhibits certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement xbrl information furnished filed part registration statement prospectus purposes sections 11 12 securities exchange act 1933 amended deemed filed purposes section 18 securities exchange act 1934 amended otherwise subject liability sections 1 incorporated reference company’s current report form 8k filed july 28 2003 2 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 3 incorporated reference company’s current report form 8k filed january 26 1998 4 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 5 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 6 incorporated reference company’s annual report form 10k year ended december 31 2003 7 incorporated reference company’s current report form 8k filed april 25 2006 8 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 9 incorporated reference company’s current report form 8k filed december 22 2006 10 incorporated reference company’s current report form 8k filed december 28 2006 11 incorporated reference company’s current report form 8k filed december 21 2007 12 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 13 incorporated reference company’s current report form 8k filed december 4 2008 14 incorporated reference company’s current report form 8k filed april 8 2009 15 incorporated reference company’s quarterly report form 10q filed may 11 2009 16 incorporated reference company’s quarterly report form 10q filed august 9 2010 17 incorporated reference company’s annual report form 10k filed march 31 2011 18 incorporated reference company’s quarterly report form 10q filed may 10 2011 19 incorporated reference company’s current report form 8k filed july 6 2011 20 incorporated reference company’s quarterly report form 10q filed november 9 2011 21 incorporated reference company’s quarterly report form 10q filed may 10 2012 22 incorporated reference company’s quarterly report form 10q filed august 8 2012 23 incorporated reference company’s quarterly report form 10q filed november 9 2012 24 incorporated reference company’s current report form 8k filed june 7 2012 25 filed herewith item 15 c see item 15a aboveitem 15 exhibits financial statement schedules item 15 following documents filed part annual report form 10k 1 financial statements following financial statements company contained item 8 part ii pages 67105 annual report form 10k report independent registered public accounting firm report independent registered public accounting firm consolidated balance sheets december 31 2013 2012 consolidated statements income three years period ended december 31 2013 consolidated statements comprehensive income three years period ended december 31 2013 consolidated statements stockholders’ equity three years ended december 31 2013 consolidated statements cash flows three years period ended december 31 2013 notes consolidated financial statements 2 financial statement schedules following schedule required filed item 8 form item 15d contained page 116 report schedule ii valuation qualifying accounts three years period ended december 31 2013 schedules omitted either inapplicable required information given consolidated financial statements notes thereto 3 exhibits refer item 15b item 15 b exhibits numbered accordance item 601 regulation sk certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report form 8k filed july 28 2003 2 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 3 incorporated reference company’s current report form 8k filed january 26 1998 4 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 5 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 6 incorporated reference company’s annual report form 10k year ended december 31 2003 7 incorporated reference company’s current report form 8k filed april 25 2006 8 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 9 incorporated reference company’s current report form 8k filed december 22 2006 10 incorporated reference company’s current report form 8k filed december 28 2006 11 incorporated reference company’s current report form 8k filed january 24 2014 12 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 13 incorporated reference company’s current report form 8k filed april 8 2009 14 incorporated reference company’s quarterly report form 10q filed august 9 2010 15 incorporated reference company’s annual report form 10k filed march 31 2011 16 incorporated reference company’s quarterly report form 10q filed may 10 2011 17 incorporated reference company’s current report form 8k filed july 6 2011 18 incorporated reference company’s quarterly report form 10q filed november 9 2011 19 incorporated reference company’s quarterly report form 10q filed august 8 2012 20 incorporated reference company’s quarterly report form 10q filed november 9 2012 21 incorporated reference company’s current report form 8k filed june 7 2012 22 incorporated reference company’s annual report form 10k filed april 1 2013 23 incorporated reference company’s quarterly report form 10q respect company’s fiscal quarter ended march 31 2013 filed august 9 2013 24 incorporated reference company’s quarterly report form 10q respect company’s fiscal quarter ended june 30 2013 filed august 9 2013 25 incorporated reference company’s quarterly report form 10q filed november 12 2013 26 incorporated reference company’s current report form 8k filed january 2 2014 27 filed herewith item 15 c see item 15a signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc friedhelm blobel phd friedhelm blobel phd president chief executive officer principal executive officer date march 17 2014 power attorney know persons presents person whose signature appears constitutes appoints friedhelm blobel phd wilson w cheung attorneysinfact agents power substitution resubstitution capacities sign amendment report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule ii valuation qualifying accounts sciclone pharmaceuticals inc receivable product returns reserves thousands 1 year ended december 31 2013 charges amounts reserved included 25 million general administrative expense related bad debt uncertain collection year ended december 31 2012 charges amounts reserved included 10 million recorded reduction product revenue relating price concessions recorded accounts receivable reserve 2 includes 11 million reserve aggrastat product related preacquisition sales acquired novamed date acquisition april 18 2011 index exhibits certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report form 8k filed july 28 2003 2 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 3 incorporated reference company’s current report form 8k filed january 26 1998 4 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 5 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 6 incorporated reference company’s annual report form 10k year ended december 31 2003 7 incorporated reference company’s current report form 8k filed april 25 2006 8 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 9 incorporated reference company’s current report form 8k filed december 22 2006 10 incorporated reference company’s current report form 8k filed december 28 2006 11 incorporated reference company’s current report form 8k filed january 24 2014 12 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 13 incorporated reference company’s current report form 8k filed april 8 2009 14 incorporated reference company’s quarterly report form 10q filed august 9 2010 15 incorporated reference company’s annual report form 10k filed march 31 2011 16 incorporated reference company’s quarterly report form 10q filed may 10 2011 17 incorporated reference company’s current report form 8k filed july 6 2011 18 incorporated reference company’s quarterly report form 10q filed november 9 2011 19 incorporated reference company’s quarterly report form 10q filed august 8 2012 20 incorporated reference company’s quarterly report form 10q filed november 9 2012 21 incorporated reference company’s current report form 8k filed june 7 2012 22 incorporated reference company’s annual report form 10k filed april 1 2013 23 incorporated reference company’s quarterly report form 10q respect company’s fiscal quarter ended march 31 2013 filed august 9 2013 24 incorporated reference company’s quarterly report form 10q respect company’s fiscal quarter ended june 30 2013 filed august 9 2013 25 incorporated reference company’s quarterly report form 10q filed november 12 2013 26 incorporated reference company’s current report form 8k filed january 2 2014 27 filed herewith item 15 c see item 15a aboveitem 15exhibits financial statement schedules item 15 athe following documents filed part annual report form 10k 1 financial statements following financial statements company contained item 8 part ii pages 5788 annual report form 10k report independent registered public accounting firm report independent registered public accounting firm consolidated balance sheets december 31 2014 2013 consolidated statements income three years period ended december 31 2014 consolidated statements comprehensive income three years period ended december 31 2014 consolidated statements stockholders’ equity three years ended december 31 2014 consolidated statements cash flows three years period ended december 31 2014 notes consolidated financial statements 2 financial statement schedules following schedule required filed item 8 form item 15d contained page 98 report schedule ii valuation qualifying accounts three years period ended december 31 2014 schedules omitted either inapplicable required information given consolidated financial statements notes thereto 3 exhibits refer item 15b item 15 b exhibits numbered accordance item 601 regulation sk exhibit number description 3i11 amended restated certificate incorporation 3i213 certificate amendment amended restated certificate incorporation 3i37 certificate designation preferences rights terms series preferred stock filed sciclone pharmaceuticals inc secretary state delaware december 22 2006 3ii18 amended restated bylaws 46 rights agreement effective december 19 2006 company mellon investor services llc rights agent including exhibit form certificate designation preferences rights series preferred stock exhibit b form right certificate exhibit c summary terms rights agreement 10117 registrant’s 2005 equity incentive plan effective june 7 2005 amended june 25 2012 1025 registrant’s 2004 outside directors stock option plan amended june 7 2005 amended february 22 2007 1032 form indemnity agreement registrant director executive officer sciclone pharmaceuticals inc 1043 manufacturing supply agreement sciclone pharmaceuticals international ltd patheon italia spa dated november 1 2002 1054 employment agreement sciclone pharmaceuticals inc friedhelm blobel phd dated april 23 2006 effective june 2 2006 1064 change control agreement sciclone pharmaceuticals inc friedhelm blobel phd dated april 23 2006 effective june 2 2006 1079 manufacturing supply agreement sciclone pharmaceuticals international ltd lonza sales ltd executed may 23 2008 10810 amendment 1 change control agreement dr friedhelm blobel sciclone pharmaceuticals inc dated april 7 2009 10910 amendment 1 employment agreement dr friedhelm blobel sciclone pharmaceuticals inc dated april 7 2009 101011 sciclone pharmaceuticals inc employee stock purchase plan amended 101118 description executive incentive plan 101212 amendment 1 manufacturing supply agreement sciclone pharmaceuticals international ltd lonza sales ltd effective december 31 2010 101312 amendment 2 change control agreement dr friedhelm blobel sciclone pharmaceuticals inc effective may 4 2010 101412 amendment 2 employment agreement dr friedhelm blobel sciclone pharmaceuticals inc effective may 4 2010 101515 change control agreement effective june 11 2012 min yin sciclone pharmaceuticals inc 101615 executive severance agreement effective june 11 2012 min yin sciclone pharmaceuticals inc 101716 change control agreement effective august 3 2012 lan xie sciclone pharmaceuticals inc 101816 executive severance agreement effective august 3 2012 lan xie sciclone pharmaceuticals inc 101914 form amendment change control agreements sciclone pharmaceuticals inc executive officers effective august 4 2011 102018 reexportation agreement sciclone pharmaceuticals international china holding ltd sinopharm holding hong kong co limited sinopharm holding lingyun biopharmaceutical shanghai co limited effective january 1 2013 102119 employment agreement hong zhao effective april 1 2013 hong zhao novamed pharmaceuticals shanghai co ltd affiliate sciclone pharmaceuticals inc 102219 change control agreement effective april 1 2013 hong zhao sciclone pharmaceuticals inc 102319 executive severance agreement effective april 1 2013 hong zhao sciclone pharmaceuticals inc 102419 sign bonus letter effective april 1 2013 hong zhao novamed pharmaceuticals shanghai co ltd affiliate sciclone pharmaceuticals inc 102520 employment agreement wilson w cheung effective july 16 2013 wilson w cheung sciclone pharmaceuticals inc 102620 change control agreement effective july 16 2013 wilson w cheung sciclone pharmaceuticals inc 102720 executive severance agreement effective july 16 2013 wilson w cheung sciclone pharmaceuticals inc 102820 framework agreement effective may 13 2013 zensun shanghai science technology co ltd sciclone pharmaceuticals international china holding ltd 102920 framework agreement effective june 25 2013 taiwan liposome company sciclone pharmaceuticals international china holding ltd 103021 employment agreement raymond low effective october 15 2013 raymond low sciclone pharmaceuticals inc 103121 executive severance agreement effective october 15 2013 raymond low sciclone pharmaceuticals inc 103221 change control agreement raymond low effective october 15 2013 raymond low sciclone pharmaceuticals inc 103322 second amendment dated december 20 2013 sciclone pharmaceuticals inc cametro center limited partnership 103423 employment agreement chun cai meng effective february 9 2014 chun cai meng sciclone pharmaceuticals hong kong ltd 103523 change control agreement effective february 9 2014 chun cai meng sciclone pharmaceuticals inc 103623 executive severance agreement effective february 9 2014 chun cai meng sciclone pharmaceuticals inc see “code ethics” item 10 executive officers directors annual report form 10k 21124 subsidiaries registrant 23124 consent independent registered public accounting firm 23224 consent independent registered public accounting firm 24124 power attorney see page 97 31124 certification principal executive officer pursuant section 302 sarbanesoxley act 2002 31224 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 32125 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 32225 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 10124 following materials registrant’s annual report form 10k year ended december 31 2013 formatted extensible business reporting language xbrl includes consolidated balance sheets december 31 2014 2013 ii consolidated statements income years ended december 31 2014 2013 2012 iii consolidated statements comprehensive income years ended december 31 2014 2013 2012 iv consolidated statements shareholders’ equity years ended december 31 2014 2013 2012 v consolidated statements cash flows years ended december 2014 2013 2012 vi notes consolidated financial statements certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report form 8k filed july 28 2003 2 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 filed october 31 2003 3 incorporated reference company’s annual report form 10k year ended december 31 2003 filed march 15 2004 4 incorporated reference company’s current report form 8k filed april 25 2006 5 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 6 incorporated reference company’s current report form 8k filed december 22 2006 7 incorporated reference company’s current report form 8k filed december 28 2006 8 incorporated reference company’s current report form 8k filed january 16 2014 9 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 10 incorporated reference company’s current report form 8k filed april 8 2009 11 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2010 filed august 9 2010 12 incorporated reference company’s annual report form 10k year ended december 31 2010 filed march 31 2011 13 incorporated reference company’s current report form 8k filed july 6 2011 14 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2011 filed november 9 2011 15 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2012 filed august 8 2012 16 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2012 filed november 9 2012 17 incorporated reference company’s current report form 8k filed june 7 2012 18 incorporated reference company’s annual report form 10k year ended december 31 2012 filed april 1 2013 19 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2013 filed august 9 2013 20 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2013 filed august 9 2013 21 incorporated reference company’s quarterly report form 10q period ended september 30 2013 filed november 12 2013 22 incorporated reference company’s current report form 8k filed january 2 2014 23 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2014 filed may 12 2014 24 filed herewith 25 furnished herewith item 15 c see item 15a signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized power attorney know persons presents person whose signature appears constitutes appoints friedhelm blobel phd wilson w cheung attorneysinfact agents power substitution resubstitution capacities sign amendment report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date friedhelm blobel phd friedhelm blobel phd president chief executive officer director principal executive officer march 12 2015 wilson w cheung wilson w cheung senior vice president chief financial officer principal financial accounting officer march 12 2015 jon saxe jon saxe chairman board directors march 12 2015 nancy chang phd nancy chang phd director march 12 2015 richard j hawkins richard j hawkins director march 12 2015 gregg lapointe gregg lapointe director march 12 2015 simon li simon li director march 12 2015 schedule ii valuation qualifying accounts sciclone pharmaceuticals inc receivables product returns reserves thousands 1 year ended december 31 2013 charges amounts reserved included 25 million general administrative expense related bad debt uncertain collection 2 year ended december 31 2012 charges amounts reserved included 10 million recorded reduction product revenue relating price concessions recorded accounts receivable reserve index exhibits exhibit number description 3i11 amended restated certificate incorporation 3i213 certificate amendment amended restated certificate incorporation 3i37 certificate designation preferences rights terms series preferred stock filed sciclone pharmaceuticals inc secretary state delaware december 22 2006 3ii18 amended restated bylaws 46 rights agreement effective december 19 2006 company mellon investor services llc rights agent including exhibit form certificate designation preferences rights series preferred stock exhibit b form right certificate exhibit c summary terms rights agreement 10117 registrant’s 2005 equity incentive plan effective june 7 2005 amended june 25 2012 1025 registrant’s 2004 outside directors stock option plan amended june 7 2005 amended february 22 2007 1032 form indemnity agreement registrant director executive officer sciclone pharmaceuticals inc 1043 manufacturing supply agreement sciclone pharmaceuticals international ltd patheon italia spa dated november 1 2002 1054 employment agreement sciclone pharmaceuticals inc friedhelm blobel phd dated april 23 2006 effective june 2 2006 1064 change control agreement sciclone pharmaceuticals inc friedhelm blobel phd dated april 23 2006 effective june 2 2006 1079 manufacturing supply agreement sciclone pharmaceuticals international ltd lonza sales ltd executed may 23 2008 10810 amendment 1 change control agreement dr friedhelm blobel sciclone pharmaceuticals inc dated april 7 2009 10910 amendment 1 employment agreement dr friedhelm blobel sciclone pharmaceuticals inc dated april 7 2009 101011 sciclone pharmaceuticals inc employee stock purchase plan amended 101118 description executive incentive plan 101212 amendment 1 manufacturing supply agreement sciclone pharmaceuticals international ltd lonza sales ltd effective december 31 2010 101312 amendment 2 change control agreement dr friedhelm blobel sciclone pharmaceuticals inc effective may 4 2010 101412 amendment 2 employment agreement dr friedhelm blobel sciclone pharmaceuticals inc effective may 4 2010 101515 change control agreement effective june 11 2012 min yin sciclone pharmaceuticals inc 101615 executive severance agreement effective june 11 2012 min yin sciclone pharmaceuticals inc 101716 change control agreement effective august 3 2012 lan xie sciclone pharmaceuticals inc 101816 executive severance agreement effective august 3 2012 lan xie sciclone pharmaceuticals inc 101914 form amendment change control agreements sciclone pharmaceuticals inc executive officers effective august 4 2011 102018 reexportation agreement sciclone pharmaceuticals international china holding ltd sinopharm holding hong kong co limited sinopharm holding lingyun biopharmaceutical shanghai co limited effective january 1 2013 102119 employment agreement hong zhao effective april 1 2013 hong zhao novamed pharmaceuticals shanghai co ltd affiliate sciclone pharmaceuticals inc 102219 change control agreement effective april 1 2013 hong zhao sciclone pharmaceuticals inc 102319 executive severance agreement effective april 1 2013 hong zhao sciclone pharmaceuticals inc 102419 sign bonus letter effective april 1 2013 hong zhao novamed pharmaceuticals shanghai co ltd affiliate sciclone pharmaceuticals inc 102520 employment agreement wilson w cheung effective july 16 2013 wilson w cheung sciclone pharmaceuticals inc 102620 change control agreement effective july 16 2013 wilson w cheung sciclone pharmaceuticals inc 102720 executive severance agreement effective july 16 2013 wilson w cheung sciclone pharmaceuticals inc 102820 framework agreement effective may 13 2013 zensun shanghai science technology co ltd sciclone pharmaceuticals international china holding ltd 102920 framework agreement effective june 25 2013 taiwan liposome company sciclone pharmaceuticals international china holding ltd 103021 employment agreement raymond low effective october 15 2013 raymond low sciclone pharmaceuticals inc 103121 executive severance agreement effective october 15 2013 raymond low sciclone pharmaceuticals inc 103221 change control agreement raymond low effective october 15 2013 raymond low sciclone pharmaceuticals inc 103322 second amendment dated december 20 2013 sciclone pharmaceuticals inc cametro center limited partnership 103423 employment agreement chun cai meng effective february 9 2014 chun cai meng sciclone pharmaceuticals hong kong ltd 103523 change control agreement effective february 9 2014 chun cai meng sciclone pharmaceuticals inc 103623 executive severance agreement effective february 9 2014 chun cai meng sciclone pharmaceuticals inc see “code ethics” item 10 executive officers directors annual report form 10k 21124 subsidiaries registrant 23124 consent independent registered public accounting firm 23224 consent independent registered public accounting firm 24124 power attorney see page 97 31124 certification principal executive officer pursuant section 302 sarbanesoxley act 2002 31224 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 32125 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 32225 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 10124 following materials registrant’s annual report form 10k year ended december 31 2013 formatted extensible business reporting language xbrl includes consolidated balance sheets december 31 2014 2013 ii consolidated statements income years ended december 31 2014 2013 2012 iii consolidated statements comprehensive income years ended december 31 2014 2013 2012 iv consolidated statements shareholders’ equity years ended december 31 2014 2013 2012 v consolidated statements cash flows years ended december 2014 2013 2012 vi notes consolidated financial statements certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report form 8k filed july 28 2003 2 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 filed october 31 2003 3 incorporated reference company’s annual report form 10k year ended december 31 2003 filed march 15 2004 4 incorporated reference company’s current report form 8k filed april 25 2006 5 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 6 incorporated reference company’s current report form 8k filed december 22 2006 7 incorporated reference company’s current report form 8k filed december 28 2006 8 incorporated reference company’s current report form 8k filed january 16 2014 9 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 10 incorporated reference company’s current report form 8k filed april 8 2009 11 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2010 filed august 9 2010 12 incorporated reference company’s annual report form 10k year ended december 31 2010 filed march 31 2011 13 incorporated reference company’s current report form 8k filed july 6 2011 14 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2011 filed november 9 2011 15 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2012 filed august 8 2012 16 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2012 filed november 9 2012 17 incorporated reference company’s current report form 8k filed june 7 2012 18 incorporated reference company’s annual report form 10k year ended december 31 2012 filed april 1 2013 19 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2013 filed august 9 2013 20 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2013 filed august 9 2013 21 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2013 filed november 12 2013 22 incorporated reference company’s current report form 8k filed january 2 2014 23 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2014 filed may 12 2014 24 filed herewith 25 furnished herewithitem 15exhibits financial statement schedules item 15 athe following documents filed part annual report form 10k 1 financial statements following financial statements company contained item 8 part ii pages 5787 annual report form 10k report independent registered public accounting firm consolidated balance sheets december 31 2015 2014 consolidated statements income three years period ended december 31 2015 consolidated statements comprehensive income three years period ended december 31 2015 consolidated statements stockholders’ equity three years ended december 31 2015 consolidated statements cash flows three years period ended december 31 2015 notes consolidated financial statements 2 financial statement schedules following schedule required filed item 8 form item 15d contained page 96 report schedule ii valuation qualifying accounts three years period ended december 31 2015 schedules omitted either inapplicable required information given consolidated financial statements notes thereto 3 exhibits refer item 15b item 15 b exhibits numbered accordance item 601 regulation sk exhibit number description 3i11 amended restated certificate incorporation 3i213 certificate amendment amended restated certificate incorporation 3i37 certificate designation preferences rights terms series preferred stock filed sciclone pharmaceuticals inc secretary state delaware december 22 2006 3ii18 amended restated bylaws 46 rights agreement effective december 19 2006 company mellon investor services llc rights agent including exhibit form certificate designation preferences rights series preferred stock exhibit b form right certificate exhibit c summary terms rights agreement 10116 registrant’s 2005 equity incentive plan effective june 7 2005 amended june 25 2012 1025 registrant’s 2004 outside directors stock option plan amended june 7 2005 amended february 22 2007 1032 form indemnity agreement registrant director executive officer sciclone pharmaceuticals inc 1043 manufacturing supply agreement sciclone pharmaceuticals international ltd patheon italia spa dated november 1 2002 1054 employment agreement sciclone pharmaceuticals inc friedhelm blobel phd dated april 23 2006 effective june 2 2006 1069 manufacturing supply agreement sciclone pharmaceuticals international ltd lonza sales ltd executed may 23 2008 10710 amendment 1 employment agreement dr friedhelm blobel sciclone pharmaceuticals inc dated april 7 2009 10811 sciclone pharmaceuticals inc employee stock purchase plan amended 10914 description executive incentive plan 101012 amendment 1 manufacturing supply agreement sciclone pharmaceuticals international ltd lonza sales ltd effective december 31 2010 101112 amendment 2 employment agreement dr friedhelm blobel sciclone pharmaceuticals inc effective may 4 2010 101214 reexportation agreement sciclone pharmaceuticals international china holding ltd sinopharm holding hong kong co limited sinopharm holding lingyun biopharmaceutical shanghai co limited effective january 1 2013 101315 employment agreement effective april 1 2013 hong zhao novamed pharmaceuticals shanghai co ltd affiliate sciclone pharmaceuticals inc 101415 sign bonus letter effective april 1 2013 hong zhao novamed pharmaceuticals shanghai co ltd affiliate sciclone pharmaceuticals inc 101517 employment agreement effective july 16 2013 wilson w cheung sciclone pharmaceuticals inc 101617 framework agreement effective may 13 2013 zensun shanghai science technology co ltd sciclone pharmaceuticals international china holding ltd 101717 framework agreement effective june 25 2013 taiwan liposome company sciclone pharmaceuticals international china holding ltd 101818 employment agreement effective october 15 2013 raymond low sciclone pharmaceuticals inc 101919 second amendment dated december 20 2013 sciclone pharmaceuticals inc cametro center limited partnership 102020 employment agreement effective february 9 2014 chun cai meng sciclone pharmaceuticals hong kong ltd 102121 description executive longterm incentive program 102222 form sciclone pharmaceuticals inc notice grant performance restricted stock units performancebased rsus us participant performance restricted stock units agreement performancebased rsus us participant dated april 3 2015 entered friedhelm blobel sciclone pharmaceuticals inc 102322 form sciclone pharmaceuticals inc notice grant restricted stock units timebased rsus us participant restricted stock units agreement timebased rsus us participant dated april 3 2015 entered friedhelm blobel sciclone pharmaceuticals inc 102422 form sciclone pharmaceuticals inc notice grant performance restricted stock units performancebased rsus us participant performance restricted stock units agreement performancebased rsus us participant dated april 3 2015 entered wilson w cheung sciclone pharmaceuticals inc 102522 form sciclone pharmaceuticals inc notice grant restricted stock units timebased rsus us participant restricted stock units agreement timebased rsus us participant dated april 3 2015 entered wilson w cheung sciclone pharmaceuticals inc 102622 form sciclone pharmaceuticals inc notice grant performance restricted stock units performancebased rsus prc participant performance restricted stock units agreement performancebased rsus prc participant dated april 3 2015 entered hong zhao sciclone pharmaceuticals inc 102722 form sciclone pharmaceuticals inc notice grant restricted stock units timebased rsus prc participant restricted stock units agreement timebased rsus prc participant dated april 3 2015 entered hong zhao sciclone pharmaceuticals inc 102823 sciclone pharmaceuticals inc 2015 equity incentive plan 102924 sciclone pharmaceuticals inc retention agreement friedhelm blobel sciclone pharmaceuticals inc effective june 16 2015 103024 sciclone pharmaceuticals inc retention agreement wilson w cheung sciclone pharmaceuticals inc effective june 16 2015 103124 sciclone pharmaceuticals inc retention agreement robert king sciclone pharmaceuticals inc effective june 30 2015 103224 sciclone pharmaceuticals inc retention agreement raymond low sciclone pharmaceuticals inc effective june 30 2015 103325 sciclone pharmaceuticals inc retention agreement lan xie sciclone pharmaceuticals inc effective july 31 2015 103425 sciclone pharmaceuticals inc retention agreement hong zhao sciclone pharmaceuticals inc effective july 31 2015 103525 sciclone pharmaceuticals inc retention agreement chun cai meng sciclone pharmaceuticals inc effective july 31 2015 103625 form stock option agreement 2015 equity incentive plan us participant 103725 form stock option agreement 2015 equity incentive plan prc participant 103825 form restricted stock units agreement 2015 equity incentive plan us participant 103925 form restricted stock units agreement 2015 equity incentive plan prc participant 104026 letter agreement supplementing 2016 import agreement sciclone pharmaceuticals international china holding limited sinopharm holding lingyun biopharmaceutical shanghai co limited effective november 12 2015 104126 letter agreement modifying reexportation agreement among sciclone pharmaceuticals international china holding limited sinopharm holding hong kong international limited sinopharm holding lingyun biopharmaceutical shanghai co limited effective november 13 2015 104226 2016 import distribution agreement sciclone pharmaceuticals international china holding limited sinopharm holding lingyun biopharmaceuticals shanghai co limited effective january 1 2016 see “code ethics” item 10 executive officers directors annual report form 10k 21126 subsidiaries registrant 23126 consent independent registered public accounting firm 24126 power attorney see page 95 31126 certification principal executive officer pursuant section 302 sarbanesoxley act 2002 31226 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 32127 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 32227 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 10126 following materials registrant’s annual report form 10k year ended december 31 2015 formatted extensible business reporting language xbrl includes consolidated balance sheets december 31 2015 2014 ii consolidated statements income years ended december 31 2015 2014 2013 iii consolidated statements comprehensive income years ended december 31 2015 2014 2013 iv consolidated statements shareholders’ equity years ended december 31 2015 2014 2013 v consolidated statements cash flows years ended december 2015 2014 2013 vi notes consolidated financial statements certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report form 8k filed july 28 2003 2 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 filed october 31 2003 3 incorporated reference company’s annual report form 10k year ended december 31 2003 filed march 15 2004 4 incorporated reference company’s current report form 8k filed april 25 2006 5 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 6 incorporated reference company’s current report form 8k filed december 22 2006 7 incorporated reference company’s current report form 8k filed december 28 2006 8 incorporated reference company’s current report form 8k filed january 16 2014 9 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 10 incorporated reference company’s current report form 8k filed april 8 2009 11 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2010 filed august 9 2010 12 incorporated reference company’s annual report form 10k year ended december 31 2010 filed march 31 2011 13 incorporated reference company’s current report form 8k filed july 6 2011 14 incorporated reference company’s annual report form 10k year ended december 31 2012 filed april 1 2013 15 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2013 filed august 9 2013 16 incorporated reference company’s current report form 8k filed june 13 2012 17 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2013 filed august 9 2013 18 incorporated reference company’s quarterly report form 10q period ended september 30 2013 filed november 12 2013 19 incorporated reference company’s current report form 8k filed january 2 2014 20 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2014 filed may 12 2014 21 incorporated reference company’s current report form 8k filed april 6 2015 22 incorporated reference company’s quarterly report form 10q period ended march 31 2015 filed may 11 2015 23 incorporated reference company’s current report form 8k filed june 17 2015 24 incorporated reference company’s quarterly report form 10q period ended june 30 2015 filed august 10 2015 25 incorporated reference company’s quarterly report form 10q period ended september 30 2015 filed november 9 2015 26 filed herewith 27 furnished herewith item 15 c see item 15a signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized power attorney know persons presents person whose signature appears constitutes appoints friedhelm blobel phd wilson w cheung attorneysinfact agents power substitution resubstitution capacities sign amendment report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date friedhelm blobel phd friedhelm blobel phd president chief executive officer director principal executive officer march 11 2016 wilson w cheung wilson w cheung senior vice president chief financial officer principal financial accounting officer march 11 2016 jon saxe jon saxe chairman board directors march 11 2016 nancy chang phd nancy chang phd director march 11 2016 richard j hawkins richard j hawkins director march 11 2016 gregg lapointe gregg lapointe director march 11 2016 simon li simon li director march 11 2016 schedule ii valuation qualifying accounts sciclone pharmaceuticals inc receivables product returns reserves thousands 1 year ended december 31 2013 charges amounts reserved included 25 million general administrative expense related bad debt uncertain collection index exhibits exhibit number description 3i11 amended restated certificate incorporation 3i213 certificate amendment amended restated certificate incorporation 3i37 certificate designation preferences rights terms series preferred stock filed sciclone pharmaceuticals inc secretary state delaware december 22 2006 3ii18 amended restated bylaws 46 rights agreement effective december 19 2006 company mellon investor services llc rights agent including exhibit form certificate designation preferences rights series preferred stock exhibit b form right certificate exhibit c summary terms rights agreement 10116 registrant’s 2005 equity incentive plan effective june 7 2005 amended june 25 2012 1025 registrant’s 2004 outside directors stock option plan amended june 7 2005 amended february 22 2007 1032 form indemnity agreement registrant director executive officer sciclone pharmaceuticals inc 1043 manufacturing supply agreement sciclone pharmaceuticals international ltd patheon italia spa dated november 1 2002 1054 employment agreement sciclone pharmaceuticals inc friedhelm blobel phd dated april 23 2006 effective june 2 2006 1069 manufacturing supply agreement sciclone pharmaceuticals international ltd lonza sales ltd executed may 23 2008 10710 amendment 1 employment agreement dr friedhelm blobel sciclone pharmaceuticals inc dated april 7 2009 10811 sciclone pharmaceuticals inc employee stock purchase plan amended 10914 description executive incentive plan 101012 amendment 1 manufacturing supply agreement sciclone pharmaceuticals international ltd lonza sales ltd effective december 31 2010 101112 amendment 2 employment agreement dr friedhelm blobel sciclone pharmaceuticals inc effective may 4 2010 101214 reexportation agreement sciclone pharmaceuticals international china holding ltd sinopharm holding hong kong co limited sinopharm holding lingyun biopharmaceutical shanghai co limited effective january 1 2013 101315 employment agreement effective april 1 2013 hong zhao novamed pharmaceuticals shanghai co ltd affiliate sciclone pharmaceuticals inc 101415 sign bonus letter effective april 1 2013 hong zhao novamed pharmaceuticals shanghai co ltd affiliate sciclone pharmaceuticals inc 101517 employment agreement effective july 16 2013 wilson w cheung sciclone pharmaceuticals inc 101617 framework agreement effective may 13 2013 zensun shanghai science technology co ltd sciclone pharmaceuticals international china holding ltd 101717 framework agreement effective june 25 2013 taiwan liposome company sciclone pharmaceuticals international china holding ltd 101818 employment agreement effective october 15 2013 raymond low sciclone pharmaceuticals inc 101919 second amendment dated december 20 2013 sciclone pharmaceuticals inc cametro center limited partnership 102020 employment agreement effective february 9 2014 chun cai meng sciclone pharmaceuticals hong kong ltd 102121 description executive longterm incentive program 102222 form sciclone pharmaceuticals inc notice grant performance restricted stock units performancebased rsus us participant performance restricted stock units agreement performancebased rsus us participant dated april 3 2015 entered friedhelm blobel sciclone pharmaceuticals inc 102322 form sciclone pharmaceuticals inc notice grant restricted stock units timebased rsus us participant restricted stock units agreement timebased rsus us participant dated april 3 2015 entered friedhelm blobel sciclone pharmaceuticals inc 102422 form sciclone pharmaceuticals inc notice grant performance restricted stock units performancebased rsus us participant performance restricted stock units agreement performancebased rsus us participant dated april 3 2015 entered wilson w cheung sciclone pharmaceuticals inc 102522 form sciclone pharmaceuticals inc notice grant restricted stock units timebased rsus us participant restricted stock units agreement timebased rsus us participant dated april 3 2015 entered wilson w cheung sciclone pharmaceuticals inc 102622 form sciclone pharmaceuticals inc notice grant performance restricted stock units performancebased rsus prc participant performance restricted stock units agreement performancebased rsus prc participant dated april 3 2015 entered hong zhao sciclone pharmaceuticals inc 102722 form sciclone pharmaceuticals inc notice grant restricted stock units timebased rsus prc participant restricted stock units agreement timebased rsus prc participant dated april 3 2015 entered hong zhao sciclone pharmaceuticals inc 102823 sciclone pharmaceuticals inc 2015 equity incentive plan 102924 sciclone pharmaceuticals inc retention agreement friedhelm blobel sciclone pharmaceuticals inc effective june 16 2015 103024 sciclone pharmaceuticals inc retention agreement wilson w cheung sciclone pharmaceuticals inc effective june 16 2015 103124 sciclone pharmaceuticals inc retention agreement robert king sciclone pharmaceuticals inc effective june 30 2015 103224 sciclone pharmaceuticals inc retention agreement raymond low sciclone pharmaceuticals inc effective june 30 2015 103325 sciclone pharmaceuticals inc retention agreement lan xie sciclone pharmaceuticals inc effective july 31 2015 103425 sciclone pharmaceuticals inc retention agreement hong zhao sciclone pharmaceuticals inc effective july 31 2015 103525 sciclone pharmaceuticals inc retention agreement chun cai meng sciclone pharmaceuticals inc effective july 31 2015 103625 form stock option agreement 2015 equity incentive plan us participant 103725 form stock option agreement 2015 equity incentive plan prc participant 103825 form restricted stock units agreement 2015 equity incentive plan us participant 103925 form restricted stock units agreement 2015 equity incentive plan prc participant 104026 letter agreement supplementing 2016 import agreement sciclone pharmaceuticals international china holding limited sinopharm holding lingyun biopharmaceutical shanghai co limited effective november 12 2015 104126 letter agreement modifying reexportation agreement among sciclone pharmaceuticals international china holding limited sinopharm holding hong kong international limited sinopharm holding lingyun biopharmaceutical shanghai co limited effective november 13 2015 104226 2016 import distribution agreement sciclone pharmaceuticals international china holding limited sinopharm holding lingyun biopharmaceuticals shanghai co limited effective january 1 2016 see “code ethics” item 10 executive officers directors annual report form 10k 21126 subsidiaries registrant 23126 consent independent registered public accounting firm 24126 power attorney see page 95 31126 certification principal executive officer pursuant section 302 sarbanesoxley act 2002 31226 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 32127 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 32227 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 10126 following materials registrant’s annual report form 10k year ended december 31 2015 formatted extensible business reporting language xbrl includes consolidated balance sheets december 31 2015 2014 ii consolidated statements income years ended december 31 2015 2014 2013 iii consolidated statements comprehensive income years ended december 31 2015 2014 2013 iv consolidated statements shareholders’ equity years ended december 31 2015 2014 2013 v consolidated statements cash flows years ended december 2015 2014 2013 vi notes consolidated financial statements certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report form 8k filed july 28 2003 2 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 filed october 31 2003 3 incorporated reference company’s annual report form 10k year ended december 31 2003 filed march 15 2004 4 incorporated reference company’s current report form 8k filed april 25 2006 5 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 6 incorporated reference company’s current report form 8k filed december 22 2006 7 incorporated reference company’s current report form 8k filed december 28 2006 8 incorporated reference company’s current report form 8k filed january 16 2014 9 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 10 incorporated reference company’s current report form 8k filed april 8 2009 11 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2010 filed august 9 2010 12 incorporated reference company’s annual report form 10k year ended december 31 2010 filed march 31 2011 13 incorporated reference company’s current report form 8k filed july 6 2011 14 incorporated reference company’s annual report form 10k year ended december 31 2012 filed april 1 2013 15 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2013 filed august 9 2013 16 incorporated reference company’s current report form 8k filed june 13 2012 17 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2013 filed august 9 2013 18 incorporated reference company’s quarterly report form 10q period ended september 30 2013 filed november 12 2013 19 incorporated reference company’s current report form 8k filed january 2 2014 20 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2014 filed may 12 2014 21 incorporated reference company’s current report form 8k filed april 6 2015 22 incorporated reference company’s quarterly report form 10q period ended march 31 2015 filed may 11 2015 23 incorporated reference company’s current report form 8k filed june 17 2015 24 incorporated reference company’s quarterly report form 10q period ended june 30 2015 filed august 10 2015 25 incorporated reference company’s quarterly report form 10q period ended september 30 2015 filed november 9 2015 26 filed herewith 27 furnished herewithitem 15exhibits financial statement schedules item 15 athe following documents filed part annual report form 10k 1 financial statements following financial statements company contained item 8 part ii pages 5180 annual report form 10k report independent registered public accounting firm consolidated balance sheets december 31 2016 2015 consolidated statements income three years period ended december 31 2016 consolidated statements comprehensive income three years period ended december 31 2016 consolidated statements stockholders’ equity three years ended december 31 2016 consolidated statements cash flows three years period ended december 31 2016 notes consolidated financial statements 2 financial statement schedules following schedule required filed item 8 form item 15d contained page 89 report schedule ii valuation qualifying accounts three years period ended december 31 2016 schedules omitted either inapplicable required information given consolidated financial statements notes thereto 3 exhibits refer item 15b item 15 b exhibits ﻿ exhibits numbered accordance item 601 regulation sk ﻿ ﻿ ﻿ exhibit number description 3i11 amended restated certificate incorporation 3i29 certificate amendment amended restated certificate incorporation 3i323 certificate elimination series preferred stock filed sciclone pharmaceuticals inc 3ii123 amended restated bylaws 10112 registrant’s 2005 equity incentive plan effective june 7 2005 amended june 25 2012 1025 registrant’s 2004 outside directors stock option plan amended june 7 2005 amended february 22 2007 1032 form indemnity agreement registrant director executive officer sciclone pharmaceuticals inc 1043 manufacturing supply agreement sciclone pharmaceuticals international ltd patheon italia spa dated november 1 2002 1054 employment agreement sciclone pharmaceuticals inc friedhelm blobel phd dated april 23 2006 effective june 2 2006 1066 amendment 1 employment agreement dr friedhelm blobel sciclone pharmaceuticals inc dated april 7 2009 1077 sciclone pharmaceuticals inc employee stock purchase plan amended 10810 description executive incentive plan 1098 amendment 2 employment agreement dr friedhelm blobel sciclone pharmaceuticals inc effective may 4 2010 101010 reexportation agreement sciclone pharmaceuticals international china holding ltd sinopharm holding hong kong co limited sinopharm holding lingyun biopharmaceutical shanghai co limited effective january 1 2013 101111 employment agreement effective april 1 2013 hong zhao novamed pharmaceuticals shanghai co ltd affiliate sciclone pharmaceuticals inc 101213 employment agreement effective july 16 2013 wilson w cheung sciclone pharmaceuticals inc 101313 framework agreement effective may 13 2013 zensun shanghai science technology co ltd sciclone pharmaceuticals international china holding ltd 101413 framework agreement effective june 25 2013 taiwan liposome company sciclone pharmaceuticals international china holding ltd 101514 employment agreement effective october 15 2013 raymond low sciclone pharmaceuticals inc 101615 second amendment dated december 20 2013 sciclone pharmaceuticals inc cametro center limited partnership 101716 description executive longterm incentive program 101817 form sciclone pharmaceuticals inc notice grant performance restricted stock units performancebased rsus us participant performance restricted stock units agreement performancebased rsus us participant dated april 3 2015 entered friedhelm blobel sciclone pharmaceuticals inc 101917 form sciclone pharmaceuticals inc notice grant restricted stock units timebased rsus us participant restricted stock units agreement timebased rsus us participant dated april 3 2015 entered friedhelm blobel sciclone pharmaceuticals inc 102017 form sciclone pharmaceuticals inc notice grant performance restricted stock units performancebased rsus us participant performance restricted stock units agreement performancebased rsus us participant dated april 3 2015 entered wilson w cheung sciclone pharmaceuticals inc 102117 form sciclone pharmaceuticals inc notice grant restricted stock units timebased rsus us participant restricted stock units agreement timebased rsus us participant dated april 3 2015 entered wilson w cheung sciclone pharmaceuticals inc 102217 form sciclone pharmaceuticals inc notice grant performance restricted stock units performancebased rsus prc participant performance restricted stock units agreement performancebased rsus prc participant dated april 3 2015 entered hong zhao sciclone pharmaceuticals inc 102317 form sciclone pharmaceuticals inc notice grant restricted stock units timebased rsus prc participant restricted stock units agreement timebased rsus prc participant dated april 3 2015 entered hong zhao sciclone pharmaceuticals inc 102418 sciclone pharmaceuticals inc 2015 equity incentive plan 102519 sciclone pharmaceuticals inc retention agreement friedhelm blobel sciclone pharmaceuticals inc effective june 16 2015 102619 sciclone pharmaceuticals inc retention agreement wilson w cheung sciclone pharmaceuticals inc effective june 16 2015 102719 sciclone pharmaceuticals inc retention agreement raymond low sciclone pharmaceuticals inc effective june 30 2015 102820 sciclone pharmaceuticals inc retention agreement lan xie sciclone pharmaceuticals inc effective july 31 2015 102920 sciclone pharmaceuticals inc retention agreement hong zhao sciclone pharmaceuticals inc effective july 31 2015 103020 form stock option agreement 2015 equity incentive plan us participant 103120 form stock option agreement 2015 equity incentive plan prc participant 103220 form restricted stock units agreement 2015 equity incentive plan us participant 103320 form restricted stock units agreement 2015 equity incentive plan prc participant 103421 letter agreement supplementing 2016 import agreement sciclone pharmaceuticals international china holding limited sinopharm holding lingyun biopharmaceutical shanghai co limited effective november 12 2015 103521 letter agreement modifying reexportation agreement among sciclone pharmaceuticals international china holding limited sinopharm holding hong kong international limited sinopharm holding lingyun biopharmaceutical shanghai co limited effective november 13 2015 103621 2016 import distribution agreement sciclone pharmaceuticals international china holding limited sinopharm holding lingyun biopharmaceuticals shanghai co limited effective january 1 2016 103724 manufacturing services agreement lonza sales ltd sciclone pharmaceuticals international ltd effective april 30 2014 “manufacturing services agreement” 103824 amendment 1 manufacturing services agreement sciclone pharmaceuticals international ltd lonza sales ltd march 22 2015 103924 amendment 2 manufacturing services agreement sciclone pharmaceuticals international ltd lonza sales ltd july 22 2015 104024 amendment 3 manufacturing services agreement sciclone pharmaceuticals international ltd lonza sales ltd december 5 2015 104124 amendment 4 manufacturing services agreement sciclone pharmaceuticals international ltd lonza sales ltd may 31 2016 104225 sciclone pharmaceuticals inc retention agreement carey chern sciclone pharmaceuticals inc effective october 24 2016 104325 employment agreement effective october 2 2016 carey chern sciclone pharmaceuticals inc 104422 sciclone pharmaceuticals inc 2016 employee stock purchase plan see “code ethics” item 10 executive officers directors annual report form 10k 21125 subsidiaries registrant 23125 consent independent registered public accounting firm 24125 power attorney see page 88 31125 certification principal executive officer pursuant section 302 sarbanesoxley act 2002 31225 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 32126 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 32226 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 10125 following materials registrant’s annual report form 10k year ended december 31 2016 formatted extensible business reporting language xbrl includes consolidated balance sheets december 31 2016 2015 ii consolidated statements income years ended december 31 2016 2015 2014 iii consolidated statements comprehensive income years ended december 31 2016 2015 2014 iv consolidated statements shareholders’ equity years ended december 31 2016 2015 2014 v consolidated statements cash flows years ended december 2016 2015 2014 vi notes consolidated financial statements ﻿ ﻿ certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report form 8k filed july 28 2003 2 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 filed october 31 2003 3 incorporated reference company’s annual report form 10k year ended december 31 2003 filed march 15 2004 4 incorporated reference company’s current report form 8k filed april 25 2006 5 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 6 incorporated reference company’s current report form 8k filed april 8 2009 7 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2010 filed august 9 2010 8 incorporated reference company’s annual report form 10k year ended december 31 2010 filed march 31 2011 9 incorporated reference company’s current report form 8k filed july 6 2011 10 incorporated reference company’s annual report form 10k year ended december 31 2012 filed april 1 2013 11 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2013 filed august 9 2013 12 incorporated reference company’s current report form 8k filed june 13 2012 13 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2013 filed august 9 2013 14 incorporated reference company’s quarterly report form 10q period ended september 30 2013 filed november 12 2013 15 incorporated reference company’s current report form 8k filed january 2 2014 16 incorporated reference company’s current report form 8k filed april 6 2015 17 incorporated reference company’s quarterly report form 10q period ended march 31 2015 filed may 11 2015 18 incorporated reference company’s current report form 8k filed june 17 2015 19 incorporated reference company’s quarterly report form 10q period ended june 30 2015 filed august 10 2015 20 incorporated reference company’s quarterly report form 10q period ended september 30 2015 filed november 9 2015 21 incorporated reference company’s annual report form 10k year ended december 31 2015 filed march 11 2016 22 incorporated reference company’s definitive proxy statement filed april 29 2016 23 incorporated reference company’s current report form 8k filed february 28 2017 24 incorporated reference company’s quarterly report form 10qa period ended june 30 2016 filed march 3 2017 25 filed herewith 26 furnished herewith ﻿ item 15 c see item 15a signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized ﻿ power attorney know persons presents person whose signature appears constitutes appoints friedhelm blobel phd wilson w cheung attorneysinfact agents power substitution resubstitution capacities sign amendment report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ﻿ signature title date friedhelm blobel phd friedhelm blobel phd president chief executive officer director principal executive officer march 9 2017 ﻿ wilson w cheung wilson w cheung senior vice president chief financial officer principal financial accounting officer march 9 2017 ﻿ jon saxe jon saxe chairman board directors march 9 2017 ﻿ nancy chang phd nancy chang phd director march 9 2017 ﻿ richard j hawkins richard j hawkins director march 9 2017 ﻿ gregg lapointe gregg lapointe director march 9 2017 ﻿ simon li simon li director march 9 2017 ﻿ ﻿ ﻿ ﻿ schedule ii valuation qualifying accounts sciclone pharmaceuticals inc receivables product returns reserves thousands ﻿ ﻿ 1 recorded gain general administrative expense ﻿ ﻿ ﻿ ﻿ index exhibits ﻿ ﻿ ﻿ ﻿ ﻿ ﻿ ﻿nannanitem 15 exhibits financial statement schedules item 15 following documents filed part annual report form 10k 1 financial statements following financial statements company contained item 8 part ii pages 54 80 annual report form 10k report independent registered public accounting firm consolidated balance sheets december 31 2007 2006 consolidated statements operations three years period ended december 31 2007 consolidated statement stockholders’ equity three years ended december 31 2007 consolidated statements cash flows three years period ended december 31 2007 notes consolidated financial statements 2 financial statement schedules following schedule required filed item 8 form item 15d contained page 91 report schedule ii valuation qualifying accounts three years period ended december 31 2007 schedules omitted either inapplicable required information given consolidated financial statements notes thereto 3 exhibits refer item 15b item 15 b exhibits numbered accordance item 601 regulation sk certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report 8k filed july 28 2003 2 incorporated reference company’s registration statement form sl 3345446 declared effective commission march 17 1992 3 incorporated reference company’s registration statement form s8 3366832 filed commission august 3 1993 4 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 5 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 1996 6 incorporated reference company’s current report form 8k filed october 14 1997 7 incorporated reference company’s current report form 8k filed january 26 1998 8 incorporated reference company’s current report form 8k filed april 20 2000 9 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 10 incorporated reference company’s annual report form 10k year ended december 31 2000 11 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2001 12 incorporated reference company’s annual report form 10k year ended december 31 2001 13 incorporated reference company’s annual report form 10k year ended december 31 2002 14 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2003 15 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 16 incorporated reference company’s annual report form 10k year ended december 31 2003 17 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2004 18 incorporated reference company’s current report form 8k filed september 15 2004 19 incorporated reference company’s current report form 8k filed april 29 2005 20 incorporated reference company’s current report form 8k filed june 1 2005 21 incorporated reference company’s current report form 8k filed february 28 2006 22 incorporated reference company’s current report form 8k filed april 25 2006 23 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2006 24 incorporated reference company’s current report form 8k filed december 22 2006 25 incorporated reference company’s current report form 8k filed december 28 2006 26 incorporated reference company’s annual report form 10k year ended december 31 2006 27 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 28 incorporated reference company’s quarterly report form 10qa quarterly period ended june 30 2007 filed october 3 2007 29 filed herewith item 15 c see item 15a signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc friedhelm blobel phd friedhelm blobel phd president chief executive officer principal executive officer date march 13 2008 power attorney know persons presents person whose signature appears constitutes appoints friedhelm blobel phd richard waldron attorneysinfact agents power substitution resubstitution capacities sign report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule ii valuation qualifying accounts sciclone pharmaceuticals inc certain prior year amounts reclassified conform current year presentation index exhibits certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement 1 incorporated reference company’s current report 8k filed july 28 2003 2 incorporated reference company’s registration statement form sl 3345446 declared effective commission march 17 1992 3 incorporated reference company’s registration statement form s8 3366832 filed commission august 3 1993 4 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 5 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 1996 6 incorporated reference company’s current report form 8k filed october 14 1997 7 incorporated reference company’s current report form 8k filed january 26 1998 8 incorporated reference company’s current report form 8k filed april 20 2000 9 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 10 incorporated reference company’s annual report form 10k year ended december 31 2000 11 incorporated reference company’s quarterly report form 10q quarterly period ended march 31 2001 12 incorporated reference company’s annual report form 10k year ended december 31 2001 13 incorporated reference company’s annual report form 10k year ended december 31 2002 14 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2003 15 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 16 incorporated reference company’s annual report form 10k year ended december 31 2003 17 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2004 18 incorporated reference company’s current report form 8k filed september 15 2004 19 incorporated reference company’s current report form 8k filed april 29 2005 20 incorporated reference company’s current report form 8k filed june 1 2005 21 incorporated reference company’s current report form 8k filed february 28 2006 22 incorporated reference company’s current report form 8k filed april 25 2006 23 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2006 24 incorporated reference company’s current report form 8k filed december 22 2006 25 incorporated reference company’s current report form 8k filed december 28 2006 26 incorporated reference company’s annual report form 10k year ended december 31 2006 27 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 28 incorporated reference company’s quarterly report form 10qa quarterly period ended june 30 2007 filed october 3 2007 29 filed herewithitem 15 exhibits financial statement schedules item 15 following documents filed part annual report form 10k 1 financial statements following financial statements company contained item 8 part ii pages 5585 annual report form 10k report independent registered public accounting firm consolidated balance sheets december 31 2011 2010 consolidated statements income three years period ended december 31 2011 consolidated statements stockholders’ equity three years ended december 31 2011 consolidated statements cash flows three years period ended december 31 2011 notes consolidated financial statements 2 financial statement schedules omitted either inapplicable required information given consolidated financial statements notes thereto 3 exhibits refer item 15b item 15 b exhibits numbered accordance item 601 regulation sk certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement xbrl information furnished filed part registration statement prospectus purposes sections 11 12 securities exchange act 1933 amended deemed filed purposes section 18 securities exchange act 1934 amended otherwise subject liability sections 1 incorporated reference company’s current report form 8k filed july 28 2003 2 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 3 incorporated reference company’s current report form 8k filed january 26 1998 4 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 5 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 6 incorporated reference company’s annual report form 10k year ended december 31 2003 7 incorporated reference company’s current report form 8k filed april 25 2006 8 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 9 incorporated reference company’s current report form 8k filed december 22 2006 10 incorporated reference company’s current report form 8k filed december 28 2006 11 incorporated reference company’s current report form 8k filed december 21 2007 12 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 13 incorporated reference company’s current report form 8k filed december 4 2008 14 incorporated reference company’s current report form 8k filed april 1 2009 15 incorporated reference company’s current report form 8k filed april 8 2009 16 incorporated reference company’s quarterly report form 10q filed may 11 2009 17 incorporated reference company’s quarterly report form 10q filed august 9 2010 18 incorporated reference company’s quarterly report form 10q filed november 8 2010 19 incorporated reference company’s annual report form 10k filed march 16 2010 20 incorporated reference company’s annual report form 10k filed march 31 2011 21 incorporated reference company’s quarterly report form 10q filed may 10 2011 22 incorporated reference company’s current report form 8k filed july 6 2011 23 incorporated reference company’s quarterly report form 10q filed november 9 2011 24 filed herewith item 15 c see item 15a signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized sciclone pharmaceuticals inc friedhelm blobel phd friedhelm blobel phd president chief executive officer principal executive officer date march 15 2012 power attorney know persons presents person whose signature appears constitutes appoints friedhelm blobel phd gary titus attorneysinfact agents power substitution resubstitution capacities sign report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibits certain information exhibit omitted filed separately securities exchange commission pursuant confidential treatment request 17 cfr sections 20080b4 20083 23046 management compensatory plan arrangement xbrl information furnished filed part registration statement prospectus purposes sections 11 12 securities exchange act 1933 amended deemed filed purposes section 18 securities exchange act 1934 amended otherwise subject liability sections 1 incorporated reference company’s current report form 8k filed july 28 2003 2 incorporated reference company’s registration statement form s8 3380911 filed commission december 28 1995 3 incorporated reference company’s current report form 8k filed january 26 1998 4 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 1998 5 incorporated reference company’s quarterly report form 10q quarterly period ended september 30 2003 6 incorporated reference company’s annual report form 10k year ended december 31 2003 7 incorporated reference company’s current report form 8k filed april 25 2006 8 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2007 filed august 8 2007 9 incorporated reference company’s current report form 8k filed december 22 2006 10 incorporated reference company’s current report form 8k filed december 28 2006 11 incorporated reference company’s current report form 8k filed december 21 2007 12 incorporated reference company’s quarterly report form 10q quarterly period ended june 30 2008 filed august 1 2008 13 incorporated reference company’s current report form 8k filed december 4 2008 14 incorporated reference company’s current report form 8k filed april 1 2009 15 incorporated reference company’s current report form 8k filed april 8 2009 16 incorporated reference company’s quarterly report form 10q filed may 11 2009 17 incorporated reference company’s quarterly report form 10q filed august 9 2010 18 incorporated reference company’s quarterly report form 10q filed november 8 2010 19 incorporated reference company’s annual report form 10k filed march 16 2010 20 incorporated reference company’s annual report form 10k filed march 31 2011 21 incorporated reference company’s quarterly report form 10q filed may 10 2011 22 incorporated reference company’s current report form 8k filed july 6 2011 23 incorporated reference company’s quarterly report form 10q filed november 9 2011 24 filed herewith