XNAS:PCYC Pharmacyclics, Inc. Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

PCYC Fair Value Estimate
Premium
PCYC Consider Buying
Premium
PCYC Consider Selling
Premium
PCYC Fair Value Uncertainty
Premium
PCYC Economic Moat
Premium
PCYC Stewardship
Premium
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2012
 
or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                 to                                

Commission File Number:  000-26658
 
Pharmacyclics, Inc.
(Exact name of registrant as specified in its charter)

Delaware
94-3148201
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

995 E. Arques Avenue
Sunnyvale, CA
94085-4521
(Address of principal executive offices)
(Zip Code)

(408) 774-0330
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x  No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes x     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer ¨
Accelerated filer x
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o    No x
 
As of May 7, 2012, there were 69,047,808  shares of the registrant's Common Stock, par value $0.0001 per share, outstanding.
 
 
 

 
 
PHARMACYCLICS, INC.
Form 10-Q
Table of Contents
 
Page No.
 
 
3
 
4
 
5
 
6
18
29
29
 
30
30
31
32
32
32
32
33
34

 
PART I.                       FINANCIAL INFORMATION

Item 1.                         Financial Statements

 

 
 
PHARMACYCLICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in thousands)
 
   
March 31,
 2012
   
June 30,
2011
 
ASSETS
           
Current assets:
           
   Cash and cash equivalents
  $ 213,469     $ 87,757  
   Marketable securities
    1,494       24,572  
   Accounts receivable
    12,905       54  
   Prepaid expenses and other current assets
    2,623       2,313  
      Total current assets
    230,491       114,696  
   Property and equipment, net
    3,075       1,312  
   Other assets
    386       344  
      Total assets
  $ 233,952     $ 116,352  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
   Accounts payable
  $ 8,686     $ 5,684  
   Accrued liabilities
    2,004       1,584  
   Income tax payable
    328       -  
   Deferred revenue – current portion
    8,057       7,000  
      Total current liabilities
    19,075       14,268  
                 
   Deferred revenue – non-current portion
    69,369       -  
   Deferred rent
    604       410  
     Total liabilities
    89,048       14,678  
                 
Commitments and contingencies (Notes 6 and 10)
               
                 
Stockholders’ equity:
               
   Preferred stock, $0.0001 par value; 1,000,000 shares authorized at March 31, 2012 and June 30, 2011; no shares issued and outstanding
    -       -  
   Common stock, $0.0001 par value; 150,000,000 and 100,000,000 authorized at March 31, 2012 and June 30, 2011; shares issued and outstanding –  68,926,876 and 67,915,865 at March 31, 2012 and June 30, 2011
    7       7  
   Additional paid-in capital
    529,130       514,813  
   Accumulated other comprehensive loss
    -       (21 )
   Accumulated deficit
    (384,233 )     (413,125 )
      Total stockholders’ equity
    144,904       101,674  
         Total liabilities and stockholders’ equity
  $ 233,952     $ 116,352  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
PHARMACYCLICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except per share data)
   
Three Months Ended
March 31,
   
 
 
 
 
Nine Months Ended
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues:
                       
   License and milestone revenues
  $ -     $ 1,356     $ 77,605     $ 4,129  
   Collaboration services revenues
    1,927       703       2,262       2,718  
      Total revenues
    1,927       2,059       79,867       6,847  
Operating expenses:
                               
   Research and development
    15,828       8,649       39,152       24,607  
   General and administrative
    4,061       2,692       11,355       6,619  
      Total operating expenses
    19,889       11,341       50,507       31,226  
Income (loss) from operations
    (17,962 )     (9,282 )     29,360       (24,379 )
Interest income
    61       64       129       139  
Interest expense and other income (expense), net
    (5 )     1       (29 )     1  
Income (loss) before income taxes
    (17,906 )     (9,217 )     29,460       (24,239 )
Income tax provision (benefit)
    (5,083 )     -       568       -  
Net income (loss)
  $ (12,823 )   $ (9,217 )   $ 28,892     $ (24,239 )
                                 
Net income (loss) per share:
                               
Basic
  $ (0.19 )   $ (0.15 )   $ 0.42     $ (0.41 )
Diluted
  $ (0.19 )   $ (0.15 )   $ 0.40     $ (0.41 )
Weighted average shares used to compute
                               
net income (loss) per share:
                               
Basic
    68,848       59,931       68,610       59,641  
Diluted
    68,848       59,931       72,174       59,641  



The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 

PHARMACYCLICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
   
 
 
 
 
Nine Months Ended
March 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
    Net income (loss)
  $ 28,892     $ (24,239 )
   Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
               
activities:
               
    Depreciation and amortization
    373       202  
    Amortization of premium/discount on marketable securities, net
    89       769  
   Gain on sale of marketable securities
    -       (2 )
    Share-based compensation expense
    8,025       5,972  
    Loss on property and equipment
    24       -  
    Changes in assets and liabilities:
               
      Accounts receivable
    (12,851 )     156  
      Prepaid expenses and other assets
    (741 )     278  
      Accounts payable
    3,315       2,325  
      Accrued liabilities
    420       37  
      Income taxes payable
    328       -  
      Deferred revenue
    70,426       (5,760 )
      Deferred rent
    194       214  
        Net cash provided by (used in) operating activities
    98,494       (20,048 )
                 
Cash flows from investing activities:
               
    Purchase of property and equipment
    (1,902 )     (639 )
    Proceeds from disposal or sale of property and equipment
    (12 )     -  
    Purchase of marketable securities
    -       (76,457 )
    Proceeds from sales of marketable securities
    -       9,665  
    Proceeds from maturities of marketable securities
    23,010       39,278  
        Net cash provided by (used in) investing activities
    21,096       (28,153 )
                 
Cash flows from financing activities:
               
    Issuance of common stock, net of issuance costs
    (559 )     -  
    Exercise of stock options and stock purchase rights
    6,681       1,707  
        Net cash provided by financing activities
    6,122       1,707  
                 
(Decrease)/Increase in cash and cash equivalents
    125,712       (46,494 )
Cash and cash equivalents at beginning of period
    87,757       51,199  
Cash and cash equivalents at end of period
  $ 213,469     $ 4,705  
                 
Supplemental disclosure of non-cash investing and financing activities:
               
Accounts payable for property and equipment purchases
  $ 246     $ -  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
PHARMACYCLICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — The Company and Significant Accounting Policies

Description of the Company

We are a clinical-stage biopharmaceutical company which is focused on discovering and developing innovative small-molecule drugs for the treatment of cancer and immune-mediated diseases. Our mission and goal is to build a viable biopharmaceutical company that commercializes novel therapies intended to improve quality of life, increase duration of life and resolve serious unmet medical healthcare needs. We identify promising product candidates using our scientific development expertise, develop our products in a rapid, cost-efficient manner and pursue commercialization and/or development partners when and where appropriate.

Presently, we have three product candidates in clinical development and several molecules in preclinical lead optimization. To date, nearly all of our resources have been dedicated to the research and development of our products, and we have not generated any commercial revenues from the sale of our products. We do not anticipate the generation of any product commercial revenues until we receive the necessary regulatory and marketing approvals to launch one of our products.

We were in the development stage at June 30, 2011, as defined in Financial Accounting Standards Board Accounting Standards Codification Topic 915, “Development Stage Entities.” During the nine months ended March 31, 2012, we exited the development stage with the signing of our first significant collaboration with Janssen Biotech, Inc (See Note 6), from which we received our first significant revenue from principal operations, reflective that we are no longer in the development stage.

Based upon the current status of our product development and plans, we believe that our existing cash, cash equivalents and marketable securities will be adequate to satisfy our capital needs through at least the next twelve months. However, the process of developing and commercializing our products requires significant research and development, preclinical testing and clinical trials, manufacturing arrangements as well as regulatory and marketing approvals. These activities, together with our general and administrative expenses, are expected to result in significant operating losses until the commercialization of our products, or partner collaborations, generate sufficient revenues to cover our expenses. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Our sustaining profitability depends upon our ability to successfully complete the development of our products, obtain required regulatory approvals and successfully manufacture and market our products.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Pharmacyclics, Inc. and our wholly-owned subsidiaries, Pharmacyclics (Europe) Limited, and Pharmacyclics Switzerland GmbH.  All intercompany accounts and transactions have been eliminated. The U.S. dollar is our functional currency for all of our consolidated operations.

The interim condensed consolidated financial statements have been prepared by us, without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.
 

In the opinion of management, the unaudited financial information for the interim periods presented reflects all normal and recurring adjustments necessary for a fair statement of results of operations, financial position and cash flows. These condensed consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our financial statements and the accompanying notes. Actual results could differ from those estimates.

Reclassifications

Certain amounts have been reclassified in the accompanying financial statements to conform to the fiscal 2012 presentation.

Revenue Recognition

We recognize revenue when all four criteria have been met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured. Revenue under our license and collaboration arrangements is recognized based on the performance requirements of the contract. Determinations of whether persuasive evidence of an arrangement exists and whether delivery has occurred or services have been rendered are based on management’s judgments regarding the fixed nature of the fees charged for deliverables and the collectability of those fees. Should changes in conditions cause management to determine that these criteria are not met for any new or modified transactions, revenue recognized could be adversely affected.

Our collaborations with multiple elements prior to July 1, 2010 were evaluated and divided into separate units of accounting if certain criteria were met, including whether the delivered element had stand-alone value and whether there was verifiable objective and reliable evidence (VSOE) of the fair value of the undelivered items. The consideration we received was combined and recognized as a single unit of accounting when criteria for separation were not met. Amounts received under such arrangements consisted of up-front collaboration payments, periodic milestone payments and payments for research activities. Up-front payments under agreements that included future performance requirements were recorded as deferred revenue and were recognized over the performance period. The performance period was estimated at the inception of the arrangement and is reevaluated at each reporting period. The reevaluation of the performance period may shorten or lengthen the period during which the deferred revenue is recognized. Revenues related to substantive, at-risk collaboration milestones are recognized upon achievement of the event specified in the underlying agreement. Revenues for research activities are recognized as the related research efforts are performed.

We recognize revenue related to collaboration and license arrangements in accordance with the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 605-25, “Revenue Recognition – Multiple-Element Arrangements,” or ASC Topic 605-25. Additionally, we adopted, effective July 1, 2010, Accounting Standards Update, or ASU, No. 2009-13, “Multiple Deliverable Revenue Arrangements,” or ASU 2009-13, which amended ASC Topic 605-25 and:
 
 
 
·
provided guidance on how deliverables in an arrangement should be separated and how the arrangement consideration should be allocated to the separate units of accounting;
 
·
required an entity to determine the selling price of a separate deliverable using a hierarchy of (i) vendor-specific objective evidence, or VSOE, (ii) third-party evidence, or TPE, or (iii) best estimate of selling price, or BESP;
 
·
and required the allocation of the arrangement consideration, at the inception of the arrangement, to the separate units of accounting based on relative fair value.

We evaluate all deliverables within an arrangement to determine whether or not they provide value on a stand-alone basis. Based on this evaluation, the deliverables are separated into units of accounting. The arrangement consideration that is fixed or determinable at the inception of the arrangement is allocated to the separate units of accounting based on their relative selling prices. We may exercise significant judgment in determining whether a deliverable is a separate unit of accounting, as well as in estimating the selling prices of such unit of accounting.

To determine the selling price of a separate deliverable, we use the hierarchy as prescribed in ASC Topic 605-25 based on VSOE, TPE or BESP. VSOE is based on the price charged when the element is sold separately and is the price actually charged for that deliverable. TPE is determined based on third party evidence for a similar deliverable when sold separately and BESP is the price at which we would transact a sale if the elements of collaboration and license arrangements were sold on a stand-alone basis. We may not be able to establish VSOE or TPE for the deliverables within collaboration and license arrangements, as we do not have a history of entering into such arrangements or selling the individual deliverables within such arrangements separately. In addition, there may be significant differentiation in these arrangements, which indicates that comparable third party pricing may not be available. We may determine that the selling price for the deliverables within collaboration and license arrangements should be determined using BESP. The process for determining BESP involves significant judgment on our part and includes consideration of multiple factors such as estimated direct expenses and other costs, and available data.

For each unit of accounting identified within an arrangement, we determine the period over which the performance obligation occurs. Revenue is then recognized using either a proportional performance or straight-line method. We recognize revenue using the proportional performance method when the level of effort to complete our performance obligations under an arrangement can be reasonably estimated. Direct labor hours or full time equivalents are typically used as the measurement of performance.

Effective July 1, 2010, we adopted ASU No. 2010-17, “Milestone Method of Revenue Recognition,” or ASU 2010-17, which provides guidance on revenue recognition using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in the period in which the milestone is achieved. The determination that a milestone is substantive is subject to considerable judgment.
 
Note 2 - Basic and Diluted Net Income (Loss) Per Share
 
Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options and shares to be purchased under the employee stock purchase plan. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of our common stock can result in a greater dilutive effect from potentially dilutive securities.
 

The computations of basic and diluted net income (loss) per share are as follows (in thousands, except per share amounts):
 
   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Numerator:
                       
Net income (loss)
  $ (12,823 )   $ (9,217 )   $ 28,892     $ (24,239 )
                                 
Denominator:
                               
Weighted average common shares-basic
    68,848       59,931       68,610       59,641  
Effect of dilutive securities:
                               
Employee stock options
    -       -       3,491       -  
Employee stock purchase plan
    -       -       73       -  
Weighted average common shares - diluted
    68,848       59,931       72,174       59,641  
                                 
Net income (loss) per share:
                               
Basic
  $ (0.19 )   $ (0.15 )   $ 0.42     $ (0.41 )
Diluted
  $ (0.19 )   $ (0.15 )   $ 0.40     $ (0.41 )
Potentially dilutive securities excluded from earnings (loss) per share - diluted because their effect is anti-dilutive     7,907       8,583       857       8,407  
 
Note 3 - Share-Based Compensation and Stockholders’ Equity

We grant options to purchase our common stock pursuant to our 2004 Equity Incentive Award Plan.

The components of share-based compensation recognized in our statements of operations for the three and nine months ended March 31, 2012 and 2011 are as follows (in thousands):

   
Three Months Ended
March 31,
   
 
 
 
Nine Months Ended
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Research and development
  $ 2,695     $ 1,213     $ 5,934     $ 4,174  
General and administrative
    790       649       2,091       1,798  
Total share-based compensation
  $ 3,485     $ 1,862     $ 8,025     $ 5,972  
 
The following table summarizes our stock option activity for the nine months ended March 31, 2012 (in thousands):


   
Number
of
Shares
   
Weighted
Average
Exercise
Price
 
Balance of June 30, 2011
    6,416     $ 4.78  
Options granted
    1,581       11.64  
Options exercised
    (885 )     6.73  
Options forfeited
    (702 )     8.92  
Balance at March 31, 2012
    6,410     $ 5.75  

The accounting grant date for employee stock options with performance obligations is the date on which the performance goals have been defined and a mutual understanding of the terms has been reached. Generally options with performance obligations vest over a four year period, with the goals set and agreed upon each year. Therefore, the table above does not include 1,361,251 performance options granted in current and prior fiscal years for which the performance criteria had not been established as of March 31, 2012.
 
At March 31, 2012, 3,915,609 shares were available for grant under the company's 2004 Equity Incentive Award Plan.
 
Employee Stock Purchase Plan. Sales under the Employee Stock Purchase Plan (“Purchase Plan”) in the nine month periods ended March 31, 2012 and 2011 were 125,945 and 137,492 shares of common stock at an average price of $2.68 and $1.97, respectively. Shares available for future purchase under the Purchase Plan were 510,585 at March 31, 2012.

Common Stock and Additional Paid-In Capital. Additional paid-in capital increased by $14,317,000 during the nine months ended March 31, 2012 as a result of the issuance of common stock upon exercise of stock options of $5,955,000, the issuance of common stock under the Employee Stock Purchase Plan of $338,000 and share-based compensation expense of $8,025,000.
 
Note 4 - Comprehensive Income (loss)
 
Comprehensive income (loss) includes net income (loss) and unrealized gains (losses) on marketable securities that are excluded from the results of operations. Our comprehensive incomes (losses) were as follows (in thousands):

   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Net income (loss)
  $ (12,823 )   $ (9,217 )   $ 28,892     $ (24,239 )
                                 
Change in net unrealized gains(losses) on available-for-sale securities
    7       1       21       4  
                                 
Comprehensive income (Loss)
  $ (12,816 )   $ (9,216 )   $ 28,913     $ (24,235 )

 
Note 5 – Fair Value Measurements and Marketable Securities
 
Our marketable securities are classified as “available-for-sale”. We include these investments in current assets and carry them at fair value. Unrealized gains and losses on available-for-sale securities are included in accumulated other income (loss). The amortized cost of debt securities is adjusted for the amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Gains and losses on securities sold are recorded based on the specific identification method and are included in interest expense and other income (expense), net in the statement of operations.
 
Management assesses whether declines in the fair value of marketable securities are other than temporary. If the decline is judged to be other than temporary, the cost basis of the individual security is written down to fair value and the amount of the write down is included in the statement of operations. In determining whether a decline is other than temporary, management considers various factors including the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. To date we have not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.
 
The fair value of our financial assets and liabilities is determined by using three levels of input which are defined as follows:
 
Level 1 - Quoted prices in active markets for identical assets or liabilities.
 
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our short-term investments primarily utilize broker quotes in markets with infrequent transactions for valuation of these securities.
 
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
We utilize the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The following is a summary of our available-for-sale securities at March 31, 2012 and June 30, 2011, respectively (in thousands):

As of March 31, 2012
 
Cost Basis
   
Unrealized Gain
   
Unrealized Loss
   
Estimated Fair Value
 
Money market funds
  $ 50,152       -       -      $ 50,152  
Government agency securities
    1,000       -       -       1,000  
US agency securities – FDIC insured
    494       -       -       494  
      51,646       -       -       51,646  
Less cash equivalents
    (50,152 )     -       -       (50,152 )
Total marketable securities
  $ 1,494       -       -      $ 1,494  
 

As of June 30, 2011
 
Cost Basis
   
Unrealized Gain
   
Unrealized Loss
   
Estimated Fair Value
 
Money market funds
  $ 26,979     $ -     $ -     $ 26,979  
Government agency securities
    16,014       11       -       16,025  
US agency securities – FDIC insured
    8,579       -       (32 )     8,547  
      51,572       11       (32 )     51,551  
Less cash equivalents
    (26,979 )     -       -       (26,979 )
Total marketable securities
  $ 24,593     $ 11     $ (32 )   $ 24,572  

At March 31, 2012, our marketable securities had the following remaining contractual maturities (in thousands):

   
Amortized Cost
   
Estimated Fair Value
 
Less than one year
  $ 1,494     $ 1,494  

The following table sets forth the basis of fair value measurements for our available-for-sale securities as of March 31, 2012 and June 30, 2011 (in thousands):

   
Estimated Fair Value as of
   
Basis of Fair Value Measurements
 
   
March 31, 2012
   
Level 1
   
Level 2
   
Level 3
 
Money market funds
  $ 50,152     $ 50,152     $  -     $ -  
Government agency securities
    1,000        -       1,000       -  
US agency securities – FDIC Insured
    494       -       494       -  
Total cash equivalents and marketable securities
  $ 51,646     $ 50,152     $ 1,494     $ -  

   
Estimated Fair Value as of
   
Basis of Fair Value Measurements
 
   
June 30, 2011
   
Level 1
   
Level 2
   
Level 3
 
Money market funds
  $ 26,979     $ 26,979     $ -     $ -  
Government agency securities
    16,025       -       16,025       -  
US agency securities – FDIC Insured
    8,547       -       8,547       -  
Total cash equivalents and marketable securities
  $ 51,551     $ 26,979     $ 24,572     $ -  

Note 6 – Agreements

Collaboration and License Agreement with Janssen Biotech, Inc (Janssen). In December 2011, we entered into a worldwide collaboration with Janssen, one of the Janssen Pharmaceutical Companies of Johnson & Johnson to develop and commercialize PCI-32765, a novel, oral, Bruton’s Tyrosine Kinase (BTK) inhibitor for oncology and other indications, excluding inflammation and immune mediated conditions, in the US and outside the US (the License Territory). The collaboration provides Janssen with a co-exclusive license of the underlying technology, which has no fixed expiration and payments by Janssen to us of a $150,000,000 non-refundable upfront payment upon execution, as well as milestone payments of up to $825,000,000 based upon continued development progress ($250,000,000), regulatory progress ($225,000,000) and approval of the product in both the US and the License Territory ($350,000,000). The agreement also includes a cost sharing arrangement for associated development activities, whereby Janssen is responsible for approximately 60% of development costs and we are responsible for the remaining 40% of associated costs. The agreement also includes a 50/50 net profit sharing arrangement for the commercialization of any resulting products from the collaboration. Both parties are responsible for the development, manufacturing and marketing of any products resulting from this agreement, with Janssen being the responsible party for commercialization in the License Territory and the parties co-commercializing with us leading the efforts in the US.  We continue to work with Janssen on protocols and the design, schedules and timing of trials.
 

In accordance with ASU No. 2009-13 (and as incorporated into ASC Topic 605-25), we identified all of the deliverables at the inception of the agreement. The significant deliverables were determined to be the license, committee services, development services and commercialization services. The commercialization services represent a contingent deliverable for which there is not a significant incremental discount.

We have determined that the license represents a separate unit of accounting as the license, which includes rights to the underlying technologies for PCI-32765, has standalone value apart from the committee and development services because the development, manufacturing and commercialization rights conveyed would permit JBI to perform all efforts necessary to bring the compound to commercialization and begin selling the drug upon regulatory approval.    We have also determined that the committee and development services each represent individual units of accounting as they have standalone value from each other.  We determined our best estimate of selling prices for the license unit of accounting, based on the income approach as defined in ASC 820-10-35-32. This measurement is based on the value indicated by current estimates about those future amounts and reflects management determined estimates and assumptions. These estimates and assumptions include, but are not limited  to, how a market participant would use the license, estimated market opportunity and expected market share and assumed royalty rates that would be paid for sales resulting from products developed using the license, similar arrangements entered into by third parties and entity-specific factors such as the terms of our previous collaborative agreement, our pricing practices and pricing objectives, the likelihood that clinical trials will be successful, the likelihood that regulatory approval will be received and that the products will become commercialized and the markets served. These estimates and assumptions led to an expected future cash flow which was discounted based on estimated weighted average cost of capital of 12% and royalty rates ranging from 30% to 40%. We also determined our best estimate of selling prices for the committee and development services, based on the nature of the services to be performed and estimates of the associated effort as well as estimated market rates for similar services. The arrangement consideration of $150,000,000 was allocated to the units of accounting based on the relative selling price method.

The clinical, regulatory and approval milestones represent non-refundable amounts that would be paid by Janssen to us if certain milestones are achieved in the future. We have elected to apply the guidance in ASC 605-28 to the milestones. These milestones, if achieved, are substantive as they relate solely to past performance, are commensurate with estimated enhancement of value associated with the achievement of each milestone as a result of our performance, which are reasonable relative to the other deliverables and terms of the arrangement, and are unrelated to the delivery of any further elements under the arrangement.

Of the $150,000,000 upfront payment received, $70,605,000 has been allocated to the licenses, $14,982,000 to the committee services and $64,413,000 to the development services. We have recognized license revenue upon execution of the arrangement as the associated unit of accounting had been delivered pursuant to the terms of the agreement. At inception, the $14,982,000 and $64,413,000 allocated to committee and development services, respectively, will be recognized as revenue as the related services are provided over the estimated service periods of 17 years and 9 years, which are equivalent to the estimated remaining life of the underlying technology and the estimated remaining development period, respectively. We have recognized development costs as a component of research and development expense of $22,578,000 and $24,487,000 for the three and nine months ended March 31, 2012, respectively, offset by amounts to be received from Janssen under the cost sharing arrangement of $11,482,000 and $12,534,000 for the three and nine months ended March 31, 2012, respectively.  Additionally, we recorded a $51,000 reduction to general and administrative expense for the three and nine months ended March 31, 2012 for cost sharing related to certain marketing and patent costs.  Accounts receivable at March 31, 2012 included $12,585,000 due from Janssen in connection with the cost sharing arrangement.
 

As of March 31, 2012, $77,426,000 is included in deferred revenue related to the committee and development services, of which $69,369,000 is included in deferred revenue non-current.

Collaboration and License Agreement with Les Laboratoires Servier. In April 2009, we entered into a collaboration and license agreement with Les Laboratoires Servier ("Servier") to research, develop and commercialize abexinostat (PCI-24781), an orally active, novel, small molecule inhibitor of pan-HDAC enzymes. Under the terms of the agreement, Servier acquired the exclusive right to develop and commercialize the pan-HDAC inhibitor product worldwide except for the United States and will pay development and regulatory milestones and a royalty to us on sales outside of the United States. Servier is solely responsible for conducting and paying for all development activities outside the United States. We will continue to own all rights within the United States.

In May 2009, we received an upfront payment from Servier of $11,000,000 ($10,450,000 net of withholding taxes) and we received an additional $4,000,000 for research collaboration paid over a twenty-four month period through April 2011. The revenue related to these payments was recognized over the two-year research period, which ended in April 2011. Total revenue recognized in the three and nine months ended March 31, 2011 was $2,059,000 and $6,847,000, respectively.

Under this agreement with Servier, we are also eligible to receive up to $24,500,000 in milestone payments upon achievement of pre-specified events; including up to $10,500,000 million for the achievement of clinical development milestones ($7,000,000 of which was paid to us, in advance, during April 2011), up to $5,000,000 for the achievement of regulatory progress and up to $9,000,000 for regulatory approval of the pan HDAC product in major jurisdictions.  In addition, Servier agreed to make royalty payments on Net Sales of the licensed product as defined in the agreement.  In October 2011, the milestone related to the $7,000,000 advance payment was reached and we recognized the amount as revenue.

Celera Corporation. In April 2006, we acquired multiple small molecule drug candidates for the treatment of cancer and other diseases from Celera Genomics, an Applera Corporation (now Celera Corporation – a subsidiary of Quest Diagnostics Incorporated). Future milestone payments under the agreement, as amended, could total as much as $97,000,000, although we currently cannot predict if or when any of the milestones will be achieved. Approximately two-thirds of the milestone payments relate to our HDAC Inhibitor program and approximately one-third relates to our Factor VIIa program. Approximately 90% of the potential future milestone payments would be paid to Celera after obtaining regulatory approvals in various countries. There are no milestone payments related to our BTK program. In addition to the milestone payments, Celera will be entitled to royalty payments based on annual sales of drugs commercialized from our HDAC Inhibitor, Factor VIIa and certain BTK Inhibitor programs.

Note 7 – Income Taxes
 
The income tax provision includes U.S. federal, state and local, and foreign income taxes and is based on the application of a forecasted annual income tax rate applied to the year-to-date pre-tax income (loss). In determining the estimated annual effective income tax rate, we analyze various factors including projections of our annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carryforwards and available tax planning alternatives. Discrete items including the effect of changes in tax laws, tax rates and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments are reflected in the period in which they occur.
 

During the nine month period, we completed our analysis of the net operating loss limitation provisions of the IRC Section 382 analysis. We determined that our net operating loss and tax credit carry forwards as of June 30, 2011 are $150,185,000 and $69,769,000, respectively, which were previously presented in our Fiscal Year 2011 10-K as $180,393,000 and $121,440,000. As we maintained a full valuation allowance against the deferred tax assets, the update did not affect the Condensed Consolidated Balance Sheet, the Condensed Consolidated Statement of Operations or the Condensed Consolidated Statement of Cash Flows.

For the nine months ended March 31, 2012, we recorded income tax expense of $568,000 that represents an estimated annual effective tax rate of approximately 2%. The difference between the estimated annual effective tax rate and the federal statutory rate of 35% was primarily attributable to the reversal of valuation allowance through the use of federal net operating loss carryovers that are not subject to any use limitations.

For the nine months ended March 31, 2011, we did not record an income tax expense due to our history of operating losses.

We are required to reduce our deferred tax assets by a valuation allowance if it is more likely than not that some or all of our deferred tax assets will not be realized. Management must use judgment in assessing the potential need for a valuation allowance, which requires an evaluation of both negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. In determining the need for and amount of the valuation allowance, if any, we assess the likelihood that we will be able to recover our deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. As a result of historical cumulative losses, we determined that, based on all available evidence, there was substantial uncertainty as to whether we will recover recorded net deferred taxes in future periods. Accordingly, we recorded a valuation allowance against all of our net deferred tax assets at both June 30, 2011 and March 31, 2012. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Should the actual timing differences differ from our estimates, the amount of our valuation allowance could be materially impacted.
 
As of June 30, 2011 and March 31, 2012, we had unrecognized tax positions that would impact our effective tax rate of approximately $1,726,000. We do not expect any material change to the unrecognized tax benefits during the next twelve months.
 
In the year ended June 30, 2009, we recorded a $550,000 income tax provision as result of withholding taxes paid on the $11.0 million upfront licensing payment received from Servier. In the quarter ended December 31, 2009, we recorded a $550,000 income tax receivable related to a tax credit resulting from a December 2009 tax treaty revision enacted between France and the United States that eliminated withholding taxes related to licensing agreements and provided that prior withholding taxes may be reclaimed. In the quarter ended March 31, 2012, we received the $550,000 payment.
 
We may from time to time be assessed interest or penalties by major tax jurisdictions, although there have been no such assessments historically. In the event we receive an assessment for interest and/or penalties, it would be classified in the financial statements as income tax expense. All tax years in major jurisdictions remain open due to the taxing authorities’ ability to adjust operating loss carry forwards.
 
 
Note 8 – Related Party Transaction
 
During the nine months ended March 31, 2012, we paid Dr. Gwen Fyfe, a former member of our Board of Directors, approximately $89,000 for consulting services under a Consulting Agreement entered into prior to Dr. Fyfe joining our Board in December 2010. In November 2011, we entered into an amendment (the “Amendment”) to our Consulting Agreement with Dr. Fyfe. The Amendment provided that Dr. Fyfe would receive a lump sum of $50,000 and that she will continue to provide limited consulting services to us for a period of two years. In addition, the options to purchase 330,000 shares of our common stock previously granted to Dr. Fyfe in connection with her consulting services continued to vest through November 30, 2011 and shall remain exercisable for a period of two years following the date of the Amendment. Dr. Fyfe did not stand for reelection at our December 15, 2011 Annual Meeting of Stockholders. Options granted to Dr. Fyfe upon her initial election to the Board continued to vest through December 15, 2011; all such vested options and all additional options received by Dr. Fyfe in connection with her Board service shall remain exercisable for a period of three years from this date. Payment of the $50,000 lump sum occurred in November 2011.
 
Note 9 – Therapeutic Discovery Project Tax Credit

During the quarter ended December 31, 2010 we were awarded a Therapeutic Discovery Project Tax Credit (“TDP”) under Section 48D of the Internal Revenue Code for each of the our submitted programs (PCI-32765 BTK Inhibitor, abexinostat HDAC Inhibitor and PCI-27483 Factor VIIa Inhibitor). We received the maximum available pro rata government allocation under TDP, which totaled to $586,000 net of related expenses. This amount was credited in full against research and development expenses during the quarter ended December 31, 2010.

Note 10 – Commitments and Contingencies

Facilities Lease:

     In February 2012, we entered into an amendment of the lease agreement for our current facilities at  E. Arques Ave. (64,776 sq. ft), which adds the 997 E. Arques Ave. building (15,000 sq. ft) to the agreement, also expiring November 2017. The amendment includes an abatement of the monthly rent of the additional facility for the first 7 months, limited to $126,000. The amendment removes the relocation option.

     We recognize rental expense on the facilities on a straight line basis over the lease term. Differences between the straight line rent expense and rent payments are classified as deferred rent liability on the balance sheet. Our future minimum lease payments at March 31, 2012 were as follows:

   
Operating
Lease Commitments
 
 
 
1-3 years
  $ 3,435  
4-5 years
    2,684  
More than 5 years
    931  
Total 
  $ 7,050  
 
Legal Proceedings:

The Company may be involved, from time to time, in legal proceedings and claims arising in the ordinary course of its business. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. The Company accrues amounts, to the extent they can be reasonably estimated, that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company believes will result in a probable loss. While there can be no assurances as to the ultimate outcome of any legal proceeding or other loss contingency involving the Company, management does not believe any pending matter will be resolved in a manner that would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
 

Note 11 – Recent Accounting Pronouncements

 In June 2011 and December 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, as amended by ASU No. 2011-12, which eliminates the presentation options currently in Accounting Standards Codification (“ASC”) Topic 220 and requires the presentation of other comprehensive income in either a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-05 and ASU no. 2011-12 are effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2011 and requires retrospective application. As this accounting standard only requires enhanced disclosure, the adoption of this standard will not impact our financial position or results of operations.
 

Item 2.                         Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our interim financial statements and the related notes appearing at the beginning of this report. The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended June 30, 2011 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 13, 2011.

 The following discussion contains forward-looking statements that involve risks and uncertainties. These statements relate to future events, such as our future clinical and product development, financial performance and regulatory review of our product candidates. Our actual results could differ materially from any future performance suggested in this report as a result of various factors, including those discussed elsewhere in this report, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011 and in our other Securities and Exchange Commission reports and filings. All forward-looking statements are based on information currently available to Pharmacyclics; and we assume no obligation to update such forward-looking statements. Stockholders are cautioned not to place undue reliance on such statements.

Company Overview
 
We are a clinical-stage biopharmaceutical company focused on discovering and developing innovative small-molecule drugs for the treatment of cancer and immune-mediated diseases. Our mission and goal is to build a viable biopharmaceutical company that commercializes novel therapies intended to improve quality of life, increase duration of life and resolve serious unmet medical healthcare needs. We identify promising product candidates using our scientific development expertise, develop our products in a rapid, cost-efficient manner and pursue commercialization and/or development partners when and where appropriate.
 
Presently, we have three product candidates in clinical development and several molecules in preclinical lead optimization. To date, nearly all of our resources have been dedicated to the research and development of our products, and we have not generated any commercial revenues from the sale of our products. We do not anticipate the generation of any product commercial revenues until we receive the necessary regulatory and marketing approvals to launch one of our products.
 
We were in the development stage at June 30, 2011, as defined in Financial Accounting Standards Board Accounting Standards Codification Topic 915, “Development Stage Entities.” During the nine months ended March 31, 2012, we exited the development stage with the signing of our first significant collaboration with Janssen Biotech, Inc. (Janssen) (See Note 6 to the Condensed Consolidated Financial Statements), from which we received our first significant revenue from principal operations, reflective that we are no longer in the development stage.
 
The process of developing and commercializing our products requires significant research and development, preclinical testing, clinical trials and manufacturing arrangements as well as regulatory and marketing approvals. These activities, together with our general and administrative expenses, are expected to result in significant operating losses until the commercialization of our products, or partner collaborations, generate sufficient revenues to cover our expenses. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Sustaining profitability depends upon our ability to successfully complete the development of our products, obtain required regulatory approvals and successfully commercialize our products.
 
 
ibrutinib (formerly PCI-32765) - Bruton’s Tyrosine Kinase (BTK) Inhibitor for Oncology
 
The USAN Council has adopted the nonproprietary name “ibrutinib” for the product candidate formerly known as PCI-32765. Ibrutinib is an orally active selective irreversible inhibitor of Bruton’s Tyrosine Kinase (BTK) that we are developing for the treatment of patients with B-cell malignancies (lymphoma or leukemias). B-cell maturation is mediated by B-cell receptor (BCR) signal transduction and BTK is an essential part of the BCR signaling pathway. Recently, BTK has been demonstrated to affect a number of vital growth and survival processes in cancerous B-cells.
 
A Phase Ib/II multicenter clinical trial (PCYC-1102-CA) of single agent ibrutinib (PCYC-1102) was initiated in May of 2010 in symptomatic chronic lymphocytic leukemia (CLL)/small lymphocytic lymphoma (SLL) patients with either relapsed/ refractory or treatment-naïve disease. Patient enrollment is complete with 117 patients treated. The results of 61 patients with relapsed/refractory disease treated with ibrutinib were presented at the 2011 American Society of Hematology (ASH) Annual Meeting in December 2011. With a median follow-up of 12.6 months in the 420mg/day cohort and 9.3 months in the 840mg/day cohort, the overall response rate (ORR), including partial response and complete response, for the 420mg dose level was 67% and for the 840mg dose 68%.  The estimated 12 month progression free survival for the pooled cohorts was 86%. The safety profile of Ibrutinib was consistent with previous reports of this study. Enrollment to this study has been completed, and follow-up is ongoing. Overall these data support Phase III evaluation of ibrutinib in relapsed or refractory as a single agent. The Phase III study is described below.
 
We intend to report the first analysis of 31 elderly treatment-naïve patients who received single agent ibrutinib as initial treatment at the 2012 American Society of Clinical Oncology (ASCO) Annual Meeting June 2012. We are initiating the process for obtaining advice from various health authorities within the US and EU over the next few months on the registration strategy for the frontline elderly patient population and we anticipate starting Phase III registration trials by the end of 2012.
 
The ongoing Phase Ib/II program for ibrutinib in CLL/SLL also includes the following clinical studies:
 
 
·
PCYC-1108-CA: A Phase Ib, multicenter, open-label, study of ibrutinib, in combination with intensive immune chemotherapy (FCR or BR)* in subjects with relapsed or refractory CLL or SLL lymphoma. This trial has completed enrollment in the BR arm (n=30); the FCR arm was terminated early due to change in development priorities. *(FCR = fludarabine, cyclophosphamide and rituximab; BR = bendamustine and rituximab).
 
 
·
PCYC-1109-CA: A Phase Ib/II study of ibrutinib and ofatumumab in subjects with relapsed or refractory CLL or SLL. The study is evaluating three separate sequences of the combination in three cohorts. The first two cohorts, enrolling a total of 47 patients, have completed enrollment. Enrollment to a third cohort is ongoing.
 
The ongoing Phase Ib/II program for ibrutinib also includes the following clinical studies in lymphoma and myeloma:
 
 
·
PCYC-1104-CA: A Phase II study of ibrutinib in patients with relapsed or refractory mantle cell lymphoma (MCL) has completed enrollment of 115 patients that included cohorts of subjects either previously treated with bortezomib or naïve to bortezomib treatment. Preliminary results from another ongoing Phase II were also presented at the 2011 ASH meeting. Fifty-one patients (31 patients had bortezomib-naive disease, 20 patients had previously received bortezomib) had post-baseline tumor assessments and were thus evaluable for response. The ORR was 69% (35/51 patients). The ORR was similar in bortezomib-naive and bortezomib-exposed patients (71% and 65%, respectively). At the time of this analysis, 31 of 35 (89%) responding patients have ongoing responses with the median follow-up of 3.7 months.
 
 
·
PCYC-1106-CA: A multicenter, open-label, Phase II study of ibrutinib in subjects with relapsed or refractory diffuse large B-cell lymphoma (DLBCL). This study is designed to assess the activity of ibrutinib in two genetically distinct subtypes of DLBCL, the activated B-cell (ABC) subtype and the germinal center (GC) subtype. The PCYC-1106 trial is activated in several US sites and, as of March 31, 2012, 57 of 60 evaluable patients have enrolled.
 
 
 
·
PCYC-1111-CA: A Phase II study of ibrutinib in subjects with relapsed or refractory myeloma (MM).We have opened this Phase II study and plan to enroll 35 patients. Pre-clinical studies, both internally as well as through external collaborations, have suggested a potentially vital role of BTK in both malignant plasma cells and the microenvironment. Five subjects have been enrolled as of March 31, 2012.
 
The ibrutinib clinical trials program is anticipated to expand with initiation of Phase lb/II studies in follicular lymphoma, as well as combination treatment studies in DLBCL.
 
We plan to initiate the first pivotal Phase III study in CLL/SLL by mid-year 2012. The Phase III randomized controlled study will compare ibrutinib to ofatumamab in relapsed or refractory CLL/SLL.  The study is anticipated to enroll 350 patients that will be randomized 1:1. The trial is designed to demonstrate superiority of ibrutinib with respect to a progression free survival endpoint.
 
In August 2011, we entered into a five-year Cooperative Research and Development Agreement with the National Cancer Institute (NCI) to collaborate on the development of ibrutinib. Under the Agreement, the NCI's Division of Cancer Treatment and Diagnosis plans to sponsor Phase I through Phase III trials of ibrutinib in various hematologic malignancies.  In addition, we are participating in several other investigator sponsored trials.
 
 
PCI-27483 - Factor VIIa Inhibitor
 
PCI-27483 is a potent and selective first-in-human small molecule inhibitor of coagulation (clotting) Factor VIIa. PCI-27483 suppresses the active form of Factor VII (FVIIa) that arises from interaction with the cell surface membrane protein known as tissue factor (TF). The FVIIa: TF complex is found at elevated levels in cancers of the pancreas, stomach, colon and lung. The activity of this complex triggers a host of patho-physiologic processes that facilitate tumor blood vessel formation (angiogenesis), growth and metastases. In pancreatic cancer patients, elevated levels of the FVIIa: TF complex correlates with an increased propensity to develop thromboses, also known as blood clots. Studies in laboratory animals indicate that PCI-27483 inhibits the growth of tumors that express TF.
 
We have completed Phase I testing of Factor VIIa Inhibitor PCI-27483 in healthy volunteers. In this study, PCI-27483 caused no adverse events, and we were able to establish the International Normalized Ratio (INR) as a pharmacodynamic marker.
 
A Phase II study is enrolling and patients are being randomized to receive either gemcitabine alone or gemcitabine plus PCI-27483 (1.2 mg/kg twice daily). The objectives of this phase of the study are to: a) assess the safety of Pharmacyclics FVIIa Inhibitor PCI-27483 at a pharmacologically active dose level; b) to assess potential inhibition of disease progression; and c) obtain initial information of the effects on the incidence of thromboembolic events.
 
 
Abexinostat (formerly PCI-24781) - Histone Deacetylase (HDAC) Inhibitor
 
Abexinostat (formerly PCI-24781) is an orally-bioavailable histone deacetylase inhibitor that is currently in multiple clinical trials. Histone deacetylases are cellular enzymes whose functions include turning gene expression off and on. Abexinostat targets histone deacetylase (HDAC) enzymes and inhibits their function. We have shown that abexinostat impacts the tumor cells by multiple mechanisms including a re-expression of tumor suppressor genes, disruption of DNA repair mechanisms, cell cycle inhibition and the generation of reactive oxygen species. Previous clinical trials have demonstrated that our HDAC Inhibitor abexinostat has favorable systemic elimination properties when dosed orally, and inhibits the target enzymes.
 
 
We are currently supporting an investigator sponsored Phase I/II trial in sarcoma patients (in combination with doxorubicin, an anti tumor agent) and a Phase I/II trial testing single agent abexinostat in patients with relapsed or refractory Non-Hodgkin's lymphoma. In addition, a Phase I study to evaluate the tolerability, efficacy, and safety of abexinostat in combination with the tyrosine kinase inhibitor pazopanib in patients with metastatic solid tumors has been initiated and is expected to begin enrollment in Q2 of calendar 2012. The Phase I portion of the sarcoma study, which evaluated safety of the combination, has completed enrollment and the recommended Phase II dose has been established. The Phase II portion will evaluate the efficacy of the combination in patients who have previously progressed on doxorubicin alone. In the Non-Hodgkin’s lymphoma trial, the Phase II portion has completed enrollment in follicular and mantle cell lymphomas with a total of 28 patients, and data are being analyzed. Responses have been observed in both of these trials, and the complete data will be presented at international conferences later this year. The safety profile of abexinostat in both these trials is consistent with the previous trials. It has been studied in over 250 patients treated in clinical trials in the US and EU thus far, and the main dose-limiting toxicity is a rapidly reversible decrease in platelets (blood cells necessary for clotting), which has been successfully managed using novel dose scheduling strategies that we have developed and tested in the clinic. Overall abexinostat has demonstrated good safety with clinical benefit in multiple clinical trials.
 
We are subject to risks common to pharmaceutical companies developing products, including risks inherent in our research, development and commercialization efforts, preclinical testing, clinical trials, uncertainty of regulatory and marketing approvals, uncertainty of market acceptance of our products, history of and expectation of future operating losses, reliance on collaborative partners, enforcement of patent and proprietary rights, and the need for future capital. In order for a product to be commercialized, we must conduct preclinical tests and clinical trials, demonstrate efficacy and safety of our product candidates to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and marketing arrangements, build a U.S. commercial capability, obtain market acceptance and, in many cases, obtain adequate coverage of and reimbursement for our products from government and private insurers. We cannot provide assurance that we will generate revenues or achieve and sustain profitability in the future.
 
 
Results of Operations

Revenue
   
Three Months Ended March 31
 (in thousands)
   
Percent Change
   
Nine Months Ended March 31,
(in thousands)
   
Percent Change
 
   
2012
   
2011
         
2012
   
2011
       
                                     
License and milestone revenue
  $ -     $ 1,356       (100 )%   $ 77,605     $ 4,129       1780 %
Collaboration services revenue
    1,927       703       174 %     2,262       2,718       (17 )%
Total revenue
  $ 1,927     $ 2,059       (6 )%   $ 79,867     $ 6,847       1066 %
 
In December 2011, we received an upfront payment of $150,000,000 from Janssen under the Collaboration and License agreement. The revenue related to the payment was allocated $70,605,000 to the licenses, $14,982,000 to the committee services and $64,413,000 to the development services. Total revenue related to the Janssen agreement recognized in the three and nine months ended March 31, 2012 was $1,789,000 and $72,574,000, respectively, of which $70,605,000 represents the revenue associated with the licenses, $ 220,000 and $278,000, respectively, represent the amortization of the committee services and $1,569,000 and $1,691,000, respectively, represent the amortization of the development services. As of March 31, 2012, approximately $77,426,000 is included in deferred revenue related to the committee and development services, of which $69,369,000 is included in deferred revenue-non-current. The $14,982,000 and $64,413,000 allocated to committee and development services, respectively, will be recognized as revenue as the related services are provided over the estimated service periods of 17 years and 9 years, which are equivalent to the estimated remaining life of the underlying technology and the estimated remaining development period, respectively. We have recognized development costs as a component of research and development expense and reimbursements for development services under the cost-sharing arrangement as an offset to research and development expense, upon delivery of the related services when expenses have been incurred and reimbursements have been earned.
 

In May 2009, we received an upfront payment of $11,000,000 ($10,450,000 net of withholding taxes) from Servier and we received an additional $4,000,000 for research collaboration paid over a twenty-four month period through April 2011. The revenue related to these payments was recognized over the two-year research period, which ended in April 2011. Total revenue related to the Servier agreement recognized in the three and nine months ended March 31, 2011 was $2,059,000 and $6,847,000, respectively, of which $1,356,000 and $4,129,000, respectively, represent the amortization of the $11,000,000 upfront payment. We also received a $7,000,000 advance development milestone payment in April 2011. In October 2011, the related milestone was reached and we recognized the $7,000,000 as revenue in the nine months ended March 31, 2012.

Research and Development

   
Three Months Ended March 31,
(in thousands)
   
Percent Change
   
Nine Months Ended March 31,
(in thousands)
   
Percent Change
 
   
2012
   
2011
         
2012
   
2011
       
                                     
Research and development expenses
  $ 15,828     $ 8,649       83 %   $ 39,152     $ 24,607       59 %

The increase of 83% or $7,179,000 in research and development costs for the three months ended March 31, 2012, as compared with the three months ended March 31, 2011, is primarily due to a $11,866,000 increase in third party clinical trial costs largely attributable to purchases of comparator drugs and other supplies, fees related to increased enrollment and other costs associated with expansion of our Btk program and a $2,088,000 increase in payroll and related expenses due to increased personnel.   Additionally, there was a $1,343,000 increase in consulting and other outside services, a $1,258,000 increase in drug manufacturing charges primarily related to our BTK program, a $1,481,000 increase in stock compensation expense, a $235,000 increase in travel related expenses and a $217,000 increase in facility and IT related expenses.  Partially offsetting these increases was a $11,482,000 reduction to research and development costs attributable to the Janssen development cost share for the quarter ended March 31, 2012 (See Note 6 to the Condensed Consolidated Financial Statements).
 
 
The increase of 59% or $14,545,000 in research and development costs for the nine months ended March 31, 2012, as compared with the nine months ended March 31, 2011, is primarily due to a $15,012,000  increase in third party clinical trial costs largely attributable to purchases of drugs and supplies, fees related to increased enrollment and other costs associated with expansion of our Btk program and a $4,774,000 increase in payroll and related expenses due to increased personnel.  Additionally, there was a $2,839,000 increase in consulting and other outside services, a $2,023,000 increase in drug manufacturing charges related primarily to our BTK program, a $1,760,000 increase in stock compensation expense and a $596,000 increase in rent expense attributable to a lease amendment and space expansion.   Partially offsetting these increases was a $12,534,000 reduction to research and development costs attributable to the Janssen development cost share for the nine months ended March 31, 2012.

 Average research and development headcount increased from 52 to 87 in the nine months ended March 31, 2011 and 2012, respectively. We expect the growth in research and development spending to continue through the end of fiscal 2012.

Research and development costs are identified as either directly attributed to one of our research and development programs or as an indirect cost, with only direct costs being tracked by specific program. Direct costs consist of personnel costs directly associated with a program, preclinical study costs, clinical trial costs, and related clinical drug and device development and manufacturing costs, drug formulation costs, contract services and other research expenditures. Indirect costs consist of personnel costs not directly associated with a program, overhead and facility costs and other support service expenses. The following table summarizes our principal product development initiatives, including the related stages of development for each product, the direct costs attributable to each product and total indirect costs for each respective period. For a discussion of the risks and uncertainties associated with the timing and cost of completing a product development phase, see the Risk Factors discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011.
 
Direct costs by program and indirect costs are as follows (in thousands):
 
Program   Description   Phase of
Development
 
Related R&D Expenses
Three Months Ended
March 31,
   
Related R&D Expenses
Nine Months Ended
March 31,
 
 
2012
   
2011
   
2012
   
2011
 
                                 
BTK Inhibitors
 
Cancer/autoimmune
 
Phase II
  $ 10,621     $ 5,763     $ 25,746     $ 15,103  
                                         
HDAC Inhibitors
 
Cancer/autoimmune
 
Phase I/II
    380       492       934       1,738  
                                         
Factor VIIa Inhibitor
 
Cancer
 
Phase II
    417       586       1,614       1,418  
                                         
Total direct costs
            11,418       6,841       28,294       18,259  
Indirect costs
            4,410       1,808       10,858       6,348  
Total research and development expenses
      $ 15,828     $ 8,649     $ 39,152     $ 24,607  
 

General and Administrative

   
Three Months Ended
March 31,
 
(in thousands)
   
Percent
Change
   
Nine Months Ended
March 31,
 
(in thousands)
   
Percent
Change
 
   
2012
   
2011
         
2012
   
2011
       
                                     
General and administrative expenses
  $ 4,061     $ 2,692       51 %   $ 11,355     $ 6,619       72 %

General and administrative costs increased by 51% or $1,369,000 in the three months ended March 31, 2012 compared with the three months ended March 31, 2011 primarily due to a $508,000 increase in accounting costs, a $398,000 increase in payroll and related expenses, a $296,000 increase in patent costs in part due to work attributable to the Janssen collaboration, a $203,000 increase in consulting and other outside services, and a $141,000 increase in stock compensation expense, partially offset by a $304,000 decrease in legal expenses.

The increase of 72% or $4,736,000 in general and administrative costs for the nine months ended March 31, 2012 compared with the nine months ended March 31, 2011 is primarily due to a $1,552,000 increase in patent and legal costs in part due to work attributable to the Janssen collaboration, a $1,007,000 increase in payroll and related expenses due to increased personnel, a $930,000 increase in accounting and reporting costs, a $565,000 increase in consulting and other outside services, and a $293,000 increase in stock compensation expense. Average general and administrative headcount increased from 11 to 15 in the nine months ended March 2011 and 2012, respectively.

Interest Income and Other Expense
 
   
Three Months Ended
March 31,
 
(in thousands)
 
 
Percent
Change
   
Nine Months Ended
March 31,
 
(in thousands)
 
 
Percent
Change
 
   
2012
   
2011
       
2012
   
2011
     
                                 
Interest income
  $ 61     $ 64         $ 129     $ 139      
Other income (expense)
    (5 )     1           (29 )     1      
Interest income and other income (expense), net
  $ 56     $ 65  
(14
)%    $ 100     $ 140  
(29
)% 

The decrease in interest income and other expense, net in the three months ended March 31, 2012 compared with the three months ended March 31, 2011 is due to lower interest income on investments, offset by costs related to the disposal of equipment. The decrease in interest income and other expense, net in the nine months ended March 31, 2012 compared with the nine months ended March 31, 2011 is due to the mix of investments held and the loss on disposal of equipment and leasehold improvements.

Liquidity and Capital Resources

Our principal sources of working capital have been private and public equity financings as well as proceeds from collaborative research and development agreements and interest income.
 

As of March 31, 2012, we had $214,963,000 in cash, cash equivalents and marketable securities. Net cash provided by operating activities was $98,494,000 during the nine months ended March 31, 2012; an increase of $118,542,000 from the $ 20,048,000 used during the nine months ended March 31, 2011. The increase resulted primarily from net income of $28,892,000 as compared to the net loss of $24,239,000 from the nine months ended March 31, 2011, after adjusting for an increase of $2,053,000 in stock compensation expense, the increases in the change in accounts receivable of $13,007,000 largely due to a receivable at March 31, 2012 from Janssen for its share of research and development costs, and prepaid expenses and other assets of $1,019,000, offset by the increases in the change in accounts payable of $990,000 and $76,186,000 in deferred revenue, primarily related to the Janssen agreement (See Note 6 to the Condensed Consolidated Financial Statements).

Net cash provided by investing activities of $21,096,000 and used in investing activities of $28,153,000 in the nine months ended March 31, 2012 and 2011, respectively, consisted primarily of the net effect of purchases and maturities of marketable securities.

Net cash provided by financing activities of $6,122,000 and $1,707,000 for the nine months ended March 31, 2012 and 2011, respectively, resulted primarily from the exercise of stock options and sale of stock under our employee stock purchase plan.

In December 2011, we received a $150,000,000 upfront payment from our collaboration and license agreement with Janssen. In the future, we have the potential under the agreement to receive milestone payments of up to $825,000,000 for achieving certain clinical, regulatory and approval targets in both the US and License Territory. However, clinical development entails risks and we have no assurance as to whether or when the milestone targets might be achieved. See Note 6 to the Condensed Consolidated Financial Statements for additional information.

 In the year ended June 30, 2009, we recorded a $550,000 income tax provision as result of withholding taxes paid on the $11.0 million upfront licensing payment received from Servier. In the quarter ended December 31, 2009, we recorded a $550,000 income tax receivable related to a tax credit resulting from a December 2009 tax treaty revision enacted between France and the United States that eliminated withholding taxes related to licensing agreements and provided that prior withholding taxes may be reclaimed. In the quarter ended March 31, 2012, we received the $550,000 payment.

In April 2006, we acquired multiple small molecule drug candidates for the treatment of cancer and other diseases from Celera Genomics, an Applera Corporation business (now Celera Corporation – a subsidiary of Quest Diagnostics Incorporated). Future milestone payments under the agreement, as amended, could total as much as $97,000,000, although we currently cannot predict if or when any of the milestones will be achieved. Approximately two-thirds of the milestone payments relate to our HDAC Inhibitor program and approximately one-third relates to our Factor VIIa program. Approximately 90% of the potential future milestone payments would be paid to Celera after obtaining regulatory approval in various countries. There are no milestone payments related to our BTK program. In addition to the milestone payments, Celera will be entitled to royalty payments based on annual sales of drugs commercialized from our HDAC Inhibitor, Factor VIIa and certain BTK Inhibitor programs.

Based upon the current status of our product development plans and our collaboration with Janssen, we believe that our existing cash, cash equivalents and marketable securities will be adequate to satisfy our capital needs through at least the next twelve months. We expect research and development expenses, as a result of on-going and future clinical trials, to consume a large portion of our existing cash resources. Changes in our research and development plans or other changes affecting our operating expenses may affect actual future consumption of existing cash resources as well. Due to our extensive drug programs we may need to raise additional capital to fund our operations in the future. We may raise additional funds through the public or private sale of securities, bank debt, partnership collaboration or otherwise. If we are unable to secure additional funds, whether through sale of our securities, debt or partnership collaborations, we will have to delay, reduce the scope of or discontinue one or more of our product development programs. Our actual capital requirements will depend on many factors, including the following:
 

•       progress with preclinical studies and clinical trials;

•       the time and costs involved in obtaining regulatory approval;

•       continued progress of our research and development programs;

•       our ability to maintain and establish collaborative arrangements with third parties;

•       the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;

•       the amount and timing of capital equipment purchases; and

•       competing technological and market developments.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. The factors described above will impact our future capital requirements and the adequacy of our available funds. If we are required to raise additional funds, we cannot be certain that such additional funding will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be highly dilutive, or otherwise disadvantageous, to existing stockholders and debt financing, if available, may involve restrictive covenants. Collaborative arrangements, if necessary to raise additional funds, may require us to relinquish rights to certain of our technologies, products or marketing territories. Our failure to raise capital when needed and on acceptable terms, would require us to reduce our operating expenses and would limit our ability to respond to competitive pressures or unanticipated requirements to develop our product candidates and to continue operations, any of which would have a material adverse effect on our business, financial condition and results of operations.


Off-Balance Sheet Arrangements

None

Critical Accounting Policies, Estimates and Judgments

There have been no material changes in our critical accounting policies, estimates and judgments during the nine months ended March 31, 2012, compared with the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended June 30, 2011, except:
 
Unresolved Staff Comments
 
The Staff of the Securities and Exchange Commission (the “Staff”), as part of their review of issuers’ periodic reports, is currently reviewing our unaudited Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2011 (the “Staff Review”). We are presently in discussions with the Staff regarding our accounting treatment for our Collaboration and License Agreement (Janssen Collaboration) with Janssen Biotech, Inc. See Note 6 to the Condensed Consolidated Financial Statements for additional information.
 
The Staff is currently considering our accounting treatment for the $150,000,000 upfront payment received in the quarter ended December 31, 2011 as well as the accounting for the cost sharing component of the arrangement.  Based on status of the Staff’s Review and various communications with the Staff relating to our accounting for the Janssen Collaboration, it is our belief that the Staff has not yet completed their review and that further discussion with the Staff will be necessary to resolve the comments.
 
Should our further discussion with the Staff result in a change in the accounting treatment for the upfront payment and/or the cost sharing arrangement, it is possible that reported revenue, operating expenses, net income (loss) and earnings per share for the unaudited quarterly periods ended December 31, 2011 and March 31, 2012 could be restated. However, such a restatement would have no effect on our cash balance.  Additionally, a change in accounting treatment may also affect the timing and amount of future revenue and/or expense recognition.
 
Revenue Recognition

We recognize revenue when all four criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured. Revenue under our license and collaboration arrangements is recognized based on the performance requirements of the contract. Determinations of whether persuasive evidence of an arrangement exists and whether delivery has occurred or services have been rendered are based on management’s judgments regarding the fixed nature of the fees charged for deliverables and the collectability of those fees. Should changes in conditions cause management to determine that these criteria are not met for any new or modified transactions, revenue recognized could be adversely affected.
 

Our collaborations prior to July 1, 2010 with multiple elements were evaluated and divided into separate units of accounting if certain criteria were met, including whether the delivered element had stand-alone value and whether there was verifiable objective and reliable evidence (VSOE) of the fair value of the undelivered items. The consideration we received was combined and recognized as a single unit of accounting when criteria for separation were not met. Amounts received under such arrangements consisted of up-front collaboration payments, periodic milestone payments and payments for research activities. Up-front payments under agreements that included future performance requirements were recorded as deferred revenue and were recognized over the performance period. The performance period was estimated at the inception of the arrangement and is reevaluated at each reporting period. The reevaluation of the performance period may shorten or lengthen the period during which the deferred revenue is recognized. Revenues related to substantive, at-risk collaboration milestones are recognized upon achievement of the event specified in the underlying agreement. Revenues for research activities are recognized as the related research efforts are performed.

We recognize revenue related to collaboration and license arrangements in accordance with the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 605-25, “Revenue Recognition – Multiple-Element Arrangements,” or ASC Topic 605-25. Additionally, we adopted, effective July 1, 2010, Accounting Standards Update, or ASU, No. 2009-13, “Multiple Deliverable Revenue Arrangements,” or ASU 2009-13, which amended ASC Topic 605-25 and:
 
 
·
provided guidance on how deliverables in an arrangement should be separated and how the arrangement consideration should be allocated to the separate units of accounting;
 
·
required an entity to determine the selling price of a separate deliverable using a hierarchy of (i) vendor-specific objective evidence, or VSOE, (ii) third-party evidence, or TPE, or (iii) best estimate of selling price, or BESP; and
 
·
required the allocation of the arrangement consideration, at the inception of the arrangement, to the separate units of accounting based on relative fair value.

We evaluate all deliverables within an arrangement to determine whether or not they provide value on a stand-alone basis. Based on this evaluation, the deliverables are separated into units of accounting. The arrangement consideration that is fixed or determinable at the inception of the arrangement is allocated to the separate units of accounting based their relative selling prices. We may exercise significant judgment in determining whether a deliverable is a separate unit of accounting, as well as in estimating the selling prices of such unit of accounting.

To determine the selling price of a separate deliverable, we use the hierarchy as prescribed in ASC Topic 605-25 based on VSOE, TPE or BESP. VSOE is based on the price charged when the element is sold separately and is the price actually charged for that deliverable. TPE is determined based on third party evidence for a similar deliverable when sold separately and BESP is the price at which we would transact a sale if the elements of collaboration and license arrangements were sold on a stand-alone basis. We may not be able to establish VSOE or TPE for the deliverables within collaboration and license arrangements, as we do not have a history of entering into such arrangements or selling the individual deliverables within such arrangements separately. In addition, there may be significant differentiation in these arrangements, which indicates that comparable third party pricing may not be available. We may determine that the selling price for the deliverables within collaboration and license arrangements should be determined using BESP. The process for determining BESP involves significant judgment on our part and includes consideration of multiple factors such as estimated direct expenses and other costs, and available data.
 

For collaborations entered into after July 1, 2010, we have determined BESP for license units of accounting based on market conditions, similar arrangements entered into by third parties and entity-specific factors such as the terms of previous collaborative agreements, our pricing practices and pricing objectives, the likelihood that clinical trials will be successful, the likelihood that regulatory approval will be received and that the products will become commercialized. We have also determined BESP for services-related deliverables based on the nature of the services to be performed and estimates of the associated effort as well as estimated market rates for similar services.

For each unit of accounting identified within an arrangement, we determine the period over which the performance obligation occurs. Revenue is then recognized using either a proportional performance or straight-line method. We recognize revenue using the proportional performance method when the level of effort to complete our performance obligations under an arrangement can be reasonably. Direct labor hours or full time equivalents are typically used as the measurement of performance.

Effective July 1, 2010, we adopted ASU No. 2010-17, “Milestone Method of Revenue Recognition,” or ASU 2010-17, which provides guidance on revenue recognition using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in the period in which the milestone is achieved. The determination that a milestone is substantive is subject to considerable judgment.
 
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk

There was no significant change in our exposure to market risk since June 30, 2011.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures: As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the third fiscal quarter of 2012, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Vice President, Finance and Administration. Based upon that evaluation, our Chief Executive Officer and our Vice President, Finance and Administration have concluded that our disclosure controls and procedures are adequate and effective to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Vice President, Finance and Administration, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal controls over financial reporting: There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 
PART II. OTHER INFORMATION
 
Item 1.                         Legal Proceedings
 
The Company may be involved, from time to time, in legal proceedings and claims arising in the ordinary course of its business. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. The Company accrues amounts, to the extent they can be reasonably estimated, that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company believes will result in a probable loss. While there can be no assurances as to the ultimate outcome of any legal proceeding or other loss contingency involving the Company, management does not believe any pending matter will be resolved in a manner that would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
 
 
Item  1A.                      Risk Factors
 
The risk factors presented below update, and should be considered in addition to, the risk factors previously disclosed by us in Part I, Item 1A “ Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2011.
 
We have unresolved comments with respect to the SEC review of our Form 10-Q for the quarterly period ended December 31, 2011.
 
The Staff of the Securities and Exchange Commission (the “Staff”), as part of their review of issuers’ periodic reports, is currently reviewing our unaudited Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2011 (the “Staff Review”). We are presently in discussions with the Staff regarding our accounting treatment for our Collaboration and License Agreement (Janssen Collaboration) with Janssen Biotech, Inc. See Note 6 to the Condensed Consolidated Financial Statement for additional information.
 
The Staff is currently considering our accounting treatment for the $150,000,000 upfront payment received in the quarter ended December 31, 2011 as well as the accounting for the cost sharing component of the arrangement.  Based on status of the Staff’s Review and various communications with the Staff relating to our accounting for the Janssen Collaboration, it is our belief that the Staff has not yet completed their review and that further discussion with the Staff will be necessary to resolve the comments.
 
Should our further discussion with the Staff result in a change in the accounting treatment for the upfront payment and/or the cost sharing arrangement, it is possible that reported revenue, operating expenses, net income (loss) and earnings per share for the unaudited quarterly periods ended December 31, 2011 and March 31, 2012 could be restated. However, such a restatement would have no effect on our cash balance.  Additionally, a change in accounting treatment may also affect the timing and amount of future revenue and/or expense recognition.
 
We are dependent on our collaboration agreement with Janssen to further develop and commercialize our BTK inhibitor ibrutinib (formerly PCI-32765) globally. The failure to maintain this agreement or the failure of Janssen to perform its obligations under this agreement, could negatively impact our business.

Pursuant to the terms of our collaboration and licensing agreement with Janssen, we granted Janssen a license to co-develop (with us) our BTK Inhibitor ibrutinib globally, to co-commercialize it (with us) in the US, and to exclusively commercialize it outside of the US, in each case for all non-immunology related indications. Under a global development plan, each party will be responsible for conducting certain clinical trials, and the costs for those trials, together with other development costs, shall be shared 40% by us and 60% by Janssen. Upon approval, profits and losses will be shared 50%/50%.

We have limited control over the development or commercialization costs incurred by Janssen, and limited control over the implementation of development and commercial activities performed by them. Our costs and revenues are therefore tied to efforts made by ourselves and Janssen in developing and marketing our product. We have limited control over the amount of time and effort Janssen will devote to the development, manufacturing and commercialization of our BTK Inhibitor ibrutinib, and very limited control over the manner in which Janssen conducts its business with regard to obtaining regulatory and other approvals and commercializing the product, especially outside the US. Accordingly, our revenues and financial position may be adversely affected if Janssen does not dedicate sufficient time to the development and commercialization of the BTK Inhibitor ibrutinib, fails to obtain regulatory approvals, or otherwise fails to comply with its obligations under the agreement.
 
We are subject to a number of other risks associated with our dependence on our collaboration and license agreement with Janssen, including:
 
 
·
We and Janssen could disagree as to future development plans and Janssen may delay future clinical trials or stop a future clinical trial;
 
 
 
·
There may be disputes between us and Janssen, including disagreements regarding the collaboration and license agreement, that may result in (1) the delay of or failure to achieve regulatory and commercial objectives that would result in milestone or profit share payments, (2) the delay or termination of any future development or commercialization ibrutinib, and/or (3) costly litigation or arbitration that diverts our management’s attention and resources;
 
 
·
Janssen may not provide us with timely and accurate information regarding supply forecasts, which could adversely impact our ability to comply with our supply obligations to Janssen and manage our own inventory of ibrutinib, as well as our ability to generate accurate financial forecasts;
 
 
·
Business combinations or significant changes in Janssen's business strategy may adversely affect Janssen's ability or willingness to perform its obligations under our collaboration agreement;
 
 
·
If Janssen is unsuccessful performing clinical trials, or in obtaining regulatory approvals for or commercializing ibrutinib outside the US, we may not receive certain additional milestone payments or any profit payments under the collaboration and license agreement and our business prospects and financial results may be materially harmed;
 
 
·
Janssen may not comply with applicable regulatory requirements or guidelines with respect to developing or commercializing ibrutinib, which could adversely impact future development or sales of ibrutinib globally.
 
The collaboration and license agreement is subject to early termination, including through Janssen's right to terminate without cause upon advance notice to us. If the agreement is terminated early, we may not be able to find another collaborator for the further development and commercialization of ibrutinib on acceptable terms, or at all, and we may be unable to pursue continued development and commercialization of ibrutinib on our own.


If our collaboration is unsuccessful or is terminated by Janssen, we might not effectively develop and market our BTK Inhibitor ibrutinib.

Integral to the success of our collaboration with Janssen is our ability to timely achieve certain milestones and obtain regulatory approvals. Our collaboration with Janssen may be unsuccessful. Under the terms of our agreement, Janssen may terminate its agreement with us without cause and upon short notice. Termination of our agreement would hinder our efforts to effectively develop and commercialize the BTK Inhibitor ibrutinib. There would be a delay in getting our product to market. Such delay would likely result in higher costs for us and could adversely affect any progress we have made in clinical trials.

We may have difficulty finding another collaboration partner on favorable terms if Janssen terminates our agreement. We might not be able to raise capital on our own. We do not have sufficient skilled personnel to fully assist in global development or marketing endeavors. As we currently lack the resources to properly develop, market and commercialize the BTK Inhibitor ibrutinib, we may be unable to continue to develop the BTK Inhibitor ibrutinib without the continued assistance of Janssen.

 
Item 2.                          Unregistered Sales of Equity Securities and Use of Proceeds
 
Not Applicable.
 
 
Item  3.                         Defaults Upon Senior Securities
 
Not Applicable.
 
 
Item  4.                         Mine Safety Disclosures
 
Not Applicable.
 
 
Item  5.                         Other Information
 
Not Applicable.
 
 
Item  6.                         Exhibits
 
   
10.1
Seventh Amendment to Lease by and between the Company and Metropolitan Life Insurance Company, dated February 14, 2012.
   
10.2
Amendment No. 1 to the Collaboration Agreement by and between the Company and Les Laboratoires Servier and Institut De Recherches Internationales Servier, dated January 5, 2012.
   
31.1
Rule 13a-14(a)/15d-14(a) Certification of CEO.
   
31.2
Rule 13a-14(a)/15d-14(a) Certification of VP Finance & Administration.
   
32.1
Section 1350 Certifications of CEO and VP Finance & Administration.

 
Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
     
 
Pharmacyclics, Inc.
 
     
 
(Registrant)
 
       
Dated:  May 10, 2012
By: 
/s/ ROBERT W. DUGGAN                                                        
 


 
Robert W. Duggan
 
 
Chairman of the Board and Chief Executive Officer
 
       
Dated:  May 10, 2012
By: 
 /s/ RAINER M. ERDTMANN 
 
     
 
Rainer M. Erdtmann
 
 
Vice President, Finance & Administration and Secretary (Principal Financial and Accounting Officer)
 

EXHIBITS INDEX


Exhibit Number
 
Description
10.1
Seventh Amendment to Lease by and between the Company and Metropolitan Life Insurance Company, dated February 14, 2012.
10.2
Amendment No. 1 to the Collaboration Agreement by and between the Company and Les Laboratoires Servier and Institut De Recherches Internationales Servier, dated January 5, 2012.
31.1
Rule 13a-14(a)/15d-14(a) Certification of CEO.
31.2
Rule 13a-14(a)/15d-14(a) Certification of VP, Finance & Administration.
32.1
Section 1350 Certifications of CEO and VP, Finance & Administration.
 
 

XNAS:PCYC Pharmacyclics, Inc. Quarterly Report 10-Q Filling

Pharmacyclics, Inc. XNAS:PCYC Stock - Get Quarterly Report SEC Filing of Pharmacyclics, Inc. XNAS:PCYC stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

Content Partners
XNAS:PCYC Pharmacyclics, Inc. Quarterly Report 10-Q Filing - 3/31/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Title |  Date |  Company |  Symbol |  Interest |  Popularity

Previous: XNAS:PCYC Pharmacyclics, Inc. Insider Activity 4/A Filing - 3/5/2012  |  Next: XNAS:PCYO Pure Cycle Corporation Insider Activity 4 Filing - 1/17/2012