UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For
the quarterly period ended September 30, 2009
  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
                (State or other jurisdiction
      of incorporation or organization)
              94-3148201
                (IRS
      Employer Identification Number)
  995
E. Arques Avenue
 Sunnyvale, CA 94085-4521
 (Address
of principal executive offices including zip code)
 
 (408)
774-0330
 (Registrant’s
telephone number, including area code)
 
 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 reports), and (2) has been subject to such filing requirements for the
past 90 days: Yes  R     No
£
 
 Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T( 229.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files) Yes  £    No
£
 
 Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer or a smaller reporting company. See the definition of
"large accelerated filer” and “accelerated filer" and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large accelerated
filer £     Accelerated
filer £     Non-accelerated
filer £     Smaller
reporting company  R
 (Do not check if a
smaller reporting company)
 
 Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): Yes £     No
R
 
 As
of October 31, 2009, there were 50,072,449 shares of the registrant's Common
Stock, par value $0.0001 per share, outstanding.
 This quarterly
report on Form 10-Q consists of 25 pages, of which this is page 1. The Exhibits
Index page immediately follows page 25.
  1
  PHARMACYCLICS, INC.
 Form
10-Q
 Table
of Contents
  PART
      I. Financial Information
              Page
      No.Item 1.
              
              Financial
      Statements (unaudited):Condensed Balance
      Sheets
              3Condensed Statements of
      Operations
              4Condensed Statements of Cash
      Flows
              5Notes to Condensed Financial
      Statements
              6Item 2.
              
              Management's Discussion and
      Analysis of Financial Condition and Results of
      Operations
              14Item
      4T.
              
              Controls and
      Procedures
              23PART
      II. Other InformationItem 1.
              
              Legal
      Proceedings
              23Item 2.
              
              Unregistered Sales of Equity
      Securities and Use of Proceeds
              23Item 3.
              
              Defaults Upon Senior
      Securities
              23Item 4.
              
              Submission of Matters to a Vote
      of Security Holders
              23Item 5.
              
              Other Information
              23Item 6.
              
              Exhibits
              24Signatures
              25Exhibits
      Index
  2
 Table of Contents
  PARTI - FINANCIAL INFORMATION
 
 Item
1. Financial Statements
  PHARMACYCLICS,
INC.
 (a
development stage enterprise)
 CONDENSED
BALANCE SHEETS
 (unaudited;
in thousands)
  September
      30,
              
              
              June
      30,2009
              
              
              2009ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              21,730
              
              
              $
              14,534Marketable
      securities
              
              
              12,144
              
              
              
              1,792Accounts
      receivable
              
              
              3
              
              
              
              632Prepaid
      expenses and other current assets
              
              
              832
              
              
              
              583Total
      current assets
              
              
              34,709
              
              
              
              17,541Property
      and equipment, net
              
              
              413
              
              
              
              470Other
      assets
              
              
              290
              
              
              
              290$
              35,412
              
              
              $
              18,301LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)Current
      liabilities:Accounts
      payable
              
              $
              1,614
              
              
              $
              1,167Accrued
      liabilities
              
              
              630
              
              
              
              801Note
      payable to related party
              
              
              -
              
              
              
              6,379Deferred
      revenue - current portion
              
              
              8,490
              
              
              
              7,025Total
      current liabilities
              
              
              10,734
              
              
              
              15,372Deferred
      revenue - non-current portion
              
              
              3,138
              
              
              
              4,603Deferred
      rent
              
              
              62
              
              
              
              67Total
      liabilities
              
              
              13,934
              
              
              
              20,042Stockholders'
      equity (deficit):Preferred
      stock
              
              
              -
              
              
              
              -Common
      stock
              
              
              5
              
              
              
              3Additional
      paid-in capital
              
              
              389,217
              
              
              
              361,153Accumulated
      other comprehensive income (loss)
              
              
              (1
              )
              
              
              1Deficit
      accumulated during development stage
              
              
              (367,743
              )
              
              
              (362,898
              )Total
      stockholders' equity (deficit)
              
              
              21,478
              
              
              
              (1,741
              )$
              35,412
              
              
              $
              18,301
  The accompanying
notes are an integral part of these condensed financial statements.
  3
 Table of Contents
  PHARMACYCLICS, INC.
 (a
development stage enterprise)
 CONDENSED
STATEMENTS OF OPERATIONS
 (unaudited;
in thousands, except per share data)
 Period
      FromInception(April
      19, 1991)Three
      Months Ended
                
                
                throughSeptember
      30,
                
                
                September
      30,2009
                
                
                2008
                
                
                2009Revenues:License
      and milestone revenues
                
                $
                -
                
                
                $
                -
                
                
                $
                7,855Contract
      and grant revenues
                
                
                -
                
                
                
                -
                
                
                
                6,154Total
      revenues
                
                
                -
                
                
                
                -
                
                
                
                14,009Operating
      expenses:Research
      and development*
                
                
                3,288
                
                
                
                3,203
                
                
                
                329,164General
      and administrative*
                
                
                1,533
                
                
                
                3,439
                
                
                
                86,148Purchased
      in-process researchand
      development
                
                
                -
                
                
                
                -
                
                
                
                6,647Total
      operating expenses
                
                
                4,821
                
                
                
                6,642
                
                
                
                421,959Loss from
      operations
                
                
                (4,821
                )
                
                
                (6,642
                )
                
                
                (407,950
                )Interest and
      other income (expense), net
                
                
                (24
                )
                
                
                100
                
                
                
                40,207Net
      loss
                
                $
                (4,845
                )
                
                $
                (6,542
                )
                
                $
                (367,743
                )Basic and
      diluted net loss per share
                
                $
                (0.12
                )
                
                $
                (0.25
                )Shares used
      to compute basic anddiluted
      net loss per share
                
                
                40,993
                
                
                
                26,015* includes
      non-cash share based compensationof the
      following:Research
      and development
                
                $
                158
                
                
                $
                179
                
                
                $
                6,872General
      and administrative
                
                
                90
                
                
                
                1,638
                
                
                
                9,192
 The accompanying
notes are an integral part of these condensed financial statements.
  4
 Table of Contents
  PHARMACYCLICS, INC.
 (a
development stage enterprise)
 CONDENSED
STATEMENTS OF CASH FLOWS
 (unaudited;
in thousands)
 Period
      FromInception(April
      19, 1991)Three
      Months Ended
                  
                  
                  throughSeptember
      30,
                  
                  
                  September
      30,2009
                  
                  
                  2008
                  
                  
                  2009Cash flows
      from operating activities:Net
      loss
                  
                  $
                  (4,845
                  )
                  
                  $
                  (6,542
                  )
                  
                  $
                  (367,743
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  63
                  
                  
                  
                  90
                  
                  
                  
                  15,347Amortization
      of premium/discount on marketable securities, net
                  
                  
                  25
                  
                  
                  
                  (23
                  )
                  
                  
                  (1
                  )Amortization
      of debt discount
                  
                  
                  21
                  
                  
                  
                  -
                  
                  
                  
                  570Gain
      on sale of marketable securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  50Purchased
      in-process research and development
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,500Share-based
      compensation expense
                  
                  
                  248
                  
                  
                  
                  1,817
                  
                  
                  
                  16,064Common
      stock issued in exchange for services provided
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15Write-down
      of fixed assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  370Changes
      in assets and liabilities:Accounts
      receivable
                  
                  
                  629
                  
                  
                  
                  -
                  
                  
                  
                  (3
                  )Prepaid
      expenses and other assets
                  
                  
                  (249
                  )
                  
                  
                  74
                  
                  
                  
                  (1,122
                  )Accounts
      payable
                  
                  
                  447
                  
                  
                  
                  (101
                  )
                  
                  
                  1,614Accrued
      liabilities
                  
                  
                  (171
                  )
                  
                  
                  410
                  
                  
                  
                  630Deferred
      revenue
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  11,628Deferred
      rent
                  
                  
                  (5
                  )
                  
                  
                  (1
                  )
                  
                  
                  62Net
      cash used in operating activities
                  
                  
                  (3,837
                  )
                  
                  
                  (4,276
                  )
                  
                  
                  (318,019
                  )Cash flows
      from investing activities:Purchase
      of property and equipment
                  
                  
                  (6
                  )
                  
                  
                  (17
                  )
                  
                  
                  (12,372
                  )Proceeds
      from sale of property and equipment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  123Purchases
      of marketable securities
                  
                  
                  (10,379
                  )
                  
                  
                  (3,179
                  )
                  
                  
                  (544,896
                  )Proceeds
      from maturities and sales of marketable securities
                  
                  
                  -
                  
                  
                  
                  2,000
                  
                  
                  
                  532,702Net
      cash used in investing activities
                  
                  
                  (10,385
                  )
                  
                  
                  (1,196
                  )
                  
                  
                  (24,443
                  )Cash flows
      from financing activities:Issuance
      of common stock, net of issuance costs
                  
                  
                  21,720
                  
                  
                  
                  -
                  
                  
                  
                  332,026Exercise
      of stock options
                  
                  
                  12
                  
                  
                  
                  -
                  
                  
                  
                  6,447Proceeds
      from related party notes payable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,400Proceeds from note payable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,000Issuance
      of convertible preferred stock, net of issuance costs
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  20,514Payments
      under capital lease obligations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,881
                  )Repayment
      of notes payable
                  
                  
                  (314
                  )
                  
                  
                  -
                  
                  
                  
                  (314
                  )Net
      cash provided by financing activities
                  
                  
                  21,418
                  
                  
                  
                  -
                  
                  
                  
                  364,192(Decrease)/Increase
      in cash and cash equivalents
                  
                  
                  7,196
                  
                  
                  
                  (5,472
                  )
                  
                  
                  21,730Cash and cash
      equivalents at beginning of period
                  
                  
                  14,534
                  
                  
                  
                  12,260
                  
                  
                  
                  -Cash and cash
      equivalents at end of period
                  
                  $
                  21,730
                  
                  
                  $
                  6,788
                  
                  
                  $
                  21,730Supplemental
      disclosure of non-cash investing and financing activities:Settlement of related party notes payable by issuance of common
      stock
                  
                  $
                  6,086
                  
                  
                  -
                  
                  
                  
                  $
                  6,086
 The accompanying
notes are an integral part of these condensed financial statements.
  5
 Table of Contents
  PHARMACYCLICS, INC.
 (a
development stage enterprise)
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 
 Note
1 — The Company and Significant Accounting Policies
 
 Description
of the Company
 
 We
are a clinical-stage biopharmaceutical company focused on developing and
commercializing innovative small-molecule drugs for the treatment of immune
mediated disease and cancer.  Our purpose is to create a profitable
company by generating income from products we develop, license and
commercialize, either with one or several potential collaborators/partners or
alone as may best forward the economic interest of our
stakeholders.  We endeavor to create novel, patentable, differentiated
products that have the potential to significantly improve the standard of care
in the markets we serve.
 
 Presently, we have
four product candidates in clinical development and two product candidates in
pre-clinical development.  It is our business strategy to establish
collaborations with large pharmaceutical and biotechnology companies for the
purpose of generating present and future income in exchange for adding to their
product pipelines.  In addition, we strive to generate collaborations
that allow us to retain valuable territorial rights and simultaneously fast
forward the clinical development and commercialization of our
products.
 
 We
continue to evolve into a company focused on licensing and co-development
activities. Most recently we signed a collaboration and licensing agreement for
one of our key compounds allowing us to significantly expedite the development
path outside of the U.S., while retaining U.S. rights and receiving upfront and
potential future milestone payments. This partnership is indicative of our
strategy going forward.
 
 To
date, substantially 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 do anticipate
generating collaboration revenue from out partnership with Servier.
 
 We
have incurred significant operating losses since our inception in 1991, and as
of September 30, 2009, had an accumulated deficit of approximately $367.7
million.  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 achieving 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
interim condensed financial statements have been prepared by Pharmacyclics, Inc.
(the “company” or “Pharmacyclics”), 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 its financial
position, results of operations and cash flows in accordance with accounting
principles generally accepted in the United States. The balance sheet at June
30, 2009 is derived from the audited balance sheet at that date which is not
presented herein.
  6
 Table of Contents
  In
the opinion of management, the unaudited financial information for the interim
periods presented reflects all adjustments, which are only normal and recurring,
necessary for a fair statement of results of operations, financial position and
cash flows. These condensed financial statements should be read in conjunction
with the financial statements included in the company’s Annual Report on Form
10-K for the fiscal year ended June 30, 2009. 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 the
company’s financial statements and the accompanying notes. Actual results could
differ from those estimates.
 
 The company has
evaluated material subsequent events through November 3, 2009, the date these
financial statements were issued.
   Note
2 - Basic and Diluted Net Loss Per Share
  Basic net loss per
share is computed using the weighted average number of common shares outstanding
during the period. Diluted net loss per share is computed using the weighted
average number of common and potential common shares outstanding during the
period. Potential common shares consist of shares issuable upon the exercise of
stock options (using the treasury stock method). Options to
purchase 8,513,587 and 5,715,364 shares of common stock were outstanding at
September 30, 2009 and 2008, respectively, but have been excluded from the
computation of diluted net loss per share because their effect was
anti-dilutive.
 
 
 Note
3 - Share-Based Compensation
 
 The company grants options to purchase its
common stock pursuant to its 2004 Equity Incentive Award Plan. Options vest upon
the passage of time or a combination of time and the achievement of certain
performance obligations.  The Compensation Committee of the Board of
Directors will determine if the performance conditions have been
met.  Share-based compensation expense for the options with
performance obligations has been recorded when the company believes that the
vesting of these options is probable.
 
 The components of
share-based compensation recognized in the company’s statements of operations
for the three months ended September 30, 2009 and 2008 and since inception are
as follows:
 
 Period
      FromInception(April
      19, 1991)Three
      Months Ended
                
                
                throughSeptember
      30,
                
                
                September
      30,2009
                
                
                2008
                
                
                2009Research and
      development
                
                $
                158,000
                
                
                $
                179,000
                
                
                $
                6,872,000General and
      administrative
                
                
                90,000
                
                
                
                1,638,000
                
                
                
                9,192,000Total
      share-based compensation
                
                $
                248,000
                
                
                $
                1,817,000
                
                
                $
                16,064,000
  7
 Table of Contents
  During the three
months ended September 30, 2009, we reversed $126,000 of previously recognized
expense as a result of a change in our assessment of probability associated with
the likelihood of achieving performance measures associated with certain
outstanding performance-based options during the
quarter.
 
 The following table
summarizes the company’s stock option activity for the three months ended
September 30, 2009:
 
 WeightedNumber
                
                
                Averageof
                
                
                ExerciseShares
                
                
                PriceBalance at
      June 30, 2009
                
                
                7,054,899
                
                
                $
                5.75Options
      granted
                
                
                91,975
                
                
                
                1.53Options
      exercised
                
                
                (15,204
                )
                
                
                0.79Options
      forfeited
                
                
                (16,083
                )
                
                
                0.82Balance at
      September 30, 2009
                
                
                7,115,587
                
                
                
                5.72
  The table above
does not include 1,398,000 performance options granted in fiscal 2009 for which
the performance criteria had not been established as of September 30,
2009.
 
 Employee Stock Purchase Plan.
The company adopted an Employee Stock Purchase Plan (the “Purchase Plan”) in
August 1995. Qualified employees may elect to have a certain percentage of their
salary withheld to purchase shares of the company's common stock under the
Purchase Plan. The purchase price per share is equal to 85% of the fair market
value of the stock on specified dates. There were no sales under the Purchase
Plan in the three month periods ended September 30, 2009 and 2008 as there were
no purchase dates during these periods.  Shares available for future
purchase under the Purchase Plan are 478,572 at September 30, 2009.
 
  Note
4 - Comprehensive Loss
  Comprehensive loss
includes net loss and unrealized gains on marketable securities that are
excluded from the results of operations. The company's comprehensive losses were
as follows:
  Three
      Months EndedSeptember
      30,2009
                
                
                2008Net
      loss
                
                $
                (4,845,000
                )
                
                $
                (6,542,000
                )Change in net
      unrealized gain (losses)on
      available-for-sale securities
                
                
                (2,000
                )
                
                
                (18,000
                )Comprehensive
      loss
                
                $
                (4,847,000
                )
                
                $
                (6,560,000
                )
   Note
5 – Fair Value Measurements and Marketable Securities
  Our marketable securities are held as
“available-for-sale”.   We classify these investments as 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 accretions 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.
  8
 Table of Contents
  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.
  In
September 2006, the FASB issued accounting guidance that defines fair value,
establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. The company adopted this accounting
guidance on July 1, 2008.  In February 2008, the FASB issued a
statement that delayed the effective date of new fair value measurement
principles for non-financial assets and liabilities, that are not measured or
disclosed on a recurring basis, to fiscal years beginning after
November 15, 2008. The company adopted this guidance on July 1,
2009.
  The accounting
guidance for fair value measurements defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date.
The accounting guidance also establishes a fair value hierarchy which requires
an entity to maximize the use of observable inputs, and minimize the use of
unobservable inputs, when measuring fair value. The guidance describes three
levels of inputs that may be used to measure fair value:
  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. The company’s
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.
  The company
utilizes the market approach to measure fair value for its 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 table sets forth the company’s financial assets (cash
equivalents and marketable securities) at fair value on a recurring basis as of
September 30, 2009.
 
 EstimatedFair
      Value as of
                
                
                Basic
      of Fair Value MeasurementsSeptember
      30, 2009
                
                
                Level
      1
                
                
                Level
      2
                
                
                Level
      3Money market
      funds
                
                $
                20,204
                
                
                $
                20,204
                
                
                $
                -
                
                
                $
                -Corporate
      bonds
                
                
                1,424
                
                
                
                -
                
                
                
                1,424
                
                
                
                -Government
      agency securities
                
                
                12,233
                
                
                
                -
                
                
                
                12,233
                
                
                
                -Total cash
      equivalents and marketable securities
                
                $
                33,861
                
                
                $
                20,204
                
                
                $
                13,657
                
                
                $
                -  EstimatedFair
      Value as of
                
                
                Basic
      of Fair Value MeasurementsJune
      30, 2009
                
                
                Level
      1
                
                
                Level
      2
                
                
                Level
      3Money market
      funds
                
                $
                10,077
                
                
                $
                10,077
                
                
                $
                -
                
                
                $
                -Government
      agency securities
                
                
                2,642
                
                
                
                -
                
                
                
                2,642
                
                
                
                -Total cash
      equivalents and marketable securities
                
                $
                12,719
                
                
                $
                10,077
                
                
                $
                2,642
                
                
                $
                -
  9
 Table of Contents
  The following is a
summary of the company’s available-for-sale securities at September 30,
2009 and June 30, 2009:
 
 EstimatedUnrealized
                
                
                Unrealized
                
                
                FairAs
      of September 30, 2009
                
                Cost
      Basis
                
                
                Gain
                
                
                Loss
                
                
                ValueMoney market
      funds
                
                $
                20,204
                
                
                $
                -
                
                
                $
                -
                
                
                $
                20,204Corporate
      bonds
                
                
                1,425
                
                
                
                -
                
                
                
                (1
                )
                
                
                1,424Government
      agency securities
                
                
                12,233
                
                
                
                -
                
                
                
                -
                
                
                
                12,23333,862
                
                
                
                -
                
                
                
                (1
                )
                
                
                33,861Less cash
      equivalents
                
                
                (21,717
                )
                
                
                -
                
                
                
                -
                
                
                
                (21,717
                )Total
      marketable securities
                
                $
                12,145
                
                
                $
                -
                
                
                $
                (1
                )
                
                $
                12,144  EstimatedUnrealized
                
                
                Unrealized
                
                
                FairAs
      of June 30, 2009
                
                Cost
      Basis
                
                
                Gain
                
                
                Loss
                
                
                ValueMoney market
      funds
                
                $
                10,077
                
                
                $
                -
                
                
                $
                -
                
                
                $
                10,077Government
      agency securities
                
                
                2,641
                
                
                
                1
                
                
                
                -
                
                
                
                2,64212,718
                
                
                
                1
                
                
                
                -
                
                
                
                12,719Less cash
      equivalents
                
                
                (10,927
                )
                
                
                -
                
                
                
                -
                
                
                
                (10,927
                )Total
      marketable securities
                
                $
                1,791
                
                
                $
                1
                
                
                $
                -
                
                
                
                1,792
 
 At
September 20, 2009, the company's marketable securities had the following
contractual maturities (in thousands):
 AmortizedCost
                  
                  
                  EstimatedFair
      ValueLess than one
      year
                  
                  $
                  12,145
                  
                  
                  $
                  12,144
 
 Note
6 – Servier Agreement
 
 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
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 a royalty to Pharmacyclics
on sales outside of the United States. Pharmacyclics will continue to own all
rights within the United States. In May 2009, Pharmacyclics received an upfront
payment of $11.0 million from Servier, less applicable withholding taxes of
$0.55 million, for a net receipt of $10.45 million.
 
 Pharmacyclics is
due to receive from Servier an additional $4 million for research collaboration
over a twenty-four month period, paid in equal increments every six
months.  The initial payment of $1 million was received in October
2009. Servier is solely responsible for conducting and paying for all
development activities outside the United States.  In addition,
Pharmacyclics could also receive from Servier up to approximately $24.5 million
upon the achievement of certain future milestones up to and including
commercialization, as well as royalty payments.
 
 Revenue associated
with our Servier collaboration and related agreements is recognized upon
achieving the four general criteria for revenue recognition (i.e., evidence of
arrangement, delivery, fixed or determinable amount and
collectability).  The company's collaboration agreement with Servier
is accounted for in accordance with accounting rules
governing  “Revenue Arrangements with Multiple Deliverables.” The
non-refundable portion of upfront payments received under the company’s existing
agreements is deferred by the company upon receipt and recognized on a
straight-line basis over the period ending on the anticipated date of completion
of the research activities associated with the Research Program, which
management believes represents the conclusion of all significant obligations on
the part of the company.  For the company’s current agreement, this
period was determined to be two years for reasons described further
below.
  10
 Table of Contents
  Under the terms of
the agreement, four company representatives are required to participate on a
Joint Research and Development Committee ("JRDC"). The JRDC’s only
responsibilities are to:
 
 ·
                Meet at least
      twice a year during the agreement
term,
 ·
                Oversee the
      Research Program, Research Plan (as defined) and Development Plan (as
      defined),
 ·
                Oversee the
      registration and commercialization of licensed products,
    and
 ·
                Maintain a
      list of Option Compounds (as defined) existing prior to and identified
      during the Research Term.
 
 We
believe that our involvement in the JRDC over the term required to complete the
research activities associated with the Research Program (currently expected to
be the two year Research Term defined in the agreements) associated with the
collaboration represents a substantive performance obligation or
"deliverable.”  However, following completion of such research
activities, participation on the JRDC represents only a right and a governance
role, rather than a substantive performance obligation.
 
 Given that the
deliverables under the collaboration do not meet criteria in the accounting
rules for separation (e.g., no separately identifiable fair value), the
arrangement is being treated as a single unit-of-accounting for purposes of
revenue recognition. We recognize the combined unit of accounting over the
estimated period required to complete the research activities under the
collaboration (two years), which coincides with the delivery period for all
substantive obligations or “deliverables” associated with the
collaboration.
 
 The collaboration
and license agreement requires us to enter into an agreement to supply drug
product for Servier’s use in clinical trials.  As the supply agreement
is considered part of the arrangement and had not been completed and executed
prior to September 30, 2009, we did not meet the “evidence of an arrangement”
criterion required for revenue recognition and have therefore deferred
recognition until such time as the supply agreement is executed.
 
 
 Note
7 – Related Party Notes Payable
 
 In
December 2008, the company borrowed $5,000,000 and in March 2009, borrowed
$1,400,000 from an affiliate of Robert W. Duggan, the company’s Chairman of the
Board and CEO. Mr. Duggan is currently the beneficial owner of approximately
24.8% of the company’s outstanding common stock. Under the terms of the
unsecured loans, the company is to repay the principal sum of $6,400,000 on the
earlier of (i) July 1, 2010 or (ii) upon the closing of an equity offering or
rights offering by the company. The loans bear interest as follows: (i) 1.36%
from December 30, 2008 until March 31, 2009, (ii) the rate of interest in effect
for such day as publicly announced from time to time by Citibank N.A. as its
“prime rate” from April 1, 2009 until December 31, 2009 and (iii) the prime rate
plus 2% from January 1, 2010 until the expiration of the
loan.  Interest is to be paid annually.  In accordance with
the terms of the loans, all principal and accrued interest were fully repaid in
August 2009.
 
 The principal
amount of the loans have been discounted to fair value for balance sheet
presentation such that the stated interest rate together with the accretion of
the discount will reflect an estimate of the market interest rate during the
term of the loan. As described in Note 5, the accounting guidance for fair value
measurements establishes a three-tier fair value hierarchy which prioritizes the
inputs used in measuring the fair value of assets and liabilities. Due to the
lack of reliable and objective observable data available to estimate the fair
value of the $5,000,000 loan, the value of the loan was determined using Level 3
inputs. These inputs included an estimate of the probable term of the loan. The
loan matured at the earlier of an equity offering or a rights offering, meeting
the criteria stated in the loan agreement, or eighteen months from its effective
date. Due to already initiated corporate events and the current cash situation
of the company, the probable term of the loan was estimated at 6.25
months.
  11
 Table of Contents
  With the term
established, the company used various methods to estimate the fair market
interest rate of the $5,000,000 loan. The first and primary approach was a
market risk approach, beginning with the risk-free rate on the effective date of
the loan increased by the calculated estimates of the cost of each of the
different premiums a lender would require for the various risks taken. These
premiums included the non-marketability risk of the note, the risk of default,
the cost of arrangement and the opportunity costs. Using this methodology, the
company estimated the fair market interest rate to be 23%. The reasonableness of
this rate was then further supported by comparison to the outcome of the Black
Scholes pricing model calculated using the following assumptions:
 
 ·
                Strike price:
      $5,000,000
 ·
                Expected
      term: 6.25 months
 ·
                Risk free
      interest rate: 0.28%
 ·
                Six month
      volatility: 139%
 
 The calculation was
performed using actual volatility for both the six-month and three-month periods
prior to the loan effective date. The company’s fair market rate estimate was
further supported by market data estimating the interest rate on high yield
bonds that the company believes would be of comparable quality to the
loan.  The total amortized discount related to the $5,000,000 loan was
$484,000 at June 30, 2009.
 
 As
the terms of the $1,400,000 loan are the same as the $5,000,000 loan with the
same expiration date, the company applied the same methodology to determine the
fair value of this loan. Due to the lack of reliable and objective observable
data available to estimate the fair value of the $1,400,000 loan, the value of
the loan was determined using Level 3 inputs. These inputs included first an
estimate of the probable term of the loan. The loan matured at the earlier of an
equity offering or a rights offering, meeting the criteria stated in the loan
agreement, or eighteen months from its effective date. Due to already initiated
corporate events and the cash situation of the company, the probable term of the
loan was estimated at 3.25 months.
 
 With the term
established, the company used various methods to estimate the fair market
interest rate of the $1,400,000 loan. The first and primary approach was a
market risk approach, beginning with the risk-free rate on the effective date of
the loan increased by the calculated estimates of the cost of each of the
different premiums a lender would require for the various risks taken. These
premiums included the non-marketability risk of the note, the risk of default,
the cost of arrangement and the opportunity costs. Using this methodology, the
company estimated the fair market interest rate to be 23%. The reasonableness of
this rate was then further supported by comparison to the outcome of the Black
Scholes pricing model calculated using the following assumptions:
 
 ·
                Strike price:
      $1,400,000
 ·
                Expected
      term: 3.25 months
 ·
                Risk free
      interest rate: 0.16%
 ·
                Three month
      volatility: 115%
 
 The calculation was
performed using actual volatility for the three month period prior to the loan
effective date. The company’s fair market rate estimate was further supported by
market data estimating the interested rate on high yield bonds that the company
believes would be of comparable quality to the loan.  The total
amortized discount related to the $1,400,000 loan was $65,000 at June 30,
2009.
  12
 Table of Contents
  Total interest
expense related to the loans was $43,000 in the quarter ended September 30,
2009. In accordance with the terms of the loans, both loans, plus accrued
interest, were fully settled in August 2009 by the issuance of 4,754,870 shares
of common stock in the company's Rights Offering.
 
 Note
8 – Income Taxes
 
 On
January 1, 2007, we adopted accounting guidance that clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial
statements and prescribes a recognition threshold and measurement process for
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This accounting guidance also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. As of June 30, 2009, the company
recorded a $2.96 million reduction to deferred tax assets for unrecognized tax
benefits, all of which were offset by a full valuation allowance.  We
may from time to time be assessed interest or penalties by major tax
jurisdictions, although there have been no such assessments historically, with
no material impact to our financial results. In the event we receive an
assessment for interest and/or penalties, it would be classified in the
financial statements as income tax expense.  As of July 1, 2007 open
tax years in major jurisdictions date back to 1991 due to the taxing
authorities’ ability to adjust operating loss carry forwards.  The
company does not anticipate a material change to its total amount of
unrecognized tax benefits within the next 12 months.
 
 
 Note
9 –  Rights offering
 
 On
July 17, 2009, the company commenced a rights offering to sell up to 18.8
million shares for gross proceeds of $24 million pursuant to which holders of
the company’s common stock were entitled to purchase additional shares of the
company’s common stock at a price of $1.28 per share (the “Rights Offering”). On
July 29, 2009, the Rights Offering was amended to increase the maximum number of
shares that could be sold from 18.8 million to 22.5 million for an aggregate
amount of up to $28.8 million.
 
 In
the Rights Offering, stockholders of record as of July 15, 2009, were
issued, at no charge, one subscription right for each share of common stock then
outstanding.  Each right entitled the holder to purchase 0.6808 share
of the company’s common stock for $1.28 per share.
 
 Fractional shares
were not issued in the Rights Offering. The subscription rights issued pursuant
to the Rights Offering expired on July 31, 2009. Stockholders who exercised
their rights in full were also permitted an oversubscription right to purchase
additional shares of common stock that remained unsubscribed at the expiration
of the Rights Offering, subject to the availability of shares and a pro rata
allocation of shares among persons exercising the oversubscription
right.
 
 As
of the close of the Rights Offering on July 31, 2009, the Rights Offering was
oversubscribed.  The proration of available over-subscription shares
was made in accordance with the Offering Prospectus.  Approximately
22.5 million shares of the company’s common stock were purchased in the Rights
Offering for net proceeds (after offering costs of $1.0 million and the partial
settlement of loans from an affiliate of Robert W. Duggan, our Chairman of the
Board and Chief Executive Officer, of approximately $6.1 million) of
approximately $21.7 million.  Mr. Duggan participated in the Rights
Offering for a total of approximately $6.1 million.
  13
 Table of Contents
  Note
10 – Related Party Transaction
 
 As discussed in Note 7 – Related Party Notes
Payable, as of June 30, 2009, the company had borrowed $6,400,000 from an
affiliate of Robert W. Duggan, the company’s Chairman of the Board and Chief
Executive Officer, in the form of an unsecured loan.  Mr. Duggan is
the beneficial owner of approximately 24.8% of the company’s outstanding common
stock.  The related party
notes were partially settled by the issuance of 4,754,870 shares in the
company’s Rights Offering.
 
 
 Note
11 –  Subsequent Event
 
 In October 2009,
the company’s Board of Directors approved, subject to stockholder approval at
the 2009 Annual Meeting, (i) an increase in the number of shares of common
stock authorized for issuance under the company’s 2004 Equity Incentive Award
Plan of 2,000,000 shares and (ii) to authorize the company’s Board of Directors,
in the future, to revise the company’s Amended and Restated Certificate of
Incorporation to permit the company to effect a reverse stock split of the
company’s issued and outstanding shares of Common Stock, by a ratio of up to
1-for-3, without further approval or authorization of the company’s
stockholders.
 
 
 Note
12 – Recent Accounting Pronouncements
 
 In November
2007, the FASB reached a consensus which focuses on how the parties to a
collaborative agreement should account for costs incurred and revenue generated
on sales to third parties, how sharing payments pursuant to a collaboration
agreement should be presented in the income statement and certain related
disclosure questions. This accounting guidance is to be applied retrospectively
for collaboration arrangements in fiscal years beginning after December 15,
2008.   The company adopted  this accounting guidance
effective July 1, 2009.  The adoption of this accounting guidance did
not have a material impact on the company’s results of operations or financial
position.
 
 In
February 2008, the FASB issued guidance that provided a deferral for application
of the new fair value measurement principles for nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually), to
fiscal years, and interim periods within those fiscal years, beginning after
November 15, 2008. The company adopted this new guidance effective July 1,
2009.  The adoption of this guidance did not have a material impact on
the company’s financial statements.
 
 In
June 2009, the FASB issued the FASB Accounting Standards Codification
(Codification).  The Codification will become the single source for
all authoritative GAAP recognized by the FASB to be applied for financial
statements issued for periods ending after September 15, 2009. The Codification
did not change GAAP and therefore did not have an affect on our financial
position, results of operations or liquidity.
 In
October 2009, the FASB issued two updates relating to revenue recognition. The
first update eliminates the requirement that all undelivered elements in an
arrangement with multiple deliverables have objective and reliable evidence of
fair value before revenue can be recognized for items that have been delivered.
The update also no longer allows use of the residual method when allocating
consideration to deliverables. Instead, arrangement consideration is to be
allocated to deliverables using the relative selling price method, applying a
selling price hierarchy. Vendor specific objective evidence (VSOE) of selling
price should be used if it exists. Otherwise, third party evidence (TPE) of
selling price should be used. If neither VSOE nor TPE is available, the
company’s best estimate of selling price should be used. The second update
eliminates tangible products from the scope of software revenue recognition
guidance when the tangible products contain software components and non-software
components that function together to deliver the tangible products’ essential
functionality. Both updates require expanded qualitative and quantitative
disclosures and are effective for fiscal years beginning on or after June 15,
2010, with prospective application for new or materially modified arrangements
or retrospective application permitted. Early adoption is permitted. The same
transition method and period of adoption must be used for both updates. The
company is in the process of analyzing the impact of these
updates.
  Item
2. Management'sDiscussion 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, 2009 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 22,
2009.
  14
 Table of Contents
  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 the company’s
Annual Report on Form 10-K for the fiscal year ended June 30, 2009 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 developing and
commercializing innovative small-molecule drugs for the treatment of cancer and
immune mediated diseases.  Our purpose is to create a profitable company by
generating income from products we develop, license and commercialize, either
with one or several potential collaborators/partners or alone as may best
forward the economic interest of our stakeholders.  We endeavor to
create novel, patentable, differentiated products that have the potential to
significantly improve the standard of care for patients in the markets we
serve.  Presently, we have four product candidates in clinical
development and two product candidates in pre-clinical
development.  It is our business strategy to establish collaborations
with large pharmaceutical and biotechnology companies for the purpose of
generating present and future income in exchange for adding to their product
pipelines.  In addition, we strive to generate collaborations that
allow us to retain valuable territorial rights and simultaneously fast forward
the clinical development and commercialization of our products.
  It
is our intention to identify product candidates based on exceptional scientific
and development expertise, bring these products to a clinical proof of concept
in a rapid, cost-effective manner, and then seek development and/or
commercialization partners. We are committed to high standards of ethics,
scientific rigor, and operational efficiency as we move each of these programs
to viable commercialization.
  To
date, substantially 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
have incurred significant operating losses since our inception in 1991, and as
of September 30, 2009 have an accumulated deficit of approximately $367.7
million.  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 achieving profitability depends upon our ability, to successfully complete
the development of our products, obtain required regulatory approvals and
successfully manufacture and market our products.
  15
 Table of Contents
  PCI-24781
is an orally-bioavailable histone deacetylase (HDAC) inhibitor that is currently
in multiple clinical trials, including a Phase I trial in patients with advanced
solid tumors and a Phase I/II trial in patients with recurrent lymphomas, with a
planned Phase I/II trial in sarcoma (in combination with doxorubicin) scheduled
to commence before the end of calendar year 2009.  PCI-24781 targets
histone deacetylase (HDAC) enzymes and inhibits their function.  We
have shown that PCI-24781 works by multiple mechanisms including re-expression
of tumor suppressors, inhibition of cell cycle and increase in reactive oxygen
species, which contribute to tumor cell cytotoxicity.  Previous
clinical trials have demonstrated that PCI-24781 has favorable pharmacokinetic
properties when dosed orally, and inhibits the target enzymes at current
clinical doses.  Up to date information about the lymphoma clinical
trial, including clinical response data, will be reported at the 51st
American Society of Hematology ("ASH") annual meeting in
December.  PCI-24781 has demonstrated a very good safety profile in
over 70 patients treated so far, with the main dose-limiting toxicity observed
being reversible thrombocytopenia, which we believe is related to the
pharmacologic mechanism of action. The duration and severity of the
thrombocytopenia has been mitigated using novel dose scheduling strategies that
we have developed and tested in the clinic.
  In
preclinical models, we have identified synergy of PCI-24781 with several
approved cancer therapeutics, and some of these combinations may be tested in
the clinic, including the combination of PCI-24781 with Doxorubicin in our
upcoming sarcoma trial due to begin before the end of calendar year
2009.  This trial will also test the novel biomarker RAD51 that we
have developed in collaboration with scientists at Stanford University, which
may be useful as predictive biomarker in clinical testing by improving patient
selection.  We are also continuing the development of our
first-in-class HDAC8 selective inhibitor for the potential treatment of cancer
and inflammatory diseases by optimizing the pharmacokinetics, metabolic
stability and in-vivo efficacy of the lead compounds.
  In
April 2009, the company entered into a collaboration agreement with Servier
pursuant to which Pharmacyclics granted to Servier an exclusive license for its
Pan-HDAC inhibitors, including PCI-24781, for territories throughout the world
excluding the United States. 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 a royalty to Pharmacyclics
on sales outside of the United States. Pharmacyclics will continue to own all
rights within the United States.  Servier has committed significant
resources to the clinical development of PCI-24781, with two Phase I trials in
lymphoma and solid tumors due to commence in Europe in the last quarter of this
year.
  PCI-27483
is a small molecule inhibitor of Factor VIIa.  This drug selectively
inhibits Factor VIIa when it is complexed with a protein called tissue factor
(TF).  In cancer, the Factor VIIa:TF complex is found in abundance in
pancreatic, gastric, colon and other tumors, and triggers a host of physiologic
processes that facilitate tumor angiogenesis, growth and invasion. The Factor
VIIa:TF complex is thought to be the cause of the increased propensity of cancer
patients to develop thromboses.  Laboratory studies and animal models
indicate that inhibitors of Factor VIIa block the growth of tumors that express
TF.
  We
have completed our initial Phase I testing of PCI-27483 in healthy volunteers.
The primary objective of the ascending dose Phase I study was to assess the
pharmacodynamic and pharmacokinetic profiles of PCI-27483 following a single,
subcutaneous injection.  In addition, the safety and tolerability of
PCI-27483 was evaluated. The drug was well tolerated and no adverse event was
observed at any dose level.  The International Normalized Ratio (INR)
of prothrombin time, a simple laboratory test for coagulation, was used to
measure pharmacodynamic effect at dose levels of 0.05, 0.20, 0.80 and 2.0
mg/kg.  A mean peak INR of 2.7 was achieved without adverse effects at
the highest dose level administered. The target INR range for oral
anti-coagulants i.e. Coumadin, is between 2 and 3. The half-life of PCI-27483
was 10 to 12 hours, which compares favorably to the single-dose half-life of the
low molecular weight heparin Lovenox (4.5 hours) and Fragmin (3 to 5
hours).
  A
multicenter Phase I/II study is planned to begin in the fourth quarter of
calendar 2009. The target patient population is locally advanced and metastatic
pancreatic cancer within two months of diagnosis either receiving or planned to
receive gemcitabine therapy.  The goals will be to; a) assess the
safety of PCI-27483 at pharmacologically active dose levels; b) to assess
potential survival benefit and c) obtain initial information of the effects on
the incidence of thromboembolic events.
  16
 Table of Contents
  PCI-32765
is an orally active small molecule inhibitor of Bruton’s tyrosine kinase (Btk)
that is being developed by Pharmacyclics for the treatment of patients with
B-cell lymphoma. Btk plays a prominent role in B-cell lymphocyte maturation by
mediating B-cell receptor (BCR) signal transduction. In the human genetic
immunodeficiency disease X-linked agammaglobulinemia, mutation of the gene that
encodes the Btk protein results in reduced BCR signaling and a failure to
generate mature B-cells. Recent studies indicate that some large B-cell
lymphomas have activation of the kinases downstream of the BCR and that
inhibition of this signaling can induce apoptosis. BCR signaling is also thought
to promote malignant cell expansion and survival in chronic lymphocytic
leukemia. In preclinical models, inhibition of Btk by PCI-32765 led to apoptosis
in multiple malignant B-cell lines, and inhibited B-cell lymphoma progression in
vivo.
  PCI-32765 also
blocks B-cell activation and inhibits autoantibody production in vivo.
Rheumatoid arthritis (RA) and lupus are two chronic inflammatory diseases
characterized by polyclonal B-cell activation and the production of
autoantibodies. By selectively inhibiting Btk, PCI-32765 has demonstrated a
dose-dependent ability to inhibit disease development in RA and lupus in animal
models. In the collagen-induced arthritis mouse model for example, oral
administration of PCI-32765 led to a regression of established disease. Btk is
also required for signaling in mast cells and basophils, which are involved in
allergic inflammation. The activation of mast cells and basophils leads to the
release of histamine and other mediators that lead to allergic symptoms, and
thus Btk inhibition may also be effective in allergy and other mast
cell-mediated diseases.   PCI-32765 potently inhibits histamine
release from human basophils and orally dosed PCI-32765 blocks mast cell
release in vivo in mouse studies.
  A
multicenter U.S. Phase I trial in B-cell lymphoma is currently enrolling
patients. We have developed a proprietary molecular probe that we are using as a
biomarker to optimize our treatment regimen in our Phase I trial. The Phase I
trial is designed to determine the safety, tolerability and to evaluate effects
on pharmacodynamic assays and tumor response.  Up to date clinical
information about this trial, including clinical response data, will be reported
at the 51st ASH
annual meeting in December.
  MGd,
is a radiation and chemotherapy sensitizing agent with a novel mechanism of
action.  MGd is designed to accumulate selectively in cancer cells.
Once inside cancer cells, MGd in combination with radiation induces apoptosis
(programmed cell death) by disrupting redox-dependent pathways. MGd is also
detectable by magnetic resonance imaging (MRI) and may allow for more precise
tumor detection.  The National Cancer Institute (NCI) is currently
sponsoring two Phase II trials which have and continue to provide valuable
developmental insights and directions.  One Phase II trial is a
multi-center study in newly diagnosed GBM in combination with radiation
therapy and temozolomide which completed the planned enrollment of 113 patients
in July 2009.  Previous studies in malignant gliomas have shown that
the combination of MGd and temozolomide has no additional overlapping toxicities
when used in combination.The second Phase II
trial is a multi-center study evaluating MGd in combination with radiation in
children with pontine (“brain stem”) gliomas. This 60 patient study completed
enrollment in January 2009 with patients currently being followed per the
clinical trial protocol.
  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.
 17
 Table of Contents
  Results
of Operations
 
 Research and
Development
  Three
      Months EndedSeptember
      30,
                
                
                Percent2009
                
                
                2008
                
                
                ChangeResearch and
      development expenses
                
                $
                3,288,000
                
                
                $
                3,203,000
                
                
                
                3
                %
  The increase of 3%
or $85,000 in research and development expenses for the three months ended
September 30, 2009 as compared to the three months ended September 30, 2008 was
primarily due to an increase of $307,000 in outside clinical trial costs
associated with our HDAC and Btk programs partially offset by a $123,000
decrease in outside pre-clinical costs associated with our HDAC, Factor VIIa and
Btk programs.
  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. The information in the column labeled “Estimated Completion of Phase” is
only our estimate of the timing of completion of the current in-process
development phase. The actual timing of completion of those phases could differ
materially from the estimates provided in the table. 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, 2009.
  18
 Table of Contents
  Prior to fiscal
1999, we did not track our research and development expenses by specific program
and for this reason we cannot accurately estimate our total historical costs on
a specific program basis. Direct costs by program and indirect costs are as
follows:
  Related
      R&D ExpensesThree
      Months EndedSeptember
      30,Phase
      ofProgram
                
                Description
                
                Development
                
                2009
                
                
                2008HDAC
      Inhibitors
                
                Cancer
                
                Phase
      I/II
                
                $
                632,000
                
                
                $
                231,000Factor
      VIIa
                
                Cancer
                
                Phase
      I/II
                
                
                526,000
                
                
                
                510,000Btk
      Inhibitors
                
                Cancer
                
                Phase
      I
                
                
                1,004,000
                
                
                
                886,000MGd
                
                Cancer
                
                Phase
      II
                
                
                32,000
                
                
                
                344,000Total direct
      costs
                
                
                
                
                2,194,000
                
                
                
                1,971,000Indirect
      costs
                
                
                
                
                1,094,000
                
                
                
                1,232,000Total
      research and  development expenses
                
                $
                3,288,000
                
                
                $
                3,203,000
 
 General and
Administrative
 
 Three
      Months EndedSeptember
      30,
                
                
                Percent2009
                
                
                2008
                
                
                ChangeGeneral and
      adiministrative expenses
                
                $
                1,533,000
                
                
                $
                3,439,000
                
                
                
                -55
                %
  The decrease of 55%
or $1,906,000 in general and administrative expenses for the three months ended
September 30, 2009 as compared to the three months ended September 30, 2008 was
primarily due to severance expenses, including stock compensation expense of
$1,394,000 and $536,000 of cash-based severance expenses, associated with
separation agreements entered into with the company’s CEO and CFO in September
2008, partially offset by an increase of $160,000 in legal and consulting
expenses.
 
 
 Interest and Other,
Net
 
 Three
      Months EndedSeptember
      30,
                
                
                Percent2009
                
                
                2008
                
                
                ChangeInterest
      income
                
                $
                19,000
                
                
                $
                100,000
                
                
                
                -81
                %Interest
      expense
                
                $
                (43,000
                )
                
                $
                -
                
                
                
                -Interest and
      other income (expense), net
                
                $
                (24,000
                )
                
                $
                100,000
                
                
                
                -124
                %
  The
decrease of 124% or $ 124,000 in interest and other income (expense), net for
the three months ended September 30, 2009 as compared to the three months ended
September 30, 2008 was primarily due to lower interest earned on the company’s
investments due to lower interest rates and $43,000 of interest expense
associated with $6,400,000 in related party loans which were outstanding for
part of the first quarter of fiscal 2010.
 
 
 Liquidity
and Capital Resources
 
 Our principal
sources of working capital have been private and public equity financings and
also proceeds from collaborative research and development agreements, as well as
interest income.
  19
 Table of Contents
  As
of September 30, 2009, we had approximately $33,874,000 in cash, cash
equivalents and marketable securities. Net cash used in operating activities of
$3,837,000 during the three months ended September 30, 2009, resulted primarily
from our net loss, net of depreciation and amortization, share-based
compensation expense, a decrease in accounts receivable and an increase in
accrued liabilities.  Net cash used in operating activities of
$4,276,000 during the three months ended September 30, 2008, resulted primarily
from our net loss, net of depreciation and amortization, share-based
compensation expense and an increase in accrued liabilities.
 
 Net cash used in
investing activities of $10,385,000 in the three months ended September 30, 2009
consisted primarily purchases of marketable securities.  Net cash used
in investing activities of $1,196,000 in the three months ended September 30,
2008 consisted primarily of the purchase of marketable securities, partially
offset by maturities and sales of marketable securities.
 
 Net cash provided
by financing activities of $ 21,418,000 for the three months ended September 30,
2009 was primarily due to $27,800,000 in net proceeds from the sale of
approximately 22.5 million shares of common stock in a Rights Offering completed
in July 2009, partially offset by the repayment of $6,400,000 in
loans.
 
 In
April 2009, we signed a collaboration and license agreement with
Servier.  In May 2009, we received an upfront payment from Servier of
$11,000,000 less applicable withholding taxes of $550,000, for a net payment of
$10,450,000.
 
 In
February 2009, we sold approximately 1.5 million shares of unregistered common
stock at $0.93 per share for net proceeds of approximately $1.4
million.
 
 In
December 2008, we borrowed $5,000,000 from an affiliate of Robert W.
Duggan.  In March 2009, the loan amount was increased to
$6,400,000.  In August 2009, pursuant to the terms of the loans, the
company repaid the $6,400,000 loans outstanding at June 30, 2009.
 
 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)
business.  Future milestone payments under the agreement, as amended,
could total as much as $98 million, although we currently cannot predict if or
when any of the milestones will be achieved.  In addition, Celera will
also be entitled to royalty payments based on annual sales of drugs
commercialized from these programs.
 
 Based upon the
current status of our product development 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. 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. In any
event, due to our extensive drug programs we will need to raise substantial
additional capital to fund our operations in the future. We are seeking
partnership collaborations to help fund the development of our product
candidates.  We also expect to raise additional funds through the
public or private sale of securities, bank debt or otherwise.  If we
are unable to secure additional funds, whether through partnership
collaborations or sale of our securities, 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:
 
 ·
                our ability
      to establish and the scope of any new
  collaborations;
  20
 Table of Contents
  ·
                the progress
      and success of clinical trials of our product candidates;
    and
 
 ·
                the costs and
      timing of obtaining regulatory
approvals.
 
 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
 
 We
do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future material effect on our financial condition,
changes in our financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
 
 
 Critical
Accounting Policies, Estimates and Judgments
 
 This discussion and
analysis of financial condition and results of operations is based upon our
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosures. On an on-going basis, we evaluate our estimates, including
those related to revenue recognition and clinical trial accruals. We base our
estimates on historical experience and on various other factors that we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results, however, may differ
significantly from these estimates under different assumptions or conditions and
may adversely affect the financial statements.
 
 We
believe the following critical accounting policies reflect the more significant
judgments and estimates used in the preparation of our financial statements and
accompanying notes.
  Revenue
Recognition
  We
recognize revenue in when the following criteria are 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. Amounts
received under such arrangements consist of up-front collaboration payments,
periodic milestone payments and payments for research activities. Collaboration
arrangements with multiple elements are divided into separate units of
accounting if certain criteria are met, including whether the delivered element
has stand-alone value and whether there is verifiable objective and reliable
evidence of the fair value of the undelivered items.  The
consideration we receive is combined and recognized as a single unit of
accounting when criteria for separation are not met.
  21
 Table of Contents
  Up-front payments
under agreements which include future performance requirements are recorded as
deferred revenue and are recognized over the performance period. The performance
period is 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.
 
 Research and Development Expenses
and Accruals
 
 Research and
development expenses include personnel and facility-related expenses, outside
contracted services including clinical trial costs, manufacturing and process
development costs, research costs and other consulting services. Research and
development costs are expensed as incurred.
 
 Our cost accruals
for clinical trials are based on estimates of the services received and efforts
expended pursuant to contracts with clinical trial centers and clinical research
organizations. In the normal course of business we contract with third parties
to perform various clinical trial activities in the on-going development of
potential products. The financial terms of these agreements are subject to
negotiation and vary from contract to contract and may result in uneven payment
flows. Payments under the contracts depend on factors such as the achievement of
certain events, the successful enrollment of patients, the completion of
portions of the clinical trial or similar conditions. The objective of our
accrual policy is to match the recording of expenses in our financial statements
to the actual services received and efforts expended. As such, expense accruals
related to clinical trials are recognized based on our estimate of the degree of
completion of the event or events specified in the specific clinical study or
trial contract.
 
 Share-Based
Compensation
 
 We
adopted accounting guidance for share-based payments, effective beginning July
1, 2005 using the modified prospective application transition method. The
modified prospective application transition method requires that companies
recognize compensation expense on new share-based payment awards and existing
share-based payment awards that are modified, repurchased, or cancelled after
the effective date. Additionally, compensation cost of the portion of
awards of which the requisite service has not been rendered that are outstanding
as of the July 1, 2005 has been expensed as the requisite service was
rendered.
 
 Options vest upon
the passage of time or a combination of time and the achievement of certain
performance obligations.  The Compensation Committee of the Board of
Directors will determine if the performance conditions have been
met.  Share-based compensation expense for the options with
performance obligations is recorded when the company believes that the vesting
of these options is probable.
 
 The fair value of
each stock option is estimated on the date of grant using the Black-Scholes
valuation model. Expected volatility is based on historical volatility data of
the company’s stock.  The expected term of stock options granted is
based on historical data and represents the period of time that stock options
are expected to be outstanding.  The expected term is calculated for
and applied to one group of stock options as the company does not expect
substantially different exercise or post-vesting termination behavior among its
employee population.  The risk-free interest rate is based on a
zero-coupon United States Treasury bond whose maturity period equals the
expected term of the company’s options.
  22
 Table of Contents
  Item 4T. 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 first fiscal quarter of 2009, 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
  Not Applicable.
  Item
2.              Unregistered
Sales of Equity Securities and Use of Proceeds
  Not Applicable.
  Item
3.              Defaults
Upon Senior Securities
  Not Applicable.
  Item
4.               Submission
of Matters to a Vote of Security Holders
  Not Applicable.
  Item
5.              Other
Information
  On
October 28, 2009, Pharmacyclics, Inc. (the "Company") entered into an Agreement and
Release with Glenn Rice (the "Separation Agreement") pursuant to which
Dr. Rice's employment with the Company shall end by mutual agreement
effective February 11, 2010.  Pursuant to the Separation
Agreement, Dr. Rice will continue to receive his annual base salary until
December 1, 2009. Between December 1, 2009 and February 11, 2010, Dr. Rice will
receive a pro-rated portion of his annual base salary based on
hours of all work performed during that time period.  In addition, pursuant
to the Separation Agreement options to purchase an aggregate of
200,000 shares of common stock of the Company held by Dr. Rice were
accelerated and became exercisable and options to purchase an aggregate of
800,000 shares of common stock of the Company held by Dr. Rice were
terminated. Dr. Rice has provided the Company with a general release from any
and all claims related to his employment. The Separation
Agreement also includes confidentiality and non-disparagement provisions.
  23
 Table of Contents
  In
addition, effective October 28, 2009, the Board amended Article III, Section 1 of the
Company's Bylaws, effective upon the 2010 annual meeting of
stockholders, to increase the authorized number of directors of the Company from
six (6) to seven (7).
  Item
6.              Exhibits
  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.
  24
 Table of Contents
  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:  November
      3, 2009
                  By:
                  /s/ Robert W.
      DugganRobert W.
      DugganChairman
      of the Board and Chief Executive Officer
  Dated:  November
      3, 2009
                  By:
                  /s/ Rainer M.
      ErdtmannRainer M.
      ErdtmannVice
      President, Finance & Administration and Secretary (Principal
      Financial and Accounting Officer)
  25
 Table of Contents
  EXHIBITS INDEX
 
 Exhibit
      Number
                
                Description31.1
                
                Rule
      13a-14(a)/15d-14(a) Certification of CEO.31.2
                
                Rule
      13a-14(a)/15d-14(a) Certification of CFO.32.1
                
                Section 1350
      Certifications of CEO and CFO.