UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





(Mark One)





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





For the quarterly period ended March 31, 2010




or





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





For the transition period from  to





Commission File Number: 000-26658





Pharmacyclics, Inc.(Exact name of registrant as specified in its charter)





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





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





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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý     No  ̈




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes o     No o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):




Large accelerated filer  ̈
Accelerated filer  ̈Non-accelerated filer  ̈ (Do not check if a smaller reporting company)
Smaller reporting company ý
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o    No ý
  As of April 30, 2010, there were 51,052,304 shares of the registrant’s Common Stock, par value $0.0001 per share, outstanding.


Table of Contents




This quarterly report on Form 10-Q consists of 27 pages, of which this is page 2. The Exhibits Index page immediately follows page 27.
  PHARMACYCLICS, INC.
 Form 10-Q
 Table ofContents
  PART I  -  FINANCIAL INFORMATION
3Item 1.
Financial Statements (unaudited)
3Condensed 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 3.
Quantitative and Qualitative Disclosures About Market Risk
24Item 4T.
Controls and Procedures
24PART II.
OTHER INFORMATION
25Item 1.
Legal Proceedings
25Item 1A.
Risk Factors
25Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
25Item 3.
Defaults Upon Senior Securities
25Item 4.
(Removed and Reserved)
25Item 5.
Other Information
25Item 6.
Exhibits
25Signatures
26Exhibits Index
27
 2
 Table of Contents
 PART I  -  FINANCIAL INFORMATION
  Item 1.
Financial Statements
  PHARMACYCLICS, INC.
 (a development stage enterprise)
 CONDENSED BALANCE SHEETS
 (unaudited; in thousands)
  March 31,


June 30,2010


2009ASSETSCurrent assets:Cash and cash equivalents

$
5,155


$
14,534Marketable securities


22,236



1,792Accounts receivable


589



632Prepaid expenses and other current assets


1,610



583Total current assets


29,590



17,541Property and equipment, net


462



470Other assets


318



290$
30,370


$
18,301LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)Current liabilities:Accounts payable

$
1,903


$
1,167Accrued liabilities


659



801Notes payable to related party


-



6,379Deferred revenue - current portion


7,106



7,025Total current liabilities


9,668



15,372Deferred revenue - non-current portion


292



4,603Deferred rent


54



67Total liabilities


10,014



20,042Stockholders' equity (deficit):Preferred stock


-



-Common stock


5



3Additional paid-in capital


391,440



361,153Accumulated other comprehensive income (loss)


(5
)


1Deficit accumulated during development stage


(371,084
)


(362,898
)Total stockholders' equity (deficit)


20,356



(1,741
)$
30,370


$
18,301
  The accompanying notes are an integral part of these unaudited 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


Nine Months Ended


throughMarch 31,


March 31,


March 31,2010


2009


2010


2009


2010Revenues:License, collaboration and milestone revenues

$
2,112


$
-


$
6,814


$
-


$
14,669Contract and grant revenues


-



-



-



-



6,154Total revenues


2,112



-



6,814



-



20,823Operating expenses:Research and development*


3,679



4,626



10,690



10,815



336,566General and administrative*


1,577



1,789



4,875



7,102



89,490Purchased in-process researchand development


-



-



-



-



6,647Total operating expenses


5,256



6,415



15,565



17,917



432,703Loss from operations


(3,144
)


(6,415
)


(8,751
)


(17,917
)


(411,880
)Interest and other income (expense), net


21



(250
)


15



(124
)


40,796Loss before benefit from income taxes


(3,123
)


(6,665
)


(8,736
)


(18,041
)


(371,084
)Benefit from income taxes


-



-



550



-



-Net loss

$
(3,123
)

$
(6,665
)

$
(8,186
)

$
(18,041
)

$
(371,084
)Basic and diluted net loss per share

$
(0.06
)

$
(0.25
)

$
(0.17
)

$
(0.69
)Shares used to compute basic anddiluted net loss per share


(50,536
)


26,696



47,202



26,248* includes non-cash share based compensationof the following:Research and development

$
224


$
200


$
598


$
552


$
7,312General and administrative


254



270



700



2,369



9,802
  The accompanying notes are an integral part of these unaudited 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)Nine Months Ended


throughMarch 31,


March 31,2010


2009


2010Cash flows from operating activities:Net loss

$
(8,186
)

$
(18,041
)

$
(371,084
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


175



232



15,459Amortization of premium/discount on marketable securities, net


966



(33
)


940Amortization of debt discount


21



250



570Gain on sale of marketable securities


-



(1
)


50Purchased in-process research and development


-



-



4,500Share-based compensation expense


1,298



2,921



17,114Common stock issued in exchange for services provided


-



-



15Write-down (gain from sale) of fixed assets


-



(11
)


370Changes in assets and liabilities:Accounts receivable


43



(3
)


(589
)Prepaid expenses and other assets


(1,055
)


4



(1,928
)Accounts payable


736



1,756



1,903Accrued liabilities


(142
)


(150
)


659Deferred revenue


(4,230
)


-



7,398Deferred rent


(13
)


(3
)


54Net cash used in operating activities


(10,387
)


(13,079
)


(324,569
)Cash flows from investing activities:Purchase of property and equipment


(167
)


(19
)


(12,533
)Proceeds from sale of property and equipment


-



11



123Purchases of marketable securities


(29,411
)


(3,179
)


(563,928
)Proceeds from maturities and sales of marketable securities


7,995



7,698



540,697Net cash (used in) provided by investing activities


(21,583
)


4,511



(35,641
)Cash flows from financing activities:Issuance of common stock, net of issuance costs


21,744



1,371



332,050Exercise of stock options


1,161



2



7,596Proceeds from related party notes payable


-



6,400



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


22,591



7,773



365,365(Decrease)/Increase in cash and cash equivalents


(9,379
)


(795
)


5,155Cash and cash equivalents at beginning of period


14,534



12,260



-Cash and cash equivalents at end of period


5,155



11,465



5,155Supplemental disclosures of non-cashinvesting and financing activities:Settlement of related party notespayable by issuance of common stock

$
6,086


$
-


$
6,086
  The accompanying notes are an integral part of these unaudited 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 cancer and immune mediated diseases.
  Our mission and goal are worth repeating: to build a viable biopharmaceutical company that designs, develops and commercializes novel therapies intended to improve quality of life, increase duration of life and resolve serious unmet medical healthcare needs. To identify promising product candidates based on exceptional scientific development expertise, develop our products in a rapid, cost-efficient manner and pursue commercialization and/or development partners when and where appropriate. We exist to make a difference for the better and these are important times to do just that.
 
 Presently, we have four product candidates in clinical development and two product candidates in pre-clinical development.  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 March 31, 2010, had an accumulated deficit of approximately $371.1 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.
  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.
  6
 Table of Contents
  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 7,044,416 and 8,427,130 shares of common stock were outstanding as of March 31, 2010 and 2009, 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 determines 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 components of share-based compensation recognized in the company’s statements of operations for the three and nine months ended March 31, 2010 and 2009 and since inception are as follows:
 
 Period FromInception(April 19, 1991)Three Months Ended


Nine Months Ended


throughMarch 31,


March 31,


March 31,2010


2009


2010


2009


2010Research and development

$
224,000


$
200,000



598,000


$
552,000


$
7,312,000General and administrative


254,000



270,000



700,000



2,369,000



9,802,000Total share-based compensation

$
478,000


$
470,000



1,298,000


$
2,921,000


$
17,114,000
  The following table summarizes the company’s stock option activity for the nine months ended March 31, 2010:
  WeightedNumber


Averageof


ExerciseShares


PriceBalance at June 30, 2009


7,054,899


$
5.75Options granted


560,858



3.14Options exercised


(776,758
)


1.49Options forfeited


(650,333
)


8.27Balance at March 31, 2010


6,188,666



5.79
 The table above does not include 855,750 performance options granted in fiscal 2009 for which the performance criteria had not been established as of March 31, 2010.
  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. Sales under the Purchase Plan in the nine months period ended March 31, 2010 and 2009 were 17,867 and 18,207 shares of common stock at a price of $1.40 and $1.08, respectively. Shares available for future purchase under the Purchase Plan are 460,705 at March 31, 2010.
  7
 Table of Contents
  Note 4 – Comprehensive Loss
  Comprehensive loss includes net loss and unrealized gains (losses) on marketable securities that are excluded from the results of operations. The company’s comprehensive losses were as follows:
  Three Months Ended


Nine Months EndedMarch 31,


March 31,2010


2009


2010


2009Net loss

$
(3,123,000
)

$
(6,665,000
)

$
(8,186,000
)

$
(18,041,000
)Change in net unrealized gain (losses)on available-for-sale securities


13,000



-



(6,000
)


(10,000
)Comprehensive loss

$
(3,110,000
)

$
(6,665,000
)

$
(8,192,000
)

$
(18,051,000
)
 
 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.
  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 fair 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 fair value. To date we have not recorded any impairment charges on marketable securities related to other-than-temporary declines in fair 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 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.
  8
 Table of Contents
  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 March 31, 2010.
  EstimatedFair Value as of


Basis of Fair Value MeasurementsMarch 31, 2010


Level 1


Level 2


Level 3Money market funds

$
5,034


$
5,034


$
-


$
-Corporate bonds


4,920



-



4,920



-Government agency securities


17,316



-



17,316



-Total cash equivalents and marketable securities

$
27,270


$
5,034


$
22,236


$
-
  EstimatedFair Value as of


Basis 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


$
-
  The following is a summary of the company’s available-for-sale securities as of March 31, 2010 and June 30, 2009:
  EstimatedUnrealized


Unrealized


FairAs of March 31, 2010

Cost Basis


Gain


Loss


ValueMoney market funds

$
5,034


$
-


$
-


$
5,034Corporate bonds


4,925



-



(5
)


4,920Government agency securities


17,316



4



(4
)


17,31627,275



4



(9
)


27,270Less cash equivalents


(5,034
)


-



-



(5,034
)Total marketable securities

$
22,241


$
4


$
(9
)

$
22,236
  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
 
 
 
 9
 Table of Contents
    Amortized


EstimatedCost


Fair ValueLess than one year

$
21,139


$
21,134Between one and two years


1,102



1,102$
22,241


$
22,236
  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 a total of $4.0 million for research collaboration over a twenty-four month period beginning April 2009, paid in equal increments every six months.  Two payments of $1.0 million each were received in October 2009 and May 2010. 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 pro rata 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.
  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.
  10
 Table of Contents
  The collaboration and license agreement required us to enter into an agreement to supply drug product for Servier’s use in clinical trials.  During the quarter ending December 31, 2009, the supply agreement, which is considered part of the arrangement, was completed and executed.  Prior to the execution of the supply agreement, we did not meet the “evidence of an arrangement” criterion required for revenue recognition and therefore had deferred revenue recognition until the execution of the supply agreement. Accordingly upon the completion of the drug supply agreement with Servier in the second quarter ended December 31, 2009, the company began recognizing revenue from its collaboration and license agreement with Servier which was entered into in April 2009.  Total revenue recognized for the three months ended March 31, 2010 was $2.1 million. Total revenue recognized for the nine months ended March 31, 2010 was $6.8 million, of which $1.2 million represents the pro-rata portion of revenue attributable to the period from April 2009 (i.e., the signing of the collaboration agreement) to June 30, 2009, had the supply agreement been completed in April 2009.
  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. Under the terms of the unsecured loans, the company was 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 bore 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 was 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.
  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%
  11
 Table of Contents
  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 were 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.
  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
  In the year ended June 30, 2009, the company recorded a $550,000 income tax provision as result of withholding taxes paid on the $11.0 million upfront licensing payment received from Servier.  In the quarter ended December 31, 2009, the company recorded a $550,000 income tax receivable related to a tax credit resulting from a December 2009 tax treaty revision enacted between France and the United States that eliminates withholding taxes related to licensing agreements and provides that prior withholding taxes may be reclaimed.
  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 $24.0 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.
  12
 Table of Contents
  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.
  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.  The related party notes were partially settled by the issuance of 4,754,870 shares in the company’s Rights Offering.
  Note 11 – Recent Accounting Pronouncements
  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.
  In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (ASC 820): Improving Disclosures about Fair Value Measurements.”  This update will require (1) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (2) information about purchases, sales, issuances and settlements to be presented separately (i.e., present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs).  This guidance clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs.  The new disclosures and clarifications of existing disclosure are effective for fiscal years beginning after December 15, 2009, except for the disclosure requirements related to the purchases, sales, issuances and settlements in the rollforward activity of Level 3 fair value measurements.  Those disclosure requirements are effective for fiscal years ending after December 31, 2010.  We are still assessing the impact of this guidance and do not believe the adoption of this guidance will have a material impact on our financial statements.
  13
 Table of Contents
  Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 You should read the following discussion and analysis of our financial condition and results of operations together with our interim financial statements and the related notes appearing at the beginning of this report. The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended June 30, 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 initially filed with the Securities and Exchange Commission on September 22, 2009.
  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 mission and goal are worth repeating: to build a viable biopharmaceutical company that designs, develops and commercializes novel therapies intended to improve quality of life, increase duration of life and resolve serious unmet medical healthcare needs. To identify promising product candidates based on exceptional scientific development expertise, develop our products in a rapid, cost-efficient manner and pursue commercialization and/or development partners when and where appropriate. We exist to make a difference for the better and these are important times to do just that.
 
 Presently, we have four product candidates in clinical development and two pre-clinical lead molecules.  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 March 31, 2010, had an accumulated deficit of approximately $371.1 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.
  14
 Table of Contents
  PHARMACYCLICS Development Portfolio:
  Program

Preclinical


Phase I


Phase II


Phase IIIBTK InhibitorsPCI-32765 NHL/CLLPCI-45292 Autoimmune diseasesHDAC InhibitorsPCI-24781 LymphomaPCI-24781 SarcomaHDAC-8Factor VIIa InhibitorPCI-27483 Pancreatic CancerMotexafin Gadolinium (MGd)GlioblastomaPontine Glioma
 
 Bruton’s Tyrosine Kinase (Btk) Inhibitor for oncology, PCI-32765, the company’s Btk Inhibitor 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 or leukemia (B-cells are white blood cells and are an important part of our immune system, B-cell lymphoma and leukemia are types of blood cancers).  Btk plays a prominent role in the development as well as the survival of white blood cells, in particular B-cells. B-cell lymphocyte maturation is mediated by B-cell receptor (BCR) signal transduction and Btk is part of the signaling. Recent studies indicate that some large B-cell lymphomas have proteins, that are activated and lie downstream of the BCR and that Btk inhibition can induce apoptosis (i.e. cell death) in these B-cells. BCR signaling is also thought to promote cancer cell expansion and survival in chronic lymphocytic leukemia, a prevalent blood cancer. 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.
  A multicenter U.S. Phase I trial in B-cell lymphoma is currently enrolling patients. This Phase I trial is designed to determine the safety and tolerability of our Btk Inhibitor PCI-32765, and to evaluate effects of Btk inhibition (using pharmacodynamic assays) and tumor response. The company has most recently published interim clinical results of the first two dose level cohorts of this Phase I trial at the American Society of Hematology (ASH) 51st annual meeting on December 7, 2009. In these cohorts, 16 heavily pretreated and progressing lymphoma patients with a variety of B-cell malignancies were evaluated. The ASH poster presentation reported that of the 16 patients enrolled, 5 had confirmed partial responses (a 50% or greater decrease in the aggregate sum of the diameters of up to 6 largest cancer masses; no increase in size of other nodes per the Revised Response Criteria for Malignant Lymphoma Bruce D. Cheson J Clin Oncol 25:579-586). The partial responses were in 2 patients with mantle cell lymphoma, 2 patients with chronic lymphocytic leukemia and 1 patient with follicular lymphoma. In addition, 3 patients had stable disease and 8 patients had progressive disease.
  The first dose level cohort consisted of 7 patients treated with our Btk Inhibitor PCI-32765. This cohort generated 2 partial responses (1 patient with mantle cell lymphoma and 1 patient with follicular lymphoma) and 1 stable disease. The second dose level cohort consisted of 9 patients generating 3 partial responses (1 patient with mantle cell lymphoma and 2 patients with chronic lymphocytic leukemia (CLL/SLL)) and 2 patients with stable disease. The overall response rate (ORR), considering only partial and complete responses, was 31% for the first two dose level cohorts.
  Concurrent with the ASH poster presentation the company announced in a press release the results of interim evaluations performed up to December 5, 2009 on 3 CLL/SLL patients in the third dose level cohort.  All three patients were determined to have a partial tumor response based on the interim analysis.  The partial response rate at that point in CLL/SLL patients was 5 out of 6.
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 Table of Contents
  The company anticipates enrolling 5 ascending-dose cohorts in the current Phase I study with PCI-32765. Per protocol, dose escalation will continue up to three levels above full Btk active-site occupancy, which occurred in dose level cohort 2.
  The company has submitted interim results of the trial in an abstract to the American Society for Clinical Oncology (ASCO) to be presented at their Annual Meeting on June 4-8, 2010 in Chicago, IL. We are pleased to announce that our abstract was selected among the few to be presented in an Oral Session. Less than 5% of all abstracts submitted were selected for an oral presentation. (Abstract Control Number: 54096, Permanent Abstract ID:  8012, Abstract Title: Btk inhibitor PCI-32765 monotherapy induces objective responses in patients with relapsed aggressive NHL: Evidence of antitumor activity from a phase I study). ASCO’s regulations require us not to disclose any information contained in this Oral Session prior to the annual meeting. Adhering to this policy precludes the company from providing further updates on its Btk program until the abstract has been made public by ASCO. Once the Oral Session has taken place the company is planning to give a full update on the trial results.
  Research is continuing to expand clinical indications for our Btk Inhibitor PCI-32765 beyond blood cancers (i.e. hematologic tumors) and to support our ongoing clinical trials in lymphoma and CLL. PCI-32765 is a potent inhibitor of histamine release (also known as degranulation) from mast cells and basophils, which are specific immune cells. Largely based on the work of Dr. Gerard Evan and others at UCSF, mast cells have emerged as an important component of the proinflammatory microenvironment, which is crucial for the physical expansion and maintenance of tumor growth (Nature Medicine 13 (10), p. 1211-18). Dr. Evan’s lab tested our Btk Inhibitor PCI-32765 in his mouse pancreatic model. In the model, PCI-32765 completely blocked mast cell degranulation which led to tumor regression and vascular collapse. This work was presented at the 2010 American Association for Cancer Research (AACR) Annual Meeting as an Oral Presentation on April 20, 2010. With respect to research in lymphoma the NCI has made valuable discoveries indicating that many types of lymphoma are driven by chronic active B-cell receptor signaling, a process dependent upon Btk activity. These findings, which included experiments with PCI-32765, were published in Nature Davis et al. (2010) Vol. 463, p88-94.
  Bruton’s Tyrosine Kinase (Btk) Inhibitor, PCI-45292, the company’s latest Btk inhibitor, is an orally-active small molecule inhibitor of Bruton’s tyrosine kinase that is being developed by Pharmacyclics for the treatment of patients with autoimmune diseases. In its most recent quarter the company identified PCI-45292 as a clinical development candidate. We are continuing to scale up the synthesis of PCI-45292 in anticipation of starting IND-enabling preclinical safety studies.  Pharmacyclics is intending to complete the in-life phase of these studies by the end of 2010 and is planning to file an IND (Investigational New Drug Application) in the first half of 2011.  This program is based on the chemical scaffold developed for the Btk Inhibitor PCI-32765, and is optimized for chronic dosing in non-oncology applications.  The preclinical development of Btk Inhibitor PCI-45292 is currently being pursued with priority.
  Histone deacetylase (HDAC) Inhibitor, PCI-24781, is the company’s orally-bioavailable histone deacetylase inhibitor that is currently in multiple clinical trials, including a Phase I trial in patients with advanced solid tumors, a Phase I/II trial in patients with recurrent lymphomas and a Phase I/II trial in sarcoma patients (in combination with doxorubicin, an anti tumor agent).  Histone Deacetylases are enzymes in a cell responsible for turning off and on genes. PCI-24781 targets histone deacetylase (HDAC) enzymes and inhibits their function.  We have shown that PCI-24781 impacts the cell by multiple mechanisms including a re-expression of tumor suppressors, disruption of DNA repair mechanisms, cell cycle inhibition and by generating an increase in reactive oxygen species, all of which may contribute to tumor cell toxicity.  Previous clinical trials have demonstrated that our HDAC Inhibitor PCI-24781 has favorable systemic elimination properties when dosed orally, and inhibits the target enzymes.  Clinical response or control of tumor growth has been recorded in the three single agent clinical trials to date.
  16
 Table of Contents
  Most recently the company announced the Phase I trial results of our HDAC Inhibitor PCI 24781, tested in heavily pretreated relapsed lymphoma patients (those who had a response but the cancer reoccurred) and/or refractory lymphoma patients (those who had an earlier treatment that did not have an effect on the cancer). The results of this trial were published at the 51st annual meeting of the American Society for Hematology in December of 2009. In a review of the clinical data at the end of the Phase I dose-escalation portion of the current lymphoma trial, we have found that PCI-24781 produced encouraging efficacy results with minimal toxicity when administered as a single agent. Among 16 lymphoma patients evaluated for disease control after the completion of at least 2 treatment cycles, we observed 1 Complete Response (follicular lymphoma), 4 Partial Responses (2 follicular lymphoma, 1 diffuse large B-cell lymphoma, 1 mantle cell lymphoma) and 6 patients with Stable Disease.  Of the 4 follicular lymphoma patients evaluated in this trial, 3 had Objective Response and one manifested Stable Disease.
  The HDAC Inhibitor PCI-24781 has demonstrated a good safety profile in over 80 patients treated so far, with the main dose-limiting toxicity observed being a rapidly reversible thrombocytopenia (a decrease in platelets, which are blood cells necessary for clotting). This effect is common among HDAC Inhibitors and is considered a class effect, related to the pharmacologic mechanism of action. The duration and severity of the thrombocytopenia is being successfully managed using novel dose scheduling strategies that we have developed and tested in the clinic.
  In preclinical models, we have identified synergy of the Pharmacyclics HDAC inhibitor PCI-24781 with several approved cancer therapeutics, and some of these combinations are being or will be tested in the clinic, including the use of PCI-24781 together with bortezomib (Velcade) in lymphoma (Clin Cancer Res. (2009) 15:3354-65), and with doxorubicin in sarcoma patients (sarcoma is a cancer of soft tissues).  This last trial is co-sponsored by prominent investigators at Massachusetts General Hospital and Dana-Farber / Harvard Cancer Center. During this trial we will also test the novel biomarker RAD51 that we have developed in collaboration with scientists at Stanford University (Proc Natl Acad Sci USA. (2007) 104:19482-7), which may be useful as predictive biomarker in clinical testing by improving patient selection.
  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 to develop and commercialize within the United States.  Servier is committing significant resources to the clinical development of Pharmacyclics HDAC Inhibitor PCI-24781. Most recently we signed a supply agreement and delivered to Servier 10 kg of PCI 24781, to support their Phase I and Phase II clinical testing program.
  Histone deacetylase-8 (HDAC8) isoform-specific inhibitor, PCI-34051, is at the preclinical lead optimization stage. PCI-34051 is the current lead molecule. The company plans to conclude its lead optimization work by the end of calendar year 2010. Most recently, a poster presentation describing the lead optimization and preclinical development of our HDAC8 isoform-specific inhibitors, including their efficacy in certain cancer subtypes like T-cell leukemia and lymphoma and neuroblastoma, as well as their potential utility in autoimmune disease was presented on April 21, 2010 during the 101st annual meeting of the American Association for Cancer Research (AACR), in Washington, D.C.
  Factor VIIa Inhibitor, PCI-27483, is a potent and highly selective small molecule inhibitor of coagulation (clotting) Factor VIIa.  This drug targets Factor VIIa, the active form of Factor VII that arises from interaction with the cell surface membrane protein known as 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 patho-physiologic processes that facilitate tumor blood vessel formation (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, also known as blood clots. Laboratory studies and animal models indicate that our inhibitor of Factor VIIa blocks the growth of tumors that express TF.
  17
 Table of Contents
  We have completed our initial Phase I testing of Factor VIIa Inhibitor PCI-27483 in healthy volunteers. The primary objective of the ascending dose Phase I study was to assess the pharmacodynamic and pharmacokinetic profiles, the relationship between drug level and physiological response, of Factor VIIa Inhibitor PCI-27483 following a single, subcutaneous injection.  In addition, the safety and tolerability of our Factor VIIa Inhibitor 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.
  A multicenter Phase I/II study has begun with Factor VIIa Inhibitor PCI-27483 in the fourth quarter of calendar 2009. The study is enrolling patients with locally advanced or metastatic pancreatic cancer that are either receiving or are planned to receive gemcitabine therapy. Part A will enroll 6 patients; each patient will be administrated with subcutaneous PCI-27483 twice daily at escalating doses from 0.8 mg/kg to 1.5 mg/kg in combination with gemcitabine for 8 weeks. Part B will enroll and randomize 40 patients to receive gemcitabine +/- PCI-27483 at a dose established in part A. Duration for both parts will be 12 weeks. Enrollment has begun with four patients dosed to date. The objectives are to: a) assess the safety of Pharmacyclics Factor VIIa Inhibitor 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.
  Motexafin Gadolinium (MGd), PCI-0120, 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 (cell death) by disrupting the oxygen dependent pathways in a cell. 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.  One Phase II trial is a multi-center study in newly diagnosed patients with glioblastoma multiform (a type of brain cancer).  In this study, which completed enrollment in July 2009, MGd is being administered in combination with radiation therapy and temozolomide, a chemotherapy for brain cancers.  Previous studies in malignant brain cancers 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”) cancers. This 60 patient study completed enrollment in January 2009 with patients currently being followed per the clinical protocol. Preliminary data was obtained from the NCI indicating that there was no statistically meaningful effect from MGd in this patient population.  However, we are continuing to monitor the patients who remain on study to further evaluate potential effects of this drug.
  We are subject to risks common to pharmaceutical companies developing products, including risks inherent in our research, development and commercialization efforts, preclinical testing, clinical trials, uncertainty of regulatory and marketing approvals, uncertainty of market acceptance of our products, history of and expectation of future operating losses, reliance on collaborative partners, enforcement of patent and proprietary rights, and the need for future capital.  In order for a product to be commercialized, we must conduct preclinical tests and clinical trials, demonstrate efficacy and safety of our product candidates to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and marketing arrangements, build a U.S. commercial capability, obtain market acceptance and, in many cases, obtain adequate coverage of and reimbursement for our products from government and private insurers.  We cannot provide assurance that we will generate revenues or achieve and sustain profitability in the future.
  Results of Operations
  Revenues
  Three Months Ended





Nine Months EndedMarch 31,


Percent


March 31,

Percent2010


2009


Change


2010


2009

ChangeLicense and milestone revenues

$
2,112,000


$
-



N/A


$
6,814,000


$
-

NA
  18
 Table of Contents
  The company recorded $2,112,000 and $6,814,000 in revenue in the three and nine month periods ended March 31, 2010 associated with its collaboration and license agreement with Servier, which was entered into in April 2009.  Given that the deliverables under the collaboration agreement with Servier 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 (two years), which coincides with the delivery period for all substantive obligations or “deliverables” associated with this agreement.
  The collaboration and license agreement required 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, we deferred recognition of all revenue under the Servier collaboration agreement until the supply agreement was completed and executed.  We completed the drug supply agreement with Servier in the second quarter ended December 31, 2009 and therefore began recognizing revenue from the Servier collaboration agreement in the quarter ended December 31, 2009.  Total revenue recognized for the three months ended March 31, 2010, was $2.1 million.  Total revenue recognized for the nine months ended March 31, 2010 was $6.8 million, of which $1.2 million represents the pro rata portion of revenue attributable to the period from April 2009 (i.e., the signing of the collaboration agreement) to June 30, 2009, had the supply agreement been completed in April 2009.
  Of the total research and development collaboration revenues for the nine months ended March 31, 2010, $5,274,000 represents the amortization of the $11,000,000 upfront payment from Servier received in April 2009.  The remaining revenue of $1,540,000 represents the pro-rata completion of services attributable to payments of $3,213,000 from Servier associated with research payments, the Company’s supply commitment and reimbursements of patent expenses received since establishing the collaboration.
  Research and Development
  Three Months Ended





Nine Months EndedMarch 31,


Percent

March 31,


Percent2010


2009


Change

2010


2009


ChangeResearch and development expenses

$
3,679,000


$
4,626,000



-20
%

$
10,690,000


$
10,815,000



-1
%
 The decrease of 20% or $947,000 in research and development expenses for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009, was primarily due to a $1,000,000 expense incurred in the prior year associated with the amendment of our agreement with Celera Corporation, and a decrease of $151,000 in personnel costs, partially offset by an increase of $144,000 in outside contracts and research.
  The decrease of 1% or $125,000 in research and development expenses for the nine months ended March 31, 2010, as compared to the nine months ended March 31, 2009, was primarily due to a $1,000,000 expense incurred in the prior year associated with the amendment of our agreement with Celera Corporation and a decrease of $104,000 in personnel costs, partially offset by increases of $367,000 in drug manufacturing costs associated with our HDAC, Btk and Factor VIIa programs, $294,000 in outside contracts and research, $259,000 in outside clinical trial costs, and $128,000 in outside services and consulting expenses.
  19
 Table of Contents
  Research and development costs are identified as either directly attributed to one of our research and development programs or as an indirect cost, with only direct costs being tracked by specific program. Direct costs consist of personnel costs directly associated with a program, preclinical study costs, clinical trial costs, and related clinical drug and device development and manufacturing costs, drug formulation costs, contract services and other research expenditures. Indirect costs consist of personnel costs not directly associated with a program, overhead and facility costs and other support service expenses. The following table summarizes our principal product development initiatives, including the related stages of development for each product, the direct costs attributable to each product and total indirect costs for each respective period.  For a discussion of the risks and uncertainties associated with the timing and cost of completing a product development phase, see the Risk Factors discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009.
  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 Expenses


Related R&D ExpensesThree Months Ended


Nine Months EndedMarch 31,


March 31,Phase ofProgram

Description

Development

2010


2009


2010


2009Btk Inhibitors

Cancer/Autoimmune

Phase I

$
1,438,000


$
786,000


$
3,750,000


$
2,332,000HDAC Inhibitors

Cancer

Phase I/II


872,000



1,920,000



2,142,000



2,945,000Factor VIIa Inhibitor

Cancer

Phase I/II


321,000



425,000



1,416,000



1,090,000MGd

Cancer

Phase II


59,000



213,000



140,000



892,000Total direct costs




2,690,000



3,344,000



7,448,000



7,259,000Indirect costs




989,000



1,282,000



3,242,000



3,556,000Total research anddevelopment expenses

$
3,679,000


$
4,626,000


$
10,690,000


$
10,815,000
 
  General and Administrative
  Three Months Ended





Nine Months EndedMarch 31,


Percent

March 31,


Percent2010


2009


Change

2010


2009


ChangeGeneral and adiministrative expenses

$
1,577,000


$
1,789,000



-12
%

$
4,875,000


$
7,102,000



-31
%
 The decrease of 12% or $212,000 in general and administrative expenses for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 was primarily due to a decrease of $126,000 in accounting and reporting costs due to the timing of such services and a decrease in administration headcount.
  The decrease of 31% or $2,227,000 in general and administrative expenses for the nine months ended March 31, 2010, as compared to the nine months ended March 31, 2009, was primarily due to share-based compensation expense of $1,795,000 and $740,000 of severance expenses associated with separation agreements entered into with the company’s former CEO and CFO in September 2008, partially offset by an increase of $164,000 in investor relations expenses and $126,000 in non-severance related share-based compensation expense.
  20
 Table of Contents
  Interest and Other Income (Expense), Net
  Three Months Ended





Nine Months EndedMarch 31,


Percent


March 31,


Percent2010


2009


Change


2010


2009


ChangeInterest income

$
21,000


$
6,000



250
%

$
58,000


$
131,000



-56
%Interest expense


-



(267,000
)


-100
%


(43,000
)


(267,000
)


-84
%Gain (Loss) on sale of investments


-



-



N/A



-



1,000



-100
%Gain (Loss) on sale of fixed assets


-



11,000



-100
%


-



11,000



-100
%Interest and other income (expense), net

$
21,000


$
(250,000
)


-108
%

$
15,000


$
(124,000
)


-112
%
 The increase of 108% or $271,000 in interest and other income, net, for the three months ended March 31, 2010, as compared to the three months ended March 31, 2009, was due to $250,000 of amortized debt discount and $17,000 of interest expense in the three months ended March 31, 2009 related to the Note Payable offset by an increase of interest earned on the company’s investments due to increased investment balances.
  The increase of 112% or $139,000 in interest and other income, net, for the nine months ended March 31, 2010, as compared to the nine months ended March 31, 2009, was primarily due to $229,000 of amortized debt discount related to the Note Payable, partially offset by a $73,000 reduction of interest income due to lower average interest rates.
  Income Taxes
  In the year ended June 30, 2009, the company recorded a $550,000 income tax provision as result of a withholding taxes paid on the $11.0 million upfront licensing payment received from Servier.  In the quarter ended December 31, 2009, the company recorded a $550,000 income tax receivable related to a tax credit resulting from to a December 2009 tax treaty revision enacted between France and the United States that eliminates withholding taxes related to licensing agreements and provides that prior withholding taxes may be reclaimed.
  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.
  As of March 31, 2010, we had approximately $27,391,000 in cash, cash equivalents and marketable securities. Net cash used in operating activities of $10,387,000 during the nine months ended March 31, 2010 resulted primarily from our net loss, a decrease in deferred revenue, and an increase in prepaid and other assets, partially offset by share-based compensation expense and amortization of premium or discount on marketable securities.  Net cash used in operating activities of $13,079,000 during the nine months ended March 31, 2009 resulted primarily from our net loss net of share-based compensation expense and an increase in accounts payable.
  Net cash used in investing activities of $21,583,000 in the nine months ended March 31, 2010 consisted primarily of purchases of marketable securities, partially offset by maturities and sales of marketable securities. Net cash provided by investing activities of $4,511,000 in the nine months ended March 31, 2009 consisted primarily of proceeds from maturities and sales of marketable securities offset by purchases.
  Net cash provided by financing activities of $22,591,000 for the nine months ended March 31, 2010 was primarily due to $21,720,000 in net proceeds from the sale of approximately 22.5 million shares of common stock in a Rights Offering completed in August 2009 and $1,161,000 in proceeds from stock option exercises. Net cash provided by financing activities of $7,773,000 in the nine months ended March 31, 2009 was primarily due to proceeds from $6,400,000 in loans and $1,371,000 in proceeds from the sale of approximately 1.5 million shares of common stock.
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  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. The withholding tax paid to the French Government will be reclaimed due to a recent revision in the Double Tax Treaty between the US and France, see Note 8.
  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 through the issuance of shares in the Rights Offering.
  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 we could be required to make 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, partnership collaboration 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;
  ·
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.
  22
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  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 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.
  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.
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 Table of Contents
  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 determines if the performance conditions have been met.  Share-based compensation expense for the options with performance obligations is recorded over the requisite performance period 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.
  Item 3.
Quantitative and Qualitative Disclosures About Market Risk
  Not Applicable.
  Item 4T.
Controls andProcedures
  (a)  Evaluation of disclosure controls and procedures: As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the third fiscal quarter of 2010, 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 Principal Executive Officer and our Principal Financial Officer. Based upon that evaluation, our Principal Executive Officer and our Principal Financial Officer 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 Principal Executive Officer and Principal Financial Officer, 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.
  24
 Table of Contents
  PART II.
OTHERINFORMATION
  Item 1.
Legal Proceedings
  Not Applicable.
  Item 1A.
Risk Factors
  Not Applicable.
  Item 2.
Unregistered Salesof Equity Securities and Use of Proceeds
  Not Applicable.
  Item 3.
Defaults Upon Senior Securities
  Not Applicable.
  Item 4.
(Removed and Reserved)
  Not Applicable.
  Item 5.
Other Information
  Not Applicable.
  Item 6.
Exhibits
  31.1
 31.2
 32.1
  25
 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.
  Dated:  May 7, 2010
Pharmacyclics, Inc.(Registrant)By:
/s/ ROBERT W. DUGGANRobert W. DugganChairman and Chief Executive Officer

(Principal Executive Officer)
   Dated:  May 7, 2010
By:
/s/ RAINER M. ERDTMANNRainer M. ErdtmannVice President, Finance & Administration and

Secretary (Principal Financial and Accounting Officer)
 
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 Table of Contents
 
 EXHIBITS INDEX
  Exhibit

Number
Description31.1
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.31.2
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.32.1
Section 1350 Certifications of Principal Executive Officer and Principal Financial Officer.