PHARMACYCLICS: FINANCING RESEARCH & DEVELOPMENT

Harvard Business School Case 201-056

Case Software 201-716 (2nd edition)

Copyright © 2001 by the President and Fellows of Harvard College

This case was prepared as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.
Exhibit 2 Pharmacyclics Financing History

Funding
Average Raised
Fiscal Year (a) Transaction Type Shares Issued Share Price ($000)
Insider Financing
91 Equity 400,000 0.02 6
92 Equity 97,111 0.02 2
93 Equity 49,000 0.06 3
94 Option Exercised 324,188 0.12 38
95 Option Exercised 38,403 0.24 9
96 Option Exercised 100,301 9.46 208
97 Option Exercised 110,840 3.77 417
98 Option/Purchase Rights Exercised 99,305 7.38 733
99 Option Exercised 88,918 6.28 558
Private Financing
92 Convertible Preferred Stock 2,040,784 1.32 2,667
93 Convertible Preferred Stock 1,580,095 4.88 7,674
94 Convertible Preferred Stock 886,960 8.63 7,623
95 Warrants Issued - - 49
96 Convertible Preferred Stock 649,132 8.63 5,601
97 Common stock 1,442,190 16.93 24,420
98 Common stock (Warrants Exercised) 80,033 - -
99 Common stock (Warrants Exercised) 45,661 - -
Public Financing
96 IPO - Common Stock 2,383,450 12 26,042
98 SEO – Common Stock 2,012,500 21.75 40,796
0 SEO – Common stock September 1999 2,645,000 38.75 96,200
Totals (b) 15,073,871 - 213,046

(a) PCYC’s fiscal year runs from July 1 to June 30.

(b) Funding raised excludes stock compensation expense of $331K.
Exhibit 3 Pharmacyclics Income Statements 1991-2000 (thousands of dollars)

Fiscal Year Ending June 30

2000 (a) 1999 1998 1997 1996 1995 1994

License & Grant Revenue 1,000 750 2,700 25 301 79 3,000

Contract Revenue 303 1,291 831 0 0 0 0
Total Revenue 1,303 2,041 3,531 25 301 79 3,000

Research & Development 10,967 21,889 13,973 9,632 7,641 9,330 6,909
General & Administrative 1,934 2,762 1,987 1,905 1,515 996 1,042
Total Operating Expense 12,901 24,651 15,960 11,537 9,156 10,326 7,951

Loss from Operations -11,598 -22,610 -12,429 -11,512 -8,855 -10,247 -4,951

Interest Income 2,557 3,398 2,826 1,480 940 187 164

Interest Expense -8 -34 -72 -226 -320 -419 -253
Interest Net 2,549 3,364 2,754 1,254 620 -232 -89

Loss Before Income Tax -9,049 -19,246 -9,675 -10,258 -8,235 -10,479 -5,040
Provision for Income Taxes 0 0 0 0 0 0 -101
Net Profit (Loss) -9,049 -19,246 -9,675 -10,258 -8,235 -10,479 -5,141

(a) Year-to-date through the second quarter ending December 31, 1999.
1993 1992

0 0
0 0
0 0

3161 487
559 58
3720 545

-3,720 -545

140 22

-3,580 -523
0 0
-3,580 -523
Exhibit 4 Pharmacyclics Balance Sheets 1991-2000 (thousands of dollars)

Fiscal Year Ending June 30

2000 (a) 1999 1998 1997 1996 1995

Cash & cash equivalents (b) 61,164 3,930 13,456 15,869 13,950 376
Short-term investments (c) 45,329 42,475 23,189 14,958 8,053 0
Accounts receivable 70 309 166 0 0 0
Prepaid expenses 2,592 463 166 216 241 164
Long-term investments (d) 28,893 5,067 33,736 6,103 0 0
Property and equipment, net 2,829 3,228 2,253 2,504 2,622 2,850
Other assets 85 85 53 57 149 149
Total Assets 140,962 55,557 73,019 39,707 25,015 3,539

Accounts payable 2,738 4,563 3,377 1,323 753 689

Accrued liabilities 487 747 432 311 300 257
Notes payable 0 0 0 0 0 2,000
Current portion of capital leases 150 216 255 768 917 749
Capital lease obligations 14 59 275 530 941 1,429
Deferred rent 42 15 39 79 113 67
Total Liabilities 3,431 5,600 4,378 3,011 3,024 5,191

Common stock at par 2 1 1 1 1 0

Additional paid-in capital 214,013 117,178 116,531 74,911 49,948 18,071
Accumulated other income (loss) -298 -85 0 0 0 0
Development deficit -76,186 -67,137 -47,891 -38,216 -27,958 -19,723
Total Stockholders’ Equity 137,531 49,957 68,641 36,696 21,991 -1,652

(a) Balances at close of second quarter 2000 ending December 31, 1999.
(b) Includes cash in banks and money market investments.
(c) Includes corporate, state or political subdivision debt maturing within one year.
(d) Includes corporate, state or political subdivision debt maturing at various dates through 2001.
g June 30
1994 1993 1992

8,690
0
0
65
0
3,242
53
12,050 6,880 2,157

642
148
0
590
1,880
21
3,281 631 5

0
18,013
0
-9,244 -4,103 -523
8,769 6,249 2,152
Exhibit 9 Pharmacyclics Projected Operating Expenses (millions of dollars)

Fiscal Year Ending June 30

2000 2001 2002 2003 2004

R& D Expense 27.5 42.5 38.0 44.0 54.5

SG&A 5.0 15.0 35.0 53.0 62.0
Total Operating Expenses 32.5 57.5 73.0 97.0 116.5
Exhibit 10 News Announcements December 1, 1999 to February 25, 2000

Pharmacyclics News Next Day

Date Source Announcement Close
2/16/2000 Investors Business Daily PCYC is listed as a ‘hot stock to watch’ $83.00
Second quarter results: PCYC loses 36 cents a
share versus 35 cents a year earlier and revenue
increases $.9M, or 433%, with a milestone
2/3/2000 Company Press Release payment from Alcon $67.00
1/19/2000 No news on PCYC $60.00
1/10/2000 Company Press Release PCYC receives milestone payment from Alcon $43.00
CEO Miller refutes a Stanford University
12/31/1999 Dow Jones Business News researcher’s report that Xcytrin is ineffective $39.00
Previous
Close
$62.75

$54.50
$40.38
$40.88

$37.06
Exhibit 11A Betas for Pharmaceutical Companies

Equity Equity Interest

Equity Market Market Bearing Leverage
Company Beta (a) Value (b) Value (C) Debt (d) (%) (e)
American Home Products 0.53 56,720 51,179 3,669 6.7
Bristol Myers Squibb 0.86 113,401 127,144 1,342 1.0
Johnson & Johnson 1.03 100,057 129,588 2,450 1.9
Lilly (Eli) & Co. 0.75 64,801 72,501 2,812 3.7
Merck & Co. 0.93 143,384 156,486 3,144 2.0
Pfizer Inc. 0.87 123,585 124,789 525 0.4
Pharmacia & Upjohn Inc. 0.65 24,749 23,385 332 1.4
Schering-Plough 1.13 51,520 62,376 6 0.0
Warner-Lambert Co. 0.76 73,759 70,634 1,250 1.7

Exhibit 11B Beta for Pharmacyclics and Competitors

Equity Equity Interest

Equity Market Market Bearing Leverage
Company Beta (a) Value (b) Value (C) Debt (d) (%) (e)
Advanced Magnetics 0.39 65 21 0 0.0
Cell Therapeutics 0.43 616 109 2 2.1
Elan Corporation 0.39 10,967 7,939 1,549 16.3
Mallinckrodt 0.96 1,713 2,572 743 22.4
OxiGENE 1.34 263 176 0 0.0
Pharmacyclics 0.97 1,205 348 0 0.0
QLT 1.31 4,629 3,810 0 0.0

(a) Beta as of February 2000

(b) Market value of equity in millions as of February 2000
(c) Market value of equity at company’s fiscal year end prior to February 2000
(d) Long term debt in millions at company’s fiscal year end prior to February 2000
(e) (d)/((d) + (c))

Exhibit 11C Corporate & Government Bond Rates as of February 28, 2000

Government Bond Yields

Maturity Rate (%)

3 months 5.82
6 months 6.03
1 year 6.21
3 years 6.58
5 years 6.58
10 years 6.55
30 years 6.19
Corporate Bonds (10-year maturity)
Maturity Rate (%)

AAA 7.28
AA 7.38
A 7.49
BBB 7.85
BB 9.07
B 10.04