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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended DECEMBER 31, 2000

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

For the transition period to

Commission file number 000-31253

PHARSIGHT CORPORATION
(Exact name of Registrant as specified in its charter)

DELAWARE		77-0401273
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

800 WEST EL CAMINO REAL, MOUNTAIN VIEW, CA 94040
(Address of principal executive offices, including zip code)

(650) 314-3800
(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 such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

As of January 31, 2001 there were 18,361,021 outstanding shares of the Registrant's common stock, $.001 par value.

PHARSIGHT CORPORATION

FORM 10-Q

INDEX

			Page
PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		Condensed Balance Sheets as of December 31, 2000 and March 31, 2000	3
		Condensed Statements of Operations for the Three and Nine Months Ended December 31, 2000 and 1999	4
		Condensed Statements of Cash Flows for the Nine Months Ended December 31, 2000 and 1999	5
		Notes to Condensed Financial Statements	6
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		10
	Item 3. Quantitative and Qualitative Disclosures about Market Risk		22
PART II. OTHER INFORMATION
	Item 2. Changes in Securities and Use of Proceeds.		23
	Item 6. Exhibits and Report on Form 8-K
		Exhibits	23
		Reports on Form 8-K	23

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PHARSIGHT CORPORATION

CONDENSED BALANCE SHEETS

(In thousands)

		December 31, 2000			March 31, 2000
		(unaudited)
Assets
Current assets:
	Cash and cash equivalents	$	20,228		$	5,286
	Short-term investments		6,999			11,196
	Accounts receivable, net of allowance for bad debts of $96 at December 31, 2000 and $27 at March 31, 2000		2,810			2,000
	Recognized income not yet billed		213			225
	Prepaids and other current assets		1,196			685

Total current assets			31,446			19,392
Property and equipment, net			1,952			1,191
Intangible assets, net
	Core technology		119			442
	Other		30			148

			149			590
Other assets			202			147

Total assets		$	33,749		$	21,320

Liabilities and stockholders' equity (deficit)
Current liabilities:
	Accounts payable	$	384		$	315
	Accrued interest		—			166
	Accrued expenses		993			396
	Accrued compensation		1,998			1,088
	Deferred revenue		2,523			1,925
	Current portion of notes payable		185			2,293
	Current obligations under capital leases		367			372

Total current liabilities			6,450			6,555
Obligations under capital leases			1,143			708
Commitments
Redeemable convertible preferred stock, $0.001 par value Authorized shares—none at December 31, 2000 and 5,512 at March 31, 2000; Issued and outstanding shares—none at December 31, 2000 and 5,455 at March 31, 2000			—			18,582
Stockholders' equity (deficit):
	Convertible preferred stock, $0.001 par value Authorized shares—none at December 31, 2000 and 5,253 at March 31, 2000; Issued and outstanding shares—none at December 31, 2000 and 5,232 at March 31, 2000		—			6
	Preferred stock, $0.001 par value Authorized shares—5,000 at December 31, 2000 and none at March 31, 2000; Issued and outstanding shares—none at December 31, 2000 and March 31, 2000		—			—
	Common stock, $0.001 par value Authorized shares—120,000 at December 31, 2000 and 19,235 at March 31, 2000; Issued and outstanding shares—18,273 at December 31, 2000 and 4,055 at March 31, 2000		18			4
	Additional paid-in capital		74,793			28,843
	Deferred stock compensation		(7,283	)		(3,459	)
	Accumulated deficit		(41,225	)		(29,761	)
	Accumulated other comprehensive loss		(6	)		(23	)
	Notes receivable from stockholders		(141	)		(135	)

Total stockholders' equity (deficit)			26,156			(4,525	)

Total liabilities and stockholders' equity (deficit)		$	33,749		$	21,320

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

PHARSIGHT CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

		Three Months Ended December 31,						Nine Months Ended December 31,
		2000			1999			2000			1999
		(unaudited)
Revenues:
	License and renewal	$	915		$	692		$	2,623		$	1,856
	Services		2,561			1,598			6,323			4,020

Total revenues			3,476			2,290			8,946			5,876
Costs and expenses:
	License and renewal(1)		570			366			1,017			682
	Services(2)		1,302			860			3,559			2,280
	Research and development(3)		1,730			1,331			5,832			3,760
	Sales and marketing(4)		2,058			1,096			4,795			2,773
	General and administrative(5)		1,041			443			2,734			1,333
	Amortization of deferred stock compensation		1,801			609			5,919			1,385
	Amortization of intangible assets		131			236			440			725

Total costs and expenses			8,633			4,941			24,296			12,938

Loss from operations			(5,157	)		(2,651	)		(15,350	)		(7,062	)
Other income (expense):
	Interest expense		(47	)		(111	)		(173	)		(391	)
	Interest income and other, net		396			244			954			372

			349			133			781			(19	)

Net loss			(4,808	)		(2,518	)		(14,569	)		(7,081	)
Accretion on Series C and Series D redeemable convertible preferred stock			—			(310	)		(443	)		(931	)

Net loss attributable to common stockholders		$	(4,808	)	$	(2,828	)	$	(15,012	)	$	(8,012	)

Basic and diluted net loss per share attributable to common stockholders		$	(0.27	)	$	(0.86	)	$	(1.33	)	$	(2.58	)

Shares used to compute basic and diluted net loss per share attributable to common stockholders			17,925			3,301			11,272			3,111

Pro forma basic and diluted net loss per share		$	(0.27	)				$	(0.89	)

Shares used to compute pro forma basic and diluted net loss per share			17,925						16,344

Excluding amortization of deferred stock compensation as follows:
(1) License and renewal		$	111		$	36		$	356		$	68
(2) Services			156			137			715			340
(3) Research and development			207			175			723			346
(4) Sales and marketing			454			147			1,416			341
(5) General and administrative			873			114			2,709			290

		$	1,801		$	609		$	5,919		$	1,385

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

PHARSIGHT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

			Nine Months Ended December 30,
			2000			1999
			(unaudited)
Operating activities
Net loss			$	(14,569	)	$	(7,081	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Amortization of deferred stock compensation			5,919			1,385
	Depreciation			634			334
	Amortization			440			725
	Changes in operating assets and liabilities:
		Accounts receivable		(810	)		(1,914	)
		Recognized income not yet billed		12			(12	)
		Prepaids and other current assets		(511	)		(221	)
		Other assets		(55	)		(72	)
		Accounts payable		69			(190	)
		Accrued expenses		597			180
		Accrued compensation		910			513
		Deferred revenue		598			1,010
		Accrued interest and other		(170	)		(13	)

Net cash used in operating activities				(6,936	)		(5,356	)
Investing activities
Purchases of property and equipment				(1,395	)		(546	)
Purchases of short-term investments				(10,361	)		(12,719	)
Maturities of short-term investments				14,575			2,000

Net cash provided by (used in) investing activities				2,819			(11,265	)
Financing activities
Proceeds from capital lease line				757			611
Principal payments on notes payable				(2,108	)		(2,330	)
Principal payments on capital lease obligations				(327	)		(219	)
Payments to holders of Series C preferred stock				(6,109	)		—
Proceeds from the issuance of convertible preferred stock, net				—			19,967
Proceeds from the issuance of common stock				26,846			86

Net cash provided by financing activities				19,059			18,115
Net increase in cash and cash equivalents				14,942			1,494
Cash and cash equivalents at the beginning of the period				5,286			4,148

Cash and cash equivalents at the end of the period			$	20,228		$	5,642

Supplemental disclosures of noncash activities
Property and equipment acquired under capital leases			$	757		$	611

Accretion of preferred stock			$	443		$	931

Conversion of preferred stock to common stock			$	9,373		$	—

Reversal of preferred stock accretion upon conversion			$	3,548		$	—

Issuance of common stock for notes			$	—		$	23

Deferred stock compensation			$	10,070		$	3,784

Reversal of deferred stock compensation upon cancellation of unvested stock options			$	(325	)	$	—

Supplemental disclosure of cash flow information
Cash paid for interest			$	238		$	297

Cash paid for taxes			$	3		$	—

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

PHARSIGHT CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

Pharsight Corporation develops and markets integrated products and services that help pharmaceutical and biotechnology companies improve the drug development process. Pharsight's solution combines proprietary computer-based simulation, statistical and data analysis tools with the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics. Pharsight was incorporated in California in April 1995 and was reincorporated in Delaware in June 2000.

The accompanying condensed financial statements of Pharsight have been prepared without audit in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with these rules and regulations. The information included in this report should be read in conjunction with Pharsight's financial statements and related notes thereto included in its Registration Statement on Form S-1 filed with the SEC, as amended on August 4, 2000.

In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly Pharsight's financial position, results of operations and cash flows for the interim periods presented. The operating results for the nine months ended December 31, 2000 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2001 or for any other future period.

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

NOTE 2. INITIAL PUBLIC OFFERING OF COMMON STOCK

On August 14, 2000, Pharsight closed the sale of a total of 3,000,000 shares of its common stock in an initial public offering ("IPO") at a price of $10.00 per share, raising $30.0 million in gross proceeds. After underwriters' discounts and commissions of $2.1 million and $1.5 million in related expenses, net proceeds were $26.4 million. As required by the terms of the Series C preferred stock, approximately $6.1 million was paid by Pharsight to the holders of its Series C preferred stock from these net proceeds.

NOTE 3. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE

Basic net loss per share is computed using the weighted-average number of vested outstanding shares of common stock. Diluted net loss per share is computed using the weighted-average number of shares of vested common stock outstanding and, when dilutive, unvested common stock outstanding, potential common shares from options and warrants to purchase common stock using the treasury stock method and from convertible securities using the as-if-converted basis. All potential common shares have been excluded from the computation of diluted net loss per share for all periods presented because the effect would be antidilutive.

In accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued for nominal consideration, prior to the effective date of Pharsight's IPO, are included in the calculation of basic and diluted net loss per share as if they

were outstanding for all periods presented. Pharsight did not have any issuances or grants for nominal consideration.

Basic and diluted pro forma net loss per share have been computed as described above and give effect to the automatic conversion of preferred stock into common stock effective upon the closing of Pharsight's IPO as if their conversion occurred at the original date of issuance.

The following table presents the calculation of basic and diluted and pro forma basic and diluted net loss per share (in thousands, except per share amounts):

		Three Months Ended December 31,						Nine Months Ended December 31,
		2000			1999			2000			1999
Basic and diluted:
	Net loss	$	(4,808	)	$	(2,518	)	$	(14,569	)	$	(7,081	)
	Accretion of preferred stock		—			(310	)		(443	)		(931	)

	Net loss attributable to common stockholders	$	(4,808	)	$	(2,828	)	$	(15,012	)	$	(8,012	)

	Weighted average common shares outstanding		18,247			3,848			11,642			3,734
	Less weighted average common shares subject to repurchase		(322	)		(547	)		(370	)		(623	)

	Shares used to compute basic and diluted net loss per share		17,925			3,301			11,272			3,111

	Basic and diluted net loss per common share	$	(0.27	)	$	(0.86	)	$	(1.33	)	$	(2.58	)

Pro forma basic and diluted:
	Net loss	$	(4,808	)	$	(2,518	)	$	(14,569	)	$	(7,081	)

	Shares used above		17,925						11,272
	Weighted average convertible preferred stock outstanding, as if converted		—						5,072

	Shares used to compute pro forma basic and diluted net loss per common share		17,925						16,344

	Pro forma basic and diluted net loss per common share	$	(0.27	)				$	(0.89	)

The number of unvested and potential common shares excluded from the calculation of diluted net loss per share is detailed in the following table (in thousands):

	December 31,
	2000	1999
Preferred stock	—	10,687
Shares subject to repurchase	296	428
Outstanding options	3,079	1,819
Warrants	272	297

	3,647	13,231

These instruments were excluded because their effect would be antidilutive.

NOTE 4. DEFERRED STOCK COMPENSATION

Pharsight recorded aggregate deferred stock compensation of $296,000 for the year ended March 31, 1999, $5.4 million for the year ended March 31, 2000 and $10.1 million for the nine months ended December 31, 2000. Deferred stock compensation represents the difference between the exercise price of stock options granted and the then deemed fair value of Pharsight's common stock. The amortization of deferred stock compensation is charged to operations over the vesting period of the options using the graded method for employee options, and the straight line method for non-employee options. The amount of deferred stock compensation relating to stock options issued to employees and consultants to be amortized in future fiscal periods, ending March 31, is as follows:

Last three months of 2001	$	1,764
2002		3,337
2003		1,524
2004		400
Thereafter		—

NOTE 5. SEGMENT INFORMATION

Revenues from sales to customers by major geographic area were (in thousands):

	Three Months Ended December 31,				Nine Months Ended December 31,
	2000		1999		2000		1999
United States	$	2,069	$	1,273	$	6,130	$	3,895
Europe		1,268		980		2,474		1,784
Other		139		37		342		197

	$	3,476	$	2,290	$	8,946	$	5,876

For the three months ended December 31, 2000, the United Kingdom accounted for approximately 14% of Pharsight's total revenues. For the three months ended December 31, 1999, the United Kingdom accounted for approximately 10% and Belgium accounted for approximately 13% of Pharsight's total revenues. No other foreign country accounted for 10% or more of Pharsight's total revenues in any of the periods presented. All of Pharsight's significant assets are located within the United States.

NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes methods for accounting for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. Because we do not currently hold any derivative instruments and do not engage in hedging activities, the adoption of SFAS 133 is

not expected to have a significant impact on our financial position, results of operations or cash flows. We will be required to implement SFAS 133, as amended, for the quarter beginning April 1, 2001.

In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." We do not believe the adoption of SAB 101 will materially change our financial position, results of operations or cash flows.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and the results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this quarterly report on Form 10-Q. This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. These forward-looking statements are usually accompanied by words like "believe," "anticipate," "plan," "seek," "expect," "intend" and similar expressions. Our actual results could differ materially from those discussed by these forward-looking statements as a result of factors, which include, but are not limited to, those discussed under "Risk Factors" below. We caution readers not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgement, belief or expectation only as of the date hereof.

Overview

We develop and market integrated products and services that help pharmaceutical and biotechnology companies improve the drug development process. Our solution combines proprietary computer-based simulation, statistical and data analysis tools with the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics.

During the period from our inception in April 1995 through March 1997, we were a development stage enterprise. Our operating activities during this period related primarily to developing products, building our corporate infrastructure and raising capital. In December 1997, we acquired Scientific Consulting, Inc. and the model workbench family of products. In the second quarter of fiscal 1998, we released our first version of software for trial simulation and started offering our scientific and decision services.

The majority of our sales activities are conducted through a dedicated direct sales organization located in the United States and Europe. In addition, our technical support personnel and scientific consultants conduct sales and marketing activities.

In fiscal 2000, we entered into licensing agreements with three organizations, Duke University, Lovelace Respiratory Research Institute and Protocare Sciences, Inc., to gain access to their proprietary medical data on a royalty basis for use in our information products. In the future, we expect to enter into alliances and license arrangements to gain access to other medical data on a royalty basis. We expect this data to provide the foundation for our information products. We intend to provide these products to our customers on a subscription basis.

Results of Operations

Three Months and Nine Months Ended December 31, 2000 and 1999

Revenues. License and renewal revenues increased 32% to $915,000 in the three months ended December 31, 2000 from $692,000 in the three months ended December 31, 1999, and increased 41% to $2.6 million in the nine months ended December 31, 2000 from $1.9 million in the same period of the prior year. For the three month period, approximately $135,000 of the increase was due to a 5% increase in the number of licenses sold, and approximately $88,000 reflected an increase in annual renewal revenues due to the growth in the installed base. For the nine month period, approximately $422,000 of the increase was due to a 43% increase in the number of licenses sold, and approximately $345,000 reflected an increase in annual renewal revenues due to the growth in the installed base.

Service revenues increased 60% to $2.6 million in the three months ended December 31, 2000 from $1.6 million in the three months ended December 31, 1999, and increased 57% to $6.3 million in the nine months ended December 31, 2000 from $4.0 million in the same nine month period of the prior year. We view this as an indication of our customer's acceptance of our methodologies. As of

December 31, 2000, we were engaged with 14 of the top 20 major pharmaceutical companies. Significant additions this quarter included: Aventis and Bayer, along with another top 20 pharmaceutical company and a leading biotechnology company.

We have entered into, and in the future we expect to continue to enter into, alliances and license arrangements to gain access to medical data on a royalty basis. We expect this data to provide the foundation for our information products. We intend to provide these products to our customers on a subscription basis. We expect the percentage of service revenues to decline as a percentage of total revenues as we release new software products, including our information products.

Cost of revenues. Cost of license and renewal revenues consists of royalty expense and cost of materials for both initial products and product updates provided for in our annual license agreements. Cost of license and renewal revenues increased 56% to $570,000 in the three months ended December 31, 2000 from $366,000 in the three months ended December 31, 1999, and increased 49% to $1.0 million in the nine months ended December 31, 2000 from $682,000 in the same period of the prior year. The increase was due primarily to the recognition of costs of our information products as cost of revenues rather than research and development expense in the three months ended December 31, 2000. During this quarter we recognized one month of our product team's expenses to convert data from contract providers into customer usable information, into cost of revenue. We anticipate this component of cost of revenues to increase substantially as all future royalties and expenses related to our information products will be included in cost of revenues. In addition, new versions of products shipped in the nine months ended December 31, 2000 contained a slightly higher royalty expense component than the older versions. These increases were offset by a reduction in salary-related expenses in the three months ended December 31, 2000. Cost of license and renewal revenues as a percentage of license and renewal revenues was 62% for the three months and 39% for the nine months ended December 31, 2000 compared to 53% and 37% in the comparable periods in 1999.

Cost of services revenues increased 51% to $1.3 million in the three months ended December 31, 2000 from $860,000 in the three months ended December 31, 1999, and increased 56% to $3.6 million in the nine months ended December 31, 2000 from $2.3 million in the same period of the prior year. The increase was due primarily to increased services personnel in scientific and decision services. There is a direct relationship between personnel and projects undertaken. Cost of services as a percentage of services revenues was 51% for the three months and 56% for the nine months ended December 31, 2000 compared to 54% and 57% in the comparable periods in 1999. Because of the direct relationship of personnel to projects undertaken, we anticipate that as we take on new projects, cost of services revenues will reflect changes in total services revenues.

Research and development. Research and development expenses increased 30% to $1.7 million in the three months ended December 31, 2000 from $1.3 million in the three months ended December 31, 1999, and increased 55% to $5.8 million in the nine months ended December 31, 2000 from $3.8 million in the same period of the prior year. The increase resulted primarily from an increase in the number of software developers and the use of outside contractors, partially offset by the information product expense now recognized in cost of revenues. In particular, we dedicated considerable resources to the development of the clinical workbench and information products. Research and development expenses as a percentage of revenues were 50% for the three months and 65% for the nine months ended December 31, 2000 compared to 58% and 64% in the comparable periods in 1999. The decrease in research and development expenses as a percentage of total revenues primarily reflects the greater increase in revenues relative to the increase in research and development staff. We believe that our research and development expenses will increase in absolute dollars as we continue to expand our product offerings.

Sales and marketing. Sales and marketing expenses increased 88% to $2.1 million in the three months ended December 31, 2000 from $1.1 million in the three months ended December 31, 1999, and increased 73% to $4.8 million in the nine months ended December 31, 2000 from $2.8 million in the same period of the prior year. The increase in sales and marketing expenses is related primarily to an expansion in our sales force personnel. Sales and marketing expenses as a percentage of total revenues were 60% for the three months and 54% for the nine months ended December 31, 2000 compared to 48% and 47% in the comparable periods in 1999. The increase in marketing and sales expenses as a percentage of total revenues reflects the rapid growth in the number of professionals selling and marketing our products and services, offset in part by increased revenues. We expect our sales and marketing expenses to increase as we continue expansion of our field sales force in both the United States and Europe.

General and administrative. General and administrative expenses increased 135% to $1.0 million in the three months ended December 31, 2000 from $443,000 in the three months ended December 31, 1999, and increased 105% to $2.7 million in the nine months ended December 31, 2000 from $1.3 million in the same period of the prior year. The increase in general and administrative expenses is related to growth in management and administrative support staff as well as professional fees as a result of the expansion of our business. General and administrative expenses as a percentage of total revenues were 30% for the three months and 31% for the nine months ended December 31, 2000 compared to 19% and 23% in the comparable periods in 1999. We expect that these expenses will continue to grow as we incur the costs of being a public company. We believe our sequential growth rate will start to slow now that we have almost completely assembled our operations team.

Deferred Stock Compensation. We have recorded, and expect to record over the next several years, substantial amounts of deferred stock compensation charges, as disclosed in Note 4 of the unaudited financial statements included in this Form 10-Q, which disclosure is incorporated by reference here.

Other income (expense). Other income (expense) increased to income of $349,000 in the three months ended December 31, 2000 from other income of $133,000 in the three months ended December 31, 1999 and increased to other income of $781,000 in the nine months ended December 31, 2000 from other expenses of $19,000 in the same period of the prior year. This change occurred as a result of higher interest income on a larger average balance of cash and short-term investments as a result of the net proceeds received in August 2000 from our initial public offering, as well as lower interest expense as we reduced the outstanding balance of our notes payable.

Provision for income taxes. As a result of our cumulative net operating losses, no provision for income taxes was recorded for the three and nine months ended December 31, 2000 and 1999.

Liquidity and Capital Resources

Since our inception we have funded operations through the private sale of preferred stock, with net proceeds of approximately $38.0 million, limited borrowings and equipment leases. In August 2000, we completed the initial public offering of 3,000,000 shares of our common stock at a price of $10.00 per share, all of which shares were issued and sold by us for aggregate proceeds of $26.4 million, net of underwriting discounts of and commissions of $2.1 million and expenses of $1.5 million. Payment of $6.1 million was made to the holders of our Series C preferred stock at the closing of the offering as required by the terms of the Series C preferred stock. This payment resulted in net proceeds to us of $20.3 million.

As of December 31, 2000, we had $27.2 million in cash, cash equivalents and short-term investments, an increase of $10.7 million from cash, cash equivalents and short-term investments held as of March 31, 2000. As of December 31, 2000, there were no borrowings under our line of credit. Our working capital, defined as current assets less current liabilities, at December 31, 2000 was

$25.0 million, an increase of $12.2 million in working capital from March 31, 2000. The increase in the working capital is attributable to the cash proceeds from our initial public offering, partially offset by increased operational spending and additional equipment purchases. In November 2000, we entered into a new $1.0 million lease line of credit and drew down $757,000 on this line. The remaining amount of $243,000 will expire in February 2001.

Net cash used in operating activities was $6.9 million in the nine months ending December 31, 2000. The cash used was primarily attributable to the net loss of $14.6 million for the nine months ending December 31, 2000, partially offset by non-cash charges totaling $7.0 million related to deferred stock compensation, depreciation and amortization.

Net cash provided by investing activities was $2.8 million in the nine months ending December 31, 2000. Net cash provided by investing activities consisted of proceeds from maturities of short term investments, net of purchases of short term investments, partially offset by purchases of property and equipment.

Net cash provided by financing activities was $19.1 million in the nine months ending December 31, 2000. Cash was provided primarily from the proceeds of our initial public offering and to a lesser extent from proceeds from our new lease line. This was partially offset by the payment to our Series C stockholders and principal payments on notes payable and capital leases.

We believe that our existing cash reserves, the proceeds from our initial public offering and our available borrowing capacity will be sufficient to support our planned operations for the next 18 to 22 months. However, we may need to raise additional funds sooner through public or private financing or other sources to fund our operations and for potential acquisitions. We may not be able to obtain adequate or favorable financing at that time. Failure to raise capital when needed could harm our business. If we raise additional funds through the issuance of equity securities, the percentage of ownership of our stockholders would be reduced. Furthermore, these equity securities might have rights, preferences or privileges senior to our common stock. In addition, the necessity of raising additional funds could force us to incur debt on terms that could restrict our ability to make capital expenditures and incur additional indebtedness.

Recent Accounting Pronouncements

RISK FACTORS

We have a history of losses that we expect will continue, and we may not be able to generate sufficient revenues to achieve profitability.

We commenced our operations in April 1995 and have incurred net losses since that time. As of December 31, 2000, we had an accumulated deficit of $41.2 million. We expect our net losses to continue as we increase our research and development costs and other costs to develop our business. Since the amounts we may determine to invest to grow our business are uncertain, we are unable to predict when, if ever, we may become profitable. We cannot assure you that we will ever generate sufficient revenues to achieve profitability. If our losses exceed the expectations of investors, the price of our common stock may decline.

Our quarterly operating results may fluctuate significantly and may fail to meet the expectations of securities analysts and investors, which could cause our stock price to decline.

We expect our quarterly operating results may fluctuate in the future, and may vary from securities analysts' and investors' expectations, depending on a number of factors described below and elsewhere in this "Risk Factors" section of this Quarterly Report on Form 10-Q, including:

•: variances in demand for our products and services;
•: timing of the introduction of new products or services and enhancements of existing products or services;
•: changes in research and development expenses;
•: our ability to complete fixed-price service contracts without committing additional resources; and
•: changes in industry conditions affecting our customers.

As a result, quarterly comparisons may not indicate reliable trends of future performance.

We also expect to increase activities and spending in substantially all of our operational areas. We base our expense levels in part upon our expectations concerning future revenues, and these expense levels are relatively fixed in the short term. If we have lower revenues, we may not be able to reduce our spending in the short term in response. Any shortfall in revenues would have a direct impact on our results of operations. For these and other reasons, we may not meet the earnings estimates of securities analysts or investors, and the price of our common stock may decline.

Because our sales and implementation cycles are long and unpredictable, our revenues are difficult to predict and may not meet our expectations or those of our investors.

The lengths of our sales and implementation cycles are difficult to predict and depend on a number of factors, including the type of product or services being provided, the nature and size of the potential customer and the extent of the commitment being made by the potential customer. Our sales cycle is unpredictable and may take six months or more. Our implementation cycle is also difficult to predict and can be longer than one year. Each of these can result in delayed revenues, increased selling expenses and difficulty in matching revenues with expenses, which may contribute to fluctuations in our results of operations and cause our stock price to be volatile. A key element of our strategy is to market our product and service offerings to large organizations. These organizations can have elaborate decision-making processes and may require evaluation periods which could extend the sales and implementation cycle. Moreover, we often must provide a significant level of education to our prospective customers regarding the use and benefit of our product and service offerings, which may cause additional delays during the evaluation and acceptance process. We therefore have difficulty forecasting the timing and recognition of revenues from sales of our product and service offerings.

Our revenues are concentrated in a few customers, and if we lose any of these customers our revenues may decrease substantially.

We receive a substantial majority of our revenues from a limited number of customers. In fiscal year 2000 and the first nine months of fiscal year 2001, sales to our top customer, Johnson & Johnson, accounted for a substantial portion of our revenues and sales to our top five customers accounted for 50.4% and 49.3% of our revenues, respectively. We expect that a significant portion of our revenues will continue to depend on sales to a small number of customers. If we do not generate as much revenues from these major customers as we expect to, or if we lose any of them as customers, our total revenues may be significantly reduced.

If we are unable to generate additional sales from existing customers and generate sales to new customers, we may not be able to generate sufficient revenues to become profitable.

Our success depends on our ability to develop our existing customer relationships and establish relationships with additional pharmaceutical and biotechnology companies. If we lose any significant relationships with existing customers or fail to establish additional relationships, we may not be able to execute our business plan and our business will suffer. As of December 31, 2000, we have only performed a limited number of projects with fourteen of the twenty largest pharmaceutical companies and a number of smaller companies. Developing customer relationships with pharmaceutical companies can be difficult for a number of reasons. These companies are often very large organizations with complex decision-making processes that are difficult to change. In addition, because our products and services relate to the core technologies of these companies, these organizations are generally cautious about working with outside companies. Some potential customers may also resist working with us until our products and services have achieved more widespread market acceptance. Our existing customers could also reassess their commitment to us, not renew existing agreements or choose not to expand the scope of their relationship with us.

Our revenues and results of operations would be adversely affected if a customer cancels a contract for services with us.

Our services agreements can be canceled upon prior notice by our customers. Additionally, due to the nature of our services engagements, customers sometimes delay projects because of timing of the clinical trials and the need for data and information that prevent us from proceeding with our projects. These delays and contract cancellations cannot be predicted with accuracy and we cannot assure you that we will be able to replace any delayed or canceled contracts with the customer or other customers. If we are unable to replace those contracts, our revenues and results of operations would be adversely affected.

We may lose existing customers or be unable to attract new customers if we do not develop new products and services or if our offerings do not keep pace with technological changes.

The successful growth of our business depends on our ability to develop new products and services and incorporate new capabilities into our existing offerings on a timely basis. If we cannot adapt to changing technologies, emerging industry standards, new scientific developments and increasingly sophisticated customer needs, our products and services may become obsolete and our business could suffer. We have suffered product delays in the past, resulting in lost product revenues. In addition, early releases of software often contain errors or defects. We cannot assure you that, despite our extensive testing, errors will not be found in our products before or after commercial release, which could result in product redevelopment costs and loss of, or delay in, market acceptance. Furthermore, a failure by us to introduce new products or services on schedule could harm our business prospects. Any delay or problems in the installation or implementation of new products or services may cause customers to forego purchases from us.

If the security of our customers' data is compromised, we could be liable for damages and our reputation could be harmed.

As part of implementing our products and services, we inherently gain access to certain highly confidential proprietary customer information. It is critical that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Despite our implementation of a number of security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. We do not have insurance to cover us for losses incurred in many of these events. If we fail to meet our customers' security expectations, we could be liable for damages and our reputation could suffer.

If we are required to commit unanticipated resources to complete fixed-price service contracts, we may incur losses on these contracts, which could cause our operating results to decline.

A significant portion of revenues from our short-term agreements has been derived from service contracts that are billed on a fixed-price basis. These contracts specify certain obligations and deliverables to be met by us regardless of our actual costs incurred. Our failure to accurately estimate the resources required for a fixed-price service contract could cause us to commit additional resources to a project, which could cause our operating results to decline. We cannot assure you that we can successfully complete these contracts on budget, and our inability to do so could harm our business.

If we are unable to complete a project due to scientific limitations or otherwise meet our customers' expectations, our reputation may be adversely affected and we may not be able to generate new business.

Because our projects may contain scientific risks that are difficult to foresee, we cannot guarantee that we will always be able to complete them. Any failure to meet our customers' expectations could harm our reputation and ability to generate new business. On a few occasions, we have encountered scientific limitations and been unable to complete a project. In each of these cases, we have been able to successfully renegotiate the terms of the project with the particular customer. We cannot assure you that we will be able to renegotiate our customer agreements if such circumstances occur in the future. Moreover, even if we complete a project, we may not meet our customers' expectations regarding the quality of our products and services or the timeliness of our services.

If we are unable to hire additional specialized personnel, we will not be able to grow our business.

Growth in the demand for our products and services will require additional personnel, particularly qualified scientific and technical personnel. We currently have limited personnel and other resources to staff and complete projects. In addition, as we grow our business, we expect an increase in the number of complex projects and large deployments of our products and services, which require a significant amount of personnel for extended periods of time. However, there is currently a shortage of these personnel worldwide, and competition for these personnel from numerous companies and academic institutions may limit our ability to hire these persons on commercially reasonable terms. Staffing projects and deploying our products and services will also become more difficult as our operations and customers become more geographically diverse. If we are not able to adequately staff and complete our projects, we may lose customers and our reputation may be harmed. Any difficulties we may have in completing customer projects may impair our ability to grow our business.

If we lose key members of our management, scientific or development staff, or our scientific advisors, or we are unable to hire sales and other personnel needed to grow our business, our reputation may be harmed and we may lose business.

We are highly dependent on the principal members of our management, scientific and development staff. However, we only carry key man insurance on our chief executive officer, Arthur H. Reidel, in the amount of $1.0 million dollars. We do not believe that the proceeds from this insurance would be sufficient to cover the loss that our business would suffer as a result of the loss of his services. Our reputation is also in part based on our association with key scientific advisors. The loss of any of these personnel might adversely impact our reputation in the market and harm our business. We also need to hire additional personnel, including sales personnel, in order to grow our business. Competition for qualified sales and other personnel meeting our requirements is intense, and we may be unable to attract and retain these people. Failure to attract and retain key management, sales, scientific and technical personnel would prevent us from growing our business, achieving our strategy and developing our products and services.

We have only recently undertaken development of our information products, and our future revenues and operating results could be harmed if these products do not achieve commercial success.

An important component of our business strategy relates to our information products. We have only recently undertaken to develop these products and, as of December 31, 2000, we had generated no revenues from them. We expect to release the initial versions of these products later this year, although we cannot guarantee you that we will be able to release these products on time. In addition, because the market for these products is new and emerging, it is difficult to predict the level of market acceptance. Our future business could be harmed if we do not release these products on time or if they do not achieve commercial success.

If we are unable to obtain sufficient data from third-party providers, our information products will not be attractive to customers.

As of December 31, 2000, we have only established relationships with three organizations to provide data for inclusion in our information products. We may not be able to enter into additional agreements with content providers on commercially favorable terms, if at all. If we are unable to obtain adequate data, our information products will not be attractive to customers and, therefore, may not achieve commercial success. In addition, we cannot assure you that our existing or prospective data providers will not reassess their commitment to us in the future or develop competitive products internally.

If there is a system failure or natural disaster at our hosting facility, we may not be able to provide access to our information products and our business could suffer.

Our information products data are stored at a third party's computer data facility located in Santa Clara, California, an area prone to earthquakes. We currently have no backup systems at other sites. Accordingly, there is a significant risk to our ability to provide access to our information products from a natural disaster or system failure at such facility. Although we carry insurance to cover us in the event of losses caused by natural disasters such as earthquakes, depending on the amount of damage this insurance may not be sufficient to cover our losses. Furthermore, any interruption in our services could damage our reputation and, therefore, our ability to conduct business in the future. We do not carry insurance that protects us from losses caused as a result of damage to our reputation.

Our business depends on our intellectual property rights, and if we are unable to adequately protect them, our competitive position will suffer.

Our intellectual property is important to our competitive position. We protect our proprietary information and technology through a combination of trademark, trade secret and copyright law, confidentiality agreements and technical measures. We may also seek to protect our intellectual property through patents. We have filed two patent applications, but do not currently have any patents issued. We cannot assure you that the steps we have taken will prevent misappropriation of our proprietary information and technology, nor can we guarantee that we will be successful in obtaining any patents or that the rights granted under such patents will provide a competitive advantage. Misappropriation of our intellectual property could harm our competitive position. We may also need to engage in litigation in the future to enforce or protect our intellectual property rights or to defend against claims of invalidity, and we may incur substantial costs as a result. In addition, the laws of some foreign countries provide less protection of intellectual property rights than the laws of the United States and Europe. As a result, we may have an increasingly difficult time adequately protecting our intellectual property rights as our sales in foreign countries grow.

If we become subject to infringement claims by third parties, we could incur unanticipated expense and be prevented from providing our products and services.

We cannot assure you that infringement claims by third parties will not be asserted against us or, if asserted, will be unsuccessful. These claims, whether or not meritorious, could be expensive and divert management resources from operating our company. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could block our ability to provide products or services, unless we obtain a license to such technology. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for our products or services will be available on commercially reasonable terms, or at all.

Future acquisitions could be difficult to integrate, disrupt our business and dilute stockholder value.

In order to expand our product and service offerings and reach new customers, we may continue to acquire products, technologies or businesses that we believe are complementary. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, services, products and personnel of the acquired company, the diversion of management's attention from other business concerns, the potential loss of key employees of the acquired company and our inability to maintain the goodwill of the acquired businesses. We also cannot predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed.

Future acquisitions may result in:

•: potentially dilutive issuances of equity securities;
•: the incurrence of additional debt;
•: the assumption of known and unknown liabilities; and
•: the write-off of software development costs, and the amortization of expenses related to goodwill and other intangible assets and charges against earnings.

Any of the above factors, if they occur, could harm our business.

Risks Related To Our Industry

Our market may not develop as quickly as expected, and companies may enter our market, thereby increasing the amount of competition and impairing our business prospects.

Because our products and services are new and still evolving, there is significant uncertainty and risk as to the demand for, and market acceptance of, these products and services. As a result, we are not able to predict the size and growth rate of our market with any certainty. In addition, other companies, including potential strategic partners, may enter our market. Our existing customers may also elect to terminate our services and internally develop products and services similar to ours. If our market fails to develop, grow more slowly than expected or become saturated with competitors, our business prospects will be impaired.

Laws protecting the privacy of confidential patient information may limit the range of services we can provide and, if we violate any of these laws, could subject us to civil and criminal penalties.

The healthcare industry is regulated by a number of federal, state, local and international governmental entities. These entities may enact laws that limit our operations or the operations of our customers. In particular, state laws aimed at protecting the privacy of confidential patient health information, including information regarding conditions like AIDS, substance abuse and mental illness, vary widely. The application of these laws in the context of research and internet health services is evolving. While these laws primarily are directed at healthcare providers, facilities and payors, and generally do not apply to the "anonymized" data we use, from which patient identifiable information has been removed, some of these laws could be applied to aspects of our business or to limit providers' ability to provide us with access to such data. We cannot predict which laws might be found applicable to our business, or assure you that our operations would be found to be in full compliance. Compliance with regulatory laws may be expensive and may limit our ability to provide a full range of services. In addition, a challenge under any of these laws could result in adverse publicity and, if successful, imposition of civil and criminal penalties, any of which could harm our business.

Existing or future laws that apply to communications and commerce over the internet could harm our business.

Laws and regulations that specifically apply to communications and commerce over the Internet are becoming more prevalent. Existing laws and regulations as well as new laws and regulations could place restrictions or impose costs on us that adversely affect our business. The United States Congress has passed laws regarding, among other things, Internet privacy, copyrights and taxation. The Federal Trade Commission has recently recommended that Congress enact further federal legislation protecting consumer privacy on the Internet. The European Union has also enacted its own directive regarding privacy in relation to the Internet. We have not fully assessed how these laws and regulations may affect our business. However, we have access to, manage, transmit and store sensitive customer information that may be subject to these privacy and other laws and regulations. As a result, in the future we may be subject to claims associated with invasion of privacy or inappropriate disclosure, use or loss of this information. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could harm our reputation and our business. In addition, these laws may make it more costly to enter into, or prevent us from entering into, additional license agreements with information providers for our information products.

Laws regulating communications and commerce over the Internet remains largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, content, libel and taxation apply to the Internet. The adoption or modification of laws or regulations relating to the Internet, or interpretations of existing law, could harm our business.

Government regulation of the pharmaceutical industry may restrict our operations or the operations of our customers and, therefore, adversely affect our business.

The pharmaceutical industry is regulated by a number of federal, state, local and international governmental entities. Although our products and services are not directly regulated by the United States Food and Drug Administration or comparable international agencies, the use of some of our analytical software products by our customers may be regulated. We currently provide assistance to our customers in achieving compliance with these regulations. The regulatory agencies could enact new regulations or amend existing regulations with regard to these or other products that could restrict the use of our products or the business of our customers, which could harm our business.

Consolidation in the pharmaceutical industry could cause disruptions of our customer relationships and interfere with our ability to enter into new customer relationships.

In recent years, the worldwide pharmaceutical industry has undergone substantial consolidation. If any of our customers consolidate with another business, they may delay or cancel projects, lay off personnel or reduce spending, any of which could cause our revenues to decrease. In addition, our ability to complete sales or implementation cycles may be impaired as these organizations undergo internal restructuring.

Reduction in the research and development budgets of our customers may impact our sales.

Our customers include researchers at pharmaceutical and biotechnology companies, academic institutions and government and private laboratories. Fluctuations in the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products. Research and development budgets fluctuate due to changes in available resources, spending priorities, internal budgetary policies and the availability of grants from government agencies. Our business could be harmed by any significant decrease in research and development expenditures by pharmaceutical and biotechnology companies, academic institutions or government and private laboratories.

Risks Related To Owning Our Stock

The public market for our common stock may be volatile.

We expect the market price of our common stock to be highly volatile and to fluctuate significantly in response to various factors, including:

•: actual or anticipated variations in our quarterly operating results;
•: announcements of technological innovations or new services or products by us or our competitors;
•: timeliness of our introductions of new products;
•: changes in financial estimates by securities analysts; and
•: changes in the conditions and trends in the pharmaceutical market.

In addition, the stock markets, including the Nasdaq National Market, have experienced extreme price and volume fluctuations that have affected the market prices of equity securities of many technology companies. These fluctuations have often been unrelated or disproportionate to operating performance. These broad market factors may materially affect the trading price of our common stock. General economic, political and market conditions, such as recessions and interest rate fluctuations, may also have an adverse effect on the market price of our common stock.

We may have substantial sales of our common stock that could cause our stock price to fall.

Sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could reduce the market price of our common stock. These sales also might make it more difficult for us to raise funds through future offerings of common stock. In connection with our initial public offering, we and our officers, directors and stockholders holding approximately 14.6 million shares of common stock agreed not to sell any shares of common stock until February 6, 2001. As this restriction has just recently lapsed, a large number of shares may be sold, or may be perceived to be sold, in the near future.

At December 31, 2000, we had approximately 18.3 million shares outstanding. Of these shares, the 3.0 million shares sold in our IPO are freely transferable without restriction or further registration under the Securities Act of 1933, except for shares purchased by our "affiliates," as defined in Rule 144 under the Securities Act. The remaining shares of common stock outstanding are "restricted securities" as defined in Rule 144. These restricted securities may be sold in the future without registration under the Securities Act to the extent permitted under Rule 144, Rule 701 or another exemption under the Securities Act.

Because our executive officers and directors have substantial control of our voting stock, takeovers not supported by them will be more difficult, possibly preventing you from obtaining optimal share price.

The control of a significant amount of our stock by insiders could adversely affect the market price of our common stock. Our executive officers and directors beneficially hold approximately 41.0% of the outstanding common stock. If our executive officers and directors choose to act or vote together, they will have the power to significantly influence all matters requiring the approval of our stockholders, including the election of directors and the approval of significant corporate transactions. Without the consent of these stockholders, we could be prevented from entering into transactions that could result in our stockholders receiving a premium for their stock.

Our charter documents contain anti-takeover provisions that may discourage take-over attempts and may reduce our stock price.

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of common stock may be harmed by the rights of the holders of any preferred stock that may be issued in the future. Other provisions of our certificate of incorporation and bylaws may make it more difficult for a third party to acquire control of us without the consent of our board of directors, even if the changes were favored by a majority of the stockholders. These include provisions that provide for a staggered board of directors, prohibit stockholders from taking action by written consent and restrict the ability of stockholders to call special meetings.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have operated primarily in the United States and all funding activities and sales have been denominated in U.S. dollars. Accordingly, we have not had any exposure to foreign currency rate fluctuations.

Our interest income is sensitive to changes in the general level of United States interest rates, particularly since the majority of our investments are in short-term instruments. Due to the nature of our short-term investments, we believe that there is no material market risk exposure. As of December 31, 2000, our cash, cash equivalents and short-term investments consisted primarily of demand deposits, money market funds, treasury instruments and commercial paper.

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On August 14, 2000, Pharsight closed the sale of a total of 3,000,000 shares of our common stock, par value $0.001 per share, at a price of $10.00 per share in a firm commitment underwritten public offering.

Of the $20.3 million in aggregate net proceeds raised by us in the offering, after deducting underwriting discounts and commissions, offering expenses and the repayment of $6.1 million to our holders of Series C preferred stock:

1.: approximately $8.2 million was used to fund ongoing operations, including research and development of new and existing products; and
2.: the remainder of the proceeds from the offering, approximately $12.1 million, remains invested in investment grade securities.

This application of the proceeds from the initial public offering did not represent a material change from the use of proceeds as described in the prospectus for the initial public offering.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a): EXHIBITS.

Exhibit
3.2*		Amended and Restated Certificate of Incorporation of Pharsight Corporation
3.3*		Bylaws of Pharsight Corporation

*

Incorporated by reference to the like-numbered exhibit to Pharsight's Registration Statement on Form S-1, Registration No. 333-34896, as amended.

(b): REPORTS ON FORM 8-K.

No reports on Form 8-K were filed by Pharsight during the quarter ended December 31, 2000.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		PHARSIGHT CORPORATION
Date: February 13, 2001		By:		/s/ ROBIN A. KEHOE Robin A. Kehoe Senior Vice President, Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)