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InterMune 10-Q 2006 Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Commission file number: 0-29801
3280 Bayshore Blvd., Brisbane, California 94005
(Address of principal executive
offices, including zip code)
(415) 466-2200
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 þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of July 31, 2006, there were 33,750,332 outstanding
shares of common stock, par value $0.001 per share, of
InterMune, Inc.
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INTERMUNE,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
See accompanying Notes to Condensed Consolidated Financial
Statements.
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INTERMUNE,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying Notes to Condensed Consolidated Financial
Statements.
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INTERMUNE,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying Notes to Condensed Consolidated Financial
Statements.
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INTERMUNE,
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
InterMune, Inc. (“InterMune,” “the Company,”
“we,” “our,” or “us”) is an
independent biopharmaceutical company focused on developing and
commercializing innovative therapies in pulmonology and
hepatology. Our revenue is provided solely from sales of
Actimmune®.
We also have preclinical and advanced stage clinical programs
addressing a range of unmet medical needs. As part of our
efforts to refocus our corporate strategy, we completed the sale
of the
Infergen®
product, including related intellectual property rights and
inventory, in December 2005. As a result of this transaction,
Infergen®
related activities are reflected as discontinued operations.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with
U.S. generally accepted accounting principles for interim
financial information. The financial statements include all
adjustments (consisting only of normal recurring adjustments)
that we believe are necessary for a fair presentation of the
periods presented. These interim financial results are not
necessarily indicative of results to be expected for the full
fiscal year or any other future period.
The consolidated financial statements include the accounts of
InterMune and its wholly-owned subsidiaries, InterMune Canada
Inc. and InterMune Ltd. (U.K.). All inter-company accounts and
transactions have been eliminated. To date, the financial
position and results of operations of InterMune Canada Inc. and
InterMune Ltd. (U.K.) have been immaterial.
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates and assumptions.
Inventories consist principally of finished-good products and
are stated at the lower of cost or market value. Cost is
determined by the
first-in,
first-out (FIFO) method.
Because of the long lead times required to manufacture our
products, we enter into non-cancelable obligations to purchase
our inventory. We evaluate the need to provide reserves for
contractually committed future purchases of inventory that may
be in excess of forecasted future demand. In making these
assessments, we are required to make judgments as to the future
demand for current or committed purchases. We are also required
to make judgments as to the expiration dates of our products,
since our products can no longer be used after their respective
expiration dates. As part of our excess inventory assessment for
all of our products, we also consider the expiration dates of
our products to be manufactured in the future under
non-cancelable purchase obligations.
Significant differences between our current estimates and
judgments and future commercial and clinical estimated demand
for
Actimmune®
and the useful life of our inventories may result in significant
charges for excess inventory or purchase commitments in the
future. These differences could have a material adverse effect
on our financial condition and results of operations during the
period in which we recognize an inventory reserve. For example,
during the year ended December 31, 2005, we charged
$9.1 million to cost of goods sold for excess inventory and
non-cancelable purchase obligations for inventory in excess of
forecasted needs.
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INTERMUNE,
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
From time to time, we use derivatives to manage our market
exposure to fluctuations in foreign currencies. We record all
derivatives on the balance sheet at fair value. For derivative
instruments that are designated and qualify as a cash flow hedge
(i.e., hedging the exposure to variability in expected future
cash flows that is attributable to a particular risk), the
effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive
income and reclassified into earnings in the same period or
periods during which the hedged transaction affects earnings.
The gain or loss on the derivative instruments in excess of the
cumulative change in the present value of future cash flows of
the hedged transaction, if any, is recognized in current
earnings during the period of change. We do not use derivative
instruments for speculative purposes.
We purchase commercial and clinical products from Boehringer
Ingelheim (“BI”) in a foreign currency. This exposes
us to foreign currency exchange rate risk. To protect against
currency exchange risks on forecasted foreign currency cash
payments for the purchases of
Actimmune®
from BI over the next year, we have considered instituting a
foreign currency cash flow hedging program. In the past, we have
hedged portions of our forecasted foreign currency cash payments
with forward contracts. When the dollar strengthens
significantly against the foreign currencies, the decline in the
value of future foreign currency expenses is offset by losses in
the value of the option or forward contracts designated as
hedges. Conversely, when the dollar weakens, the increase in the
value of future foreign currency expenses is offset by gains in
the value of the forward contracts. In accordance with
FAS 133, hedges related to anticipated transactions are
designated and documented at the hedge’s inception as cash
flow hedges and evaluated for hedge effectiveness at least
quarterly.
At June 30, 2006, net gains on derivative instruments
expected to be reclassified from accumulated other comprehensive
income to earnings ratably with sales of
Actimmune®
were $0.3 million. Such amount will be recognized as a
reduction of cost of goods sold ratably as the related units of
Actimmune®
are sold. At June 30, 2006, there were no outstanding
derivative instruments.
Initial payments for the acquisition of products that, at the
time of acquisition, are already marketed or are approved by the
U.S. Food and Drug Administration (“FDA”) for
marketing are capitalized and amortized ratably over the
estimated life of the products, typically ten years. At the time
of acquisition, the product life is estimated based upon the
term of the agreement, the patent life of the product and our
assessment of future sales and profitability of the product. We
assess this estimate regularly during the amortization period
and adjust the asset value or useful life when appropriate.
Initial payments for the acquisition of products that, at the
time of acquisition, are under development or are not approved
by the FDA for marketing, have not reached technical feasibility
and have no foreseeable alternative uses are expensed as
research and development costs. Acquired product rights consist
of payments made for the acquisition of rights to interferon
gamma. Accumulated amortization of this intangible asset was
$2.1 million and $1.8 million at June 30, 2006
and December 31, 2005, respectively. Amortization expense
for acquired product rights for each of the next four years
until fully amortized is as follows: 2006 —
$0.2 million; 2007 — $0.5 million;
2008 — $0.5 million; 2009 —
$0.2 million.
In accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” if
indicators of impairment exist, we assess the recoverability of
the affected long-lived assets by determining whether the
carrying value of such assets can be recovered through
undiscounted future operating cash flows. If impairment is
indicated, we will measure the amount of such impairment by
comparing the carrying value of the asset to the present value
of the expected future cash flows associated with the use of the
asset.
We recognize revenue generally upon delivery when title passes
to a credit-worthy customer and record provisions for estimated
returns, rebates, chargebacks and cash discounts against
revenue. We are obligated to
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INTERMUNE,
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
accept from customers the return of pharmaceuticals that have
reached their expiration date. We believe that we are able to
make reasonable and reliable estimates of product returns,
rebates, chargebacks and cash discounts based on historical
experience and other known or anticipated trends and factors. We
review all sales transactions for potential rebates, chargebacks
and discounts each month and believe that our reserves are
adequate. We include shipping and handling costs in cost of
goods sold.
On March 26, 2004, we entered into an agreement with Baxter
under which we co-promoted Baxter’s product
Aralast®
in the United States for the treatment of patients with
hereditary emphysema. Under this agreement, we were compensated
by Baxter based upon a percentage of Aralast sales. We
recognized Aralast co-promotion revenue upon receipt of the
co-promotion funds from Baxter. The co-promotion revenue
calculation was dependent upon national sales data which lagged
one quarter for reporting purposes, therefore estimates were not
used. Co-promotion revenue was based on a percentage of
Baxter’s sales of Aralast to pulmonologists. We terminated
this agreement with Baxter in December 2005 in connection with
the decision to significantly reduce our field-based pulmonary
disease awareness activities.
Research and development (“R&D”) expenses include
salaries, contractor and consultant fees, external clinical
trial expenses performed by contract research organizations
(“CRO”), licensing fees and facility and
administrative expense allocations. In addition, we
fund R&D at research institutions under agreements that
are generally cancelable at our option. Research costs typically
consist of applied research and preclinical and toxicology work.
Pharmaceutical manufacturing development costs consist of
product formulation, chemical analysis and the transfer and
scale-up of
manufacturing at our contract manufacturers. Clinical
development costs include the costs of Phase I, II and
III clinical trials. These costs, along with the manufacturing
scale-up
costs, are a significant component of research and development
expenses.
We accrue costs for clinical trial activities performed by
contract research organizations and other third parties based
upon the estimated amount of work completed on each study as
provided by the CRO. These estimates may or may not match the
actual services performed by the organizations as determined by
patient enrollment levels and related activities. We monitor
patient enrollment levels and related activities using available
information; however, if we underestimate activity levels
associated with various studies at a given point in time, we
could record significant R&D expenses in future periods when
the actual activity level becomes known. We charge all such
costs to R&D expenses.
We compute basic net loss per share by dividing the net loss for
the period by the weighted average number of common shares
outstanding during the period. We deduct shares subject to
repurchase by us from the outstanding shares to arrive at the
weighted average shares outstanding. We compute diluted net loss
per share by dividing the net loss for the period by the
weighted average number of common and common equivalent shares
outstanding during the period. We exclude potentially dilutive
securities, composed of incremental common shares issuable upon
the exercise of stock options and common shares issuable upon
conversion of our convertible notes, from diluted net loss per
share because of their anti-dilutive effect.
The securities excluded were as follows (in thousands):
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INTERMUNE,
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The calculation of basic and diluted net loss per share is as
follows (in thousands, except per share data):
On January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004),
“Share-Based Payment,” (“SFAS 123(R)”)
which requires the measurement and recognition of compensation
expense for all share-based payment awards made to employees and
directors including employee stock options, restricted stock and
employee stock purchases related to the Employee Stock Purchase
Plan (“ESPP”) based on estimated fair values.
SFAS 123(R) supersedes the Company’s previous
accounting under Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) for periods beginning
in fiscal 2006. In March 2005, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 107
(“SAB 107”) relating to SFAS 123(R). The
Company has applied the provisions of SAB 107 in its
adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified
prospective transition method, which requires the application of
the accounting standard as of January 1, 2006, the first
day of the Company’s fiscal year 2006. In accordance with
the modified prospective transition method, the Company’s
Condensed Consolidated Financial Statements for prior periods
have not been restated to reflect, and do not include, the
impact of SFAS 123(R). Stock-based compensation expense
recognized under SFAS 123(R) for the three and six months
ended June 30, 2006 was $4.7 million and
$9.4 million, respectively, which consisted of stock-based
compensation expense related to employee stock options,
restricted stock and the ESPP. Basic and diluted net loss per
share for the three and six months ended June 30, 2006 were
$0.08 and $0.17 higher, respectively, than if we had continued
to account for stock-based compensation under APB 25.
Stock-based compensation expense of $0.5 million and
$1.0 million for the three and six months ended
June 30, 2005, respectively, was related to restricted
stock which the Company had been recognizing under previous
accounting standards. There was no stock-based compensation
expense related to employee stock options and the ESPP
recognized during the three and six months ended June 30,
2005. See Note 9 for additional information.
SFAS 123(R) requires companies to estimate the fair value
of share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as expense over the
requisite service periods in the Company’s Consolidated
Statement of Operations. Prior to the adoption of
SFAS 123(R), the Company accounted for stock-based awards
to employees and directors using the intrinsic value method in
accordance with APB 25 as allowed under Statement of
Financial Accounting Standards No. 123, “Accounting
for Stock-Based Compensation” (“SFAS 123”).
Under the intrinsic value method, no stock-based compensation
expense had been recognized in the Company’s Consolidated
Statement of Operations, other than for restricted stock,
because the exercise price of the Company’s stock options
granted to employees and directors equaled the fair market value
of the underlying stock at the date of grant.
Stock-based compensation expense recognized during the period is
based on the value of the portion of share-based payment awards
that is ultimately expected to vest during the period.
Stock-based compensation expense
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INTERMUNE,
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
recognized in the Company’s Condensed Consolidated
Statement of Operations for the first six months of fiscal 2006
included compensation expense for share-based payment awards
granted prior to, but not yet vested as of December 31,
2005 based on the grant date fair value estimated in accordance
with the pro forma provisions of SFAS 123 and compensation
expense for the share-based payment awards granted subsequent to
December 31, 2005 based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R).
In conjunction with the adoption of SFAS 123(R), the
Company changed its method of attributing the value of
stock-based compensation to expense from the accelerated
multiple-option approach to the straight-line single option
method. Compensation expense for all share-based payment awards
granted on or prior to December 31, 2005 will continue to
be recognized using the accelerated multiple-option approach
while compensation expense for all share-based payment awards
granted subsequent to December 31, 2005 is recognized using
the straight-line single option method. As stock-based
compensation expense recognized in the Condensed Consolidated
Statement of Operations for the first six months of fiscal 2006
is based on awards ultimately expected to vest, it has been
reduced for estimated forfeitures. SFAS 123(R) requires
forfeitures to be estimated at the time of grant and adjusted,
if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In the Company’s pro forma
information required under SFAS 123 for the periods prior
to fiscal 2006, the Company accounted for forfeitures as they
occurred.
Upon adoption of SFAS 123(R), the Company retained its
method of valuation for share-based awards granted beginning in
fiscal 2006 with the use of the Black-Scholes option-pricing
model (“Black-Scholes model”) which was previously
used for the Company’s pro forma information required under
SFAS 123. For additional information, see Note 9. The
Company’s determination of fair value of share-based
payment awards on the date of grant using an option-pricing
model is affected by the Company’s stock price as well as
assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to the
Company’s expected stock price volatility over the term of
the awards, and actual and projected employee stock option
exercise behaviors. Option-pricing models were developed for use
in estimating the value of traded options that have no vesting
or hedging restrictions and are fully transferable. Because the
Company’s employee stock options have certain
characteristics that are significantly different from traded
options, and because changes in the subjective assumptions can
materially affect the estimated value, in management’s
opinion, the existing valuation models may not provide an
accurate measure of the fair value of the Company’s
employee stock options. Although the fair value of employee
stock options is determined in accordance with SFAS 123(R)
and SAB 107 using an option-pricing model, that value may
not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
In the fourth quarter of 2005, our Board of Directors approved a
restructuring plan that was designed to help streamline our
operations and reduce our operating expenses in 2006. The plan,
which consisted of a significant reduction in our investment in
field-based pulmonary disease awareness activities, was
implemented concurrently with the divestiture of
Infergen®
in December 2005. These combined actions led to a significant
headcount reduction of approximately 160 employees and resulting
termination costs of approximately $9.2 million.
Restructuring charges comprised approximately $5.5 million
of this amount which were recorded in the fourth quarter of 2005
as a separate component of operating expenses in the statement
of operations, with the remainder allocated to discontinued
operations. The majority of the 160 employees left InterMune at
the end of the fourth quarter of 2005 with the remainder having
left during the first quarter of 2006.
The $5.5 million restructuring charge is comprised of
approximately $4.7 million for cash severance and related
benefits and approximately $0.8 million for non-cash stock
compensation, consisting of costs related to the acceleration of
unvested stock options for approximately 400,000 shares of
our common stock.
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INTERMUNE,
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The activity in the accrued restructuring balance, included
within accrued compensation on the balance sheet, was as follows
for the six months ended June 30, 2006 (in thousands):
Inventories consist of the following (in thousands):
Comprehensive loss is comprised of net loss and other
comprehensive income (loss). We include in other comprehensive
income (loss) changes in the fair value of derivatives
designated as effective foreign currency cash flow hedges and
unrealized gains and losses on our
available-for-sale
securities. Comprehensive loss is as follows (in thousands):
Accumulated other comprehensive income consists of the following
(in thousands):
In February 2004, we issued 0.25% convertible senior notes
due March 1, 2011 in an aggregate principal amount of
$170.0 million (the “Senior Notes”). The Senior
Notes are convertible into our common stock at the option of the
holder at a conversion price of approximately $21.63 per
share, subject to adjustment in certain circumstances. Interest
on the Senior Notes is payable semiannually in arrears on
March 1 and September 1 of each year. The Senior Notes
are unsecured and rank on parity with all existing and future
senior unsecured debt and prior to all subordinated
indebtedness. In addition, the Senior Notes are effectively
subordinated to any existing and future secured debt to the
extent of the value of the collateral securing such debt. As of
June 30, 2006, we had no other secured debt or senior
obligations. Offering expenses of $5.8 million related to
the sale of the Senior Notes were recorded in other assets and
are being amortized to interest expense over the term of the
Senior Notes, which is
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INTERMUNE,
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
seven years from the date of issuance. Accumulated amortization
at June 30, 2006 and December 31, 2005 was
$2.0 million and $1.6 million, respectively.
We have purchase commitments with BI for the manufacture and
supply of
Actimmune®.
In 2000, we entered into an agreement with BI for the clinical
and commercial supply of
Actimmune®.
The agreement with BI generally provides for the exclusive
supply by BI and exclusive purchase by us of
Actimmune®.
We are required to purchase a minimum amount of
Actimmune®
per year, and BI is required to supply
Actimmune®
to us, subject to certain limits. In July 2005, we amended the
supply agreement with BI pursuant to which BI agreed to waive
certain of our minimum purchase commitments for
Actimmune®
for 2005, and to reduce certain other minimum
Actimmune®
purchase requirements for 2006. With regard to certain minimum
purchase requirements for 2007 and thereafter, BI granted us the
option of either taking delivery of
Actimmune®
or paying for the difference between the amount of product
actually purchased and the minimum purchase requirement. At
June 30, 2006, our minimum purchase obligations totaled
$96.1 million and are committed through the year 2012. Of
these commitments, we have $1.1 million and
$18.5 million of outstanding fixed purchase order
commitments that become due and payable in 2006 and 2007,
respectively. Our contractual obligation to BI is denominated in
euros.
We will be required to make contingent milestone payments to the
owners of our licensed products or the suppliers of our drug
compounds in accordance with our license, commercialization and
collaboration agreements in the aggregate amount of
$84.9 million if all of the milestones per the agreements
are achieved. These milestones include development, regulatory
approval, commercialization and sales milestones.
Lease
Commitments
In May 2006, we entered into an amendment to our existing lease
to expand our existing office space by approximately
15,000 square feet. The lease expires concurrently with our
existing facility lease in March 2011. Additional rent expense
expected to be incurred up to the expiration date is as follows:
$0.2 million for the remainder of 2006, $0.4 million
for each of the years 2007 through 2010 and $0.1 million in
2011.
We have determined that, in accordance with
SFAS No. 131, we operate in one segment, because
operating results are reported only on an aggregate basis to our
chief operating decision makers. We currently market
Actimmune®
in the United States for the treatment of chronic granulomatous
disease and severe, malignant osteopetrosis. Prior to its
divestiture in December 2005, we also marketed
Infergen®
in the United States and Canada for chronic hepatitis C
virus infections; and prior to its divestiture in May 2005, we
also marketed Amphotec worldwide for invasive aspergillosis.
Revenue for the three and six months ended June 30, 2005
has been adjusted to reflect the reclassification of
Infergen®
revenue into discontinued operations.
Our net revenue by product for the three and six months ended
June 30, were as follows (in thousands):
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INTERMUNE,
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Our net revenue by region for the three and six months ended
June 30, was as follows (in thousands):
Our revenue and trade receivables are concentrated with a few
customers. We perform credit evaluations on our customers’
financial condition and limit the amount of credit extended.
However, we generally do not require collateral on accounts
receivable. Concentrations of credit risk, with respect to
accounts receivable, exist to the extent of amounts presented in
the financial statements. Two customers represented 63% and 19%,
respectively, of total accounts receivable at June 30,
2006, and three customers represented 46%, 12% and 11%,
respectively, of total accounts receivable at December 31,
2005. No other customer represented more than 10% of accounts
receivable at June 30, 2006 or December 31, 2005.
Revenue from customers representing 10% or more of total revenue
during the six months ended June 30, 2006 and June 30,
2005, was as follows:
To provide employees with an opportunity to purchase our common
stock through payroll deductions, our board of directors adopted
the 2000 Employee Stock Purchase Plan (the “ESPP”).
Under the ESPP, employees, subject to certain restrictions, may
purchase shares of common stock at 85% of the fair market value
at either the date of eligibility for enrollment or the date of
purchase, whichever is less. Purchases are limited to the lesser
of 15% of each employee’s eligible annual compensation or
$25,000. During the six months ended June 30, 2006, we
issued 67,408 shares under the ESPP and
1,054,082 shares remained available for future issuance at
June 30, 2006.
In January 2006 we granted employees restricted stock awards for
404,450 shares of our common stock with a weighted-average
fair value of $19.30 per share that vest in January 2008.
The vesting may accelerate depending on the Company’s
achievement of certain performance criteria over the two-year
period, twenty-five percent each for four different milestones.
In May 2006, the first of the four milestones was met. Grants
made in 2004 and prior (none were granted in 2005) vest
annually over a four-year period, thirty percent in each of the
first three years and ten percent in the final year. Restricted
stock awards are shares of common stock which are forfeited if
the employee leaves the Company prior to vesting. As a result of
these 2006 restricted stock awards and awards granted in 2004
and prior, we recognized $2.1 million and $3.8 million
in compensation expense during the three and six months ended
June 30, 2006, respectively, compared to $0.5 million
and $1.0 million in the three and six months ended
June 30, 2005, respectively. As all of the restricted stock
awards vest through 2008, we will continue to recognize stock
based compensation expenses related to the grants of these
restricted awards. These stock awards offer employees the
opportunity to earn shares of our stock over time, rather than
options that give the employee the right to purchase stock at a
set price. If all of the remaining restricted stock awards that
were granted in 2003, 2004 and 2006 vest, we will recognize
approximately $5.4 million in compensation expense over a
weighted average remaining period of 1.5 years. However, no
compensation expense will be recognized for stock awards that do
not vest.
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INTERMUNE,
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of our restricted stock activity during the six months
ended June 30, 2006 is presented in the following table:
We have three share-based compensation plans for employees and
non-employee directors, which authorize the granting of stock
options, restricted stock, and other types of awards consistent
with the purpose of the plans. The number of shares authorized
for issuance under our plans as of June 30, 2006 totals
approximately 7.1 million shares, of which approximately
1.3 million shares were available for future issuance.
Stock options granted under these plans are granted with an
exercise price equal to the market price of our stock at the
date of grant; those option awards generally vest at a
cumulative rate of 25% per year beginning on the first
anniversary of the grant date and expire ten years from the date
of grant.
General
Option Information
The stock option and related activity during the six months
ended June 30, 2006 under all of our stock compensation
plans is summarized as follows:
At June 30, 2006, the weighted average remaining
contractual term for the outstanding options is 8.0 years
and the aggregate intrinsic value is approximately
$12.5 million on that date. The total intrinsic value of
options exercised during the three and six months ended
June 30, 2006 was approximately $0.2 million and
$3.2 million, respectively. Intrinsic value for stock
options is defined as the difference between the current market
value and the grant price.
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INTERMUNE,
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information about options
outstanding and exercisable at June 30, 2006:
At June 30, 2006, the weighted average remaining
contractual term for options exercisable is 7.1 years and
the aggregate intrinsic value for those shares is approximately
$4.8 million. If all of the remaining nonvested and
outstanding stock option awards that have been granted became
vested, we will recognize approximately $19.8 million in
compensation expense over a weighted average remaining period of
1.5 years. However, no compensation expense will be
recognized for any stock awards that do not vest.
We adopted SFAS 123(R) using the modified prospective
transition method, which requires the application of the
accounting standard as of January 1, 2006, the first day of
the Company’s fiscal year 2006. The Company’s
Condensed Consolidated Financial Statements as of and for the
six months ended June 30, 2006 reflect the impact of
SFAS 123(R). In accordance with the modified prospective
transition method, the Company’s Condensed Consolidated
Financial Statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R).
Stock-based compensation expense recognized under
SFAS 123(R) for the three and six months ended
June 30, 2006 was $4.7 million and $9.4 million,
respectively, which consisted of stock-based compensation
expense related to employee stock options, restricted stock and
the ESPP. For the three months ended June 30, 2006,
approximately $2.3 million has been recorded in research
and development (R&D) expense and the remaining
$2.4 million has been recorded in selling, general and
administrative (SG&A) expense. For the six months ended
June 30, 2006, approximately $4.4 million has been
recorded in R&D expense and the remaining $5.0 million
has been recorded in SG&A expense. Approximately
$0.2 million has been included in SG&A expense for the
three and six months ended June 30, 2006 in connection with
the amendment to our Amended and Restated 2000 Non-Employee
Directors’ Stock Option Plan. Basic and diluted net loss
per share for the three and six months ended June 30, 2006
were $0.08 and $0.17 greater, respectively, than if we had
continued to account for stock-based compensation under
APB 25. Stock-based compensation expense of
$0.5 million and $1.0 million for the three and six
months ended June 30, 2005, respectively, was related to
restricted stock which the Company had been recognizing under
previous accounting standards. There was no stock-based
compensation expense related to employee stock options and the
ESPP recognized during the three and six months ended
June 30, 2005.
Upon adoption of SFAS 123(R), we retained our method of
valuation for share-based awards granted beginning in fiscal
2006 with the use of the Black-Scholes model which was
previously used for the Company’s pro forma information
required under SFAS 123. The Company’s determination
of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by the Company’s
stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but
are not limited to the Company’s expected stock price
volatility over the term of the awards, and actual and projected
employee stock option exercise behaviors. A description of the
assumptions follows:
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INTERMUNE,
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We estimated the fair value of each option grant on the date of
grant using the Black-Scholes model with the following
weighted-average assumptions:
The weighted-average fair value per share of options granted
during the three and six month periods ended June 30, 2006
was $8.92 and $9.08, respectively.
We estimated the fair value of the employees’ stock
purchase rights using the Black-Scholes model with the following
weighted-average assumptions:
The weighted-average fair value for purchase rights granted
under the employee stock purchase plan for the three and six
month periods ended June 30, 2006 was $6.46.
As stock-based compensation expense recognized in the Condensed
Consolidated Statement of Operations for the first six months of
fiscal 2006 is based on awards ultimately expected to vest, it
has been reduced for estimated forfeitures. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
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INTERMUNE,
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Had we used the fair value based accounting method for
stock-based compensation expense prescribed by
SFAS No. 123 for the three and six months ended
June 30, 2005, our net loss and net loss per share would
have increased to the following pro-forma amounts (in thousands,
except per share data):
Prior to the adoption of SFAS No. 123(R), pro forma
disclosures reflected the fair value of each option grant
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions:
The weighted-average fair value per share of options granted
during the six month period ended June 30, 2005 was $8.33.
We estimated the fair value of the employees’ stock
purchase rights using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
The weighted-average fair value for purchase rights granted
under the employee stock purchase plan for the six month period
ended June 30, 2005 was $5.83.
On November 9, 2004, we received a subpoena from the
U.S. Department of Justice requiring us to provide the
Department of Justice with certain information relating to
Actimmune®,
including information regarding the promotion and marketing of
Actimmune®.
We are cooperating with the Department of Justice in this
inquiry. On July 27, 2006, we announced that we had
recorded a provision of $30.0 million in connection with a
proposed comprehensive settlement with the government concerning
promotional activities for
Actimmune®
by former
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INTERMUNE,
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
employees during a period ending in January 2003. This proposed
settlement, which is in the process of being negotiated, is
expected to resolve all outstanding government investigations of
InterMune.
We expect that the settlement terms would not have a negative
impact on our key research and development programs, including
our two Phase III clinical programs of
Actimmune®
and pirfenidone for idiopathic pulmonary fibrosis and our
protease inhibitor, ITMN-191, for the treatment of
hepatitis C virus infections. Although the financial terms
of the settlement are still under negotiation, we have concluded
that a liability is probable and have recorded a provision of
$30.0 million representing our best estimate of the
settlement. In addition to a monetary settlement, which would be
paid over a period of years, we anticipate that the
comprehensive settlement will include various other terms,
including a resolution of the pending investigations without
criminal sanctions. Because the ultimate settlement terms may
differ materially from the proposed settlement, we cannot
predict whether the ultimate outcome of this inquiry will have a
material adverse effect on our business.
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This Quarterly Report on
Form 10-Q
(the “Report”) contains certain information regarding
our financial projections, plans and strategies that are
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. These statements involve substantial risks and
uncertainty. You can identify these statements by
forward-looking words such as “may,” “will,”
“expect,” “intend,” “anticipate,”
“believe,” “estimate,” “plan,”
“could,” “should,” “continue” or
the negative of such terms or similar words or expressions.
These forward-looking statements may also use different phrases.
We have based these forward-looking statements on our current
expectations and projections about future events. These
forward-looking statements, which are subject to risks,
uncertainties and assumptions about us, may include, among other
things, statements which address our strategy and operating
performance and events or developments that we expect or
anticipate will occur in the future, including, but not limited
to, statements in the discussions about:
You should also consider carefully the statements under the
heading “Risk Factors” below, which address additional
factors that could cause our results to differ from those set
forth in the forward-looking statements. Any forward-looking
statements are qualified in their entirety by reference to the
factors discussed in this Report, including those discussed in
this Report under the heading “Risk Factors” below.
Because of the factors referred to above, as well as the factors
discussed in this Report under the heading “Risk
Factors” below, could cause actual results or outcomes to
differ materially from those expressed in any forward-looking
statements made by us or on our behalf, you should not place
undue reliance on any forward-looking statement. Further, any
forward-looking statement speaks only as of the date on which it
is made, and we undertake no obligation to update any
forward-looking statement to reflect events or circumstances
after the date on which the statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time
to time, and it is not possible for us to predict which factors
will arise. In addition, we cannot assess the impact of each
factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ
materially from those contained in any forward-looking
statements. When used in the Report, unless otherwise indicated,
“InterMune,” “we,” “our” and
“us” refers to InterMune, Inc.
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. We base our
estimates on historical experience and on various other
assumptions that we believe are reasonable. These estimates are
the basis for our judgments about the carrying values of assets
and liabilities, which in turn may impact our reported revenue
and expenses. Actual results may differ from these estimates
under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an
accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time the estimate is
made, and if different estimates that reasonably could have been
used, or changes in the accounting estimate that are reasonably
likely to occur periodically, could materially change the
financial statements. We believe there have been no significant
changes
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during the three- and six-month period ended June 30, 2006
to the items that we disclosed as our critical accounting
policies and estimates under Item 7,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” in our Annual Report
on
Form 10-K
for the year ended December 31, 2005, with the exception of
our estimates related to the recording of expenses for
stock-based compensation.
Beginning January 1, 2006, we account for stock-based
compensation in accordance with SFAS No. 123(R),
Share-Based Payment. Under the fair value recognition
provisions of this statement, stock-based compensation cost is
measured at the grant date based on the fair value of the award
and is recognized as expense over the vesting period. In order
to estimate the value of share-based awards, we use the
Black-Scholes model, which requires the use of certain
subjective assumptions. The most significant assumptions are our
estimates of the expected volatility and the expected term of
the award. In addition, judgment is also required in estimating
the amount of share-based awards that are expected to be
forfeited. If actual results differ significantly from any of
these estimates, stock-based compensation expense and our
results of operations could be materially impacted.
The Company adopted SFAS 123(R) using the modified
prospective transition method, which requires the application of
the accounting standard as of January 1, 2006, the first
day of the Company’s fiscal year 2006. SFAS 123(R)
supersedes the Company’s previous accounting under
APB 25. The Company’s Condensed Consolidated Financial
Statements as of and for the three and six months ended
June 30, 2006 reflect the impact of SFAS 123(R). In
accordance with the modified prospective transition method, the
Company’s Condensed Consolidated Financial Statements for
prior periods have not been restated to reflect, and do not
include, the impact of SFAS 123(R). Stock-based
compensation expense recognized under SFAS 123(R) for the
three and six months ended June 30, 2006 was
$4.7 million and $9.4 million, respectively, which
consisted of stock-based compensation expense related to
employee stock options, restricted stock and the ESPP.
Stock-based compensation expense of $0.5 million and
$1.0 million for the three and six months ended
June 30, 2005 was related to restricted stock which the
Company had been recognizing under previous accounting
standards. There was no stock-based compensation expense related
to employee stock options and the ESPP recognized during the
three and six months ended June 30, 2005.
If all of the remaining restricted stock awards that were
granted in 2003, 2004 and 2006 became vested, we would recognize
approximately $5.4 million in compensation expense over a
weighted average remaining period of 1.5 years. If all of
the remaining nonvested and outstanding stock option awards that
have been granted became vested, we will recognize approximately
$19.8 million in compensation expense over a weighted
average remaining period of 1.5 years. However, no
compensation expense will be recognized for any stock awards
that do not vest.
We are an independent biopharmaceutical company focused on
developing and commercializing innovative therapies in
pulmonology and hepatology. Pulmonology is the field of medicine
concerned with the diagnosis and treatment of lung conditions.
Hepatology is the field of medicine concerned with the diagnosis
and treatment of disorders of the liver. We were incorporated in
California in 1998 and reincorporated in Delaware in 2000 upon
becoming a public company. On April 26, 2001, we changed
our name from InterMune Pharmaceuticals, Inc. to InterMune, Inc.
During the past several years, we have reorganized our business
by curtailing new investment in non-core areas and focusing our
development and commercial efforts in pulmonology and
hepatology. Until December 2005, our revenue base was provided
primarily from the sales of two products,
Actimmune®
(interferon gamma-1b) and
Infergen®
(consensus interferon alfacon-1). As part of our efforts to
refocus our corporate strategy, we completed the sale of the
Infergen®
product, including related intellectual property rights and
inventory, to a wholly-owned subsidiary of Valeant
Pharmaceuticals International (“Valeant”) in December
2005, for approximately $120.0 million in cash, of which
$6.5 million was attributed to the purchase of finished
product inventory. As part of this transaction, we received a
$2.1 million promissory note from Valeant due in 2007 and
may also receive up to approximately $20.0 million in
clinical related contingent milestone payments beginning in
2007. Concurrent with the above transaction, we made the
decision to significantly reduce our investment in field-based
idiopathic pulmonary fibrosis (“IPF”) disease
awareness activities, which, when combined with the sale of our
Infergen®
assets, led to a significant headcount reduction of
approximately 160 full time equivalent employees and resulting
termination costs of approximately $9.2 million. We also
made the strategic decision to continue to advance the
development of our chronic hepatitis C virus
(“HCV”) protease inhibitor at least through
Phase Ib development without a partner. As a result of
these decisions made during the latter part of 2005, we
currently have the following key development programs:
Actimmune®
for IPF, pirfenidone for IPF, the HCV protease inhibitor and a
new target
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compound in hepatology. During 2005, we divested the
Amphotec®
(amphotericin B cholesteryl sulfate complex for injection)
product as well as the oritavancin compound. We have sustained
losses in every year since inception and, as of June 30,
2006, we had an accumulated deficit of $517.6 million. On
July 27, 2006, we announced that we had recorded a
provision of $30.0 million in connection with a proposed
comprehensive settlement with the government concerning
promotional activities for
Actimmune®
by former employees during a period ending in January 2003. This
proposed settlement, which is in the process of being
negotiated, is expected to resolve all outstanding government
investigations of InterMune and is included in our results of
operations for the three and six months ended June 30, 2006.
Our sole approved product is
Actimmune®
(interferon gamma-1b), approved for the treatment of patients
with severe, malignant osteopetrosis and chronic granulomatous
disease (“CGD”). For the six months ended
June 30, 2006,
Actimmune®
accounted for all of our product revenue, and substantially all
of this revenue was derived from physicians’ prescriptions
for the off-label use of
Actimmune®
in the treatment of IPF.
We have a preclinical research program in the hepatology area.
In September 2002, we entered into a drug discovery
collaboration agreement with Array BioPharma, Inc.
(“Array”) to discover novel small molecule protease
inhibitors for the treatment of hepatitis C. In late 2004,
we amended the Array agreement to provide for the acquisition of
certain intellectual property rights from Array. In April 2005,
we initiated a second research collaboration with Array with
respect to a new hepatology target.
Results from scientific studies presented at the Digestive
Disease Week medical conference in May 2005 have identified
protease inhibitors as a promising therapeutic class. In 2005,
we presented several abstracts demonstrating in vitro high
potency, favorable pharmacokinetics, including uptake into the
liver, and encouraging tolerability for our two lead oral HCV
protease inhibitor compounds. In the third quarter of 2005, we
chose “ITMN 191” (formerly known as ITMN B) as
our lead compound and are currently advancing this compound
through toxicology and other clinical trial
authorisation-enabling studies. We expect to submit a Clinical
Trial Authorisation (“CTA”) with European regulatory
authorities for this lead compound in the third quarter of 2006.
In addition, we are pursuing research related to other small
molecules for follow-on compounds to ITMN 191.
We have a preclinical research program in pulmonology. In
September 4, 2001 we entered into a license and
collaboration agreement with Maxygen Holdings Ltd., a wholly
owned subsidiary of Maxygen, Inc., to develop and commercialize
novel, next generation interferon gamma products that have
enhanced pharmacokinetics and a potential for less frequent
dosing regimens than
Actimmune®.
We have a late-stage development pipeline in the pulmonology
area and an early-stage pipeline in the hepatology area.
In hepatology, we are working to provide expanded treatment
options for patients suffering from HCV infections. Prior to the
end of 2005, we were focusing our hepatology efforts on those
HCV patients that did not show a sufficient and sustained
virologic response to pegylated interferons plus ribavirin.
These patients are referred to as HCV “PEG
non-responders.” Because we anticipate a shift in HCV
treatment paradigm from non-specific immunomodulator drugs
toward direct targeted therapies such as protease and polymerase
inhibitors, we decided to divest our
Infergen®
product in 2005. In connection with the sale of the
Infergen®
product to Valeant, we are no longer limiting our hepatology
efforts to the PEG non-responder patient population. We have now
decided to focus our hepatology program on the development of
small molecules for the treatment of HCV, the first of which is
our protease inhibitor program which we believe may have a broad
application in the overall HCV patient
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population. In this regard, we have transferred the
Phase III trial of once-daily treatment with
Infergen®
in combination with ribavirin therapy for HCV PEG non-responder
patients (the “DIRECT trial”) to Valeant. We have also
decided not to proceed with the expansion phase of the
Phase IIb clinical trial for once-daily
Infergen®
in combination with
Actimmune®,
with and without ribavirin for the treatment of HCV PEG
non-responders which effectively terminates our further
investment in this program. We are also no longer investing in
or actively seeking a partner for the PEG-Alfacon-1 program due
to limited interest by potential partners, long development
timelines and high costs. Accordingly, our Development, License
and Manufacturing Agreement with Shearwater Corp. (now known as
Nektar Therapeutics AL, Corp.) was mutually terminated as of
June 26, 2006.
In pulmonology, we are developing two therapies for the
treatment of IPF. IPF is a fatal disease characterized by
progressive scarring, or fibrosis, of the lungs, which leads to
the deterioration and destruction of lung function. There is no
FDA approved therapy for IPF. Although conclusive data does not
exist, we estimate that approximately 80,000 people suffer from
IPF in the United States. We are developing two clinically
advanced compounds for the treatment of IPF,
Actimmune®
and pirfenidone.
We initiated a second Phase III clinical trial of
Actimmune®
for the treatment of patients with mild to moderate IPF (the
“INSPIRE” trial) in December 2003. The INSPIRE trial
required the enrollment of approximately 600 patients, all
of which were enrolled by the end of 2005. According to the
protocol, when we neared the enrollment of the
600th patient, we conducted a prespecified sample size
re-evaluation. The results of the re-evaluation determined that
the overall mortality rate observed at that early point in the
trial was somewhat lower than forecast in the study protocol.
Consequently, as provided in the protocol, we made the decision
in October 2005 to increase the pre-specified sample size of the
trial by approximately 200 patients to increase the
likelihood that the protocol-specified number of events will
have occurred by the time the trial is scheduled to conclude in
late 2007. On April 13, 2006, we completed enrollment of
the INSPIRE trial by enrolling a total of 826 patients. The
INSPIRE trial is scheduled to conclude near the end of 2007, and
we expect to disclose top-line data from the trial in early 2008.
We have rights to develop and commercialize
Actimmune®
for a broad range of diseases in the United States, Canada and
Japan. We are collaborating with Boehringer Ingelheim GmbH
(“BI”), which has similar rights in Europe and the
rest of the world, to develop and commercialize interferon
gamma-1b under the trade name
Imukin®.
We are also developing pirfenidone for the treatment of IPF. In
2005 we finalized the design of a Phase III clinical
program for pirfenidone (the “CAPACITY” program) after
receiving input from the FDA and the European Medicines Agency
(“EMEA”). This program is designed to enroll
approximately 580 patients with mild to moderate forms of
IPF in two separate, concurrent multi-national Phase III
trials. The primary endpoint of these trials will be lung
function, as measured by change in forced vital capacity
(“FVC”), which is believed to be an important measure
of disease progression. Phase II studies of pirfenidone
suggest that pirfenidone may be effective in preventing a
decline in lung function and disease progression. On
April 27, 2006 we announced that we had initiated the
CAPACITY program by enrolling the first patient in the program.
We also were evaluating
Actimmune®
in patients with ovarian cancer in a Phase III trial (the
“GRACES” trial). On February 2, 2006, we
announced our decision to discontinue the GRACES trial after
evaluating the safety and efficacy of
Actimmune®
in combination with standard of care chemotherapy in patients
with advanced ovarian cancer. After reviewing the results of an
analysis of progression free survival time and an interim
analysis of overall survival time, an independent Data Safety
Monitoring Board recommended the discontinuation of the ongoing
post-treatment
follow-up of
patients in the study. This recommendation was based on a
shorter overall survival time in patients who received
Actimmune®
plus standard of care chemotherapy compared to patients who
received standard of care chemotherapy alone.
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The following chart shows the status of our product development
programs as of June 30, 2006:
Results
of Operations
The following discussion of our results of operations for the
comparative periods excludes
Infergen®
revenue and related expenses. These amounts are reflected in
discontinued operations as a result of the sale of the
Infergen®
product to Valeant in December 2005.
Total product revenue was $24.1 million and
$26.7 million for the three-month periods ended
June 30, 2006 and 2005, respectively, representing a
decrease of 10%. Total product revenue was $48.5 million
and $55.0 million for the six-month periods ended
June 30, 2006 and 2005, respectively, representing a
decrease of 12%. These decreases were primarily attributable to
decreases in sales of
Actimmune®,
Amphotec, a product line we divested in May 2005, and
Aralast®,
a product we ceased co-promoting in December 2005. For the
three- and six-month periods ended June 30, 2006,
Actimmune®
accounted for all of our net product revenue compared to 97% of
our total product revenue in the three and six months ended
June 30, 2005. Substantially all of this revenue was
derived from physicians’ prescriptions for the off-label
use of
Actimmune®
in the treatment of IPF.
There are a number of variables that impact
Actimmune®
revenue including, but not limited to, the level of
U.S. enrollment in our IPF clinical trials or those of
other companies, new patients started on therapy, average
duration of therapy, new data on
Actimmune®
or other products presented at medical conferences and
publications in medical journals, reimbursement and patient
referrals from physicians.
Cost of goods sold included product manufacturing costs,
royalties and distribution costs. Cost of goods sold were
$5.0 million and $7.5 million for the three-month
periods ended June 30, 2006 and 2005, respectively. The
gross margin percentage for our products was 79% and 72% for
these periods in 2006 and 2005, respectively. The improvement in
gross margin for the second quarter of 2006, when compared to
the same period in 2005, was primarily the result of
approximately $1.3 million in charges related to the
divestiture of
Amphotec®
in the second quarter of 2005.
Cost of goods sold were $11.3 million and
$14.1 million for the six-month periods ended June 30,
2006 and 2005, respectively. The gross margin for our products
was 77% and 74%, respectively, for these periods in 2006 and
2005. This improvement is attributable to the same reason noted
above for the three month period.
Exchange rate fluctuations between the U.S. dollar and the
Euro may adversely affect cost of goods sold on
Actimmune®
purchased from BI. We have, in the past, utilized forward
exchange contracts to partially offset the effect of exchange
rate fluctuations on purchases. However, no forward exchange
contracts had been established in 2005 or to date in 2006.
We recorded amortization of acquired product rights of
$0.1 million and $0.2 million for the three- and
six-month periods ended June 30, 2006, respectively. For
the three- and six-month periods ended June 30, 2005, we
recorded amortization of acquired product rights of
$0.1 million and $0.9 million, respectively. The
amortization
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and impairment of product rights for the six-months ended
June 30, 2005 includes $0.6 million in respect of the
impairment of
Amphotec®
recorded in anticipation of the divestiture of this product in
2005.
Research and development expenses were $24.8 million and
$18.0 million for the three-month period ended
June 30, 2006 and 2005, respectively, representing an
increase of $6.8 million or 38%. Research and development
expenses were $46.3 million and $34.9 million for the
six-month periods ended June 30, 2006 and 2005,
respectively, representing an increase of $11.4 million, or
33%. The increase in spending for the three- and six-month
periods ended June 30, 2006 compared with the same periods
in 2005 was primarily due to increased spending in our two
late-stage clinical development programs in IPF and the
advancement of our pre-clinical HCV protease inhibitor program,
as well as $2.3 million and $4.4 million of
stock-based compensation expense for the three- and six-months
ended June 30, 2006, respectively.
The following table lists our current product development
programs and the research and development expenses recognized in
connection with each program during the indicated periods. The
category title “Programs-Non specific” is comprised of
facilities, personnel costs that are not allocated to a specific
development program or discontinued programs and
$4.4 million of stock-based compensation in 2006. Our
management reviews each of these program categories in
evaluating our business. For a discussion of the risks and
uncertainties associated with developing our products, as well
as the risks and uncertainties associated with potential
commercialization of our product candidates, see the Risk
Factors below including those under the headings “Risks
Related to the Development of Our Products and Product
Candidates” and “Risks Related to Manufacturing and
Our Dependence on Third Parties.”
Our development program expenses for the six months ended
June 30, were as follows (in thousands):
A significant component of our total operating expenses is our
ongoing investments in research and development and, in
particular, the clinical development of our product pipeline.
The process of conducting the clinical research necessary to
obtain FDA approval is costly, time consuming, and variable with
respect to the timing of expense recognition. Current FDA
requirements for a new human drug to be marketed in the United
States include:
Based on our existing budgeted programs and including the impact
of SFAS 123(R), we expect research and development expenses
to be in a range of $90.0 million to $105.0 million in
2006.
Selling, general and administrative expenses were
$10.1 million and $16.1 million for the three-month
periods ended June 30, 2006 and 2005, respectively,
representing a decrease of $6.0 million or 37%. Selling,
general and administrative expenses were $20.8 million and
$31.7 million for the six-month periods ended June 30,
2006 and 2005, respectively, representing a decrease of
$11.0 million or 35%. The decreased spending for the three-
and six-
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month periods ended June 30, 2006 compared with the same
period in 2005 was primarily attributable to the headcount
reductions announced last November in field-based IPF disease
awareness activities and a decrease in the number of personnel
in the home office. This decrease was partially offset by
stock-based compensation expense of $2.4 million and
$5.0 million for the three- and six-month periods ended
June 30, 2006, respectively. In 2006, including the impact
of SFAS 123(R), we expect selling, general and
administrative expenses to be in a range of $30.0 million
to $45.0 million.
On November 9, 2004, we received a subpoena from the
U.S. Department of Justice requiring us to provide the
Department of Justice with certain information relating to
Actimmune®,
including information regarding the promotion and marketing of
Actimmune®.
We are cooperating with the Department of Justice in this
inquiry. On July 27, 2006, we announced that we had
recorded a provision of $30.0 million in connection with a
proposed comprehensive settlement with the government concerning
promotional activities for
Actimmune®
by former employees during a period ending in January 2003. This
proposed settlement, which is in the process of being
negotiated, is expected to resolve all outstanding government
investigations of InterMune.
Interest income increased to $2.2 million for the
three-month period ended June 30, 2006, compared to
$1.0 million for the three-month period ended June 30,
2005 and increased to $4.4 million for the six-month period
ended June 30, 2006, compared to $2.1 million for the
six-month period ended June 30, 2005. These increases in
interest income in the three- and six-month periods ended
June 30, 2006 reflect increasing investment yields on our
cash and short-term investments resulting from higher market
interest rates and the increased cash position as a result of
the $120.0 million in proceeds received in December 2005
from the sale of
Infergen®.
Interest expense remained flat at $0.3 million and
$0.6 million, respectively, for each of the three- and
six-month periods ended June 30, 2006 and June 30,
2005. Interest expense for each of the reported periods is a
result of our outstanding $170.0 million
0.25% convertible senior notes due in March 2011 and
includes amortization of debt issuance costs.
Other income (expense) was $0.1 million expense for the
three-month period ended June 30, 2006 compared to other
expense of $0.2 million for the three-month period ended
June 30, 2005. Other income (expense) was $0.1 million
expense for the six-month period ended June 30, 2006
compared to other income of $0.5 million for the six-month
period ended June 30, 2005. Other income of
$0.5 million for the six-month period ended June 30,
2005 represented a foreign currency transaction gain.
Gain
(loss) from Discontinued Operations
The gain (loss) from discontinued operations reflects the
divestiture of our
Infergen®
product line to Valeant which was completed in December 2005.
The gain (loss) from discontinued operations of
$0.1 million and ($0.2) million in the three and six
months ended June 30, 2006, respectively, compares to
losses of ($9.2) million and ($16.3) million in the
three and six months ended June 30, 2005, respectively. The
components of the loss from discontinued operations for the
three and six months ended June 30, 2005 included net
revenue of
Infergen®,
the related cost of goods sold and amortization of acquired
product rights, as well as certain allocated research and
development and selling general and administrative expenses
specific to
Infergen®.
Discontinued operations in 2006 consist primarily of transition
services.
At June 30, 2006, we had available cash, cash equivalents
and
available-for-sale
securities of $180.1 million. The primary objective of our
investment activities is to preserve principal while at the same
time maximizing yields without significantly increasing risk. To
achieve this objective, we invest our excess cash in debt
instruments of the
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U.S. federal and state governments and their agencies and
high-quality corporate issuers, and, by policy, restrict our
exposure to any single corporate issuer by imposing
concentration limits.
Cash used in operating activities was $45.9 million during
the six-month period ended June 30, 2006, comprised
primarily of a net loss of $56.8 million and a significant
decrease in accounts payable and accrued compensation of
approximately $27.0 million. This use of cash is net of the
$30.0 million provision for estimated settlement,
stock-based compensation expense of $9.4 million and a
decrease in accounts receivable of $3.3 million. The
decrease in accounts payable and accrued compensation was the
result of approximately $4.5 million in severance payments
made in connection with the headcount reduction at the end of
2005 as a result of our decision to concurrently sell our
Infergen®
assets and reduce our investment in field-based IPF disease
awareness activities. In addition, we reduced the days
outstanding in our trade payables, thus reducing our accounts
payable balance by approximately $17.0 million. The
decrease in accounts receivable is primarily due to the decline
in
Actimmune®
sales and the elimination of
Infergen®
sales. Details concerning the loss from operations can be found
above in this Report under the heading “Results of
Operations.”
Cash used in investing activities was $81.9 million in
during the six-month period ended June 30, 2006, comprised
primarily of purchases of short-term investments totaling
$95.0 million, offset by approximately $13.1 million
of short-term investment maturities. A portion of the
$120.0 million in proceeds received from the sale of our
Infergen®
assets at the end of 2005 was invested during the first quarter
of 2006 in accordance with our investment objectives.
Cash provided by financing activities of $11.7 million for
the six-month period ended June 30, 2006 was primarily due
to the receipt of proceeds from issuance of common stock. A
significant number of
in-the-money
stock options were exercised as a result of the headcount
reduction at the end of 2005.
We do not have any “special purpose” entities that are
not consolidated in our financial statements. We have no
commercial commitments with related parties. We have no loans
with related parties, except for executive loans to
Dr. Marianne Armstrong, our Chief Medical Affairs and
Regulatory Officer in the amount of $0.1 million (due April
2007), and Dr. Lawrence Blatt, our Chief Scientific
Officer, in the amount of $0.1 million (due May 2007). Both
of these loans were in place prior to the enactment of the
Sarbanes-Oxley Act in 2002.
We believe that we will continue to require substantial
additional funding in order to complete the research and
development activities currently contemplated and to
commercialize our product candidates. We believe our existing
cash, cash equivalents and
available-for-sale
securities, together with anticipated cash flows from our
operations, will be sufficient to fund our operating expenses,
estimated proposed settlement with the government, debt
obligations and capital requirements under our current business
plan through at least the end of 2007. However, this
forward-looking statement is based upon the risks identified in
this report; our current plans and assumptions, which may
change; and our capital requirements, which may increase in
future periods. Our future capital requirements will depend on
many factors, including, but not limited to:
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As a result, we may require additional funds and may attempt to
raise additional funds through equity or debt financings,
collaborative arrangements with corporate partners or from other
sources. We have no commitments for such fund raising activities
at this time. Additional funding may not be available to finance
our operations when needed or, if available, the terms for
obtaining such funds may not be favorable or may result in
dilution to our stockholders.
The securities in our investment portfolio are not leveraged,
are classified as
available-for-sale
and are, due to their short-term nature, subject to minimal
interest rate risk. We currently do not hedge interest rate
exposure. Because of the short-term maturities of our
investments, we do not believe that a change in market rates
would have a significant negative impact on the value of our
investment portfolio.
The primary objective of our investment activities is to
preserve principal while at the same time maximizing yields
without significantly increasing risk. To achieve this
objective, we invest our excess cash in debt instruments of the
U.S. federal and state governments and its agencies and
high-quality corporate issuers, and, by policy, restrict our
exposure to any single corporate issuer by imposing
concentration limits. To minimize the exposure due to adverse
shifts in interest rates we maintain investments of shorter
effective maturities.
The table below presents the principal amounts and
weighted-average interest rates by year of maturity for our
investment portfolio as of June 30, 2006 by effective
maturity (in millions, except percentages):
We have obligations denominated in euros for the purchase of
Actimmune®
inventory. In 2004, we used foreign currency forward contracts
to partially mitigate this exposure, but did not enter into any
new foreign currency forward contracts in 2005 or 2006 to date.
We regularly evaluate the cost-benefit of entering into such
arrangements, and presently have no foreign currency hedge
agreements outstanding.
As of the end of the period covered by this quarterly report on
Form 10-Q,
we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures, or “disclosure
controls.” This controls evaluation was performed under the
supervision and with the participation of management, including
our Chief Executive
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Officer (“CEO”) and Chief Financial Officer
(“CFO”). Disclosure controls are controls and
procedures designed to reasonably assure that information
required to be disclosed in our reports filed under the Exchange
Act, such as this Report, is recorded, processed, summarized and
reported within the time periods specified in the SEC’s
rules and forms. Disclosure controls are also designed to
reasonably ensure that such information is accumulated and
communicated to our management, including the CEO and CFO, as
appropriate, to allow timely decisions regarding required
disclosure. Based upon the controls evaluation, our CEO and CFO
have concluded that, as a result of the matters discussed below
with respect to our internal control over financial reporting,
our disclosure controls were effective as of the end of the
period covered by this Report.
On August 7, 2006, Norman L. Halleen stepped down as Chief
Financial Officer and Senior Vice President, Finance. He is
being replaced by John C. Hodgman effective August 14, 2006.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Exchange Act). Our internal control system was
designed to provide reasonable assurance to management and our
board of directors regarding the reliability of financial
reporting and preparation of published financial statements in
accordance with generally accepted accounting principles.
Management assessed our internal control over financial
reporting as of December 31, 2005, the end of our fiscal
year, and concluded that our internal control over financial
reporting was effective as of December 31, 2005. Management
assessed our internal control over financial reporting as of
June 30, 2006, the end of the period covered by this
report. As a result of this assessment, management has concluded
that our internal control over financial reporting was effective
as of June 30, 2006. In making our assessment of internal
control over financial reporting, we used the criteria issued in
the report Internal Control-Integrated Framework by the
Committee of Sponsoring Organizations of the Treadway Commission.
There have been no changes to our internal controls over
financial reporting during the three months ended June 30,
2006 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Attached as exhibits to this Report, there are
“Certifications” of the CEO and the CFO required by
Rule 13a-14(a)
of the Securities Exchange Act of 1934, or the
Rule 13a-14(a)
Certifications. This Controls and Procedures section of the
Report includes the information concerning the controls
evaluation referred to in the
Rule 13a-14(a)
Certifications and it should be read in conjunction with the
Rule 13a-14(a)
Certifications for a more complete understanding of the topics
presented.
Our management, including our CEO and CFO, does not expect that
our control systems will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of
a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, within InterMune have been detected. These
inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, by
collusion of two or more people or by management override of the
control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of
changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
Accordingly, our disclosure controls and procedures are
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designed to provide reasonable, not absolute, assurance that the
objectives of our disclosure control system are met and, as set
forth above, our CEO and CFO have concluded, based on their
evaluation as of the end of the period covered by this Report,
that our disclosure controls and procedures were effective to
provide reasonable assurance that the objectives of our
disclosure control system were met.
On November 9, 2004, we received a subpoena from the
U.S. Department of Justice requiring us to provide the
Department of Justice with certain information relating to
Actimmune®,
including information regarding the promotion and marketing of
Actimmune®.
We are cooperating with the Department of Justice in this
inquiry. On July 27, 2006, we announced that we reserved
$30.0 million in connection with a proposed comprehensive
settlement with the government concerning promotional activities
for
Actimmune®
by former employees during a period ending in January 2003. This
proposed settlement, which is in the process of being
negotiated, is expected to resolve all outstanding government
investigations of InterMune.
We expect that the settlement terms would not have a negative
impact on our key research and development programs, including
our two Phase III clinical programs of
Actimmune®
and pirfenidone for idiopathic pulmonary fibrosis and our
protease inhibitor, ITMN-191, for the treatment of
hepatitis C virus infections. Although the financial terms
of the settlement are still under negotiation, we believe that
it is appropriate to reserve $30 million to reflect the
anticipated financial impact of the proposed settlement. In
addition to a monetary settlement, which would be paid over a
period of years, we anticipate that the comprehensive settlement
will include various other terms, including a resolution of the
pending investigations without criminal sanctions. Because the
ultimate settlement terms may differ materially from the
proposed settlement, we cannot predict whether the ultimate
outcome of this inquiry will have a material adverse effect on
our business.
An investment in our common stock is risky. Stockholders and
potential investors in shares of our stock should carefully
consider the following risk factors, which hereby update those
risks contained in the “Risk Factors” section of our
Annual Report on
Form 10-K
for the period ended December 31, 2005, in addition to
other information and risk factors in this Report. We are
identifying these risk factors as important factors that could
cause our actual results to differ materially from those
contained in any written or oral forward-looking statements made
by or on behalf of InterMune. We are relying upon the safe
harbor for all forward-looking statements in this Report, and
any such statements made by or on behalf of InterMune are
qualified by reference to the following cautionary statements,
as well as to those set forth elsewhere in this Report.
We commenced operations in 1998 and have incurred significant
losses to date. Our revenue has been limited primarily to sales
of
Actimmune®
derived from physicians’ prescriptions for the off-label
use of
Actimmune®
in the treatment of IPF. Although we are developing
Actimmune®
for the treatment of IPF,
Actimmune®
may not be marketed for IPF before 2008, if at all. We are
developing pirfenidone for the treatment of IPF, but pirfenidone
will not be marketed for any diseases before 2010, if at all. We
are developing ITMN 191, our protease inhibitor, for the
treatment of hepatitis C and we plan to file a Clinical
Trial Authorisation (“CTA”) with European regulatory
authorities in the third quarter of 2006, but there is no
guarantee that we will be able to make this filing by the end of
that period.
We may fail to develop our products on schedule, or at all, for
the reasons stated in this “Risks Related to the
Development of Our Products and Product Candidates” section
of this Report. If this were to occur, our costs would increase
and our ability to generate revenue could be impaired. In
addition, we may need to raise capital in amounts greater than
we anticipate in order to continue our development activities as
planned. If additional capital is not available, we may be
forced to curtail our development activities or cease operations.
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To gain approval to market a product for treatment of a specific
disease, we must provide the FDA and foreign regulatory
authorities with clinical data that demonstrate the safety and
statistically significant efficacy of that product for the
treatment of the disease. Clinical development is a long,
expensive and uncertain process, and delay or failure can occur
at any stage of any of our clinical trials. A number of
companies in the pharmaceutical industry, including
biotechnology companies, have suffered significant setbacks in
advanced clinical trials, even after promising results in
earlier trials. Success in preclinical testing and early
clinical trials does not ensure that later clinical trials will
be successful. For example, we have decided to end our
investment in
Actimmune®
for patients with ovarian cancer as a result of our decision to
discontinue the GRACES trial on the recommendation of an
independent Data Safety Monitoring Board. As a result, we do not
intend to conduct further development of
Actimmune®
for the treatment of ovarian cancer.
We are conducting the INSPIRE trial, a second Phase III
clinical trial of
Actimmune®
as a treatment for IPF. However,
Actimmune®
may not demonstrate safety or statistically significant efficacy
with respect to the primary or secondary endpoints of the
protocol of that clinical trial or any additional clinical
trial. If the Phase III clinical trial were to fail to
demonstrate statistically significant efficacy, we would likely
abandon the development of
Actimmune®
for the treatment of IPF, which would seriously harm our
business and would result in a significant decline in our
expected
Actimmune®
revenue.
The commencement or completion of any of our clinical trials may
be delayed or halted for numerous reasons, including, but not
limited to, the following:
Our development costs will increase if we have material delays
in our clinical trials or if we need to perform more or larger
clinical trials than planned. For example, our development costs
related to
Actimmune®
as a treatment for IPF increased due to our need to conduct an
additional Phase III clinical trial, as our first
Phase III clinical trial of
Actimmune®
for the treatment of IPF failed to show a significant effect on
the primary endpoint of progression-free survival or on
secondary endpoints of lung function and quality of life. In
addition, we conducted a blinded pre-specified sample size
re-evaluation in the INSPIRE trial that was a part of the
original study protocol to determine if the observed aggregate
mortality rate to date was consistent with the mortality
assumptions underlying the trial design. At this early stage of
the trial, the aggregate mortality rate observed was somewhat
lower than the projections used in designing the trial. To
increase the likelihood of reaching the total number of deaths
upon which the trial is powered by the time the trial is
scheduled to conclude in late 2007, we decided to increase the
trial size by approximately 200 patients. However, there is
no guarantee that this increase in patient numbers will in fact
result in
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an aggregate mortality rate necessary to reach the mortality
projections. In this event, the scheduled completion of this
trial could extend past late 2007. If there are any significant
delays for this or any of our other current or planned clinical
trials, our financial results and the commercial prospects for
our products and product candidates will be harmed, and our
prospects for profitability will be impaired.
We may determine that certain preclinical product candidates or
programs do not have sufficient potential to warrant the
allocation of resources toward them. Accordingly, we may elect
to terminate our programs for and, in certain cases, our
licenses to, such product candidates or programs. If we
terminate a preclinical program in which we have invested
significant resources, we will have expended resources on a
program that will not provide a full return on our investment
and missed the opportunity to have allocated those resources to
potentially more productive uses.
If we
fail to comply or fail to maintain our compliance with FDA or
other government regulations prohibiting the promotion of
off-label uses and the promotion of products for which marketing
approval has not been obtained, it could result in regulatory
enforcement action by the FDA or other governmental authorities,
including a substantial fine, either of which could harm our
business.
Physicians may prescribe commercially available drugs for uses
that are not described in the product’s labeling and that
differ from those uses tested by us and approved by the FDA.
Such off-label uses are common across medical specialties. For
example, even though the FDA has not approved the use of
Actimmune®
for the treatment of IPF, we are aware that physicians are, and
have in the past, prescribing
Actimmune®
for the treatment of IPF. Substantially all of our
Actimmune®
revenue is derived from physicians’ prescriptions for
off-label use for IPF. The FDA does not regulate the behavior of
physicians in their choice of treatments. The FDA and other
governmental agencies do, however, restrict manufacturers’
communications on the subject of off-label use. Companies may
not promote FDA approved drugs or investigational drugs for
off-label or unapproved uses. Accordingly, we may not
promote Actimmune®
for the treatment of IPF. The FDA and other governmental
authorities actively enforce regulations prohibiting promotion
of off-label uses and the promotion of products for which
marketing approval has not been obtained. The federal government
has levied large civil and criminal fines against manufacturers
for alleged improper promotion, and the FDA has enjoined several
companies from engaging in off-label promotion. The FDA has also
requested that companies enter into consent decrees or permanent
injunctions under which certain promotional conduct is changed
or curtailed. We are aware of at least one instance in which the
Office of the Inspector General of the FDA has sought and
secured criminal penalties and a corporate integrity agreement
against a pharmaceutical manufacturer requiring that company to
pay substantial fines and to monitor certain promotional
activities to ensure compliance with FDA regulations. We engage
in medical education activities that are subject to scrutiny
under the FDA’s regulations relating to off-label
promotion. While we believe we are currently in compliance with
these regulations, the regulations are subject to varying
interpretations, which are evolving.
If the FDA or any other governmental agency initiates an
enforcement action against us and it is determined that we
violated prohibitions relating to off-label promotion in
connection with past or future activities, we could be subject
to civil
and/or
criminal fines and sanctions such as those noted above in this
risk factor, any of which would have an adverse effect on our
revenue, business and financial prospects.
In addition, some of the agreements pursuant to which we license
our products, including our license agreement relating to
Actimmune®,
contain provisions requiring us to comply with applicable laws
and regulations, including the FDA’s restriction on the
promotion of FDA approved drugs for off-label uses. As a result,
if it were determined that we violated the FDA’s rules
relating to off-label promotion in connection with our marketing
of
Actimmune®,
we may be in material breach of our license agreement for
Actimmune®.
If we failed to cure a material breach of this license
agreement, we could lose our rights to certain therapeutic uses
for
Actimmune®
under the agreement.
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The FDA and foreign regulatory authorities may impose
significant restrictions on the use or marketing of
Actimmune®
or our other products or impose additional requirements for
post-approval studies. Later discovery of previously unknown
problems with any of our products or their manufacture may
result in further restrictions, including withdrawal of the
product from the market. In this regard, the FDA has conducted
routine inspections of our manufacturing contractors, and some
were issued a standard “notice of observations.” While
we believe that all of these observations are being
appropriately corrected, failure to correct any deficiency could
result in manufacturing delays. Our existing approvals for
diseases, and any new approval for any other disease that we
target, if granted, could be withdrawn for failure to comply
with regulatory requirements or to meet our post-approval
commitments. For example, we have ongoing Phase IV
post-marketing commitments to the FDA relating to
Actimmune®
for the treatment of osteopetrosis. Our failure to adequately
address these ongoing Phase IV commitments could result in
a regulatory action or restriction, such as withdrawal of the
relevant product’s approval by the FDA. If approval for a
disease is withdrawn, we could no longer market the affected
product for that disease. In addition, governmental authorities
could seize our inventory of such product, or force us to recall
any product already in the market, if we fail to comply with FDA
or other governmental regulations.
For a description of restrictions relating to the off-label
promotion of our products, please see the risk factor titled,
“If we fail to comply or fail to maintain our compliance
with FDA or other government regulations prohibiting the
promotion of off-label uses and the promotion of products for
which marketing approval has not been obtained, it could result
in regulatory enforcement action by the FDA or other
governmental authorities, including a substantial fine, either
of which could harm our business.” above.
If our
clinical trials fail to demonstrate to the FDA and foreign
regulatory authorities that any of our products or product
candidates are safe and effective for the treatment of
particular diseases, the FDA and foreign regulatory authorities
may require us to conduct additional clinical trials or may not
grant us marketing approval for such products or product
candidates for those diseases.
Our failure to adequately demonstrate the safety and
effectiveness of any of our products or product candidates for
the treatment of particular diseases will delay or prevent our
receipt of the FDA’s and foreign regulatory
authorities’ approval and, ultimately, may prevent
commercialization of our products and product candidates for
those diseases. The FDA and foreign regulatory authorities have
substantial discretion in deciding whether, based on the
benefits and risks in a particular disease, any of our products
or product candidates should be granted approval for the
treatment of that particular disease. Even if we believe that a
clinical trial has demonstrated the safety and statistically
significant efficacy of any of our products or product
candidates for the treatment of a disease, the results may not
be satisfactory to the FDA or foreign regulatory authorities.
Preclinical and clinical data can be interpreted by the FDA and
foreign regulatory authorities in different ways, which could
delay, limit or prevent regulatory approval. If regulatory
delays are significant or regulatory approval is limited or
denied altogether, our financial results and the commercial
prospects for those of our products or product candidates
involved will be harmed, and our prospects for profitability
will be impaired.
We currently depend heavily and will depend heavily in the
future on third parties for support in product development,
clinical development, manufacturing, marketing and distribution
of our products. The termination of a significant number of our
existing collaborative arrangements, or our inability to
establish and maintain collaborative arrangements could have a
material adverse effect on our ability to complete clinical
development of our products.
We rely on contract clinical research organizations
(“CROs”), medical institutions and clinical
investigators for various aspects of our clinical development
activities including clinical trial monitoring, data collection
and data management. As a result, we have had and continue to
have less control over the conduct of clinical trials, the
timing and completion of the trials, the required reporting of
adverse events and the management of data developed through the
trial than would be the case if we were relying entirely upon
our own staff. Although we rely on CROs, medical
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institutions and clinical investigators to conduct all of our
clinical trials, we are responsible for confirming that each of
our clinical trials is conducted in accordance with the
investigational plan and protocol. Moreover, the FDA and foreign
regulatory agencies require us to comply with regulations and
standards, commonly referred to as good clinical practices, for
conducting, recording and reporting the results of clinical
trials to assure that the data and results are credible and
accurate and that the trial participants are adequately
protected. Our reliance on third parties does not relieve us of
these responsibilities and requirements.
Outside parties may have staffing difficulties, may undergo
changes in priorities or may become financially distressed,
adversely affecting their willingness or ability to conduct our
trials. We may experience unexpected cost increases that are
beyond our control. Any failure of such CROs to successfully
accomplish clinical trial monitoring, data collection and data
management and the other services they provide for us in a
timely manner and in compliance with regulatory requirements
could have a material adverse effect on our ability to complete
clinical development of our products and obtain regulatory
approval. Problems with the timeliness or quality of the work of
a CRO may lead us to seek to terminate the relationship and use
an alternate service provider. However, making such changes may
be costly and may delay our trials, and contractual restrictions
may make such a change difficult or impossible. Additionally, it
may be difficult to find a replacement organization that can
conduct our trials in an acceptable manner and at an acceptable
cost.
We do not have the resources, facilities or experience to
manufacture any of our products or product candidates ourselves.
Completion of our clinical trials and commercialization of our
products requires access to, or development of, manufacturing
facilities that meet FDA standards to manufacture a sufficient
supply of our products. The FDA must approve facilities that
manufacture our products for commercial purposes, as well as the
manufacturing processes and specifications for the product. We
depend on third parties for the manufacture of our products and
product candidates for preclinical, clinical and commercial
purposes, and we rely on third parties with FDA approved
manufacturing facilities for the manufacture of
Actimmune®
for commercial purposes. These third parties include BI and
Cardinal Health, Inc. (“Cardinal”). We have a
long-term supply contract with BI for
Actimmune®
and an agreement with Cardinal for the manufacture of the drug
product for pirfenidone. However, if we do not perform our
obligations under these agreements, these agreements may be
terminated.
Our manufacturing strategy for our products and product
candidates presents many risks, including, but not limited to,
the following:
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Any of these factors could delay clinical trials, regulatory
submissions or commercialization of our products for particular
diseases, interfere with current sales, entail higher costs and
result in our being unable to effectively sell our products.
Our
supply agreement with BI may restrict our ability to establish
alternative sources of
Actimmune®
in a timely manner or at an acceptable cost, which may cause us
to be unable to meet demand for
Actimmune®
and to lose potential revenue.
Our supply agreement with BI provides that BI is our exclusive
source of supply for
Actimmune®,
except under certain circumstances. Under our agreement with BI,
we cannot seek a secondary source to manufacture
Actimmune®
until BI has indicated to us its inability or unwillingness to
meet our requirements. If we are delayed in establishing a
secondary supply source for
Actimmune®,
or cannot do so at an acceptable cost, we may suffer a shortage
of commercial supply of
Actimmune®
or a higher cost of product, either of which would have a
material and adverse effect on our revenue, business and
financial prospects.
During the six months ended June 30, 2006, CuraScript, Inc.
(formerly Priority Healthcare, Inc.) accounted for approximately
60% of our total product sales and 63% of our outstanding
receivables. If this customer or any other customer that sells a
significant portion of
Actimmune®
were to experience financial difficulties, or otherwise became
unable or unwilling to sell
Actimmune®,
our business would be harmed. Additionally, any reduction, delay
or loss of orders from our key customers could harm our revenue
in any period or harm our business generally.
Our success depends on the continued customer support efforts of
our network of specialty pharmacies and distributors. A
specialty pharmacy is a pharmacy that specializes in the
dispensing of injectable or infused medications for complex or
chronic conditions, which often require a high level of patient
education and ongoing management. The use of specialty
pharmacies and distributors involves certain risks, including,
but not limited to, risks that these specialty pharmacies and
distributors will:
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Any such failure may result in decreased
Actimmune®
revenue, which would harm our business.
Our products and product candidates are expensive, and we
anticipate that the annual cost for treatment for each of the
diseases for which we are seeking approval will be significant.
These costs will vary for different diseases based on the dosage
and method of administration. Accordingly, we may decide not to
market any of our products or product candidates for an approved
disease because we believe that it may not be commercially
successful. Market acceptance of and demand for our products and
product candidates will depend on many factors, including, but
not limited to:
The continuing efforts of governmental and other third-party
payors to contain or reduce the cost of healthcare through
various means may adversely affect our ability to successfully
commercialize our products. For example, in most foreign
markets, the pricing
and/or
profitability of prescription pharmaceuticals are subject to
governmental control. In the United States, we expect that there
will continue to be federal and state proposals to implement
similar governmental controls. For example, the federal Medicare
Prescription Drug Improvement and Modernization Act of 2003
provides a new Medicare prescription drug benefit which began in
2006 and which mandates other reforms. Although we cannot
predict the full effects on our business of the implementation
of this program, it is possible that the new Medicare benefit,
which will be managed by private health insurers, pharmacy
benefit managers and other managed care organizations, will
result in decreased reimbursement for prescription drugs, which
may further exacerbate industry-wide pressure to reduce the
prices charged for prescription drugs. In addition, increasing
emphasis on managed care in the United States will continue to
put pressure on the pricing of pharmaceutical products. These
new and any future cost-control initiatives could decrease the
price that we would receive for
Actimmune®
or any other products that we may develop in the future, which
would reduce our revenue and potential profitability.
Our ability to commercialize our products or product candidates
for particular diseases is highly dependent on the extent to
which coverage and reimbursement for our products is available
from:
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Significant uncertainty exists as to the coverage and
reimbursement status of pharmaceutical products, particularly
with respect to products that are prescribed by physicians for
off-label use. If governmental and other third-party payors do
not provide adequate coverage and reimbursement levels for our
products, market acceptance of our products will be reduced, and
our sales will suffer. Many third-party payors provide coverage
or reimbursement only for FDA approved indications. If any large
or if several third-party payors decide to deny reimbursement
for
Actimmune®
used to treat IPF, sales of
Actimmune®
would decline, and our revenue would suffer.
Often, third-party payors make the decision to reimburse an
off-label prescription based on whether that product has a
compendia listing. A drug compendia is produced by a compendia
body, such as the United States Pharmacopoeia Drug Information,
that lists approved indications that a product has received from
the FDA. The compendia bodies also evaluate all of the clinical
evidence to determine whether an off-label use of a product
should be listed in the compendia as medically appropriate. A
compendia listing of an off-label use is a requirement of
third-party payors, such as Medicare and private payors, to
cover that use. Applications for a compendia listing are often
based upon the publication of certain data as abstracts or in
peer reviewed journals whose publication is often outside the
applicant’s control. If we are unable to achieve acceptance
by a compendia body for
Actimmune®
for the treatment of IPF, third-party payors may decide to deny
reimbursement for
Actimmune®
for the treatment of IPF, and fewer physicians may prescribe
Actimmune®
for such treatment.
Some third-party payors have denied coverage for
Actimmune®
for the treatment of IPF for a variety of reasons, including the
cost of
Actimmune®,
the fact that IPF is not an FDA approved indication for
Actimmune®
or a third-party payor’s assessment that a particular
patient’s case of IPF has advanced to a stage at which
treatment with
Actimmune®
would not have a significant effect. We believe that
approximately 60-70% of the patients who seek coverage for
Actimmune®
for the treatment of IPF from private third-party payors are
able to obtain coverage. While coverage trends have not changed
significantly in the last two years, major health plans could
further restrict coverage or adopt a policy of no coverage.
Our commercial opportunities will be reduced or eliminated if
our competitors develop or market products that, compared to our
products or product candidates:
Even if we are successful in developing effective drugs, our
products may not compete effectively with our competitors’
current or future products. Our competitors include larger, more
established, fully integrated pharmaceutical companies and
biotechnology companies that have substantially greater capital
resources, existing competitive products, larger research and
development staffs and facilities, greater experience in drug
development and in obtaining regulatory approvals and greater
marketing capabilities than we do.
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We are subject to various federal and state laws pertaining to
health care “fraud and abuse,” including anti-kickback
laws and false claims laws. Subject to certain exceptions, the
anti-kickback laws make it illegal for a prescription drug
manufacturer to knowingly and willfully solicit, offer, receive
or pay any remuneration in exchange for, or to induce, the
referral of business, including the purchase or prescription of
a particular drug. The federal government has published
regulations that identify “safe harbors” or exemptions
for certain payment arrangements that do not violate the
anti-kickback statutes. Due to the breadth of the statutory
provisions and the absence of guidance in the form of
regulations or court decisions addressing some of our practices,
it is possible that our practices might be challenged under
anti-kickback or similar laws. False claims laws prohibit anyone
from knowingly presenting, or causing to be presented, for
payment to third party payors (including Medicare and Medicaid)
claims for reimbursed drugs or services that are false or
fraudulent, claims for items or services not provided as claimed
or claims for medically unnecessary items or services. Our
activities relating to the reporting of wholesaler or estimated
retail prices for our products, the reporting of Medicaid rebate
information and other information affecting federal and state
and third-party payment for our products, and the sale and
marketing of our products, could become subject to scrutiny
under these laws.
In addition, pharmaceutical companies have been prosecuted under
the False Claims Act in connection with their
“off-label” promotion of drugs. For information
regarding allegations with respect to “off-label”
promotion by us, please see the risk factor titled “If we
fail to comply or fail to maintain compliance with FDA or other
government regulations prohibiting the promotion of off-label
uses and the promotion of products for which marketing approval
has not been obtained, it could result in regulatory enforcement
action by the FDA or other governmental authorities, including a
substantial fine, either of which could harm our business”
above.
If the government were to allege that we were, or convict us of,
violating these laws, there could be a material adverse effect
on us, including a substantial fine, decline in our stock price,
or both. Our activities could be subject to challenge for the
reasons discussed above and due to the broad scope of these laws
and the increasing attention being given to them by law
enforcement authorities.
Our commercial success will depend in part on obtaining and
maintaining patent protection on our products and product
candidates and successfully defending these patents against
third-party challenges. Our ability to commercialize our
products will also depend in part on the patent positions of
third parties, including those of our competitors. The patent
positions of pharmaceutical and biotechnology companies can be
highly uncertain and involve complex legal and factual
questions. No consistent policy regarding the breadth of claims
allowed in biotechnology patents has emerged to date.
Accordingly, we cannot predict with certainty the scope and
breadth of patent claims that may be afforded to other
companies’ patents. We could incur substantial costs in
litigation if we are required to defend against patent suits
brought by third parties, or if we initiate suits to protect our
patent rights.
The degree of future protection for our proprietary rights is
uncertain, and we cannot ensure that:
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Others have filed and in the future may file patent applications
covering uses and formulations of interferon gamma-1b, a
pegylated version of this product, and other products in our
development program. If a third party has been or is in the
future issued a patent that blocked our ability to commercialize
any of our products, alone or in combination, for any or all of
the diseases that we are targeting, we would be prevented from
commercializing that product or combination of products for that
disease or diseases unless we obtained a license from the patent
holder. We may not be able to obtain such a license to a
blocking patent on commercially reasonable terms, if at all. If
we cannot obtain, maintain and protect the necessary proprietary
rights for the development and commercialization of our products
or product candidates, our business and financial prospects will
be impaired.
Composition of matter patent protection for pirfenidone molecule
has expired in the United States and elsewhere. Marnac, Inc.
(“Marnac”) and others have obtained patents in the
United States and elsewhere relating to methods of use of
pirfenidone for the treatment of certain diseases. We have
licensed from Marnac and KDL GmbH (“KDL”) rights to a
U.S. patent related to the use of pirfenidone for the
treatment of fibrotic disorders, including the use of
pirfenidone for the treatment of IPF. Marnac has retained rights
under other U.S. and foreign patents for the use of pirfenidone
to treat diseases other than fibrotic disorders. It is possible
that Marnac will license these patent rights to third parties to
develop, market, sell and distribute pirfenidone for these
indications in the United States and elsewhere. It is also
possible that a third party may develop pirfenidone for the
treatment of certain diseases that are not covered by patents
held by Marnac or those we licensed from Marnac. If Marnac or
others were to license their method of use patents for
non-fibrotic indications to a third party, or if a third party
were to develop pirfenidone for a use that is not covered by any
patents and such third parties successfully developed
pirfenidone for non-fibrotic indications, we could face
competition from third party products with the same active
pharmaceutical ingredient as our product candidate. If a third
party were to obtain FDA approval for the use of pirfenidone for
an indication before we did, such third party would be first to
market and could establish the price for pirfenidone. This could
adversely impact our ability to implement our pricing strategy
for the product and may limit our ability to maximize the
commercial potential of pirfenidone. The presence of a lower
priced competitive product with the same active pharmaceutical
ingredients as our product could lead to use of the competitive
product for our fibrotic indications. This could lead to pricing
pressure for pirfenidone, which would adversely affect our
ability to generate revenue from the sale of pirfenidone for
fibrotic indications.
We license certain patents and trade secrets relating to
Actimmune®
from Genentech, Inc. (“Genentech”) and relating to
pirfenidone from Marnac and KDL. If we breach any of our
agreements with Genentech or with Marnac and KDL, any of these
licensors may be able to terminate the respective license, and
we would have no further rights to utilize the licensed patents
or trade secrets to develop and market the corresponding
products, which could adversely affect our revenue and financial
prospects.
We have licensed certain patents relating to interferon
gamma-1b, the active ingredient in
Actimmune®,
from Genentech. A U.S. patent relating to the composition
of interferon gamma-1b expires in 2014. Other material
U.S. patents relating to interferon gamma-1b expire between
2009 and 2013. We also previously purchased certain patents
relating to interferon gamma analogs from Amgen, Inc.
(“Amgen”) in 2002 including two U.S. patents that
issued August 30, 2005 which will expire on August 30,
2022. When these various patents expire, we will be unable to
use these patents to try to block others from marketing
interferon gamma-1b in the United States.
We have licensed from Marnac and KDL rights to a
U.S. patent related to the use of pirfenidone for the
treatment of fibrotic disorders, including the use of
pirfenidone for the treatment of IPF. After the U.S. patent
expires in 2011, we will not be able to use this patent to block
others from marketing pirfenidone for fibrotic
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disorders, including IPF although we may be able to extend our
U.S. exclusivity for IPF if we gain FDA approval for IPF
under orphan drug designation, which we may not be able to do.
The pirfenidone molecule itself has no composition of matter
patent protection in the United States or elsewhere. Therefore,
we have no ability to prevent others from commercializing
pirfenidone for (i) uses covered by the other patents held
by Marnac and third parties, or (ii) other uses in the
public domain for which there is no patent protection. We are
relying on exclusivity granted from orphan drug designation in
IPF to protect pirfenidone from competitors in this indication.
The exclusivity period in the United States begins on first NDA
approval for this product in IPF and ends seven years
thereafter. In addition, a third party could develop pirfenidone
for another non-fibrotic disease that also qualifies for orphan
drug designation and could be granted seven years exclusivity in
that indication. Additionally, in the European Union we have
been granted orphan drug designation for pirfenidone for the
treatment of IPF by the EMEA, which provides for ten years of
market exclusivity in the European Union following first
marketing approval in the European Union. We cannot provide any
assurance that we will be able to maintain this orphan drug
designation.
Once our patents expire, we will be subject to competition from
third parties who will be able to use the intellectual property
covered by these patents, which could impair our ability to
generate revenue.
Our commercial success depends in part on our ability and the
ability of our collaborators to avoid infringing patents and
proprietary rights of third parties. As noted in the immediately
preceding risk factor, third parties may accuse us or our
collaborators of employing their proprietary technology in our
products, or in the materials or processes used to research or
develop our products, without authorization. Any legal action
against our collaborators or us claiming damages
and/or
seeking to stop our commercial activities relating to the
affected products, materials and processes could, in addition to
subjecting us to potential liability for damages, require our
collaborators or us to obtain a license to continue to utilize
the affected materials or processes or to manufacture or market
the affected products. We cannot predict whether we, or our
collaborators, would prevail in any of these actions or whether
any license required under any of these patents would be made
available on commercially reasonable terms, if at all. If we are
unable to obtain such a license, we, or our collaborators, may
be unable to continue to utilize the affected materials or
processes or manufacture or market the affected products or we
may be obligated by a court to pay substantial royalties
and/or other
damages to the patent holder. Even if we are able to obtain such
a license, the terms of such a license could substantially
reduce the commercial value of the affected product or products
and impair our prospects for profitability. Accordingly, we
cannot predict whether or to what extent the commercial value of
the affected product or products or our prospects for
profitability may be harmed as a result of any of the
liabilities discussed above. Furthermore, infringement and other
intellectual property claims, with or without merit, can be
expensive and time-consuming to litigate and can divert
management’s attention from our core business.
We generally do not control the patent prosecution of technology
that we license from others. Accordingly, we are unable to
exercise the same degree of control over this intellectual
property as we would exercise over technology that we own. For
example, if Genentech fails to maintain the intellectual
property licensed to us, we may lose our rights to develop and
market certain therapeutic uses for
Actimmune®
and may be forced to incur substantial additional costs to
maintain or protect the intellectual property or to compel
Genentech to do so.
We rely on trade secrets to protect technology where it is
possible that patent protection is not appropriate or
obtainable. However, trade secrets are difficult to protect. We
protect these rights mainly through confidentiality agreements
with our corporate partners, employees, consultants and vendors.
These agreements generally provide that all confidential
information developed or made known to an individual or company
during the course of their relationship with us will be kept
confidential and will not be used or disclosed to third parties
except in specified circumstances. In the case of employees and
consultants, our agreements generally provide that all
inventions made by the individual while engaged by us will be
our exclusive property. We cannot be certain that these parties
will
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comply with these confidentiality agreements, that we will have
adequate remedies for any breach, or that our trade secrets will
not otherwise become known or be independently discovered by our
competitors. If our trade secrets become known, we may lose a
competitive advantage and our ability to generate revenue may
therefore be impaired.
Under some of our research and development agreements,
inventions discovered in certain cases become jointly owned by
our corporate partner and us and in other cases become the
exclusive property of one of us. It can be difficult to
determine who owns a particular invention, and disputes could
arise regarding those inventions. These disputes could be costly
and could divert management’s attention from our business.
Our research collaborators and scientific advisors have some
rights to publish our data and proprietary information in which
we have rights. Such publications may impair our ability to
obtain patent protection or protect our proprietary information,
which could impair our ability to generate revenue.
Physicians may choose not to prescribe
Actimmune®
or provide fewer patient referrals for
Actimmune®
for the treatment of IPF because:
Net sales of
Actimmune®
for the six months ended June 30, 2006 were
$48.5 million, compared to $53.6 million for the six
months ended June 30, 2005, a decline of approximately 10%.
If physicians do not prescribe
Actimmune®
for the treatment of IPF for the above reasons or any other
reasons, our
Actimmune®
revenue will continue to decline. Revenue for
Actimmune®
may have been adversely affected by the publication of an
article and a related editorial in the January 8, 2004
issue of the New England Journal of Medicine regarding the
results of our initial Phase III trial of
Actimmune®
or the treatment of IPF. The article concluded that “(i)n a
well-defined population of patients with idiopathic pulmonary
fibrosis,
(Actimmune®)
did not affect progression-free survival, pulmonary function, or
the quality of life. Owing to the size of and duration of the
trial, a clinically significant survival benefit could not be
ruled out.” The related editorial that appeared in the
January 8, 2004 New England Journal of Medicine, among
other things, cast doubt on our study’s indication of
“increased survival among patients who were compliant with
interferon gamma-1b treatment” by stating, “(i)t
should be emphasized that survival data based on one year of
observation in a disease with an unknown date of onset and a
life expectancy of two to five years after diagnosis may be very
misleading.” The editorial concluded by stating,
“(s)tudies of other promising agents ... are indicated,
since interferon gamma-1b has not proved to be the answer.”
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As of June 30, 2006, our annual debt service obligation on
the $170.0 million in aggregate principal amount of our
0.25% convertible senior notes due March 1, 2011 was
$0.4 million. We intend to fulfill our current debt service
obligations, including repayment of the principal, both from
cash generated by our operations and from our existing cash and
investments. If we are unable to generate sufficient cash to
meet these obligations and need to use existing cash or
liquidate investments in order to fund our current debt service
obligations, including repayment of the principal, we may have
to delay or curtail research and development programs.
We may add additional lease lines to finance capital
expenditures and may obtain additional long-term debt and lines
of credit. If we issue other debt securities in the future, our
debt service obligations will increase further.
Our indebtedness could have significant additional negative
consequences, including, but not limited to:
If a designated event, such as the termination of trading of our
common stock on the NASDAQ National Market or a specified change
of control transaction, occurs prior to maturity, we may be
required to redeem all or part of our 0.25% convertible
senior notes due 2011. We may not have enough funds to pay the
redemption price for all tendered notes. Although the indenture
governing the 0.25% convertible senior notes due 2011
allows us in certain circumstances to pay the applicable
redemption prices in shares of our common stock, if a designated
event were to occur, we may not have sufficient funds to pay the
redemption prices for all the notes tendered.
We have not established a sinking fund for payment of our
outstanding notes, nor do we anticipate doing so. In addition,
any future credit agreements or other agreements relating to our
indebtedness may contain provisions prohibiting redemption of
our outstanding notes under certain circumstances, or expressly
prohibit our redemption of our outstanding notes upon a
designated event or may provide that a designated event
constitutes an event of default under that agreement. If a
designated event occurs at a time when we are prohibited from
purchasing or redeeming our outstanding notes, we could seek the
consent of our lenders to redeem our outstanding notes or
attempt to refinance this debt. If we do not obtain consent, we
would not be permitted to purchase or redeem our outstanding
notes. Our failure to redeem tendered notes would constitute an
event of default under the indenture for the notes, which might
constitute a default under the terms of our other indebtedness.
We believe our existing cash, cash equivalents and
available-for-sale
securities, together with anticipated cash flows from our
operations, will be sufficient to fund our operating expenses,
debt obligations and capital requirements under our current
business plan through at least the end of 2007. However, our
current plans and assumptions may change, and our capital
requirements may increase in future periods. We have no
committed sources of capital and do not know whether additional
financing will be available when needed, or, if available, that
the terms will be favorable to our stockholders or us. If
additional funds are not available, we may be forced to delay or
terminate clinical trials, curtail operations or obtain funds
through collaborative and licensing arrangements that may
require us to relinquish commercial rights or potential markets,
or grant licenses on terms that are not favorable to us. If
adequate funds are not available, we will not be able to
successfully execute our business plan.
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We have incurred net losses since inception, and our accumulated
deficit was approximately $517.6 million at June 30,
2006. We expect to incur substantial additional net losses prior
to achieving profitability, if ever. The extent of our future
net losses and the timing of our profitability are highly
uncertain, and we may never achieve profitable operations. We
are planning to expand the number of diseases for which our
products may be marketed, and this expansion will require
significant expenditures. To date, we have generated revenue
primarily through the sale of
Actimmune®.
However,
Actimmune®
sales have decreased in recent periods and
Actimmune®
is currently our sole marketed product. We have not generated
operating profits to date from our products. If the time
required for us to achieve profitability is longer than we
anticipate, we may not be able to continue our business.
We base many of our operating decisions on anticipated revenue
trends and competitive market conditions, which are difficult to
predict. Based on projected revenue trends, we acquired
inventories and entered into non-cancelable purchase obligations
in order to meet anticipated increases in demand for our
products. However, more recent projected revenue trends resulted
in us recording charges of $9.1 million during 2005 for
excess inventory and non-cancelable purchase obligations for
inventory in excess of forecasted needs. If revenue levels
experienced in future quarters are substantially below our
expectations, especially revenue from sales of
Actimmune®,
we could be required to record additional charges for excess
inventories
and/or
non-cancelable purchase obligations.
The testing, marketing and sale of medical products entail an
inherent risk of product liability. If product liability costs
exceed our liability insurance coverage, we may incur
substantial liabilities. Whether or not we were ultimately
successful in product liability litigation, such litigation
would consume substantial amounts of our financial and
managerial resources, and might result in adverse publicity, all
of which would impair our business. While we believe that our
clinical trial and product liability insurance currently
provides adequate protection to our business, we may not be able
to maintain our clinical trial insurance or product liability
insurance at an acceptable cost, if at all, and this insurance
may not provide adequate coverage against potential claims or
losses.
Our research and development activities involve the controlled
use and disposal of hazardous materials, chemicals, infectious
disease agents and various radioactive compounds. Although we
believe that our safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and
federal regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the
event of such an accident, we could be held liable for
significant damages or fines, which may not be covered by or may
exceed our insurance coverage.
On November 9, 2004, we received a subpoena from the
U.S. Department of Justice requiring us to provide the
Department of Justice with certain information relating to
Actimmune®,
including information regarding the promotion and marketing of
Actimmune®.
We are cooperating with the Department of Justice in this
inquiry. On July 27, 2006, we announced that we had
recorded a provision of $30.0 million in connection with a
proposed comprehensive settlement with the government concerning
promotional activities for
Actimmune®
by former employees during a period ending in January 2003. This
proposed settlement, which is in the process of being
negotiated, is expected to resolve all outstanding government
investigations of InterMune.
We expect that the settlement terms would not have a negative
impact on our key research and development programs, including
our two Phase III clinical programs of
Actimmune®
and pirfenidone for idiopathic pulmonary fibrosis and our
protease inhibitor, ITMN-191, for the treatment of
hepatitis C virus infections. Although the financial terms
of the settlement are still under negotiation, we believe that
it is appropriate to reserve $30.0 million to reflect the
anticipated financial impact of the proposed settlement. In
addition to a monetary settlement, which
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would be paid over a period of years, we anticipate that the
comprehensive settlement will include various other terms,
including a resolution of the pending investigations without
criminal sanctions. Because the ultimate settlement terms may
differ materially from the proposed settlement, we cannot
predict whether the ultimate outcome of this inquiry will have a
material adverse effect on our business.
While we currently maintain clinical trial and product liability
insurance, directors’ and officers’ liability
insurance, general liability insurance, property insurance and
warehouse and transit insurance, first- and third-party
insurance is increasingly more costly and narrower in scope, and
we may be required to assume more risk in the future. If we are
subject to third-party claims or suffer a loss or damage in
excess of our insurance coverage, we may be required to share
that risk in excess of our insurance limits. Furthermore, any
first- or third-party claims made on our insurance policies may
impact our future ability to obtain or maintain insurance
coverage at reasonable costs, if at all.
Because we are an emerging company with limited resources, and
because research and development is an expensive process, we
must regularly assess the most efficient allocation of our
research and development resources. Accordingly, we may choose
to delay our research and development efforts for a promising
product candidate to allocate those resources to another
program, which could cause us to fall behind our initial
timetables for development. As a result, we may not be able to
fully realize the value of some of our product candidates in a
timely manner, since they will be delayed in reaching the
market, or may not reach the market at all.
We had 188 full-time employees as of July 31, 2006,
and our success depends on our continued ability to attract,
retain and motivate highly qualified management and scientific
personnel and on our ability to develop relationships with
leading academic scientists. Competition for personnel and
academic collaborations is intense. We are highly dependent on
our current management and key scientific and technical
personnel, including Daniel G. Welch, our Chief Executive
Officer and President, as well as the other principal members of
our management. None of our employees, including members of our
management team, has a long-term employment contract, and any of
our employees can leave at any time. Our success will depend in
part on retaining the services of our existing management and
key personnel and attracting and retaining new highly qualified
personnel. In addition, we may need to hire additional personnel
and develop additional academic collaborations as we continue to
expand our research and development activities. We do not know
if we will be able to attract, retain or motivate personnel or
cultivate academic collaborations. Our inability to hire, retain
or motivate qualified personnel or cultivate academic
collaborations would harm our business.
The Annual Meeting of Stockholders was held on May 24, 2006
in Brisbane, California. Of the 33,650,921 shares of
InterMune Common Stock entitled to vote at the meeting,
30,262,542 shares were represented at the meeting in person
or by proxy, constituting a quorum. The voting results are
presented below.
The stockholders elected one director to serve for the ensuing
three years and until his successor is elected. The votes
regarding the election of the director were as follows:
The stockholders approved the ratification of Ernst &
Young LLP as our independent auditors for the year ending
December 31, 2006. There were 30,221,951 votes cast for the
proposal, 35,591 votes cast against, 5,000 abstentions, and no
broker non-votes.
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Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
InterMune, Inc.
Date: August 4, 2006
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