Forward-Looking Statements

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:

• product and product candidate development;

• governmental regulation and approval;

• sufficiency of our cash resources;

• future revenue, including those from product sales and collaborations, and future expenses;

• our research and development expenses and other expenses;

• the timing and payment of settlement amounts pursuant to our Civil Settlement Agreement with the government and potential restrictions on our business related to the Deferred Prosecution Agreement and Corporate Integrity Agreement with the government;

• the timing and payment of milestone payments under the Collaboration Agreement with Roche; and

• our operational and legal risks.

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.

Critical Accounting Policies

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 during the three- and nine-month periods ended September 30, 2009 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, 2008 (as updated in our 8-K we filed with the SEC on September 1, 2009), except for our estimates as they relate to our adoption of the guidance in the Debt Topic of FASB ASC, formerly FSP APB 14-1.

The new guidance requires the issuer of convertible debt that may be settled in shares or cash at their option, such as our $49.0 million 0.25% convertible senior notes due March 2011 that are outstanding as of September 30, 2009, to account for their liability and equity components separately by bifurcating the conversion option from the debt instrument, classifying the conversion option in equity and then accreting the resulting discount on the debt as additional interest expense over the expected life of the debt. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. This required management to make estimates and assumptions regarding interest rates as of the date of original issuance.

Company Overview

We are a biotech 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. 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. Subsequent to the discontinuation of our clinical trial of Actimmune for IPF in 2007, we now have the following key development programs in place: pirfenidone for IPF, the chronic hepatitis C virus ("HCV") protease inhibitor program and a new target in hepatology.

In February 2009, we announced results from the two Phase 3 CAPACITY studies for pirfenidone. The primary endpoint of change in percent predicted Forced Vital Capacity ("FVC") at Week 72 was met with statistical significance in CAPACITY 2 (p=0.001), along with the secondary endpoints of categorical change in FVC and progression-free survival ("PFS"). The primary endpoint was not met in CAPACITY
1 (p=0.501), but supportive evidence of a pirfenidone treatment effect was observed on a number of measures. Pirfenidone was safe and generally well tolerated in both CAPACITY studies. In November 2009, we submitted an NDA for submission to the U.S. Food and Drug Administration ("FDA"), which will be followed by a Marketing Authorization Application ("MAA") submission to the European Medicines Agency ("EMEA").

In May 2008, we initiated a 14-day, Phase 1b study of ITMN-191 with standard of care therapy. In January 2009, we announced top-line results from all six completed dosage cohorts from that study. Viral kinetic performance and safety results were reported for three cohorts in each of which ITMN-191 was given every 12 hours (q12h) and every eight hours (q8h). This study demonstrated sufficient viral kinetic performance to warrant advancing ITMN-191 to a Phase 2b study, which will study both q12h and q8h regimens and both 12- and 24-week treatment durations. The Phase 2b study has begun during the third quarter of 2009. ITMN-191 was generally safe and well tolerated. There were no serious adverse events ("SAEs") or Grade 4 adverse events ("AEs") during treatment with ITMN-191.

In November 2008, we, together with Roche and Pharmasset, Inc. announced the initiation of INFORM-1, a dual combination clinical trial investigating the combination of two oral antiviral molecules in the absence of interferon. The initial study evaluated the safety and combined antiviral activity of ITMN-191 (also known as R7227) and R7128, a polymerase inhibitor, in 14 days of combination therapy in treatment-naοve patients infected with HCV genotype 1. These results were announced in April 2009 and discussed at the EASL conference. Patients receiving the combination of R7227 and R7128 for 14 days-without pegylated interferon or ribavirin-experienced a median reduction in viral levels of -4.8 to -5.2 log(10) IU/mL in the highest doses tested. No treatment-related SAEs, no dose reductions and no discontinuations were reported in the study. Pharmacokinetic analysis confirmed that there were no drug-drug interactions between the compounds. The study was amended in April 2009 to include additional cohorts and study different treatment regimens.

Approved Product

Our sole approved product is Actimmune, approved for the treatment of patients with severe, malignant osteopetrosis and chronic granulomatous disease ("CGD"). For the nine month period ended September 30, 2009, Actimmune accounted for all of our product revenue and a majority of this revenue was derived from physicians' prescriptions for the off-label use of Actimmune in the treatment of IPF.

Results of Operations

Revenue

Total revenue was $27.3 million and $23.3 million for the three-month periods ended September 30, 2009 and 2008, respectively, representing an increase of 17%. This increase was attributable to the recognition of a $20.0 million milestone payment from Roche in the third quarter of 2009 associated with the initiation of the Phase 2b clinical trial of ITMN 191 as compared to recognition of a $15.0 million milestone receipt in the third quarter of 2008 under the same collaboration agreement with Roche. Total revenue was $42.1 million and $40.8 million for the nine-month periods ended September 30, 2009 and 2008, respectively, representing an increase of 3%. This increase was attributable to recognition of the larger milestone receipt noted above in 2009, partially offset by a decrease in sales of Actimmune of approximately $3.7 million, or 16%. In early March 2007, we announced that our Phase III INSPIRE program for Actimmune in IPF had been discontinued and that future Actimmune revenue was expected to decline. For the three- and nine-month periods ended September 30, 2009 and 2008, sales of Actimmune accounted for all of our net product revenue. A majority 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 discontinuation of the Phase III INSPIRE clinical trial, the level of enrollment in IPF clinical trials 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. In light of the failure of the INSPIRE clinical trial in 2007, we expect that net sales of Actimmune for the year ending December 31, 2009 will decline when compared with the year ended December 31, 2008.

Cost of goods sold

Cost of goods sold included product manufacturing costs, royalties and distribution costs. Cost of goods sold were $1.0 million and $1.4 million for the three-month periods ended September 30, 2009 and 2008, respectively. The gross margin percentage for our products was 84% and 81% for these periods in 2009 and 2008, respectively. For the nine months ended September 30, 2009, cost of goods sold were $5.7 million compared with $7.3 million for the same period last year. The gross margin percentage for our products was 70% and 69% for these periods in 2009 and 2008, respectively. During the second quarter of 2008, we recorded a $0.7 million charge for excess inventory to reflect our decision during the latter part of that quarter to ship only current dated product that had recently been received from Boehringer Ingelheim ("BI") under the new supply agreement. The decline in dollar value of cost of goods sold for the three- and nine-months ended September 30, 2009 compared to the same periods last year reflects the declining Actimmune revenue.

Research and development expenses

Research and development expenses were $20.6 million and $25.6 million for the three-month periods ended September 30, 2009 and 2008, respectively, representing a decrease of $5.0 million, or 20%. Research and development expenses were $68.0 million and $78.0 million for the nine-month periods ended September 30, 2009 and 2008, respectively, representing a decrease of $10.1 million or 13%. The decreases in spending for the three- and nine-month periods ended September 30, 2009 compared with the same periods in 2008 primarily reflect the completion of the CAPACITY clinical trials late in 2008 and the amendment to the Roche collaboration agreement entered into in November 2008 whereby Roche funds certain of our research activities.

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 $2.5 million and $2.0 million of stock-based compensation in 2009 and 2008, respectively. 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."

The following chart shows the status of our product development programs as of September 30, 2009:

                                                Preclinical     Phase I     Phase II     Phase III
Pulmonology
Pirfenidone-Idiopathic pulmonary fibrosis
(CAPACITY)                                                                                   X
Anti-inflammatory/antifibrotic                       X

Hepatology
ITMN-191-Chronic hepatitis C program;
protease inhibitor                                                             X
Next generation protease inhibitor                   X
Second Target in hepatology                          X

Our development program expenses for the nine month periods ended September 30, were as follows (in thousands):

                     Development Program       2009       2008
                     Pulmonology             $ 36,950   $ 43,688
                     Hepatology                20,253     24,813
                     Programs-Non-specific     10,762      9,527

                     Total                   $ 67,965   $ 78,028

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:

• the successful conclusion of preclinical laboratory and animal tests, if appropriate, to gain preliminary information on the product's safety;

• the filing by the FDA of an IND application to conduct human clinical trials for drugs;

• the successful completion of adequate and well-controlled human clinical investigations to establish the safety and efficacy of the product for its recommended use; and

• the submission by a company and acceptance and approval by the FDA of an NDA or BLA for a drug product to allow commercial distribution of the drug for the approved indication.

Based on our existing budgeted programs and including the impact of stock-based compensation, we expect research and development expenses to be in a range of $90.0 million to $100.0 million in 2009, net of development cost reimbursements under the Roche collaboration.

Acquired research and development milestone payments

The $1.7 million in milestone payments made during the third quarter of 2009 were made in connection with the initiation of the Phase 2b study of ITMN-191 in patients chronically infected with HCV. The $13.5 million milestone payment in the first quarter of 2009 was made in accordance with the pirfenidone purchase agreement entered into in November 2007 and our decision in February 2009 to submit NDA and MAA filings for pirfenidone.

General and administrative expenses

General and administrative expenses were $9.9 million for the three-month period ended September 30, 2009 compared with $8.2 million for the three-month period ended September 30, 2008. For the nine-month periods ended September 30, 2009 and 2008, general and administrative expenses were $26.9 million and $22.7 million, respectively, representing an increase of $4.2 million, or 18%. The increased spending for the three- and nine-month periods ended September 30, 2009 compared with the same periods in 2008 is primarily attributed to costs related to preparation for the potential commercialization of pirfenidone. In 2009, including stock-based compensation, we expect general and administrative expenses to be in a range of $35.0 million to $40.0 million, which includes an estimate of approximately $5.0 million for the above mentioned expenses.

Restructuring charges

In connection with the completion and announcement of our CAPACITY trials, we announced a reduction in force in February 2009. We expect to incur approximately $0.9 million of restructuring charges during 2009, of which approximately $0.8 million has been incurred through September 30, 2009 consisting primarily of severance payments to terminated employees.

Interest income

Interest income decreased to $0.3 million for the three-month period ended September 30, 2009, compared to $1.2 million for the three-month period ended September 30, 2008. Interest income also decreased to $1.5 million for the nine-month period ended September 30, 2009, compared to $4.6 million for the nine-month period ended September 30, 2008. These decreases reflect decreasing investment yields on our cash and short-term investments resulting from lower market interest rates as well as lower average cash and investment balances.

Interest expense

Interest expense decreased to $2.7 million in the third quarter of 2009 compared with $3.0 million for the third quarter of 2008 and decreased to $7.9 million for the nine-months ended September 30, 2009 compared with $10.1 million for the comparable period in 2008. Each period reflects interest expense recorded in connection with our liability under the government settlement reached in October 2006. Interest expense for the nine-months ended September 30, 2008 also includes interest on our $170.0 million 0.25% convertible notes due in March 2011 (the "2011 Notes"), including the amortization of related debt issuance costs. On June 24, 2008, we issued $85.0 million in aggregate principal amount of 5.00% Convertible Senior Notes due 2015 (the "2015 Notes") to certain holders of our existing 2011 Notes in exchange for $85.0 million in aggregate principal amount of their 2011 Notes.

On January 1, 2009, we adopted guidance in the Debt Topic of the FASB ASC, formerly FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1). As a result, we have recorded additional interest expense of $1.0 million and $3.7 million in the three- and nine-months ended September 30, 2009, representing amortization of the debt discount established with our adoption of this guidance. The adoption requires retrospective application, therefore, our previously reported interest expense for the three- and nine-months ended September 30, 2008 has been restated to reflect additional interest expense of $1.5 million and $7.1 million, respectively. The decrease in interest expense for the three- and nine-months ended September 30, 2009 compared to the same periods in 2008 reflects our declining obligation under our government settlement, the decline in debt discount amortization as a result of the 2009 debt conversions, as well as the June 2008 issuance of the 2015 Notes in exchange for the 2011 Notes. The 2015 Notes may not be settled in cash upon conversion at the option of the issuer and thus do not fall under the requirements of this guidance, thereby removing the debt discount that would have been recorded had the 2011 Notes not been exchanged.

The following table reconciles interest expense for the three- and nine-months ended September 30, 2008 as previously reported with current year reported results (in thousands):

                                               Three Months Ended           Nine Months Ended
                                                             September 30, 2008
Interest expense, as previously
reported                                       $             1,520         $             4,101
Adjustments and reclassification:
Amortization of debt discount and debt
issuance costs in connection with
adoption of new guidance                                     1,451                       7,079
Reclassification to loss on
extinguishment of debt                                          -                       (1,113 )

Interest expense, as reported herein           $             2,971         $            10,067

Loss on extinguishment of debt

In April 2009, we entered into exchange agreements with certain holders of our convertible notes to issue, in the aggregate, approximately 2.1 million shares of common stock, valued at approximately $36.1 million, in exchange for, in the aggregate, $32.3 million principal amount of the convertible notes, representing approximately 38% of the aggregate principal outstanding of our 2011 Notes at the date of the exchanges.

In September 2009, we entered into an exchange agreement with certain holders of our convertible notes to issue approximately 0.2 million shares of common stock, valued at approximately $4.0 million, in exchange for approximately $3.8 million principal amount of the convertible notes, representing approximately 7% of the aggregate principal outstanding of our 2011 Notes at the date of the exchange. All of the convertible notes we acquired pursuant to the exchange agreements in April and September 2009 were retired upon the closing of the exchanges.

The exchange agreements were treated as induced conversions as the holders received a greater number of shares of common stock than would have been issued under the original conversion terms of the convertible notes. At the time of the exchange agreements, none of the conversion contingencies were met. Under the original terms of the convertible notes, the amount payable on conversion was to be paid in cash, and the remaining conversion obligation (stock price in excess of conversion price) was payable in cash or shares, at our option. Under the terms of the exchange agreements, all of the settlement was paid in shares. The difference in the value of the shares of common stock sold under the exchange agreements and the value of the shares used to derive the amount payable under the original conversion agreement resulted in a loss on extinguishment of debt of approximately $11.9 million (the inducement loss). As required by new guidance in the Debt Topic of the FASB ASC, upon derecognition of the 2011 Notes, we remeasured the fair value of the liability and equity components using a borrowing rate for similar non-convertible debt that would be applicable to us at the date of the exchange agreements. Because borrowing rates increased, the remeasurement of the components of the convertible notes resulted in a gain on extinguishment of approximately $2.2 million (the revaluation gain). As a result, we recognized a net loss on extinguishment of debt of approximately $0.7 million and $10.3 million during the three- and nine-months ended September 30, 2009, calculated as the inducement loss, plus an allocation of advisory fees of approximately $0.6 million; less the revaluation gain.

On June 24, 2008, we issued $85.0 million in 2015 Notes to certain holders of our existing 2011 Notes in exchange for $85.0 million in aggregate principal amount of their 2011 Notes. Remaining debt issuance costs of approximately $1.1 million, related to the extinguishment of $85.0 million of the existing 2011 Notes, were expensed during the second quarter of 2008 and have been included in the loss on extinguishment of debt in our condensed consolidated statements of operations.

The following table reconciles loss on extinguishment of debt for the nine-months ended September 30, 2008 as previously reported with current year reported results (in thousands):

                                                                   Nine Months Ended
                                                                  September 30, 2008
Loss on extinguishment of debt, as previously reported            $                -
Adjustments and reclassification:
Adjustments, net in connection with adoption of ASC
Debt Topic guidance                                                               181
Reclassification from interest expense                                          1,113

Loss on extinguishment of debt, as reported herein                $             1,294

Other income (expense)

Other income was $0.4 million and $6.0 million for the three- and nine-month period ended September 30, 2009, respectively, consisting primarily of realized gains from the sale of investments, including our shares of Targanta common stock in the first quarter of 2009. This compares with other income of $1.3 million for the nine-month period ended September 30, 2008, comprised primarily . . .