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ITMN > SEC Filings for ITMN > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for INTERMUNE INC


6-May-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This Quarterly Report on Form 10-Q (the "Report") contains 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


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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" and "continue" or similar words. 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 about:

• product and product candidate development;

• the market or markets for our products or product candidates;

• the ability of our products to treat patients in our markets;

• the ability to achieve certain pricing and reimbursement levels for our product in various countries in Canada, the European Union and elsewhere, including our estimates of the number of patients who meet certain disease progression measures (e.g., forced vital capacity);

• the timing of concluding and announcing pricing and reimbursement discussions in various countries in the European Union and elsewhere;

• the timing of receipt of top-line results from our ASCEND clinical trial and our expected announcement thereof;

• timing and expectations of when our products or product candidates may be marketed or made available to patients in various jurisdictions;

• opportunities to establish development or commercial alliances;

• commercial launch preparations, including the timing of launches in the various European Union jurisdictions and the implementation of the infrastructure required for the commercial launches;

• the scope and enforceability of our intellectual property rights, including the anticipated durations of patent protection and marketing exclusivity in the European Union, United States and other jurisdictions, and including claims that we or our collaborators may infringe third party intellectual property rights or otherwise be required to pay license fees and/or royalties under such third party rights;

• our expectations regarding the entry into a complete settlement agreement with Shionogi & Co., Ltd., or Shionogi, relating to the complaint filed by Shionogi against us alleging principally that we breached our agreement with Shionogi governing the exchange and use of certain documents and information relating to the parties' respective clinical trials of pirfenidone, including the timing of entry into the complete settlement agreement;

• governmental regulation and approval;

• requirement of additional funding to complete research and development and commercialize products;

• liquidity and sufficiency of our cash resources;

• future revenue, including those from product sales and collaborations, adequacy of revenue reserve levels, future expenses, future financial performance and trends;

• the uses of proceeds from our concurrent registered underwritten public offerings of our common stock and 2.50% convertible senior notes due 2017 completed in January 2013;

• our future research and development expenses and other expenses;

• our expectations that our remediation plan sufficiently addressed and remediated the material weakness in our internal controls that we identified in connection with management's evaluation of our internal controls over financial reporting as of December 31, 2012;

• our expectations regarding the likelihood for approval of the proposal of an amendment to the Company's certificate of incorporation to increase its authorized share capital and the resulting elimination of the requirement to mark-to-market the fair value of the embedded conversion derivative in our 2017 Notes; and

• our operational and legal risks.

You should also consider carefully the statements under "Item 1A. 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 "Item 1A. Risk


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Factors" below. Because the factors referred to above, as well as the factors discussed in this Report under "Item 1A. 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 this Report, unless otherwise indicated, "InterMune," "we," "our," "us" or the "Company" 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. We have discussed the development, selection and disclosure of these estimates with the Audit Committee of our board of directors. 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 month period ended March 31, 2013 to the items that we disclosed as our critical accounting policies and estimates under Part II, 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, 2012.

Overview

We are a biotechnology company focused on the research, development and commercialization of innovative therapies in pulmonology and orphan fibrotic diseases. Pulmonology is the field of medicine concerned with the diagnosis and treatment of lung conditions. We have a product in pulmonology, pirfenidone, which is an orally active, small molecule compound. Pirfenidone was granted marketing authorization effective February 2011 in all 27 member countries of the European Union, or the EU, for the treatment of adults with mild to moderate idiopathic pulmonary fibrosis, or IPF. In September 2011, we launched commercial sales of pirfenidone in Germany under the trade name Esbriet, and Esbriet is now also commercially available in Austria, Belgium, Denmark, France, Iceland, Luxembourg, Norway and Sweden. We continue to prepare for the commercial launch of Esbriet in other countries in the EU, and we expect to launch in Italy by mid-June 2013 and launch in the UK by mid-August 2013. In addition, on January 2, 2013, we began the commercial launch of Esbriet in Canada.

In January 2013, we completed a registered underwritten public offering of 15,525,000 shares of our common stock and a concurrent registered underwritten public offering of $120.8 million aggregate principal amount of 2.50% convertible senior notes due 2017. The resulting aggregate net proceeds from the common stock offering were approximately $145.7 million, after deducting underwriting discounts and estimated expenses. The resulting aggregate net proceeds from the convertible note offering were approximately $116.8 million, after deducting underwriting discounts and estimated expenses. In January 2013, we used a portion of the net proceeds from the convertible note offering to repurchase approximately $66.6 million of our outstanding 5.00% convertible senior notes due 2015 (the "2015 Notes") for proceeds of $72.2 million. We intend to use the remaining net proceeds from the convertible note offering and, if necessary a portion of the net proceeds from the common stock offering to repay at maturity or earlier repurchase some or all of such remaining 2015 Notes. We further intend to use the net proceeds from the common stock offering and any remaining proceeds from the convertible note offering to fund the commercialization of Esbriet, to fund our ASCEND trial and for general corporate purposes, which may include funding research and development and increasing working capital.

On June 19, 2012, we completed the divestiture of our worldwide development and commercialization rights to the pharmaceutical product containing Interferon Gamma-1b sold by us under the trade name Actimmune for $55.0 million in cash, plus certain conditional royalty payments for a period of two years following the closing. Such divestiture was consummated pursuant to the terms of the Asset Purchase Agreement, dated as of May 17, 2012, that we entered into with Vidara Therapeutics International Limited, an Irish company, Vidara Therapeutics Holdings LLC, a Delaware limited liability company and Vidara Therapeutics Research Limited, an Irish company. The operating results of our Actimmune activities have been reclassified as discontinued operations for all periods presented.


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Esbrietฎ (Pirfenidone)

Pirfenidone is an orally active, small molecule compound under development for the treatment of idiopathic pulmonary fibrosis. In September 2011, we launched commercial sales of pirfenidone in Germany under the trade name Esbriet, and Esbriet is now also commercially available in Austria, Belgium, Denmark, France, Iceland, Luxembourg, Norway and Sweden. On January 2, 2013, we began the commercial launch of Esbriet in Canada. In addition, we continue to prepare for the commercial launch of Esbriet in other countries in the EU.

In March 2013, we announced that we concluded pricing and reimbursement discussions with the Italian Medicines Agency (AIFA) and have reached an agreement with the Pricing and Reimbursement Commission (CPR) of the AIFA regarding the pricing and reimbursement conditions of Esbriet for the treatment of adult patients with mild to moderate IPF. Before a new product can be launched in Italy, the final pricing and reimbursement agreement with the CPR must be approved by the Board of the AIFA and the publication of its approval must appear in the Gazzetta Ufficiale della Repubblica Italiana (Official Gazette of the Italian Republic). The AIFA board approval and publication process for Esbriet is expected to take approximately 6 to 12 weeks. Additional details on the pricing and reimbursement conditions for Esbriet in Italy will be provided coincident with the AIFA board approval and the publication of its approval in the Official Gazette. We anticipate launching Esbriet in Italy by mid-June 2013 promptly following publication of the agreement's approval in the Official Gazette.

With respect to Spain and the Netherlands, the continuing economic conditions in Spain and health care system changes in the Netherlands make it challenging to predict the date by which a company can expect to conclude pricing and reimbursement for a new product. We currently expect to provide an update on the pricing and reimbursement discussions on Esbriet in Spain and the Netherlands in the fourth quarter of this year.

In the UK, on March 20, 2013, we announced that the National Institute for Health and Clinical Excellence (NICE) issued its final appraisal determination (FAD) recommending the use of Esbrietฎ (pirfenidone) for the treatment of mild to moderate IPF. The FAD forms the basis of the final guidance to the English National Health Service (NHS), which was published on April 24, 2013 and must be implemented by the NHS within 90 days of publication. Accordingly, we expect to initiate commercial launch of Esbriet in England and Wales by mid-August 2013. In addition to launches in these remaining so called "Top 5" EU countries (Italy, Spain and the UK), we expect to launch Esbriet in Ireland in the third quarter of 2013 assuming that acceptable pricing and reimbursement conditions are negotiated. On March 20, 2013, we also announced that health authorities in Finland Pharmaceutical Pricing Board of Finland (Pharmaceutical Pricing Board of Finland) have agreed to pricing and reimbursement for Esbriet in that country, effective June 1, 2013.

To support our commercialization efforts of Esbriet in Europe, we have invested significantly and continue to invest in the establishment of a commercial infrastructure within Europe, including an increase to our employee headcount in that region. On December 17, 2010, we announced several additions to our senior leadership team in support of our commercialization efforts as well as announcing the establishment of our European headquarters in Reinach, Switzerland, subsequently moved to Muttenz, Switzerland in early 2012. In December 2010, we transferred all of our non-U.S. rights to research, develop and commercialize pirfenidone for IPF to our wholly-owned Swiss subsidiary, InterMune International AG. Based on our current intellectual property portfolio, we expect to have exclusive rights to sell pirfenidone within the European Union through 2030.

In July 2011, we initiated a new Phase 3 clinical study to evaluate pirfenidone in IPF known as ASCEND in an effort to support approval of pirfenidone for the treatment IPF in the United States. We achieved the full enrollment with 555 randomized patients for our ASCEND trial in January 2013 and we currently expect top-line results from ASCEND in the second quarter of 2014.

Results of Operations

Comparison of the three months ended March 31, 2013 and 2012

Revenue

Three Months Ended
March 31,
2013 2012 % Change
Esbriet revenues $ 10,530 $ 4,880 116 %

Revenue for the three months ended March 31, 2013 and 2012, consists solely of Esbriet product sales, primarily in Germany. The increase in our Esbriet revenues period over period is a result of continued market uptake of our product in Germany, as well as our ongoing European expansion efforts.

Cost of Goods Sold



                                          Three Months Ended
                                              March  31,
                                           2013           2012       % Change
          Cost of goods sold            $    2,376        $ 860            176 %
          Percentage of total revenue           23 %         18 %

Cost of goods sold included product manufacturing costs, distribution costs, inventory write-downs, amortization of acquired product rights and for the three months ended March 31, 2013, royalties payable to Shionogi. Cost of goods sold for the three months ended March 31, 2013 and 2012 consists solely of costs related to Esbriet. The increase in cost of goods sold as a percentage of total revenue period over period is primarily due to the royalty payment of 4.25% to Shionogi pursuant to our February 2013 settlement arrangement, which was effective on sales in the EU commencing on January 1, 2013.

Research and Development Expenses

Three Months Ended
March 31,
2013 2012 % Change
Research and development $ 25,876 $ 23,212 11 %

The increased spending for research and development expenses for the three months ended March 31, 2013, compared with the same period in 2012, was primarily due to an increase in the number of patients enrolled in our ASCEND clinical trial.

Selling, General and Administrative Expenses

Three Months Ended
March 31,
2013 2012 % Change
Selling, general and administrative $ 29,976 $ 26,284 14 %

The increased spending for the three month period ended March 31, 2013, compared with the same period in 2012, is primarily attributed to the ongoing expansion of our European and Canadian infrastructures, including but not limited to additional headcount.


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Interest Income

Three Months Ended
March 31,
2013 2012 % Change
Interest income $ 137 $ 145 (6 )%

There is no significant difference in interest income in the three month period ended March 31, 2013 compared to the same period in 2012.

Interest Expense

Three Months Ended
March 31,
2013 2012 % Change
Interest expense $ (3,483 ) $ (2,205 ) 58 %

The increase in interest expense is primarily due to the January 2013 issuance of our 2.5% convertible senior notes due 2017 of $120.8 million aggregate principal amount (the 2017 Notes).

Fair Value of Embedded Conversion Derivative

Three Months Ended
March 31,
2013 2012 % Change
Change in value of embedded conversion derivative $ 8,758 $ - 100 %

The embedded conversion derivative in the 2017 Notes was initially recorded at $36.9 million based on our fair value measurement at the debt issuance date. This conversion feature is periodically marked-to-market resulting in a credit of $8.8 million for the period ending March 31, 2013. This credit of $8.8 million primarily resulted from a decline in our stock price following the issuance of the debt through the end of the quarter. Refer to Note 10 to these financial statements for further discussion of the embedded conversion derivative in the 2017 Notes.

Loss on extinguishment of debt

                                           Three Months  Ended
                                                March 31,
                                            2013            2012       % Change
       Loss on extinguishment of debt   $     (7,900 )      $  -            (100 )%

This loss is attributed to the extinguishment of the portion of our 2015 Notes repaid in connection with the issuance of our 2017 Notes in January 2013.

Other Income (Expense)

Three Months Ended
March 31,
2013 2012 % Change
Other income (expense) $ 480 $ (985 ) (149 )%

Other expense in the three months ended March 31, 2013 and 2012 consisted primarily of currency gains and losses related to the unhedged portion of our non-dollar denominated balance sheet exposures in connection with our European expansion.

Discontinued operations

Three Months Ended March 31, 2013 2012 % Change Income from discontinued operations, net of taxes $ 230 $ 1,715 (87 )%

Income from discontinued operations reflects ongoing royalties received in connection with our previously divested Actimmune operations, net of related costs and intraperiod tax allocation expenses.


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Liquidity and Capital Resources

At March 31, 2013, we had cash, cash equivalents and available-for-sale securities of $442.0 million compared to $308.0 million at December 31, 2012. This increase of $134.0 million was primarily attributable to the completion of our registered underwritten public offering of 15.5 million shares of our common stock and a concurrent registered underwritten public offering of $120.8 million aggregate principal amount of 2.5% convertible senior notes due 2017. The aggregate net proceeds from these concurrent offerings were approximately $262.5 million. The increase was partially offset by extinguishment of $66.6 million of our 2015 Notes, as well as, and operating cash outflows of $56.1 million.

Certain of our available cash and cash equivalents are held in accounts managed by third party financial institutions and consist of invested cash and cash in our core operating accounts. The invested cash is invested in interest bearing funds managed by third party financial institutions. We can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets. In addition, at any point in time we could have balances that exceed the Federal Deposit Insurance Corporation insurance limits. While we monitor the cash balances in our operating accounts on a regular basis, these cash balances could be impacted and we may be unable to access our cash if the underlying financial institutions fail or if we become subject to other adverse conditions in the financial markets. To date we have not experienced a lack of access to cash in any of our third party financial institution accounts.

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 their agencies and high-quality corporate issuers, and, by policy, restrict our exposure by imposing concentration limits and credit worthiness requirements for all corporate issuers.

Cash Flows from Operating Activities

Cash used in operating activities was $56.1 million during the three month period ended March 31, 2013, comprised primarily of a net loss of $49.9 million and non-cash change in the fair value of our embedded conversion derivative of $8.8 million in relation to the options on our convertible senior notes due 2017. Details concerning the loss from operations can be found above in this Report under the heading "Results of Operations."

Cash Flows from Investing Activities

Cash used in investing activities was $76.2 million during the three month period ended March 31, 2013, and was comprised primarily of purchases of available-for-sale securities of $138.0 million, partially offset by maturities and sales of available-for-sale securities of $62.2 million.

Cash Flows from Financing Activities

Cash provided by financing activities of $190.6 million for the three month period ended March 31, 2013 was due to the registered underwritten public offering of 15.5 million shares of our common stock and a concurrent registered underwritten public offering of $120.8 million aggregate principal amount of 2.5% convertible senior notes due 2017. The aggregate net proceeds from these concurrent offerings were approximately $262.5 million. This was offset by the repurchase of $72.2 million of 5.0% convertible senior notes due 2015.

Off-Balance Sheet Arrangements

As of March 31, 2013, we did not have any material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Recent Accounting Pronouncements

See "Note 2: Summary of Significant Accounting Policies" of the Financial Statements in Part I, Item 1 of this report.


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