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

Show all filings for INTERMUNE INC

Form 10-Q for INTERMUNE INC


6-Aug-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 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;


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• 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;

• 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; 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 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


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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 six months ended June 30, 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, Finland, France, Iceland, Luxembourg, Norway and Sweden. In January 2013, Esbriet became commercially available in Canada. In June 2013, we announced that the Italian Medicines Agency (AIFA) approved the pricing and reimbursement conditions of Esbriet for the treatment of adult patients with mild to moderate IPF. Esbriet became eligible for reimbursement in Italy beginning on June 29, 2013 and was commercially launched in Italy in July 2013. We continue to prepare for the commercial launch of Esbriet in other countries in the EU, and we expect to launch in the UK by mid-August 2013.

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 a portion of the remaining net proceeds from the convertible senior 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, Canada, Denmark, Finland, France, Iceland, Italy, Luxembourg, Norway and Sweden. In addition, we continue to prepare for the commercial launch of Esbriet in other countries in the EU.

In June 2013, we announced that the Italian Medicines Agency (AIFA) approved the pricing and reimbursement conditions of Esbriet for the treatment of adult patients with mild to moderate IPF. Esbriet became eligible for reimbursement in Italy beginning on June 29, 2013. Our first commercial sale of Esbriet in Italy occurred in July 2013.

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 Ireland, on July 8, 2013, the Health Service Executive (HSE), the final stage health technology appraisal committee in Ireland, reported that it has approved Esbriet for reimbursement in the treatment of mild-to-moderate IPF. The approval for reimbursement follows a recommendation based on cost effectiveness from the National Centre for Pharmacoeconomics (NCPE), after we agreed to a reimbursement scheme with the HSE. Reimbursement of Esbriet in Ireland is expected to start on August 1, 2013, and we plan to launch in Ireland in mid-August. 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, at which time we commercially launched Esbriet in Finland.

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 and six months ended June 30, 2013 and 2012

Revenue

Three Months Six Months
Ended June 30, Ended June 30,
(in thousands, except percentages) 2013 2012 % Change 2013 2012 % Change Esbriet revenues $ 14,400 $ 5,538 160 % $ 24,930 $ 10,418 139 %

Revenue for the three and six months ended June 30, 2013 and 2012, consists solely of Esbriet product sales. Revenue has increased in both the three and six months ended June 30, 2013 compared to the prior year periods as a result of continued market uptake of our product in Germany, as well as our ongoing expansion efforts in Europe.


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Cost of Goods Sold



                                          Three Months                              Six Months
                                         Ended June 30,                           Ended June 30,
(in thousands, except percentages)     2013         2012        % Change        2013         2012        % Change
Cost of goods sold                    $ 1,943      $ 3,323            -42 %    $ 4,319      $ 4,183              3 %
Percentage of total revenue                13 %         60 %                        17 %         40 %

Cost of goods sold relate solely to Esbriet sales and included product manufacturing costs, distribution costs, inventory write-downs, internal supply chain management costs, amortization of acquired product rights and from January 2013, royalties payable to Shionogi. For the three and six months ended June 30, 2013, our cost of goods sold as a percentage of revenues has decreased when compared to the comparable periods in 2012 primarily reflecting: i) economies of scale achieved from increased sales including the effect of spreading fixed costs over a broader base, and ii) the absence in 2013 of any charges related to establishing additional manufacturing sources for Esbriet, offset by the inclusion of the Shionogi royalties in 2013.

Research and Development Expenses

Three Months Six Months
Ended June 30, Ended June 30,
(in thousands, except percentages) 2013 2012 % Change 2013 2012 % Change Research and development $ 27,531 $ 25,166 9 % $ 53,407 $ 48,378 10 %

The increased spending for research and development expenses for the three and six months ended June 30, 2013, compared with the same periods in 2012, is primarily due to an increase in the number of patients enrolled in our ASCEND clinical trial, which was fully enrolled in January 2013.

Selling, General and Administrative Expenses

Three Months Six Months
Ended June 30, Ended June 30,
(in thousands, except percentages) 2013 2012 % Change 2013 2012 % Change Selling, general and administrative $ 37,273 $ 25,642 45 % $ 67,249 $ 51,926 30 %

The increased spending for the three and six months ended June 30, 2013, compared with the same periods in 2012, is primarily attributed to the ongoing expansion of our European and Canadian infrastructures, including but not limited to additional headcount.

Interest Income

Three Months Six Months
Ended June 30, Ended June 30,
(in thousands, except percentages) 2013 2012 % Change 2013 2012 % Change Interest income $ 115 $ 159 -28 % $ 252 $ 304 -17 %

The decrease in interest income for the three and six months ended June 30, 2013 compared to the same periods in 2012 is due to higher balances in marketable securities in the comparable prior year periods.

Interest Expense

Three Months Six Months
Ended June 30, Ended June 30,
(in thousands, except percentages) 2013 2012 % Change 2013 2012 % Change Interest expense ($ 3,634 ) ($ 2,237 ) 62 % ($ 7,117 ) ($ 4,442 ) 60 %

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).


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Fair Value of Embedded Conversion Derivative



                                            Three Months                             Six Months
                                           Ended June 30,                          Ended June 30,
(in thousands, except percentages)        2013         2012      % Change          2013        2012      % Change
Change in value of embedded
conversion derivative                   ($  6,336 )    $  -            100 %    $    2,422     $  -            100 %

The embedded conversion derivative in the 2017 Notes was initially recorded at $36.9 million based on our fair value measurement at the January 2013 debt issuance date. This conversion feature is periodically marked to fair value which resulted in an increase of $6.3 million for the three months ending June 30, 2013 and a net decrease of $2.4 million for the six months ended June 30, 2013. On May 30, 2013, upon obtaining stockholder approval of the additional authorized shares of our common stock, the derivative liability was marked to fair value and reclassified to stockholders' equity. The expense of $6.3 million recorded in the three months ended June 30, 2013 primarily resulted from an increase in our stock price during the period. The estimated fair value of the embedded conversion derivative was $34.5 million immediately prior to its reclassification to stockholders' equity. Refer to Note 10 to these financial statements for further discussion of the embedded conversion derivate in the 2017 Notes.

Loss on extinguishment of debt

Three Months Six Months Ended June 30, Ended June 30, (in thousands, except percentages) 2013 2012 % Change 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 Six Months
Ended June 30, Ended June 30,
(in thousands, except percentages) 2013 2012 % Change 2013 2012 % Change Other income (expense) ($ 574 ) ($ 139 ) 313 % ($ 94 ) ($ 1,124 ) -92 %

Other expense in the three and six months ended June 30, 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                            Six Months
                                             Ended June 30,                         Ended June 30,
(in thousands, except percentages)          2013        2012       % Change        2013        2012       % Change
Income from discontinued operations, net
of taxes                                   $  387     $ 32,340           -99 %    $  617     $ 34,055           -98 %

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.

Liquidity and Capital Resources

Our principal sources of liquidity are our existing cash, cash equivalents and available for sale securities, cash generated from operations and proceeds from our convertible note financings issued in June 2008, September 2011 and January 2013.

At June 30, 2013, our capital resources consisted of cash, cash equivalents and available for sale securities of $386.7 million. Based on our current expectations, we believe our existing cash, cash equivalents and available for sale securities will be sufficient to meet our planned operations through at least the next 12 months. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, the expansion of sales, marketing and administrative activities, the timing of introduction of our product into new markets and the continuing market acceptance of our products.


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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 $112.3 million during the six months ended June 30, 2013, comprised primarily of a net loss of $112.7 million and non-cash charges of $14.8 million primarily consisting of depreciation, stock-based compensation, amortization of debt discount and debt issuance costs, changes in the fair value of our embedded derivative and loss on extinguishment of debt.

Cash used in operating activities was $85.4 million during the six months ended June 30, 2012, comprised primarily of a net loss of $55.9 million which included $40.5 million of non-cash charges primarily consisting of depreciation, stock-based compensation and discontinued operations.

Cash used for our operations increased by $26.9 million compared to the same period in prior year. 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 $39.6 million during the six months ended June 30, 2013, and was comprised primarily of purchases of available-for-sale securities of $148.3 million, partially offset by maturities and sales of available-for-sale securities of $109.2 million.

Cash provided by investing activities was $31.5 million during the six months ended June 30, 2012, comprised primarily of proceeds from the divestiture of Actimmune, as well as sales and maturities of available-for-sale securities of $173.1 million, partially offset by purchases of $194.3 million of available-for-sale securities.

Cash used for investing activities for the six months ended June 30, 2013 increased $71.1 million compared to the same period in the prior year. The cash used for investing was primarily due to net purchases in available for sale securities of $17.9 million during the six months ended June 30, 2013 compared to proceeds received of $55.0 million resulting from the sale of Actimmune during the same period in 2012.

Cash Flows from Financing Activities

Cash provided by financing activities of $191.7 million for the six months ended June 30, 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 . . .

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