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ITMN > SEC Filings for ITMN > Form 10-Q on 2-May-2014All Recent SEC Filings

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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:

- expectations regarding the timing for resubmission of our new drug application to the U.S. Food and Drug Administration, or FDA, for pirfenidone and the time period of the FDA's completion of its review of the NDA;

- the potential to make pirfenidone available as a medicine to idiopathic pulmonary fibrosis, or IPF, patients in the United States and the timing of commercial launch in the United States;

- 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 the European Union, Canada 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;

- expectations around the enrollment size, timing and results of our ongoing clinical trials;

- our expectations regarding the effectiveness of our strategic priorities and our ability to take successful actions to achieve our three point strategy;

- our ability to successfully discover, develop and commercialize our current and any future pre-clinical product candidates, including second generation pirfenidone compounds;

- opportunities to establish development or commercial alliances;

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

- commercial launch preparations, including the timing of launches in the European Economic Area, or the EEA, and the implementation of the commercial infrastructure required for commercial launches in Europe and the United States;

- 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 our cash resources, including the proceeds from our registered underwritten public offerings in 2013 and 2014;

- our future research and development expenses and other expenses;

- 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 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.


We are a biotechnology company focused on the research, development and commercialization of innovative therapies in pulmonology and orphan fibrotic diseases. In pulmonology, we are focused on therapies for the treatment of idiopathic pulmonary fibrosis, or IPF, a progressive and fatal lung disease. Pirfenidone is approved for marketing by InterMune in all 28 member countries of the European Union, or EU, and Canada as Esbriet. Pirfenidone is not approved for marketing in the United States. We intend to resubmit the pirfenidone New Drug Application, or NDA, to the U.S. FDA early in the third quarter of 2014 to support regulatory registration in the United States. Our research programs are focused on the discovery of targeted, small-molecule therapeutics and biomarkers to treat and monitor serious pulmonary and fibrotic diseases.

In March 2014, we completed a registered underwritten public offering of 8,625,000 shares of our common stock. The resulting aggregate net proceeds from the common stock offering were approximately $268.0 million, after deducting underwriting discounts and estimated expenses.

EsbrietŪ (pirfenidone)

Pirfenidone is an orally active, small-molecule compound that has been developed for the treatment of idiopathic pulmonary fibrosis. In September 2011, we launched commercial sales of pirfenidone in Germany under the trade name Esbriet. Esbriet is now also commercially available in 14 of the 15 European countries we originally targeted in our plan, including key markets beyond Germany such as France, Italy and the UK. In addition, we launched Esbriet in Canada in January 2013. We launched in the Netherlands in April 2014 and we currently expect to provide an update on Esbriet pricing and reimbursement in Spain, the only country of our original 15 priority countries yet to secure pricing and reimbursement, in the second half of 2014.

We are also pursuing the registration of pirfenidone to treat IPF in the United States. In July 2011, we commenced a Phase 3 clinical study of pirfenidone in IPF known as the ASCEND trial. Relative to our two previous studies of pirfenidone in IPF (CAPACITY), the ASCEND study utilized centralized procedures for radiographic and pathologic diagnosis of IPF. This yielded a high confidence in the diagnosis of IPF. Additionally, centralized oversight of spirometry (lung function tests) enhanced the quality control of the primary endpoint. Finally, minor modifications of entry criteria for ASCEND could further refine the study population for patients who were more likely to experience a decline in lung function during the study.

Pre-Clinical and Clinical Programs

In February 2014, we announced positive top-line data from the ASCEND study demonstrating that pirfenidone significantly reduced IPF disease progression as measured by the primary endpoint of change in percent predicted forced vital capacity, or FVC, from Baseline to Week 52 (rank ANCOVA p<0.000001). A 10% decline in percent predicted FVC in an individual IPF patient is considered clinically meaningful and strongly predicts mortality. At Week 52, 16.5% of patients in the pirfenidone group experienced an FVC decline of 10% or more or death, compared with 31.8% in the placebo group, representing a 47.9% reduction in the proportion of patients who experienced a meaningful change in FVC or death. The data also demonstrated that 22.7% of patients in the pirfenidone group experienced no decline in FVC, compared with 9.7% in the placebo group, representing a 132.5% increase in the proportion of patients for which FVC did not decrease between Baseline and Week 52.

Pirfenidone also demonstrated significant treatment effects on both of the key pre-specified secondary endpoints of six-minute walk test distance, or 6MWD and progression-free survival, or PFS. Pirfenidone reduced by 27.5% the proportion of patients who experienced a decline in 6MWD of 50 meters or greater (p=0.0360) and reduced the risk of death or disease progression by 43% compared to placebo (Hazard Ratio [HR]=0.57; 95% confidence interval, 0.43-0.77; p=0.0001). Three additional secondary endpoints were also pre-specified in ASCEND to measure all-cause mortality, treatment-emergent IPF-related mortality and change from Baseline to Week 52 in dyspnea (shortness of breath). The two mortality analyses were performed for the ASCEND study alone as well as for the pooled population of the ASCEND study and the previous Phase 3 CAPACITY studies through 52 weeks. In the analysis of the ASCEND study alone, there were fewer events of all-cause mortality (HR=0.55, log rank p=0.1045) and of treatment-emergent IPF-related mortality (HR=0.44, log rank p=0.2258) in the pirfenidone group compared with the placebo group. Similarly, analyses of the pooled population showed that the risk of all-cause mortality and treatment-emergent IPF-related death was reduced in the pirfenidone group by 48% (HR=0.52, log rank p=0.0107) and 68% (HR=0.32, log rank p=0.0061), respectively, compared to the placebo group. The secondary endpoint of dyspnea, measured by the UCSD Shortness of Breath Questionnaire, or SOBQ, was not achieved (p=0.1577).

Consistent with observations from the previous Phase 3 studies and post-marketing experience in Europe and Canada, pirfenidone demonstrated a favorable safety profile and was generally well-tolerated in ASCEND. The percentage of patients discontinuing treatment due to an adverse event, or AE, was 14.4% in the pirfenidone group and 10.8% in the placebo group. Serious adverse events were reported in 19.8% of patients in the pirfenidone group and 24.9% in the placebo group. Hospitalizations due to respiratory, thoracic and mediastinal AEs were reported in 3.6% of patients in the pirfenidone group and 11.2% in the placebo group.

The most common AEs with higher incidence in the pirfenidone group were primarily gastrointestinal (e.g., nausea and dyspepsia) and skin-related (e.g., rash). The GI and rash AEs were generally mild to moderate in severity, manageable, reversible and only infrequently led to treatment discontinuations.

Although elevations of aminotransferase levels of at least 3 times the upper limit of normal occurred in 2.9% of pirfenidone patients versus 0.7% of placebo patients, these elevations occurred early, were manageable and reversible, and were similar to those observed in previous pirfenidone studies.

We intend to present additional data from the ASCEND study at the 2014 American Thoracic Society International Conference in May 2014.

The results of the ASCEND trial will supplement the existing Phase 3 clinical data from our CAPACITY clinical trials to support the potential registration of pirfenidone to treat patients with IPF in the United States. We intend to resubmit the pirfenidone New Drug Application, or NDA, to the U.S. Food and Drug Administration, or FDA, early in the third quarter of 2014 to support regulatory registration in the United States. As a Class 2 resubmission, FDA's review is expected to be completed within six months. If FDA approval occurs within that timeframe, we currently anticipate that we would be prepared to launch pirfenidone in the United States early in the second quarter of 2015.

We are planning to implement an Expanded Access Program, or EAP, for the investigational drug, pirfenidone. The EAP will be conducted under a treatment protocol and limited to enrollment of IPF patients in the U.S. who meet specific medical criteria. Investigational drugs such as pirfenidone are not generally available until the FDA approves them. However, the Food and Drug Administration's (FDA) regulations have compassionate use provisions under which FDA may allow certain investigational drugs to be made available in cases where there are not comparable or satisfactory alternative therapies for serious or life-threatening illnesses. One of these provisions is an Expanded Access Program under a treatment protocol. The pirfenidone EAP will be designed to provide access to the drug while marketing approval is being sought from the FDA.

In July 2013, we initiated a randomized, double-blind, placebo controlled Phase 2 clinical study, known as the PANORAMA trial, designed to evaluate the safety and tolerability of N-acetylcysteine (NAC) in patients with IPF and who are currently being treated with Esbriet (pirfenidone). NAC is a pharmaceutical drug and nutritional supplement used primarily as a mucolytic agent and in the management of paracetamol/acetaminophen overdose. NAC is an antioxidant that has been used alone or in combination with other agents, including Esbriet, for the treatment of IPF. However, NAC is not approved for the treatment of IPF by any major regulatory agency and no controlled data currently exists regarding the safety and tolerability of Esbriet and NAC in combination. The PANORAMA trial is expected to enroll approximately 250 patients at approximately 70 centers in Europe with a treatment duration of six months. However, depending on the results of the PANTHER trial, a trial sponsored by the National Institutes of Health to evaluate NAC versus placebo in the treatment of IPF patients, we may modify or terminate our PANORAMA trial.

In October 2013, we initiated the LOTUSS trial, a Phase 2, multinational, open-label, 16-week, randomized, parallel-group, safety and tolerability study of Esbriet (pirfenidone) in patients with systemic sclerosis-related interstitial lung disease (SSc-ILD). Systemic sclerosis (SSc), also known as scleroderma, is an autoimmune connective tissue disorder resulting in, among other features, excessive collagen production and tissue fibrosis. SSc is a multiorgan disease that can involve the lungs, skin, heart, gut and kidneys. Most affected patients are women and are between 30 to 50 years old at diagnosis. Lung involvement (SSc-ILD) eventually occurs in more than 70% of SSc patients, and is the leading cause of functional impairment as well as the leading cause of mortality in this population. There are currently no licensed pharmacological agents approved to treat SSc-ILD although some patients receive immunosuppressive drugs. Therefore, we believe SSc-ILD represents a significant unmet medical need. We have been granted orphan drug designation status for pirfenidone in the United States. During the quarter, enrollment was completed on schedule for this Phase 2 trial.

In March 2014, we announced ITMN-30162 and ITMN-14440, our two lead pirfenidone analogs. These product candidates have displayed anti-fibrotic activity at very low doses in animal models, pharmacokinetic profiles that predict once or twice-daily dosing in humans and, based on non-clinical studies, a reduced potential for GI and photosensitivity effects. Both ITMN-30162 and ITMN-14440 are in preclinical development and we intend to proceed with clinical development for at least one of these product candidates in the first half of 2015.

Our Strategy

Consistent with the corporate strategy we outlined during the fourth quarter of 2013, our first priority remains the successful commercialization of Esbriet in IPF, including planning and executing a successful launch in the United States if Esbriet is approved following resubmission of our NDA. We are also conducting two clinical studies, LOTUSS and PANORAMA, to expand and explore the growth of Esbriet in IPF and in other indications. Our PANORAMA trial is designed to evaluate the safety and tolerability of N-acetylcysteine, or NAC, in patients with IPF being treated with Esbriet. Our LOTUSS trial, is a Phase 2, multinational, open-label, randomized, parallel-group, safety and tolerability study of Esbriet in patients with SSc-ILD which we recently completed enrollment in this trial. We are also investing in internal programs to expand Esbriet in IPF, including new formulations for Esbriet, as well as broadening our pipeline beyond Esbriet and IPF into other specialty fibrotic diseases through our internal research capability and business development initiatives focused on broadening our pipeline, and continue to evaluate opportunities as they arise.

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 months ended March 31, 2014 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, 2013.

Results of Operations

Comparison of the three months ended March 31, 2014 and 2013


Three Months Ended
March 31, Percentage Change
(in thousands, except percentages) 2014 2013 2014 vs 2013 Esbriet product sales $ 30,274 $ 10,530 188 %

Revenue for the three months ended March 31, 2014 increased $19.7 million, or 188%, compared to the same period in 2013. Revenue increased as a result of i) continued expansion into new countries, including Italy and the UK, as well as other of our 15 priority countries, ii) continued growth in existing markets, including Canada, France and Germany, and iii) increased disease awareness and marketing efforts.

Cost of Goods Sold and Gross Margin

                                          Three Months Ended
                                               March 31,             Percentage Change
   (in thousands, except percentages)      2014          2013          2014 vs 2013
   Cost of goods sold                   $     3,365     $ 2,376                      42 %
   As a percentage of total revenue              11 %        23 %
   Gross profit                         $    26,909     $ 8,154                     230 %
   Gross margin                                  89 %        77 %

Cost of goods sold consists of both direct and indirect manufacturing costs, amortization of acquired product rights and royalties to Shionogi related to sales of Esbriet in the EU commencing on January 1, 2013. Manufacturing costs include product costs, distribution, inventory write-downs and internal supply chain management costs. The following table summarizes the major components of cost of goods sold:

                                                Three Months Ended
                                                     March 31,               Percentage Change
Major components of cost of goods sold
(in thousands, except percentages)             2014             2013           2014 vs 2013
Manufacturing costs                         $     1,949      $    1,678                      16 %
Amortization of acquired product rights             250             250                       - %
Royalty expense                                   1,166             448                     160 %
Total COGS                                  $     3,365      $    2,376                      42 %

Cost of goods sold for the three months ended March 31, 2014 increased $1.0 million, or 42%, compared to the same period in 2013. Excluding amortization of acquired product rights and Shionogi royalty expenses, cost of goods sold as a percentage of revenue decreased from 16% to 6%. Historically our higher COGS as a percentage of revenues included the costs of delayed launches such as product repackaging, relabeling and shipping activities. The decrease in COGS as a percentage of revenues is also a result of i) increased economies of scale from improved production planning associated with the completion of pricing and reimbursement in our targeted countries, and ii) absorption of fixed costs such as the amortization of our acquired product rights and other internal supply chain costs, over an increased number of units produced.

Research and Development Expenses

Three Months Ended
March 31, Percentage Change
(in thousands, except percentages) 2014 2013 2014 vs 2013 Research and development $ 32,051 $ 25,876 24 %

Research and development expenses for the three months ended March 31, 2014, increased $6.2 million, or 24%, compared to the same period in 2013 and related primarily to completion activities for our ASCEND clinical trial in the U.S., which was initiated in July 2011. We also initiated two additional clinical studies in 2013, LOTUSS and PANORAMA, in order to research expanded uses of Esbriet as well as combined therapy with existing compounds, in addition to PASSPORT, a trial to satisfy post-approval regulatory requirements in the EU. Additionally, we initiated work to prepare for an Early Access Program, or EAP, in the first quarter of 2014 in order to provide Esbriet to U.S. patients prior to FDA approval under the FDAs compassionate use provisions.

Milestone Payments to Third Parties

We made no third-party payments in the three months ended March 31, 2014 and 2013 related to contractual milestone obligations that were charged directly to expense. In 2011, we received authorization to market Esbriet in the EU and made a milestone payment of $20.0 million in the aggregate to Marnac and KDL and have capitalized such payment as acquired product rights. This asset is being amortized to cost of goods sold over the estimated useful life of Esbriet and we incurred approximately $0.3 million of amortization expense in the first quarter of both 2014 and 2013.

Selling, General and Administrative Expenses

Three Months Ended
March 31, Percentage Change
(in thousands, except percentages) 2014 2013 2014 vs 2013 Selling, general and administrative $ 44,327 $ 29,976 48 %

Selling, general and administrative expenses for the three months ended March 31, 2014, increased $14.4 million, or 48%, compared to the same period in 2013. This increase is primarily attributed to an increase in headcount associated with the development of our global sales organization and related marketing activities.

Interest Income

Three Months Ended
March 31, Percentage Change
(in thousands, except percentages) 2014 2013 2014 vs 2013 Interest income $ 103 $ 137 (25 )%

The decrease in interest income for the three months ended March 31, 2014 compared to the same period in 2013 is due to lower average balances in marketable securities in the first quarter of 2014.

Interest Expense

Three Months Ended
March 31, Percentage Change
(in thousands, except percentages) 2014 2013 2014 vs 2013 Interest expense $ (3,860 ) $ (3,483 ) 11 %

Interest expense primarily relates to coupon interest on our 2015 Notes, 2017 Notes and 2018 Notes, as well as amortization of our note discount in connection with the January 2013 issuance of our 2.50% convertible senior notes due 2017. Increase in interest expense is attributed to the use of an effective interest rate to amortize our note discount over the remaining term of the 2017 Notes.

Fair Value of Embedded Conversion Derivative

                                                  Three Months Ended
                                                       March 31,                 Percentage Change
(in thousands, except percentages)              2014               2013            2014 vs 2013
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 January 2013 note issuance date. The expense of $8.8 million recorded in the three months ended March 31, 2013 primarily resulted from a decrease in our stock price during the period. On May 30, 2013, upon obtaining stockholder approval of additional authorized shares of our common stock, the derivative liability was marked to fair value and reclassified to stockholders' equity. Refer to Note 10 to our unaudited condensed consolidated financial statements for further discussion of the embedded conversion derivative in the 2017 Notes.

Loss on Extinguishment of Notes

                                         Three Months Ended
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