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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2004

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 0-21699

 


 

VIROPHARMA INCORPORATED

(Exact Name of Registrant as Specified in its Charter)

 


 

Delaware   23-2789550

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

397 Eagleview Boulevard

Exton, Pennsylvania 19341

(Address of Principal Executive Offices and Zip Code)

 

610-458-7300

(Registrant’s Telephone Number, Including Area Code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days:    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No   x

 

Number of shares outstanding of the issuer’s Common Stock, par value $.002 per share, as of August 2, 2004: 26,634,708 shares.

 



VIROPHARMA INCORPORATED

 

INDEX

 

               Page

PART I. FINANCIAL INFORMATION     
     Item 1.    Financial Statements     
    

Consolidated Balance Sheets at December 31, 2003 and June 30, 2004 (unaudited)

   3
    

Consolidated Statements of Operations (unaudited) for the three months ended June 30, 2003 and 2004, six months ended June 30, 2003 and 2004 and the period from December 5, 1994 (Inception) to June 30, 2004

   4
    

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2003 and 2004 and the period from December 5, 1994 (Inception) to June 30, 2004

   5
    

Notes to Consolidated Financial Statements (unaudited)

   6
     Important Information About Forward-Looking Statements    10
     Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    11
     Item 3.    Quantitative and Qualitative Disclosures About Market Risk    22
     Item 4.    Controls and Procedures    22
PART II. OTHER INFORMATION     
     Item 1.    Legal Proceedings    23
     Item 4.    Submission of Matters to a Vote of Security Holders    23
     Item 5.    Other Information    23
     Item 6.    Exhibits and Reports on Form 8-K    24
     Signatures    25

 

2


PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ViroPharma Incorporated

(A Development Stage Company)

Consolidated Balance Sheets

(unaudited)

December 31, 2003 and June 30, 2004

 

     December 31,     June 30,  
     2003

    2004

 

Assets

                

Current assets:

                

Cash and cash equivalents

   $ 12,969,261     $ 7,810,155  

Short-term investments

     108,179,330       93,807,796  

Notes receivable from officers

     88,743       44,372  

Other current assets

     2,392,037       3,235,407  
    


 


Total current assets

     123,629,371       104,897,730  

Equipment and leasehold improvements, net

     7,212,493       931,236  

Debt issue costs, net

     1,908,860       1,607,461  

Other assets

     94,458       94,458  
    


 


Total assets

   $ 132,845,182       107,530,885  
    


 


Liabilities and Stockholders’ deficit

                

Current liabilities:

                

Loans payable

   $ 8,334     $ —    

Due to partners

     —         241,000  

Accounts payable

     649,561       294,833  

Accrued expenses and other current liabilities

     6,800,484       5,938,393  

Deferred revenue - current

     3,074,245       800,331  
    


 


Total current liabilities

     10,532,624       7,274,557  

Convertible subordinated notes

     127,900,000       127,900,000  

Deferred revenue - noncurrent

     1,127,273       845,455  

Other liabilities

     794,580       677,805  
    


 


Total liabilities

     140,354,477       136,697,817  
    


 


Commitments and Contingencies

                

Stockholders’ deficit:

                

Preferred stock, par value $0.001 per share. 5,000,000 shares authorized; Series A convertible participating preferred stock; no shares issued and outstanding

     —         —    

Series A junior participating preferred stock; 200,000 shares designated; no shares issued and outstanding

     —         —    

Common stock, par value $0.002 per share. 100,000,000 shares authorized; issued and outstanding 26,462,738 at December 31, 2003 and 26,629,780 at June 30, 2004

     52,925       53,260  

Additional paid-in capital

     250,320,035       250,616,825  

Deferred compensation

     (209,654 )     (74,397 )

Accumulated other comprehensive loss

     (101,343 )     (197,302 )

Deficit accumulated during the development stage

     (257,571,258 )     (279,565,318 )
    


 


Total stockholders’ deficit

     (7,509,295 )     (29,166,932 )
    


 


Total liabilities and stockholders’ deficit

   $ 132,845,182     $ 107,530,885  
    


 


 

See accompanying notes to unaudited consolidated financial statements.

 

3


ViroPharma Incorporated

(A Development Stage Company)

Consolidated Statements of Operations

(unaudited)

Three months ended June 30, 2003 and 2004, six months ended June 30, 2003 and 2004

and the period from December 5, 1994 (Inception) to June 30, 2004

 

    

Three months ended

June 30,


   

Six months ended

June 30,


   

Period from
December 5,
1994

(Inception)

to June 30,

2004


 
     2003

    2004

    2003

    2004

   

Revenues:

                                        

License fee and milestone revenue

   $ 140,909     $ 1,205,584     $ 309,217     $ 2,551,973     $ 18,354,214  

Grant revenue

     —         97,320       —         254,276       1,192,033  

Other revenue

     —         462,453       34,000       696,417       1,016,942  
    


 


 


 


 


Total revenues

     140,909       1,765,357       343,217       3,502,666       20,563,189  
    


 


 


 


 


Continuing operating expenses incurred in the development stage:

                                        

Research and development

     4,504,708       3,047,137       10,592,961       11,412,535       227,551,722  

Acquisition of technology rights

     —         —         —         —         20,000,000  

Marketing

     —         —         —         —         23,360,873  

General and administrative

     1,561,118       2,312,189       3,486,728       10,556,951       56,954,088  
    


 


 


 


 


Total operating expenses

     6,065,826       5,359,326       14,079,689       21,969,486       327,866,683  
    


 


 


 


 


Gain on repurchase of debt, net

     —         —         2,805,337       —         31,527,142  

Interest income

     792,671       297,609       1,098,720       627,378       35,447,548  

Interest expense

     2,102,278       2,081,686       4,248,914       4,154,618       45,577,077  
    


 


 


 


 


Loss from continuing operations

     (7,234,524 )     (5,378,046 )     (14,081,329 )     (21,994,060 )     (285,905,881 )

Discontinued operations:

                                        

Income from discontinued sales operations

     —         —         —         —         6,340,563  
    


 


 


 


 


Net loss

   $ (7,234,524 )   $ (5,378,046 )   $ (14,081,329 )   $ (21,994,060 )   $ (279,565,318 )
    


 


 


 


 


Basic and diluted net loss per share

   $ (0.28 )   $ (0.20 )   $ (0.55 )   $ (0.83 )        
    


 


 


 


       

Shares used in computing basic and diluted loss per share amounts

     25,886,314       26,552,169       25,806,961       26,488,412          
    


 


 


 


       

 

See accompanying notes to unaudited consolidated financial statements.

 

4


ViroPharma Incorporated

(A Development Stage Company)

Consolidated Statements of Cash Flows

(unaudited)

Six months ended June 30, 2003 and 2004 and the

period from December 5, 1994 (Inception) to June 30, 2004

 

    

Six months ended

June 30,


   

Period from

December 5, 1994

(Inception)

to June 30,

2004


 
     2003

    2004

   

Cash flows from operating activities:

                        

Net loss

   $ (14,081,329 )   $ (21,994,060 )   $ (279,565,318 )

Adjustments to reconcile net loss to net cash used in operating activities:

                        

Non-cash gain on sale of sales force

     —         —         (15,410,000 )

Non-cash gain on reduction of convertible subordinated notes

     (2,875,000 )     —         (32,449,373 )

Non-cash settlement of interest payable related to note reduction

     —         —         23,501  

Write-off of deferred financing costs on reduction of notes

     69,663       —         922,231  

Non-cash charge for lease costs

     —         —         1,650,000  

Non-cash acquisition of technology rights

     —         —         16,500,000  

Non-cash compensation expense

     90,184       135,257       2,302,900  

Non-cash warrant value

     —         —         153,751  

Non-cash consulting expense

     —         —         46,975  

Non-cash interest expense

     307,679       301,399       3,195,725  

Non-cash asset impairment from restructuring

     —         4,781,788       6,298,960  

Depreciation and amortization expense

     1,252,644       257,553       8,376,669  

Changes in assets and liabilities:

                        

Notes receivable from officers

     43,371       44,371       (44,372 )

Due (from) to partners

     (2,132,778 )     241,000       241,000  

Other current assets

     1,080,449       (843,370 )     (3,235,407 )

Other assets

     48,558       —         (94,458 )

Accounts payable

     (343,792 )     (354,728 )     294,833  

Accrued expenses and other current liabilities

     (1,051,868 )     (862,091 )     15,082,973  

Deferred revenue

     (309,218 )     (2,555,732 )     1,645,786  

Other liabilities

     —         (116,775 )     9,883,223  
    


 


 


Net cash used in operating activities

     (17,901,437 )     (20,965,388 )     (264,180,401 )
    


 


 


Cash flows from investing activities:

                        

Purchase of equipment and leasehold improvements

   $ (431,174 )   $ (162,632 )   $ (17,207,950 )

Proceeds from sale of equipment

     —         1,404,548       1,601,085  

Purchases of short-term investments

     (74,875,014 )     (77,691,416 )     (1,243,856,139 )

Sales of short-term investments

     —         —         9,680,414  

Maturities of short-term investments

     89,259,449       91,966,991       1,140,170,627  
    


 


 


Net cash provided by (used in) investing activities

     13,953,261       15,517,491       (109,611,963 )
    


 


 


Cash flows from financing activities:

                        

Net proceeds from issuance of preferred stock

   $ —       $ —       $ 27,242,143  

Net proceeds from issuance of common stock

     38,350       297,125       199,196,086  

Preferred stock cash dividends

     —         —         (1,254,294 )

Proceeds from loans payable and milestone advance

     —         —         2,100,000  

Payment of loans payable

     (66,622 )     (8,334 )     (2,100,000 )

Repurchase of convertible subordinated notes

     (2,125,000 )     —         (18,500,125 )

Proceeds received on notes receivable

     —         —         1,625  

Gross proceeds from notes payable

     —         —         180,692,500  

Issuance costs on notes payable

     —         —         (5,725,416 )

Payment of notes payable

     —         —         (50,000 )
    


 


 


Net cash (used in) provided by financing activities

     (2,153,272 )     288,791       381,602,519  
    


 


 


Net (decrease) increase in cash and cash equivalents

     (6,101,448 )     (5,159,106 )     7,810,155  

Cash and cash equivalents at beginning of period

     15,987,056       12,969,261       —    
    


 


 


Cash and cash equivalents at end of period

   $ 9,885,608     $ 7,810,155     $ 7,810,155  
    


 


 


Supplemental disclosure of non-cash transactions:

                        

Conversion of Note Payable to Series A and Series B Preferred Stock

   $ —       $ —       $ 642,500  

Conversion of mandatorily redeemable convertible preferred stock to common shares

     —         —         16,264,199  

Notes issued for 828,750 common shares

     —         —         1,625  

Deferred compensation

     —         —         2,222,158  

Forfeiture of restricted stock

     —         —         126,511  

Accretion of redemption value attributable to mandatorily redeemable converted common stock

     —         —         1,616,445  

Conversion of milestone advance to loan payable

     —         —         1,000,000  

Unrealized gains (losses) on available for sale securities

     113,321       (95,959 )     (197,302 )

Issuance of common stock in note reduction

     —         —         1,150,502  

Issuance of common stock to Aventis Pharmaceuticals Inc.

     —         —         4,590,000  

Settlement of milestone advances to Aventis Pharmaceuticals Inc.

     —         —         20,000,000  

Supplemental disclosure of cash flow information:

                        

Cash paid for interest

   $ 4,047,000     $ 3,837,000     $ 39,418,443  

 

See accompanying notes to unaudited consolidated financial statements.

 

5


ViroPharma Incorporated

(A Development Stage Company)

Notes to Consolidated Financial Statements

 

(1) Organization and Business Activities

 

ViroPharma Incorporated (a development stage company) commenced operations on December 5, 1994. ViroPharma Incorporated and its subsidiary (the “Company” or “ViroPharma”) is a development stage pharmaceutical company focused on the development and commercialization of products that address serious diseases treated by physician specialists and in hospital settings.

 

The Company is devoting substantial effort towards conducting drug development, conducting clinical trials, pursuing business development opportunities, pursuing regulatory approval for products under development, and raising capital. The Company has earned no significant revenue from product sales and has not achieved profitable operations or positive cash flow from operations. The Company’s deficit accumulated during the development stage aggregates $279.6 million through June 30, 2004. There is no assurance that profitable operations can ever be achieved, and even if achieved, could be sustained on a continuing basis.

 

The Company plans to continue to finance its operations with a combination of cash, cash equivalents, and short-term investments, stock issuances and debt issuances, as available, license payments, payments from strategic research and development arrangements when and if agreed upon milestones are achieved and, in the longer term, revenues from product sales or collaborations, if its planned products are commercialized or if it is successful in acquiring marketed products through its business development efforts. There are no assurances, however, that the Company will be successful in obtaining regulatory approval for any of its product candidates, in obtaining an adequate level of financing needed for the long-term development and commercialization of its product candidates or in acquiring marketed products through its business development efforts.

 

Basis of Presentation

 

The consolidated financial information at June 30, 2004, and for the three months and six months ended June 30, 2003 and 2004 and for the period from December 5, 1994 (inception) to June 30, 2004, is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the consolidated financial information set forth therein in accordance with accounting principles generally accepted in the United States of America. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2003 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

During the second quarter of 2003, the Company discovered that it had been accounting for the discounts and premiums associated with its short-term investments incorrectly. The amortization of these discounts and premiums should have been recorded ratably over the holding period for each investment to interest income. In financial statements prior to the second quarter of 2003, the Company reported these amounts as a change in accumulated other comprehensive income (loss), a component of stockholders’ equity, in the consolidated balance sheet. Due to the lack of materiality, the cumulative net effect of the activity of approximately $2.1 million has been relieved from accumulated other comprehensive income (loss) and charged directly to deficit accumulated during the development stage in the consolidated balance sheet in 2003. The effects of this charge on loss from continuing operations for each of the years ended December 31, 2000, 2001, 2002 and 2003 and on the deficit accumulated during the development stage as of each period end is immaterial.

 

Reclassification

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

(2) Comprehensive Income (Loss)

 

In the Company’s annual consolidated financial statements, comprehensive income (loss) is presented as a separate financial statement. For interim consolidated financial statements, the Company is permitted to disclose the information in the footnotes to the consolidated financial statements. The disclosures are required for comparative purposes. The only comprehensive income (loss) item the Company has is unrealized gains and losses on available for sale securities. The following reconciles net income (loss) to comprehensive income (loss) for the three and six months ended June 30, 2003 and 2004:

 

6


ViroPharma Incorporated

(A Development Stage Company)

Notes to Consolidated Financial Statements

 

    

Three months ended

June 30,


   

Six months ended

June 30,


 
     2003

    2004

    2003

    2004

 

Net loss

   $ (7,234,524 )   $ (5,378,046 )   $ (14,081,329 )   $ (21,994,060 )

Other comprehensive income (loss):

                                

Unrealized gains (losses) on available for sale securities

     (219,931 )     (165,595 )     113,321       (95,959 )
    


 


 


 


Comprehensive income (loss)

   $ (7,454,455 )   $ (5,543,641 )   $ (13,968,008 )   $ (22,090,019 )
    


 


 


 


 

(3) Convertible Subordinated Notes

 

In June 2004, the Company terminated its exchange offer of its proposed 6% Convertible Senior Plus Cash Notes due 2009 for up to all of the $127.9 million aggregate principal amount of its currently outstanding 6% Convertible Subordinated Notes due March 2007. In the proposed exchange offer, ViroPharma would have offered up to $99.1 million aggregate principal amount of new 6% Convertible Senior Plus Cash Notes due 2009 for up to all of the $127.9 million aggregate principal amount of its currently outstanding 6% Convertible Subordinated Notes. The Company incurred approximately $0.6 million in costs related to this terminated transaction, all of which is included in general and administrative expense in the second quarter of 2004.

 

During the six months ended June 30, 2003, the Company recognized a $2.8 million gain, after the write-off of $0.1 million of deferred financing costs, related to the purchase of $5.0 million of principal amount of its outstanding convertible notes. The gain is classified as gain on repurchase of debt, net, and there were no comparable reductions in the Company’s outstanding convertible notes during 2004. Through June 30, 2004, the Company has reduced its outstanding convertible notes by $52.1 million of principal amount.

 

(4) Stock Compensation

 

The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. As such, compensation cost for employees and directors is measured on the date of grant for fixed options as the excess of the current market price of the underlying stock over the exercise price. Such compensation amounts are amortized over the respective vesting periods of the option grant. Any charge to operations for variable options with performance criteria is affected each reporting period by changes in the fair value of the Company’s common stock. The Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123) which permits entities to provide pro forma net income (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants as if the fair-value based method defined in SFAS 123 had been applied. In addition, the Company adopted the revised disclosure requirements under Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of SFAS 123.”

 

Compensation expense for options granted to non-employees is determined in accordance with SFAS No. 123, and related interpretations, as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Compensation expense for options granted to non-employees is remeasured each period as the underlying options vest.

 

7


ViroPharma Incorporated

(A Development Stage Company)

Notes to Consolidated Financial Statements

 

The Company applies APB Opinion No. 25 in accounting for its stock options granted to employees and directors. Had the Company determined compensation cost for options granted to employees and directors based on the fair value at the grant date under SFAS 123, the Company’s net loss and net loss per share would have been increased to the pro forma amounts under SFAS 123 indicated below:

 

     For the three months ended
June 30,


   

For the six months ended

June 30,


 
     2003

    2004

    2003

    2004

 

Net income (loss):

                                

As reported

   $ (7,234,524 )   $ (5,378,046 )   $ (14,081,329 )   $ (21,994,060 )
Add: stock-based employee compensation expense included in net loss      —         —         —         —    
Deduct: total stock-based employee compensation expense determined under the fair value-based method for all employee and director awards      (1,974,382 )     (752,418 )     (4,048,579 )     (1,352,910 )
    


 


 


 


Pro forma under SFAS No. 123

   $ (9,208,906 )   $ (6,130,464 )   $ (18,129,908 )   $ (23,346,970 )
    


 


 


 


Net income (loss) per share:

                                

Basic and diluted:

                                

As reported

   $ (0.28 )   $ (0.20 )   $ (0.55 )   $ (0.83 )
    


 


 


 


Pro forma under SFAS No. 123

   $ (0.36 )   $ (0.23 )   $ (0.70 )   $ (0.88 )
    


 


 


 


 

(5) Restructuring

 

In January 2004, the Company announced that it had restructured its organization to focus its resources on the advancement and development of later stage products. As of June 30, 2004, the Company has reduced its workforce by 70% from December 2003 levels. This reduction is the result of the Company discontinuing its early stage activities, including discovery research and most internal preclinical activities, and reductions in clinical development and general and administrative personnel. During the first six months of 2004, the Company included approximately $9.3 million of severance and asset impairment costs related to this restructuring in its net loss from continuing operations. The following table reflects the charges recorded, payments made, and liability remaining at June 30, 2004 (in thousands):

 

     Research and
Development


   G&A

    Total

 

Restructuring charges:

                       

Severance

   $ 3,395    $ 703     $ 4,098  

Asset impairments

     —        5,169       5,169  
    

  


 


Total

   $ 3,395    $ 5,872     $ 9,267  

Restructuring activity through June 30, 2004:

                       

Severance payments

   $ —      $ —       $ (4,090 )

Asset impairments recorded to accumulated depreciation

     —        —         (4,783 )

Additional severance charges during the second quarter

     184      220       404  

Additional proceeds from the sale of unused fixed assets

     —        (386 )     (386 )
    

  


 


Total

   $ 184    $ (166 )   $ (8,855 )

Remaining payments as of June 30, 2004

                  $ 412  
                   


 

As of June 30, 2004, the restructuring accrual consists of remaining severance payments. The balance of these obligations will be paid by the end of the third quarter of 2004. In the second quarter the Company recorded an additional charge of $0.4 million for the acceleration of options upon the separation of two executives as well as other charges for employee separations. In addition, the Company adjusted its restructuring charge as the result of receiving $0.4 million in additional proceeds from the sale of unused fixed assets.

 

8


ViroPharma Incorporated

(A Development Stage Company)

Notes to Consolidated Financial Statements

 

(6) Lease Costs

 

The Company leases an aggregate of 119,000 square feet in two facilities for its corporate and development activities under operating leases expiring in 2008 and 2017, respectively. During the third quarter of 2003, the Company determined that it would not utilize 30,000 square feet of leased space in the facility leased through 2017 and it recognized a non-cash charge of approximately $1.7 million in its general and administrative expenses relating to this space. This charge was an estimate of the present value of the loss the Company might incur over the remaining 13 years of the related lease and was net of assumed sublease income.

 

As a result of the Company’s restructuring in January 2004, it further reduced its space requirements and may record a non-cash charge in future periods as it reviews its provision for non-utilized space consistent with Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). Consistent with SFAS 146, the Company reviewed its provision for unused space and determined that no adjustment was necessary as of June 30, 2004. During July 2004, the Company moved all of its operations to the facility leased through 2017 and is currently seeking to sublease all planned unused space in both facilities to third parties. The Company cannot be certain that it will be able to sublease its planned unused space on favorable terms or that the Company will be able to sublease any or all of the unused space by the period it anticipates or at all. As of June 30, 2004, the Company had a $1.2 million liability related to this issue remaining on the consolidated balance sheet.

 

(7) Litigation

 

In March and May 2002, the Company and certain of its directors were named as defendants in purported class actions filed in the United States District Court for the Eastern District of Pennsylvania. In July 2002, these actions were consolidated into a single complaint that also named certain of its officers as defendants. The plaintiffs in these actions have alleged that certain statements by the Company about Picovir® were misleading. A judgment against the Company could materially exceed the coverage which may be available under the Company’s directors’ and officers’ liability insurance. The Company filed a motion to dismiss this action in August 2002. In April 2003, the court granted in part and denied in part the Company’s motion to dismiss the consolidated complaint.

 

In March 2004, the Company entered into an agreement in principle with plaintiffs’ counsel to settle this litigation. The parties subject to the litigation then entered into a stipulation and agreement of the settlement dated June 29, 2004. Under the terms of the settlement, the Company’s insurance carriers assumed the obligation to pay the settlement amount of $9.0 million from the Company’s insurance coverage. The settlement will therefore not result in the payment of any funds by the Company. On July 12, 2004, the Court issued an order granting preliminary approval of the settlement. However, the proposed settlement is still subject to final approval of the court. If the proposed settlement does not receive final approval by the Court, then the range of possible resolutions of these proceedings could include judgments against the Company or its directors or officers or settlements that could require substantial payments by the Company, which could have a material adverse impact on its financial position, results of operations and cash flows. To date no liability related to this matter has been reflected in the Company’s consolidated balance sheet as the proposed settlement is within the limits of the Company’s insurance coverage and will be paid directly by the Company’s insurers. These proceedings might require substantial attention of the Company’s management team and therefore divert time and attention from the Company’s business and operations.

 

9


IMPORTANT INFORMATION ABOUT FORWARD-LOOKING STATEMENTS

 

Our disclosure and analysis in this report contains some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate”, “estimate”, “expect”, “project”, “intend”, “plan”, “believe” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. These forward-looking statements include the statements in this report on Form 10-Q about:

 

  our plans to focus on later stage opportunities in order to accelerate our path toward becoming a profitable pharmaceutical company by generating revenues, and achieve profitability, sooner;

 

  our plans to build franchises in narrowly focused prescribing groups such as transplant, hepatology and gastroenterology;

 

  our plans to expand these franchises with the acquisition of additional products;

 

  the schedule for anticipated near term events in our CMV, HCV and intranasal pleconaril programs;

 

  our estimate of future direct and indirect expenses for 2004;

 

  our plans to sublease all unused office and lab space at the rates and/or timeframes that we have estimated, or at all; and

 

  our expectation that our available cash, cash equivalents and short-term investments at June 30, 2004 will be sufficient to fund our planned business operations and debt service requirements through at least the end of 2006.

 

Our actual results could differ materially from those results expressed in, or implied by, these forward-looking statements. There can be no assurance that:

 

  our plans to focus on later stage opportunities in order to accelerate our path toward becoming a profitable pharmaceutical company by generating revenues, and achieve profitability, sooner will be successful, or that we will ever be able to generate revenues from product sales and become a profitable pharmaceutical company;

 

  we will be successful in building franchises in narrowly focused prescribing groups such as transplant, hepatology and gastroenterology;

 

  we will be able to expand these franchises with the acquisition of additional products;

 

  we will, or will be able to, achieve the development milestones for our CMV, HCV and intranasal pleconaril programs during the timeframes described in this report, or at all;

 

  Schering-Plough will exercise its option to continue the development and commercialization of intranasal pleconaril;

 

  our actual direct and indirect expenses will be within the ranges that we estimate;

 

  we will be able to sublease all unused office and lab space at the rates and/or timeframes that we have estimated, or at all; or

 

  our available cash, cash equivalents and short-term investments at June 30, 2004 will be sufficient to fund our planned business operations and debt service requirements through at least the end of 2006.

 

We will face intense competition in acquiring products to expand our product portfolio. Many of the companies and institutions that we will compete with in acquiring products to expand our product portfolio have substantially greater capital resources, research and development staffs and facilities than we have, and substantially greater experience in conducting business development activities. We may not have sufficient resources to execute our plans, and our actual expenses over the period described in this report may vary depending on a variety of factors, including: the cost of acquiring new product opportunities as a result of business development efforts; the actual cost of conducting clinical trials; the outcome of clinical trials in our CMV and HCV programs, and our resulting right to receive or obligation to pay milestone payments under collaborations relating to those programs; Schering-Plough’s decision regarding its option to continue the development and commercialization of intranasal pleconaril; and the costs associated with ongoing litigation.

 

Conducting clinical trials for investigational pharmaceutical products is subject to risks and uncertainties. There can be no assurance that planned clinical trials can be initiated, or that planned or ongoing clinical trials can be successfully concluded or concluded in accordance with our anticipated schedule. We may need additional financing in order to acquire new products in connection with our plans as described in this report.

 

Our outstanding convertible subordinated notes may make it more difficult for us to raise additional financing and we may not be able to service our debt obligation. In addition, in the future we may not be able to maintain our listing on the Nasdaq Stock Market.

 

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These and other risks and uncertainties that could affect our actual results are discussed in greater detail in this report and in our other filings with the Securities and Exchange Commission. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance, or achievements. We do not assume responsibility for the accuracy and completeness of the forward-looking statements other than as required by applicable law. We do not undertake any duty to update after the date of this report any of the forward-looking statements in this report to conform them to actual results.

 

You should read this report on Form 10-Q in combination with the Management’s Discussion and Analysis of Financial Condition and Results of Operations, the description of our business and the discussion of our risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2003 and in our most recently filed registration statements on Forms S-3 and S-4.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Background

 

We are a development stage pharmaceutical company focused on the development and commercialization of products that address serious diseases treated by physician specialists and in hospital settings. Since commencing operations in December 1994, we have devoted substantially all of our resources to our product development programs, debt service, business development, sales and marketing activities and our former early stage research activities. We have generated no revenues from sales of our own products and have been dependent upon funding primarily from equity and debt financing. We have not been profitable from product sales since inception and have incurred a cumulative net loss of $279.6 million through June 30, 2004. Losses have resulted principally from costs incurred in research and development activities, write-off of acquired technology rights, general and administrative expenses, debt service and sales and marketing expenses. We expect to incur additional operating and net losses over the next several years.

 

Strategic Direction

 

In January 2004, we redefined our strategic direction to focus on development of later stage opportunities, to build specific franchises relating to our current development programs and to expand our product portfolio through the acquisition of complementary late stage or commercial product opportunities as a means to accelerate our path toward becoming a profitable pharmaceutical company.

 

We intend to build franchises within narrowly focused prescribing groups. Initially we will focus on the transplant, hepatology and gastroenterology areas, using our two core clinical programs in cytomegalovirus (CMV) infections related to hematopoietic stem cell (bone marrow) transplantation, and hepatitis C (HCV), as foundations for that effort. To build these franchises we intend to:

 

  focus on the development of our two current core clinical programs; and

 

  expand our product portfolio.

 

To expand our product portfolio, we plan to seek products for diseases treated by physician specialists and in hospital settings to complement the markets that we hope our CMV and HCV programs will serve. We are aggressively pursuing in-licensing agreements for products in a late stage of clinical development and products that are currently on the market but are under-promoted or not currently promoted.

 

We also intend to explore potential uses of our non-core assets to create additional value. This could include the out-license or sale of former product candidates (including intranasal pleconaril) and the sale of unused physical and other intellectual assets.

 

Strategic Risks and Uncertainties

 

We may not be successful in implementing our strategic direction. There are a variety of risks and uncertainties that we face in executing this strategy. For example, we will face intense competition in acquiring products to expand our product portfolio. Many of the companies and institutions that we will compete with in acquiring products to expand our product portfolio have substantially greater capital resources, research and development staffs and facilities than we have, and substantially greater experience in conducting business development activities.

 

We expect the cash, cash equivalents and short-term investments available at June 30, 2004 will be sufficient to fund our current and planned activities that are intended to implement our strategic direction, and debt service requirements, until at least the end of 2006. However, the results of our business development efforts could cause our actual results to significantly deviate from this estimate. We may need additional financing in order to acquire new products in connection with our plans as described in this report. We are currently exploring alternatives to either reduce the outstanding principal amount or to restructure our outstanding convertible subordinated notes. Even if we are successful in such efforts, our convertible notes may make it more difficult for us to raise additional financing. We may not have sufficient resources to

 

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execute our plans, and our actual expenses over the periods described in this report may vary depending on a variety of factors, including:

 

  the cost of acquiring new product opportunities as a result of our business development efforts;

 

  the actual cost of conducting clinical trials;

 

  the outcome of clinical trials in our CMV and HCV programs;

 

  Schering-Plough’s decision regarding its option to continue the development and commercialization of intranasal pleconaril;

 

  our resulting right to receive or obligation to pay milestone payments under agreements relating to our CMV, HCV and common cold programs;

 

  our ability to sublease unused office and lab space;

 

  whether we are able to maintain our listing on the Nasdaq Stock Market; and

 

  the costs associated with ongoing litigation.

 

Our ability to achieve profitability is dependent on developing and obtaining regulatory approvals for our product candidates, successfully commercializing such product candidates (which may include entering into collaborative agreements for product development and commercialization), acquiring products through our business development efforts, and securing contract manufacturing services and distribution and logistics services. We will need to raise substantial additional funds to continue our business activities and fund our debt service obligations beyond 2006.

 

Business Developments

 

Research and Development programs

 

We have two core clinical development programs: (1) CMV, with an initial focus on CMV infections in recipients of hematopoietic stem cell (e.g., bone marrow) transplants, and (2) HCV. These programs are within the transplant, hepatology and gastroenterology areas and are at the center of our strategic focus. The following chart generally describes our core clinical development programs:

 

Core Program / Disease

Indication


 

Product Candidate


 

Development Status


 

ViroPharma
Commercialization Rights


CMV   Maribavir   Phase 2   Worldwide, other than Japan
HCV   HCV-086   Phase 1b - proof of concept   Co-promotion rights in the United States and Canada with Wyeth
HCV   Follow On   Preclinical   Co-promotion rights in the United States and Canada with Wyeth

 

CMV program – In the first quarter of 2004, we initiated two phase 1 clinical trials with maribavir to evaluate the potential for drug interactions and to evaluate the pharmacokinetics of maribavir in subjects with renal impairment, respectively. We initiated a dose-ranging phase 2 clinical trial with maribavir for the prevention of CMV infections in allogeneic stem cell transplant patients in July 2004. We expect to begin dosing patients in this study in August 2004, and we expect to have the results of our phase 2 clinical trial in early 2005. If the data is supportive, we plan to begin phase 3 clinical trials as early as mid-2005.

 

HCV program – In the first quarter of 2004, we and Wyeth initiated a phase 1 clinical trial with HCV-086 in healthy subjects. In June 2004, we initiated a phase 1b proof of concept dose ranging clinical trial with HCV-086 in hepatitis C infected patients with the objectives of collecting continued safety data and antiviral activity data. We expect to have the results of the phase 1b proof of concept trial in the fourth quarter of 2004. If the data from these studies are supportive, we plan to begin phase 2 clinical trials with HCV-086 in mid-2005.

 

We also have non-core research and development programs that we have either discontinued or are attempting to outlicense. The following chart sets forth our non-core research and development programs that contributed to our financial results set forth in this report, and their status:

 

Non-Core Program / Disease Indication


 

Product Candidate


 

Status


Common Cold   Pleconaril - Intranasal formulation   Proof of concept studies / subject to an option granted to Schering-Plough Corporation
Common Cold   Pleconaril - Oral formulation   Inactive
CEMA   Pleconaril - Oral formulation   Inactive
Discovery Research   Various   Inactive

 

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Common Cold program – In the first half of 2004, we were conducting a series of clinical studies and data analyses for our common cold program. These studies were designed to evaluate the antiviral activity, safety and other performance characteristics of the new intranasal pleconaril formulation. Schering-Plough will determine whether it will exercise its option to enter into a full license agreement with us under which Schering-Plough would assume responsibility for all future development and commercialization of intranasal pleconaril in the United States and Canada and buy all remaining bulk drug substance from us.

 

Contractual agreements

 

In November 2003, we entered into an agreement granting Schering-Plough an option to license our intranasal formulation of the antiviral compound pleconaril for the treatment of the common cold in the United States and Canada. Schering-Plough paid us an upfront option fee of $3 million, and we conducted a series of clinical studies to evaluate the antiviral activity, safety and other performance characteristics of the new intranasal pleconaril formulation. After assessing the product’s performance in the characterization studies, Schering-Plough has the option to enter into a full license agreement with us under which Schering-Plough would assume responsibility for all future development and commercialization of intranasal pleconaril in the United States and Canada. If Schering-Plough chooses to exercise its option, we expect to receive an initial license fee of $10 million and Schering-Plough will purchase our existing bulk drug substance for an additional pre-determined fee. We would also be eligible to receive additional milestone payments upon achievement of certain targeted events as well as royalties on Schering-Plough’s sales of intranasal pleconaril in the licensed territory. There is no assurance that Schering-Plough will exercise its option to continue with the development and commercialization of an intranasal formulation of pleconaril.

 

Also in November 2003, we further amended our agreement with Sanofi-Synthelabo in connection with our entry into the option agreement with Schering-Plough in respect of intranasal pleconaril. If Schering-Plough exercises its option to continue the development and commercialization of pleconaril, the November 2003 amendment, among other things, reduces the royalty rate applicable to future product sales, if any, used to calculate royalties payable to Sanofi-Synthelabo.

 

In August 2003, we announced the acquisition of worldwide rights (excluding Japan) from GlaxoSmithKline (GSK) to an antiviral compound (maribavir, or VP 41263) that is an inhibitor of cytomegalovirus (CMV). Maribavir is a benzimidazole compound that was originally intended as a treatment for CMV retinitis, and phase 1 data from studies previously conducted by GSK demonstrated antiviral effect and a favorable safety profile. Under the terms of the agreement, we have exclusive worldwide rights (excluding Japan) to develop and commercialize maribavir for the prevention and treatment of cytomegalovirus infections related to transplant (including solid organ and hematopoietic stem cell transplantation), congenital transmission, and in patients with HIV infection. We plan to focus initially on patients who have undergone allogeneic stem cell (e.g., bone marrow) transplantation. We paid GSK a $3.5 million licensing fee upon entering into the agreement and may pay additional milestones based upon the successful outcome of certain clinical development and regulatory events. We also may pay royalties to GSK and its licensor on product sales, if any, in the United States and the rest of the world (excluding Japan). We initiated a phase 2 clinical trial in July 2004. The $3.5 million up-front licensing fee was recorded as an acquisition of technology rights expense during 2003, as the underlying technology has not reached technological feasibility and has no alternative uses.

 

In June 2003, we amended our HCV collaboration agreement with Wyeth to, among other things, focus the parties’ screening activity on one target, to allocate more of the collaboration’s pre-development efforts to ViroPharma (subject to our cost sharing arrangement with Wyeth for this work), and to clarify certain of the reconciliation and reimbursement provisions of the collaboration agreement. In addition, under the amended agreement both companies are permitted to work outside the collaboration on screening against targets other than the target being addressed together under the collaboration. In connection with our restructuring in January 2004, we and Wyeth agreed to cease screening compounds against HCV under our collaboration.

 

Restructuring

 

In January 2004, we announced that we began to implement our strategic decision to focus on later stage opportunities. As part of this process, we substantially discontinued our early stage activities, including discovery research and most internal preclinical development activities. We also made reductions in clinical development and general and administrative personnel. We are completing certain discrete efforts related to our early stage programs in order to finalize the transition. As of June 2004, we have reduced our workforce by approximately 70% overall from December 31, 2003 levels. Included in the operating expenses for the six months ended June 30, 2004 are approximately $9.3 million of costs

 

13


related to this restructuring, including employee severance and asset impairment costs. Our discontinuation of our early stage activities also required us to wind down our biodefense program. We also ceased efforts to develop pleconaril for the treatment of serious or life-threatening diseases as part of this restructuring.

 

Liquidity

 

We expect that our near term source of revenue will arise from milestone and license fee payments that we may receive from Wyeth and Schering-Plough if we achieve agreed upon events under our agreements with each of these companies, as well as from the sale of various non-core assets and programs. However, there are no assurances that we can achieve the events that require payments to us under the Wyeth and Schering-Plough arrangements, or sell any non-core assets and programs.

 

Overall Cash Flows

 

Through June 30, 2004, we used approximately $264.2 million of cash in operating activities. We invest our cash in short-term investments. Through June 30, 2004, we have used approximately $109.6 million in investing activities, including $94.0 million in short-term investments and $15.6 million in equipment purchases and new construction. Through June 30, 2004, we have financed our operations primarily through private and public offerings of common stock, a convertible subordinated notes offering, private placements of redeemable preferred stock, two bank loans and equipment lease lines totaling approximately $381.6 million, net of approximately $18.5 million used to repurchase $50.1 million in principal amount of our 6% convertible subordinated notes due 2007, and 473,054 shares of our common stock issued in exchange for the surrender of $2.0 million in principal amount of such notes.

 

During the six months ended June 30, 2004, we used approximately $21.0 million of cash in operating activities. We invest our cash in short-term investments. For the six months ended June 30, 2004, cash provided by investing activities was approximately $15.5 million, primarily from short-term investments, net of asset sales of $1.4 million. For the six months ended June 30, 2004, we have received approximately $0.3 million of cash from financing activities, all of which relates to cash received from employees exercising stock options. At June 30, 2004 we had cash, cash equivalents and short-term investments of approximately $101.6 million. Also, at June 30, 2004 the annualized weighted average nominal interest rate on our short-term investments was approximately 1.0%.

 

Operating Cash Outflows

 

The cash flows we have used in operations historically have been applied to research and development activities, marketing and business development efforts, general and administrative expenses, and servicing our debt. The process of bringing drugs from the preclinical research and development stage through phase 1, phase 2, and phase 3 clinical trials and FDA approval is a time consuming and expensive process. Because our product candidates are currently in the preclinical and clinical stages of development, there are a variety of events that could occur during the development process that will dictate the course we must take with our drug development efforts and the cost of these efforts. As a result, we cannot reasonably estimate the costs that we will incur through the commercialization of any product candidate. Nonetheless, we expect that the most significant uses of our near-term operating cash outflows are as described below.

 

For each of our research and development programs, we incur both direct and indirect expenses. Direct expenses include third party costs related to these programs such as contract research, consulting, cost sharing payments or receipts, and preclinical and clinical development costs. Indirect expenses include personnel, facility, and other overhead costs.

 

Direct expenses - Core Development Programs

 

CMV program – From the date we in-licensed maribavir through June 30, 2004, we have incurred $4.7 million of direct costs in connection with this program, including the acquisition fee of $3.5 million paid to GSK for the rights to maribavir.

 

During 2004, we expect to spend between $6.0 million and $9.0 million in direct expenses for research and development activities for the development of maribavir, of which $1.2 million was spent during the six month period ended June 30, 2004. These activities include phase 1 studies with maribavir, initiated in January 2004, and a phase 2 study that we initiated during July 2004. The results of these studies will significantly impact the timing and the amount of expenses, including potential milestone payments to GSK, that we will incur related to this program in future years. In addition, discussions with the FDA regarding these future studies may impact the timing, nature and cost of future planned studies. We are solely responsible for the cost of developing our CMV product candidate.

 

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Should we achieve certain product development events, we are obligated to make certain milestone payments to GlaxoSmithKline, the licensor of maribavir.

 

HCV program – From the date that we commenced predevelopment activities for compounds in this program that are currently active through June 30, 2004, we have incurred $0.5 million in direct expenses for the predevelopment and development activities relating to such compounds. These costs are net of contractual cost sharing arrangements between Wyeth and us. Wyeth pays a substantial portion of the collaboration’s predevelopment and development expenses.

 

During 2004, we expect to spend between $1.0 million and $3.0 million in direct expenses for predevelopment and development activities, of which $0.3 million was spent during the six month period ended June 30, 2004. The planned activities include a phase 1 clinical trial for our lead product candidate, initiated in February 2004, a phase 1b proof of concept clinical trial, initiated in June 2004, and other predevelopment activities. The results of the planned studies, along with other predevelopment activities performed during the year, will significantly impact the timing and amount of expenses we will incur related to this program in future years.

 

Should we achieve certain product development events, Wyeth is required to pay us certain cash milestones and to purchase, in cash, our common stock pursuant to terms of our collaboration agreement. Based on the activities planned by Wyeth and us, there is the potential to achieve these milestones in 2004 or 2005. However, there can be no assurances that we will be successful in achieving these milestones during this timeframe, or at all.

 

Direct Expenses - Non-Core Development Programs (Active)

 

Common Cold – From the date that we commenced predevelopment activities for the intranasal formulation of pleconaril through June 30, 2004, we have incurred $1.8 million in direct expenses. We do not expect to incur any additional direct expenses in connection with predevelopment activities of this program. In the fourth quarter of 2003, we received $3 million under our option agreement with Schering-Plough, which we are using to fund these activities. In addition, we have billed Schering-Plough for specific activities approved by them under the agreement.

 

Schering-Plough is reviewing the data from our intranasal studies. It has the option to enter into a license agreement with us for the development and commercialization of the intranasal formulation of pleconaril. Should Schering-Plough choose to enter into a license agreement with us, Schering-Plough will be solely responsible for the future development and commercialization of pleconaril, and we could receive an upfront payment of $10 million in 2004, as well as an additional pre-determined fee for our existing bulk drug substance. In addition, should Schering-Plough be successful in commercializing the intranasal formulation of pleconaril, we would receive royalties and milestones related to future product sales, if any. However, there can be no assurance that Schering-Plough will exercise its option to continue the development and commercialization of intranasal pleconaril.

 

Indirect development expenses

 

During the first six months of 2004, we incurred restructuring costs of approximately $3.6 million that are related to our development and discovery operations. In addition, we spent $1.6 million on our discovery operations during the first quarter of 2004. We do not expect to incur additional material costs related to our former discovery operations in 2004.

 

During 2004, we expect to spend up to $7.5 million in indirect expenses in connection with our predevelopment and development programs, of which $5.4 million was spent in the six month period ended June 30, 2004.

 

Business development activities

 

Through June 30, 2004, we have not incurred material costs in connection with the business development activities other than the acquisition fee of $3.5 million paid to GSK in 2003 for the rights to maribavir (VP 41263).

 

During 2004, we intend to seek new opportunities to expand our pipeline. The costs associated with acquiring any particular product candidate can vary substantially based upon market size of the product, the commercial effort required for the product, the product’s current stage of development, and actual and potential generic and non-generic competition for the product, among other factors. Due to the variability of the cost of acquiring a product candidate, it is not feasible to predict what our actual acquisition costs would be, however, the costs could be substantial.

 

General and administrative activities

 

During the six months ended June 30, 2004, we have incurred restructuring costs of approximately $5.7 million that are related to our general and administrative activities.

 

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We expect to spend between $7.0 and $9.0 million on general and administrative activities in 2004 on activities not related to the restructuring of the company of which $4.9 million was spent as of June 30, 2004. This includes costs related to unused office and research and development space that we are actively seeking to sub-lease.

 

Restructuring and transition activities

 

All restructuring and transition costs are properly reflected in either research and development or general and administrative expense in our consolidated statement of operations. During the first six months of 2004, we incurred approximately $9.3 million in costs related to our January 2004 restructuring. Of these costs, $4.5 million relates to severance payments and stock option modification costs that have been or will be paid in 2004 and $4.8 million relates to asset impairments. In addition, we expect to have transition related costs between $1.0 million and $1.5 million during 2004, most of which is compensation related expenses and was spent as of June 30, 2004.

 

Debt service requirements

 

Annual interest payments on our outstanding $127.9 million 6% convertible subordinated notes due 2007 total $7.7 million.

 

Operating Cash Inflows

 

We cannot reasonably estimate the period in which we will begin to receive material net cash inflows from our product candidates. Cash inflows from development-stage products are dependent on several factors, including the achievement of milestones and regulatory approvals. We may not receive milestone payments from any existing or future collaborations if a development-stage product fails to meet technical or performance targets or fails to obtain the required regulatory approvals. Further, our revenues from collaborations will be affected by efforts of our collaborative partners. Even if we achieve technical success in developing drug candidates, our collaborative partners may not devote the resources necessary to complete development and commence marketing of these products, when and if approved, or they may not successfully market these products.

 

Contractual Obligations

 

Future contractual obligations and commercial commitments at June 30, 2004, are as follows:

 

    

Payments due by period

(in millions)


Contractual Obligations


   Total

   Less than
1 year


   2-3
years


   4-5
years


   More than
5 years


Long-term debt

   $ 127.9    $ 0.0    $ 127.9    $ 0.0    $ 0.0

Capital lease obligations

     0.0      0.0      0.0      0.0      0.0

Operating leases

     14.0      1.8      3.5      3.0      5.7

Purchase obligations

     0.0      0.0      0.0      0.0      0.0

Other long-term liabilities reflected on the registrant’s balance sheet under GAAP

     0.0      0.0      0.0      0.0      0.0
    

  

  

  

  

Total

   $ 141.9    $ 1.8    $ 131.4    $ 3.0    $ 5.7
    

  

  

  

  

 

We lease an aggregate of 119,000 square feet in two facilities for our corporate and development activities under operating leases expiring in 2008 and 2017, respectively. During the third quarter of 2003, we determined that we would not utilize 30,000 square feet of leased space in the facility leased through 2017 and we recognized a non-cash charge of approximately $1.7 million in our general and administrative expenses relating to this space. This charge was an estimate of the present value of the loss we might incur over the remaining 13 years of the related lease and was net of assumed sublease income.

 

As a result of our restructuring in January 2004, we further reduced our space requirements and may record a non-cash charge in future periods as we review our provision for non-utilized space consistent with Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). During July 2004, we moved to our facility leased through 2017 and are currently seeking to sublease all planned unused space in both facilities to third parties. We cannot be certain that we will be able to sublease our planned unused space on favorable terms or that we will be able to sublease any or all of the unused space by the period we anticipate or at all. As of June 30, 2004, we had a $1.2 million liability related to these leases remaining on our consolidated balance sheet.

 

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Capital Resources

 

As a result of our restructuring in January 2004, particularly the discontinuation of our early stage activities, we expect our recurring monthly expenses and operating losses in 2004 to be lower than we experienced during 2003, and we expect the cash, cash equivalents and short-term investments available at June 30, 2004 will be sufficient to fund our current business operations and debt service requirements until at least the end of 2006. We expect that we will need to raise substantial additional funds to continue our business activities and fund our debt service and other obligations beyond 2006. To obtain this financing, we intend to access the public or private equity or debt markets or enter into additional arrangements with corporate collaborators to whom we may issue equity or debt securities. Our outstanding convertible subordinated notes may make it more difficult for us to raise additional financing. In addition, in the future, we may not be able to maintain our listing on the Nasdaq Stock Market, which may also make it more difficult to raise additional financing.

 

Equity financing

 

We have an effective Form S-3 universal shelf registration statement filed with the Securities and Exchange Commission for the potential additional issuance of up to approximately $212.0 million of our securities. The registration statement provides us with the flexibility to determine the type of security we choose to sell, including common stock, preferred stock, warrants and debt securities, as well as the ability to time such sales when market conditions are favorable.

 

If we raise additional capital by issuing equity securities, the terms and prices for these financings may be much more favorable to the new investors than the terms obtained by our existing stockholders. These financings also may significantly dilute the ownership of existing stockholders.

 

Additional equity financing, however, may not be available on acceptable terms from any source as a result of, among other factors, our outstanding 6% Convertible Subordinated Notes due March 2007, our inability to achieve regulatory approval of any of our product candidates, our inability to generate revenue through our existing collaborative agreements, the existence of pending litigation involving allegations of securities fraud, and our inability to file, prosecute, defend and enforce any patent claim and or other intellectual property rights. If sufficient additional financing is not available, we may need to delay, reduce or eliminate current development programs, or reduce or eliminate other aspects of our business.

 

Additionally, Wyeth is required to purchase our common stock at the time of successful completion of certain product development events pursuant to the terms of our collaboration agreement. However, in the event we are not able to successfully achieve the product development events, this additional financing would not be available to us.

 

Debt Financing

 

In June 2004, we terminated our exchange offer of our proposed 6% Convertible Senior Plus Cash Notes due 2009 for up to all of the $127.9 million aggregate principal amount of our currently outstanding 6% Convertible Subordinated Notes due March 2007. In the proposed exchange offer, we would have offered up to $99.1 million aggregate principal amount of new 6% Convertible Senior Plus Cash Notes due 2009 for up to all of the $127.9 million aggregate principal amount of our currently outstanding 6% Convertible Subordinated Notes due March 2007. We also withdrew our registration statement filed in connection with our offer to the public of an additional $25 million of the Senior Plus Cash Notes for cash and will not proceed with the offer of these securities.

 

Through June 30, 2004 we have reduced the principal amount of our existing notes by $52.1 million and the outstanding balance of our existing notes at June 30, 2004 is $127.9 million. We have purchased an aggregate of $50.1 million in principal amount of our convertible subordinated notes for approximately $18.5 million in cash through June 30, 2004. In October and November 2003, we entered into agreements with a third party under which we issued a total of 473,054 shares of our common stock in exchange for the surrender of $2.0 million of face amount of our existing notes held by such third party. We are currently exploring alternatives to either reduce the outstanding principal amount or to restructure our convertible subordinated notes. Even if we are successful in such efforts, our outstanding convertible notes may make it more difficult for us to raise additional financing.

 

Critical Accounting Policies

 

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and contingent assets and liabilities. These estimates and assumptions are affected by the application of our accounting policies. Critical policies and practices are both most important to the portrayal of a company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

 

17


Our summary of significant accounting policies is described in Note 2 to our consolidated financial statements included in Item 8 of our most recent Annual Report on Form 10-K. Due to the nature of our business and our stage of development, we do not currently face the many complex or subjective judgments that face companies that are further along in their life cycle that may be necessary in applying accounting policies. However, we consider the following policies and estimates to be the most critical in understanding the more complex judgments that are involved in preparing our consolidated financial statements and the that could impact our results of operations, financial position, and cash flows:

 

  Stock Based Employee Compensation - We apply Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations in accounting for all stock-based employee compensation. We have elected to adopt only the disclosure provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement 123.” Had we applied SFAS 123 our net loss for the three months ended June 30, 2003 and 2004 would have increased by approximately $2.0 million and $0.8 million, respectively, and for the six months ended June 30, 2003 and 2004 would have increased by $4.0 million and $1.4 million, respectively.

 

  Revenue Recognition - Our revenue from collaborative agreements consists of up-front fees, and milestone payments. We recognize revenues from these agreements consistent with Staff Accounting Bulletin No. 104, “Revenue Recognition” (SAB 104), issued by the Securities and Exchange Commission. Non-refundable upfront fees are deferred and recognized as revenue over the related performance period. We estimate our performance period based on the specific terms of each collaborative agreement, but the actual performance period may vary. We adjust the performance periods based on available facts and circumstances. Contract milestone payments related to the achievement of substantive steps or regulatory events in the development process are recognized as revenues upon the completion of the milestone event or requirement.

 

  Exit or Disposal Costs - In 2003 and the six months ended June 30, 2004, we had costs for which we applied Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). These costs related to exiting activities for which there was significant subjectivity and judgment and their impact on our financial condition was material.

 

  During 2003, we recorded a $1.7 million charge related to an operating lease for office space which we did not expect to utilize in the foreseeable future. The charge was an estimate of the present value of the loss we would incur over the 13 years remaining on the lease, net of assumed sublease income. Management used assumptions in calculating this estimate, including operating and maintenance costs, lease payments and sublease income derived from this office space. Should we negotiate higher than expected sublease rental income agreements, reach a settlement with our lessors to be released from our existing obligations, or should our space requirements change, as described below, we could revise our estimated provision which would impact our results of future operations. Should future lease, maintenance or other costs related to these facilities exceed our estimates, we could incur additional expenses in future periods.

 

  In June of 2004, as a result of the our restructuring in January 2004, we further reduced our space requirements. Consistent with SFAS 146, we reviewed our provision for unused space and determined that no adjustment was necessary as of June 30, 2004. We are currently seeking to sublease all planned unused space to third parties. We cannot be certain that we will be able to sublease our planned unused space on favorable terms or at all.

 

  During the six months ended June 30, 2004, we recorded a $4.5 million charge related to severance and stock option modifications that has been or will be paid to employees as part of our 2004 restructuring of the company. The costs were accrued consistent with the provisions of SFAS 146 and we expect them to be paid by the third quarter of 2004.

 

As we progress in our development and move closer to product approval and commercial operations, we may face additional issues that will require increased levels of management estimation and complex judgments.

 

18


Results of Operations

 

Quarters ended June 30, 2004 and 2003

 

Overview

 

For the quarter ended June 30, 2004, we reported a net loss of $5.4 million compared to a net loss of $7.2 million for the same period in 2003. Net loss per share for the quarter ended June 30, 2004 was $0.20 per share, basic and diluted, compared to net loss of $0.28 per share, basic and diluted, for the same period in 2003. The decrease in net loss of $1.8 million from the second quarter of 2003 to the same period in 2004 was due primarily to reduction in headcount and operational costs resulting from our restructuring during January 2004, and an increase in revenues recognized during the quarter ended June 30, 2004.

 

Revenues

 

Revenues were approximately $1.8 million for the quarter ended June 30, 2004, compared to approximately $0.1 million during the same period in 2003. During the quarter ended June 30, 2004, we recognized revenue of approximately $1.5 million from advance payments received and amounts agreed to be paid under our option agreement with Schering-Plough. In both periods we recognized similar amounts of revenue related to advance payments from Wyeth under our collaboration agreement.

 

Research and Development Expenses

 

Research and development expenses decreased approximately $1.5 million to $3.0 million in the second quarter of 2004 from $4.5 million in the second quarter of 2003. Our research and development expenses were divided between our research and development programs in the following manner (in thousands):

 

     For the three months ended June 30,

 
     2003

    2004

 

Direct - Core programs

                

CMV

   $ —       $ 824  

HCV

     (627 )     208  

Direct - Non-core programs

                

Common cold

     137       (224 )

CEMA

     277       —    

Indirect

                

Development

     2,657       1,744  

Discovery research

     2,061       495  
    


 


Total

   $ 4,505     $ 3,047  
    


 


 

Core Programs

 

In the quarter ended June 30, 2004, we incurred $0.8 million in direct expenses related to our CMV program. In the first quarter of 2004, we initiated two phase 1 clinical trials with maribavir to evaluate the potential for drug interactions and to evaluate the pharmacokinetics of maribavir in subjects with renal impairment, respectively. We had no expenses under this program in the second quarter of 2003, as we did not acquire the rights for its development and commercialization until August 2003.

 

During the second quarter of 2004, we incurred $0.2 million of direct costs related to development activities of our HCV program, which increased $0.8 million from the second quarter of 2003. These costs are net of payments from or to Wyeth made in accordance with our cost-sharing arrangement. During the second quarter of 2004, the primary drivers of these costs were phase 1 clinical trials for our current lead product candidate and predevelopment activities on a follow-on compound to our lead product candidate. During 2003, the primary drivers of costs were phase 1 clinical trials for our previous lead product candidate and predevelopment activities on follow-on compounds, one of which is the product candidate currently in phase 1 clinical trials, and also included a $0.7 million credit related to the 2003 amendment of our agreement with Wyeth.

 

Non Core Programs

 

In the quarter ended June 30, 2004, we recorded a net credit of $0.2 million related to our common cold program compared to $0.1 million in costs during the same period in 2003. In the second quarter of 2004, we incurred $0.1 million of direct expenses related to the intranasal formulation of pleconaril, our only product candidate in this program and recorded a $0.3 million credit from a revision of the estimated costs accrued for research contracts related to the oral formulation of pleconaril. We began development of the intranasal formulation in mid-2003 and incurred $0.1 million of direct expenses on its development in the second quarter of 2003. During the second quarter of 2003, we incurred $0.3 million direct expenses related to clinical and regulatory activities related to our efforts to pursue the development of pleconaril for the treatment of serious and life-threatening diseases caused by enteroviral infections (CEMA). We ceased these development activities in connection with our January 2004 restructuring and have no comparable 2004 direct costs.

 

19


Indirect Expenses

 

In the quarter ended June 30, 2004, we incurred $1.7 million of indirect expenses related to our development activities, which decreased $1.0 million from $2.7 million in the second quarter of 2003. This decrease is due primarily to cost savings realized as the result of our restructuring in January 2004. Included in the second quarter 2004 indirect costs is a $0.2 million charge for stock option modifications and payroll tax costs related to the January 2004 restructuring.

 

In the quarter ended June 30, 2004, we incurred $0.5 million of indirect expenses related to our discovery research activities which decreased from $2.1 million in the second quarter of 2003. We exited our discovery research activities in January 2004.

 

General and administrative expenses

 

General and administrative expenses for the quarter ended June 30, 2004 of approximately $2.3 million increased $0.7 million from $1.6 million in the same period in 2003. Included in the second quarter results are $0.7 million of costs related to our terminated bond offering, an increase in expenses of $0.2 million in expenses related to business development efforts undertaken during the second quarter of 2004, and a $0.2 million credit related to our January 2004 restructuring from revisions to estimates of severance and stock option modification costs and additional proceeds received from the sale of unused fixed assets.

 

Interest and other expenses (gains)

 

Interest income for the quarter ended June 30, 2004 of $0.3 million decreased $0.5 million from interest income of $0.8 million during the same period in the prior year. This decrease is due to lower invested balances. Interest expense for the quarter ended June 30, 2004 of $2.1 million remained relatively unchanged from the same period in 2003.

 

Six months ended June 30, 2004 and 2003

 

Overview

 

For the six months ended June 30, 2004, we reported a net loss of $22.0 million compared to a net loss of $14.1 million for the same period in 2003. Net loss per share for the six months ended June 30, 2004 was $0.83 per share, basic and diluted, compared to net loss of $0.55 per share, basic and diluted, for the same period in 2003. The increase in net loss of $7.9 million from the six months ended June 30, 2003 to the same period in 2004 was due primarily to a $9.3 million charge incurred in 2004 relating to the severance and asset impairment costs from our January 2004 restructuring. During the first quarter of 2003, we purchased $5.0 million of face value of our outstanding convertible notes for $2.1 million, resulting in a gain of $2.8 million after the write-off of related debt issue costs. There were no similar debt repurchases during the first six months of 2004. The remaining $3.0 million of net decrease in the loss relates to the operational revenues and expenses explained below.

 

Revenues

 

Revenues were approximately $3.5 million for the six months ended June 30, 2004, compared to approximately $0.3 million during the same period in 2003. During 2004, we recognized revenue of approximately $3.1 million from advance payments received and amounts agreed to be paid under our option agreement with Schering-Plough. In both periods we recognized similar amounts of revenue related to advance payments from Wyeth under our collaboration agreement.

 

20


Research and Development Expenses

 

Research and development expenses increased approximately $0.8 million to $11.4 million in the six months ended June 30, 2004 from $10.6 million in the same period of 2003. Our research and development expenses were divided between our research and development programs in the following manner (in thousands):

 

     For the six months ended June 30,

     2003

    2004

Direct - Core programs

              

CMV

   $ —       $ 1,231

HCV

     (397 )     327

Direct - Non-core programs

              

Common cold

     120       808

CEMA

     535       —  

Indirect

              

Development

     5,178       5,588

Discovery research

     5,157       3,459
    


 

Total

   $ 10,593     $ 11,413
    


 

 

Core Programs

 

In the six months ended June 30, 2004, we incurred $1.2 million in direct expenses related to our CMV program. In the first six months of 2004, we initiated two phase 1 clinical trials with maribavir to evaluate the potential for drug interactions and to evaluate the pharmacokinetics of maribavir in subjects with renal impairment, respectively. We had no expenses under this program in the first six months of 2003, as we did not acquire the rights for its development and commercialization until August 2003.

 

During the six months ended June 30, 2004, we incurred $0.3 million of direct costs related to development activities of our HCV program, which increased $0.7 million from the same period in 2003. These costs are net of payments from Wyeth made in accordance with our cost-sharing arrangement. During 2004, the primary drivers of these costs were phase 1 clinical trials for our current lead product candidate and predevelopment activities on a follow-on compound to our lead product candidate. During the six months ended June 30, 2003, the primary drivers of costs were phase 1 clinical trials for our previous lead product candidate and predevelopment activities on follow-on compounds, one of which is the product candidate currently in phase 1 clinical trials and also included a $0.7 million credit related to 2003 amendment of our agreement with Wyeth.

 

Non Core Programs

 

In the six months ended June 30, 2004, we incurred $0.8 million in costs related to our common cold program compared to $0.1 million in costs during the same period in 2003. In the six months ended June 30, 2004, all non-core program direct expenses are related to the intranasal formulation of pleconaril, our only active product candidate in our non-core programs. Included in the cost is a $0.3 million credit from a revision of the estimated costs accrued for the oral formulation of pleconaril. We began development of the intranasal formulation in mid-2003 and incurred $0.1 million of direct expenses on its development in the second quarter of 2003. During the six months ended June 30, 2003, we incurred $0.5 million of direct expenses related to clinical and regulatory activities related to our efforts to pursue the development of pleconaril for the treatment of serious and life-threatening diseases caused by enteroviral infections (CEMA). We ceased these development activities in connection with our January 2004 restructuring and have no comparable 2004 direct costs.

 

Indirect Expenses

 

In the six months ended June 30, 2004, we incurred $5.6 million of indirect expenses related to our development activities, which increased $0.4 million from $5.2 million in the same period of 2003. Included in the costs recorded in 2004 are $1.7 million in severance costs from our January 2004 restructuring.

 

In the six months ended June 30, 2004, we incurred $3.5 million of indirect expenses related to our discovery research activities, which decreased from $5.2 million in the same period of 2003. We exited our discovery research activities in January 2004. Included in the 2004 indirect costs is a $1.9 million charge for severance and related costs of the January 2004 restructuring.

 

General and administrative expenses

 

General and administrative expenses for the six months ended June 30, 2004 of approximately $10.6 million increased $7.1 million from $3.5 million in the same period in 2003. This increase was primarily due to $5.7 million in severance stock option modification costs and asset impairment costs that were the result of the January 2004 restructuring, $0.6 million in costs related to our terminated bond restructuring, an increase in expenses of $0.3 million related to business development efforts undertaken during 2004, and $0.4 million in increased public company and other expenses.

 

21


Interest and other expenses (gains)

 

Interest income for the six months ended June 30, 2004 of $0.6 million decreased $0.5 million from interest income of $1.1 million during the same period in the prior year. This is due to lower invested balances. Interest expense for the six months ended June 30, 2004 of $4.2 million remained relatively unchanged when compared to the same period in 2003.

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

Our holdings of financial instruments are comprised of a mix of U.S. corporate debt, government securities and commercial paper. All such instruments are classified as securities available for sale. Our debt security portfolio represents funds held temporarily pending use in our business and operations. We manage these funds accordingly. Our primary investment objective is the preservation of principal, while at the same time maximizing the generation of investment income. We seek reasonable assuredness of the safety of principal and market liquidity by investing in cash equivalents (such as Treasury bills and money market funds) and fixed income securities (such as U.S. government and agency securities, municipal securities, taxable municipals, and corporate notes) while at the same time seeking to achieve a favorable rate of return. Our market risk exposure consists principally of exposure to changes in interest rates. Our holdings are also exposed to the risks of changes in the credit quality of issuers. Historically, we have typically invested in financial instruments with maturities of less than one year. The carrying amount and the annualized weighted average nominal interest rate of our investment portfolio at June 30, 2004 was approximately $101.6 million and approximately 1.0%, respectively.

 

At June 30, 2004, we had outstanding $127.9 million of 6% convertible subordinated notes due March 2007. The notes are convertible into shares of our common stock at a price of $109 per share, subject to certain adjustments. The notes bear interest at a rate of 6% per annum, payable semi-annually in arrears, and can be redeemed by us, at certain premiums over the principal amount. At July 30, 2004, the market value of our convertible subordinated notes was approximately $70.3 million, based on quoted market prices. The fair value of our convertible subordinated notes is dependant upon, among other factors, the fair value of our common stock and prevailing market interest rates.

 

ITEM 4. Controls and Procedures

 

(a) An evaluation was performed under the supervision and with the participation of the Company’s management, including its Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2004. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported as specified in Securities and Exchange Commission rules and forms.

 

(b) There were no significant changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such controls that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

22


PART II. - OTHER INFORMATION

 

 

ITEM 1. Legal Proceedings

 

In March and May 2002, we and certain of our directors were named as defendants in purported class actions filed in the United States District Court for the Eastern District of Pennsylvania. In July 2002, these actions were consolidated into a single complaint, which also named certain of our officers as defendants. The plaintiffs in these actions have alleged that certain statements by us about Picovir® were misleading. A judgment against us could materially exceed the coverage which may be available under our directors’ and officers’ liability insurance. We filed a motion to dismiss this action in August 2002. In April 2003, the court granted in part and denied in part our motion to dismiss the consolidated complaint.

 

In March 2004, we entered into an agreement in principle with plaintiffs’ counsel to settle this litigation. The parties to the litigation then entered into a stipulation and agreement of the settlement dated June 29, 2004. Under the terms of the settlement, our insurance carriers assumed the obligation to pay the settlement amount of $9 million from our insurance coverage. The settlement will therefore not result in the payment of any funds by us. On July 12, 2004, the Court issued an order granting preliminary approval of the settlement. However, the proposed settlement is still subject to final approval of the court. If the proposed settlement does not receive final approval by the Court, then the range of possible resolutions of these proceedings could include judgments against us or our directors or officers or settlements that could require substantial payments by us, which could have a material adverse impact on our financial position, results of operations and cash flows. To date no liability related to this matter has been reflected in our consolidated balance sheet as the proposed settlement is within the limits of our insurance coverage and will be paid directly by the insurance company. These proceedings might require substantial attention of our management team and therefore divert time and attention from our business and operations.

 

ITEM 4. Submission of Matters to a Vote of Security Holders

 

On May 21, 2004, we held our annual stockholders meeting. In connection with the stockholders meeting, we solicited proxies for the election of Mr. Michel de Rosen and Dr. William Claypool as our class II directors. The record date for determining the stockholders entitled to receive notice of, and vote at, the meeting was April 2, 2004. We had 26,509,723 shares of our common stock outstanding on the record date for the meeting, of which a total of 21,688,067 shares were represented at the stockholders meeting by proxy. Such shares were voted at the stockholders meeting as follows:

 

     Number of Votes

Director Name


   FOR

   WITHHELD

Mr. Michel de Rosen

   20,711,849    976,218

Dr. William Claypool

   20,705,305    982,762

 

Mr. Paul Brooke, Mr. Robert Glaser, Mr. Michael Dougherty and Dr. Frank Baldino, Jr. are the class I and III directors whose terms continued after the annual meeting.

 

ITEM 5. Other Information

 

On May 24, 2004, we received a notice from Nasdaq stating that our market value had fallen below the $50 million market value requirement set forth in Marketplace Rule 4450(b)(1)(A) for the previous 10 consecutive trading days, and were afforded a standard 30-day grace period through June 23, 2004 to regain compliance. On June 24, 2004, we received notice from Nasdaq that we had not regained compliance, and would be subject to removal from the Nasdaq National Market. We filed a request for a hearing to appeal the Nasdaq staff’s determination. The hearing was held on July 29, 2004. At that hearing, we presented a plan to the Nasdaq Listing Qualifications Panel for regaining compliance with the Nasdaq listing rules. Our stock will continue to be traded on the Nasdaq National Market pending a final decision by the Nasdaq Listing Qualifications Panel. There can be no assurance the Nasdaq Listing Qualifications Panel will grant our request for continued listing on the Nasdaq National Market. We may also apply to transfer our listing to the Nasdaq SmallCap Market. There can be no assurance the Nasdaq Listing Qualifications Panel will approve any application that we may submit to list on the Nasdaq SmallCap Market.

 

23


ITEM 6. Exhibits and Reports on Form 8-K

 

  (a) List of Exhibits:

 

  31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

  31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

  32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

  (b) Reports on Form 8-K:

 

We filed the following Current Reports on Form 8-K during the quarter ended June 30, 2004:

 

  (i) We filed a Current Report on Form 8-K dated June 28, 2004 to report, pursuant to Item 5, that we received a determination letter from the Nasdaq indicating that we did not comply with the minimum $50 million market value requirement for continued listing on the Nasdaq National Market, as set forth in Market place Rule 4450(b)(1)(A), and that we intended to file a request for a hearing to appeal the Nasdaq staff’s determination

 

  (ii) We filed a Current Report on Form 8-K dated May 26, 2004 to report, pursuant to Item 5, that we had been notified by Nasdaq that we did not meet the continued listing requirements for the Nasdaq National Market and reported that we had until June 23, 2004 to regain compliance.

 

  (iii) We filed a Current Report on Form 8-K dated May 25, 2004 to report, pursuant to Item 5 and Item 7, to provide an update on intranasal pleconaril.

 

  (iv) We filed a Current Report on Form 8-K dated May 4, 2004, to update, pursuant to Item 5, the capitalization table included in our Registration Statement on Form S-4 (No. 333-113790) and our Registration Statement on Form S-3 (No. 333-113791) and also furnished our announcement of financial results for the quarter ended March 31, 2004 pursuant to Item 12.

 

24


SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    VIROPHARMA INCORPORATED

Date: August 5, 2004

  By:  

/s/    MICHEL DE ROSEN        


        Michel de Rosen
       

President, Chief Executive Officer and Chairman

of the Board of Directors

        (Principal Executive Officer)
    By:  

/s/    VINCENT J. MILANO        


        Vincent J. Milano
        Vice President, Chief Financial Officer and
        Treasurer
        (Principal Financial and Accounting Officer)

 

25


Exhibit Index

 

Exhibit

 

Description


31.1   Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

26