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EX-32 - EX-32.1 - INTERMUNE INCitmn-ex32_2014063010.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

Form 10-Q

þ

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

For the quarterly period ended June 30, 2014

OR

¨

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

For the transition period from              to             

Commission File Number: 0-29801

INTERMUNE, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

94-3296648

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3280 Bayshore Boulevard

Brisbane, California 94005

(Address of principal executive offices, including zip code)

(415) 466-2200

(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 requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer  þ

  

Accelerated filer  ¨

 

Non-accelerated filer  ¨ (Do not check if a smaller reporting  company)

  

Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   þ

As of July 31, 2014, there were 107,969,163 outstanding shares of common stock, par value $0.001 per share, of InterMune, Inc.

 

 

 

 

 


 

INTERMUNE, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2014

INDEX

 

Item

 

 

Page

 

PART I — FINANCIAL INFORMATION

 

 

1.

 

Financial Statements:

3

 

 

 

a. Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, 2013

3

 

 

 

b. Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013

4

 

 

 

c. Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2014 and 2013

5

 

 

 

d. Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013

6

 

 

 

e. Notes to Condensed Consolidated Financial Statements

7

 

2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

3.

 

Quantitative and Qualitative Disclosures About Market Risk

26

 

4.

 

Controls and Procedures

27

 

PART II — OTHER INFORMATION

 

 

1.

 

Legal Proceedings

27

 

1A.

 

Risk Factors

29

 

2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

3.

 

Defaults Upon Senior Securities

52

 

4.

 

Mine Safety Disclosures

52

 

5.

 

Other Information

52

 

6.

 

Exhibits

52

Signatures

53

 

 

 

2


 

PART I — FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements

INTERMUNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

(Unaudited)

 

 

(Note 2)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

208,562

 

 

$

191,433

 

Available-for-sale securities

 

351,623

 

 

 

195,574

 

Accounts receivable, net

 

31,019

 

 

 

21,436

 

Inventories

 

10,992

 

 

 

11,125

 

Prepaid expenses and other current assets

 

11,232

 

 

 

9,600

 

Total current assets

 

613,428

 

 

 

429,168

 

Property and equipment, net

 

4,909

 

 

 

4,706

 

Acquired product rights, net

 

16,750

 

 

 

17,250

 

Other assets (includes restricted cash of $3,759 at June 30, 2014 and $4,531 at

    December 31, 2013)

 

8,933

 

 

 

11,509

 

Total assets

$

644,020

 

 

$

462,633

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

14,613

 

 

$

16,778

 

Accrued compensation and benefits

 

16,166

 

 

 

17,148

 

Convertible notes - current

 

18,360

 

 

 

 

Accrued expenses and other current liabilities

 

38,574

 

 

 

29,122

 

Total current liabilities

 

87,713

 

 

 

63,048

 

Convertible notes - noncurrent

 

216,118

 

 

 

265,102

 

Other long-term liabilities

 

143

 

 

 

200

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000 shares authorized, no shares issued and

    outstanding at June 30, 2014 and December 31, 2013, respectively

 

 

 

 

 

Common stock, $0.001 par value; 175,000 shares authorized; 102,918 and

    89,608 shares issued and outstanding at June 30, 2014 and December 31, 2013,

    respectively

 

103

 

 

 

90

 

Additional paid-in capital

 

1,781,544

 

 

 

1,450,937

 

Accumulated other comprehensive income

 

757

 

 

 

774

 

Accumulated deficit

 

(1,442,358

)

 

 

(1,317,518

)

Total stockholders' equity

 

340,046

 

 

 

134,283

 

Total liabilities and stockholders’ equity

$

644,020

 

 

$

462,633

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

3


 

INTERMUNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Esbriet product sales

$

35,739

 

 

$

14,400

 

 

$

66,013

 

 

$

24,930

 

Cost and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

5,770

 

 

 

1,943

 

 

 

9,135

 

 

 

4,319

 

Research and development

 

39,746

 

 

 

27,531

 

 

 

71,797

 

 

 

53,407

 

Selling, general and administrative

 

52,632

 

 

 

37,273

 

 

 

96,959

 

 

 

67,249

 

Total costs and expenses

 

98,148

 

 

 

66,747

 

 

 

177,891

 

 

 

124,975

 

Loss from operations

 

(62,409

)

 

 

(52,347

)

 

 

(111,878

)

 

 

(100,045

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

266

 

 

 

115

 

 

 

369

 

 

 

252

 

Interest expense

 

(3,902

)

 

 

(3,634

)

 

 

(7,762

)

 

 

(7,117

)

Change in value of embedded conversion derivative

 

 

 

 

(6,336

)

 

 

 

 

 

2,422

 

Loss on extinguishment of notes

 

(4,934

)

 

 

 

 

 

(4,934

)

 

 

(7,900

)

Other

 

(382

)

 

 

(574

)

 

 

(684

)

 

 

(94

)

Loss from continuing operations before income taxes

 

(71,361

)

 

 

(62,776

)

 

 

(124,889

)

 

 

(112,482

)

Income tax provision

 

152

 

 

 

481

 

 

 

642

 

 

 

880

 

Loss from continuing operations, net of income taxes

 

(71,513

)

 

 

(63,257

)

 

 

(125,531

)

 

 

(113,362

)

Income from discontinued operations, net of income taxes

 

320

 

 

 

387

 

 

 

691

 

 

 

617

 

Net loss

$

(71,193

)

 

$

(62,870

)

 

$

(124,840

)

 

$

(112,745

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(0.72

)

 

$

(0.78

)

 

$

(1.32

)

 

$

(1.43

)

Discontinued operations

 

 

 

 

0.01

 

 

 

 

 

 

0.01

 

Net loss per share

$

(0.72

)

 

$

(0.77

)

 

$

(1.32

)

 

$

(1.42

)

Shares used in computing basic and diluted net income (loss) per common share

 

99,209

 

 

 

81,210

 

 

 

94,898

 

 

 

79,321

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4


 

INTERMUNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net loss

$

(71,193

)

 

$

(62,870

)

 

$

(124,840

)

 

$

(112,745

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

144

 

 

 

(109

)

 

 

88

 

 

 

(664

)

Unrealized gains (losses) on available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses during period

 

(96

)

 

 

(90

)

 

 

(104

)

 

 

(135

)

Less: Reclassification adjustments for gains (losses) transferred to net loss

 

(1

)

 

 

2

 

 

 

(1

)

 

 

2

 

Total other comprehensive income (loss)

 

47

 

 

 

(197

)

 

 

(17

)

 

 

(797

)

Comprehensive loss

$

(71,146

)

 

$

(63,067

)

 

$

(124,857

)

 

$

(113,542

)

See accompanying notes to condensed consolidated financial statements.

 

 

 

5


 

INTERMUNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

Six Months Ended

 

 

June 30,

 

 

2014

 

 

2013

 

Cash flows used in operating activities:

 

 

 

 

 

 

 

Net loss

$

(124,840

)

 

$

(112,745

)

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

 

 

 

 

 

 

 

Stock-based compensation expense

 

9,488

 

 

 

5,493

 

Amortization of note discount and note issuance costs

 

3,850

 

 

 

3,187

 

Change in fair value of embedded conversion derivative

 

 

 

 

(2,422

)

Depreciation and amortization expense

 

1,543

 

 

 

1,325

 

Loss on extinguishment of notes

 

4,934

 

 

 

7,900

 

Net realized (gains) losses on sales of available-for-sale securities

 

1

 

 

 

(2

)

Other

 

42

 

 

 

(68

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

(9,583

)

 

 

(4,893

)

Inventories

 

133

 

 

 

191

 

Prepaid expenses

 

(1,632

)

 

 

(1,317

)

Other assets

 

796

 

 

 

(342

)

Accounts payable and accrued compensation

 

(3,147

)

 

 

(9,206

)

Other accrued liabilities

 

9,452

 

 

 

1,187

 

Net cash used in operating activities

 

(108,963

)

 

 

(111,712

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(1,246

)

 

 

(542

)

Purchases of available-for-sale securities

 

(259,329

)

 

 

(148,290

)

Maturities of available-for-sale securities

 

103,174

 

 

 

88,177

 

Sales of available-for-sale securities

 

 

 

 

21,014

 

Net cash used in investing activities

 

(157,401

)

 

 

(39,641

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock in a public offering, net of issuance costs

 

267,953

 

 

 

145,734

 

Proceeds from convertible notes, net of issuance costs

 

 

 

 

116,800

 

Debt extinguishment costs

 

(558

)

 

 

(72,183

)

Proceeds from issuance of common stock under employee stock benefit plans

 

16,109

 

 

 

1,361

 

Net cash provided by financing activities

 

283,504

 

 

 

191,712

 

Effect of exchange rate changes on cash and cash equivalents

 

(11

)

 

 

(582

)

Net increase in cash and cash equivalents

 

17,129

 

 

 

39,777

 

Cash and cash equivalents at beginning of period

 

191,433

 

 

 

117,748

 

Cash and cash equivalents at end of period

$

208,562

 

 

$

157,525

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Interest paid in cash

$

3,933

 

 

$

4,906

 

Non-cash financing activities:

 

 

 

 

 

 

 

Reclassification of derivative liability to stockholders' equity

$

 

 

$

34,465

 

Reclassification of debt exchange to stockholders' equity

$

37,069

 

 

$

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

6


 

INTERMUNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.   ORGANIZATION

Overview

InterMune, Inc. (“InterMune,” “we,” and the “Company”) is a biotechnology company focused on the research, development and commercialization of innovative therapies in pulmonology and orphan fibrotic diseases. In pulmonology, we are focused on therapies for the treatment of idiopathic pulmonary fibrosis, or IPF, a progressive and fatal lung disease. We have a product in pulmonology, pirfenidone, which is an orally active, small-molecule compound. Pirfenidone was granted marketing authorization effective February 2011 in all 28 member countries of the European Union, or the EU, for the treatment of adults with mild to moderate IPF. In September 2011, we launched commercial sales of pirfenidone in Germany under the trade name Esbriet®, and Esbriet is now also commercially available in various European countries, including key markets such as France, Italy and the UK. In addition, we launched in Canada in January 2013.

We are also pursuing the registration of pirfenidone to treat IPF in the United States. After reviewing various regulatory and clinical development options and following our discussions with the United States Food and Drug Administration, or FDA, we commenced an additional pivotal Phase 3 clinical study of pirfenidone in IPF in July 2011, known as the ASCEND trial. In February 2014, we announced top-line results of ASCEND and in May 2014 we resubmitted our Class 2 New Drug Application, or NDA, to the FDA to support regulatory registration in the United States. The FDA confirmed that the resubmitted NDA had been filed and that it has assigned a Prescription Drug User Fee Act goal date of November 23, 2014. In addition, on July 17, 2014, the FDA assigned Breakthrough Therapy Designation status for pirfenidone.

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

In June 2014, we completed the exchange of $43.1 million in aggregate principal amount of our 2.50% convertible senior notes due 2017 Notes (the “2017 Notes”) beneficially owned by certain existing holders of our 2017 Notes for an aggregate of 3,378,457 shares of our common stock (the “Exchange Shares”), valued at $47.22 per share, plus accrued but unpaid interest. The notes were exchanged at a rate of 78.3884 shares per $1,000 note, which represents an exchange price of approximately $12.77 per share and an approximate $0.10 discount from the original conversion price of the 2017 Notes of $12.87 per share. See Note 9 to these financial statements for details of this exchange.

 

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies and recent accounting pronouncements were described in Note 2 to our Consolidated Financial Statements included in our 2013 Annual Report on Form 10-K for the fiscal year ended December 31, 2013. There have been no significant changes in our accounting policies since December 31, 2013.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. The financial statements include all adjustments (consisting only of normal recurring adjustments) that we believe are necessary for a fair presentation of the periods presented. The condensed consolidated balance sheet at December 31, 2013 was derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP. These interim financial results are not necessarily indicative of results to be expected for the full fiscal year or any other future period and should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2013, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, or SEC.

Revenue Recognition

Revenue is generated from product sales and recorded net of mandatory government rebates. We only ship product upon receipt of valid orders from customers, such as pharmacies and hospitals, which are in turn a result of actual patient prescriptions. Delivery is considered to have occurred when title passes to a credit-worthy customer. We include shipping and handling costs in cost of goods

7


 

sold. Pursuant to terms and conditions of sale, our customers have no general right of product return but we permit returns if the product is damaged or defective when received by the customer. Such restriction on product returns is common practice in the markets in which we sell, and as a result, we have had no significant expenses related to product returns, damaged or expired goods.

To date, all significant amounts recorded as estimates of items that reduce gross revenue related solely to mandatory government rebates, many of which were negotiated on a confidential basis with the respective government reimbursement agencies. Our estimation of these rebates requires only the application of pre-specified rates, determined as part of pre-launch pricing negotiations with the relevant government reimbursement agencies, to sales of our product as applicable. We recognize these mandatory government rebates as reductions of product sales and the recording of these rebates is substantially mechanical in nature and does not involve the application of significant judgment. Fluctuations in the amounts recorded for these rebates relate solely to increased sales or the eventual payment of amounts due to the various government agencies. To date, we have had no significant charges or credits related to prior period estimates.

Derivative Financial Instruments

On January 22, 2013, we issued $120.8 million aggregate principal amount of 2.50% convertible senior notes due 2017 (the “2017 Notes”). As a result of our issuance of the 2017 Notes, our total potential outstanding common stock exceeded our authorized shares by approximately 4.3 million shares as of that date and we were therefore required to value the embedded conversion derivative and recognize it at fair value as a long-term liability.

On May 30, 2013, we obtained stockholder approval to an amendment to our certificate of incorporation to increase the number of our authorized shares of common stock from 100,000,000 to 175,000,000. As a result of the increase in authorized number of shares, we can now settle the 2017 Notes in cash, stock, or a combination thereof, solely at our election, the derivative associated with the embedded conversion derivative was marked to fair value at May 30, 2013 and the long-term liability was reclassified to stockholders’ equity.

See Note 10 for further details of our embedded conversion derivative.

Net Income (Loss) Per Share

Basic net loss per share is calculated based on the weighted-average number of shares of our common stock outstanding during the period, as adjusted. Diluted net loss per share is calculated based on the weighted average number of shares of our common and other dilutive securities outstanding during the period. The potential dilutive shares of our common stock resulting from the assumed exercise of outstanding stock options and shares subject to repurchase are determined under the treasury stock method. The potential dilutive shares of our common stock issuable on conversion of our convertible notes are determined using the “if-converted” method. Anti-dilutive securities, which consist of stock options, restricted stock awards and units, and shares that could be issued upon conversion of our convertible notes, are not included in the diluted net loss per share calculation.

 

For the calculation of net loss per share, anti-dilutive securities excluded were as follows:

 

 

As of

 

 

June 30,

 

 

2014

 

 

2013

 

 

(in thousands)

 

Common stock options and restricted awards and units

 

6,342

 

 

 

6,095

 

Shares issuable upon conversion of convertible notes

 

11,888

 

 

 

15,237

 

 

The following table is a reconciliation of the denominator used in the calculation of basic and diluted net loss per share attributable to our common stockholders:

 

 

Three Months

 

 

Six Months

 

 

Ended June 30,

 

 

Ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

(in thousands)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares of common stock outstanding

 

99,631

 

 

 

81,823

 

 

 

95,360

 

 

 

79,924

 

Less: Weighted-average shares subject to repurchase

 

(422

)

 

 

(613

)

 

 

(462

)

 

 

(603

)

Weighted-average shares used in computing net income (loss) per common share – basic and diluted

 

99,209

 

 

 

81,210

 

 

 

94,898

 

 

 

79,321

 

8


 

 

Stock-Based Compensation

The following table reflects stock-based compensation expense recognized for the three and six month periods ended June 30, 2014 and 2013:

 

 

Three Months

 

 

Six Months

 

 

Ended June 30,

 

 

Ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

(in thousands)

 

Cost of goods sold

$

37

 

 

$

15

 

 

$

64

 

 

$

43

 

Research and development

 

1,411

 

 

 

667

 

 

 

2,559

 

 

 

1,664

 

Selling, general and administrative

 

3,757

 

 

 

2,023

 

 

 

6,865

 

 

 

3,786

 

Total stock-based compensation expense

$

5,205

 

 

$

2,705

 

 

$

9,488

 

 

$

5,493

 

 

Under the fair value recognition provisions of Accounting Standards Codification (ASC) 718-10, Stock Compensation, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period for that portion of the award that is ultimately expected to vest. In order to estimate the value of share-based awards, we use the Black-Scholes model, which requires the use of certain subjective assumptions. The most significant assumptions are our estimates of the expected volatility, the expected term of the award and the estimated forfeiture rate.

Segment Reporting

We have determined, in accordance with ASC 280, Segment Reporting, that our business operates in one operating segment: the research, development and commercialization of innovative therapies in pulmonology and orphan fibrotic diseases.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, Presentation of Financial Statements and Property, Plant and Equipment. This ASU is an amendment to the discontinued operations accounting guidance. The amendment raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures for both discontinued operations and disposals of individually significant components that don’t qualify as discontinued operations. We adopted ASU No. 2014-08 for the period ended June 30, 2014. The adoption of this new guidance did not have an effect on our condensed consolidated balance sheets, statement of operations or cash flows.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU is an amendment to the revenue recognition accounting guidance. The amendment clarifies the principles for recognizing revenue and develops a common revenue standard for all industries. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, which can be applied either prospectively or retrospectively. Early adoption is not permitted. We are evaluating the impact of adopting this prospective guidance on our consolidated results of operations and financial condition.

 

3.   DISCONTINUED OPERATIONS

On June 19, 2012, we completed the divestiture of our worldwide development and commercialization rights to the pharmaceutical product containing Interferon Gamma-1b sold by us under the trade name Actimmune for $55.0 million in cash, plus certain conditional royalty payments for a period of two years following the closing (the transaction is referred to herein as the “Asset Sale”). The Asset Sale was consummated pursuant to the terms of the Asset Purchase Agreement, dated as of May 17, 2012, by and among InterMune and Vidara Therapeutics International Limited, an Irish company, Vidara Therapeutics Holdings LLC, a Delaware limited liability company and Vidara Therapeutics Research Limited, an Irish company, as amended on June 18, 2012. The operating results of our Actimmune activities have been reclassified as discontinued operations for all periods presented. As a consequence of the divestiture, we were required to apply intraperiod tax allocation rules for the purposes of calculating our provision (benefit) for income taxes.

9


 

Results of Discontinued Operations

Summary operating results for the discontinued operations are as follows:

 

 

Three Months

 

 

Six Months

 

 

Ended June 30,

 

 

Ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

(in thousands)

 

Actimmune revenue, net

$

500

 

 

$

500

 

 

$

1,077

 

 

$

1,000

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

15

 

 

 

(81

)

 

 

30

 

 

 

65

 

Total costs and expenses

 

15

 

 

 

(81

)

 

 

30

 

 

 

65

 

Income from discontinued operations

 

485

 

 

 

581

 

 

 

1,047

 

 

 

935

 

Income and gains related to discontinued operations, before tax

 

485

 

 

 

581

 

 

 

1,047

 

 

 

935

 

Income tax expense

 

165

 

 

 

194

 

 

 

356

 

 

 

318

 

Income from discontinued operations, net of taxes

$

320

 

 

$

387

 

 

$

691

 

 

$

617

 

 

 

4.   DERIVATIVE INSTRUMENTS

We conduct business throughout Europe and Canada and therefore, we are exposed to adverse movements in foreign currency exchange rates. To limit the exposure related to foreign currency changes, we enter into foreign exchange forward contracts to reduce the short-term effects of foreign currency fluctuations on assets and liabilities such as foreign currency receivables and payables. We do not enter into such contracts for trading or speculative purposes. These derivatives are not designated as hedging instruments. Gains and losses on the contracts are included in “other” as a component of other income (expense) in our condensed consolidated statements of operations and substantially offset foreign exchange gains and losses from the remeasurement of intercompany balances. Our net contract losses were $0.1 million for the three month periods ended June 30, 2014 and 2013, respectively. Our net contract losses for the six month period ended June 30, 2014 were $0.1 million compared to net gains of $0.1 million in the same period in 2013. The notional value of our outstanding currency hedges was 17.7 million Euros and 5.5 million Canadian dollars at June 30, 2014 and 9.5 million Euros at December 31, 2013, and the fair value of these outstanding derivatives at June 30, 2014 was zero and at December 31, 2013 was a loss of $0.2 million.

Our foreign exchange forward contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We do, however, seek to mitigate such risks by limiting counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. We are not generally required to pledge collateral under these agreements. We do not expect material losses as a result of defaults by counterparties.

In addition to our foreign exchange forward contract derivative instruments, we also had an embedded derivative option related to our 2017 Notes. See Note 10 to these financial statements for details of our embedded conversion derivative.

 

5.   FAIR VALUE

In accordance with ASC 820-10, Fair Value Measurements and Disclosures, we determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:

Level 1 inputs which include quoted prices in active markets for identical assets or liabilities;

Level 2 inputs which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For our available-for-sale securities, we review trading activity and pricing as of the measurement date. For our convertible senior notes we determined the fair value based on quoted market values. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and

Level 3 inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements

10


 

are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

The following table represents the fair value hierarchy for our financial assets which require fair value measurement on a recurring basis as of June 30, 2014 and December 31, 2013:

 

 

As of June 30, 2014

 

 

(in thousands)

 

Assets

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Money market funds

$

52,364

 

 

$

 

 

$

 

 

$

52,364

 

Obligations of government-sponsored enterprises

 

 

 

 

230,682

 

 

 

 

 

 

230,682

 

Corporate debt securities

 

 

 

 

120,941

 

 

 

 

 

 

120,941

 

Commercial paper

 

 

 

 

4,999

 

 

 

 

 

 

4,999

 

Total

$

52,364

 

 

$

356,622

 

 

$

 

 

$

408,986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013

 

 

(in thousands)

 

Assets

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Money market funds

$

40,739

 

 

$

 

 

$

 

 

$

40,739

 

Obligations of government-sponsored enterprises

 

 

 

 

145,942

 

 

 

 

 

 

145,942

 

Corporate debt securities

 

 

 

 

39,134

 

 

 

 

 

 

39,134

 

Commercial paper

 

 

 

 

26,662

 

 

 

 

 

 

26,662

 

Total

$

40,739

 

 

$

211,738

 

 

$

 

 

$

252,477

 

Level 2 Inputs

We estimate the fair values of our governmental related debts and corporate debt by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate the fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data, and other observable inputs. Our foreign currency derivatives contracts have maturities less than three months and all are with counterparties that have a minimum credit rating of A or equivalent by Standard & Poor’s, Moody’s Investors Service, Inc. or Fitch, Inc. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency rates, London Interbank Offered rates (LIBOR) and swap rates. These inputs, where applicable, are at commonly quoted intervals.

The following table summarizes the carrying and fair value of our Level 2 convertible senior notes as of June 30, 2014 and December 31, 2013:

 

 

As of June 30, 2014

 

 

As of December 31, 2013

 

 

(in thousands)

 

 

Carrying value

 

 

Fair value

 

 

Carrying value

 

 

Fair value

 

Convertible senior notes due 2015

$

18,360

 

 

$

43,026

 

 

$

18,360

 

 

$

21,028

 

Convertible senior notes due 2017

 

60,868

 

 

 

267,380

 

 

 

91,492

 

 

 

166,563

 

Convertible senior notes due 2018

 

155,250

 

 

 

232,566

 

 

 

155,250

 

 

 

139,930

 

Total

$

234,478

 

 

$

542,972

 

 

$

265,102

 

 

$

327,521

 

 

Embedded Conversion Derivative

The embedded conversion derivative on the 2017 Notes was reclassified to stockholders’ equity on May 30, 2013 in connection with the approval of an amendment to our certificate of incorporation increasing our authorized number of shares of common stock. The embedded conversion derivative was classified as Level 3 because this liability was not actively traded and was valued using a binomial lattice model. Significant inputs to this model were the remaining time to maturity, volatility and risk-free interest rate.

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The following table sets forth the changes in the estimated fair value for our Level 3 classified embedded conversion derivative:

 

 

Three Months

 

 

Six Months

 

 

Ended June 30,

 

 

Ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

(in thousands)

 

Fair value measurement at beginning of period

$

 

 

$

28,129

 

 

$

 

 

$

 

Embedded conversion derivative recorded in connection with 2017 Notes

 

 

 

 

 

 

 

 

 

 

36,887

 

Change in fair value measurement included in operating expenses

 

 

 

 

6,336

 

 

 

 

 

 

(2,422

)

Derivative liability reclassified to stockholders’ equity

 

 

 

 

(34,465

)

 

 

 

 

 

(34,465

)

Fair value measurement at end of period

$

 

 

$

 

 

$

 

 

$

 

 

 

6.   CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES

The following table is a summary of available-for-sale debt and equity securities included in cash and cash equivalents or available-for-sale securities:

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

unrealized

 

 

unrealized

 

 

 

 

 

 

cost

 

 

gains

 

 

losses

 

 

Fair value

 

June 30, 2014

(in thousands)

 

Money market funds

$

52,364

 

 

$

 

 

$

 

 

$

52,364

 

Obligations of government-sponsored enterprises

 

230,688

 

 

 

58

 

 

 

(64

)

 

 

230,682

 

Corporate debt securities

 

120,980

 

 

 

16

 

 

 

(55

)

 

 

120,941

 

Commercial paper

 

4,999

 

 

 

 

 

 

 

 

 

4,999

 

Total

$

409,031

 

 

$

74

 

 

$

(119

)

 

$

408,986

 

 

 

 

Amortized

 

 

 

 

 

 

cost

 

 

Fair value

 

 

(in thousands)

 

Reported as:

 

 

 

 

 

 

 

Cash equivalents

$

57,363

 

 

$

57,363

 

Available-for-sale securities

 

351,668

 

 

 

351,623

 

Total

$

409,031

 

 

$

408,986

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

unrealized

 

 

unrealized

 

 

 

 

 

 

cost

 

 

gains

 

 

losses

 

 

Fair value

 

December 31, 2013

(in thousands)

 

Money market funds

$

40,739

 

 

$

 

 

$

 

 

$

40,739

 

Obligations of government-sponsored enterprises

 

145,890

 

 

 

52

 

 

 

 

 

 

145,942

 

Corporate debt securities

 

39,123

 

 

 

18

 

 

 

(7

)

 

 

39,134

 

Commercial paper

 

26,662

 

 

 

 

 

 

 

 

 

26,662

 

Total

$

252,414

 

 

$

70

 

 

$

(7

)

 

$

252,477

 

 

 

Amortized

 

 

 

 

 

 

cost

 

 

Fair value

 

 

(in thousands)

 

Reported as:

 

 

 

 

 

 

 

Cash equivalents

$

56,903

 

 

$

56,903

 

Available-for-sale securities

 

195,511

 

 

 

195,574

 

Total

$

252,414

 

 

$

252,477

 

 

Cash and cash equivalents in the tables above exclude cash of $151.2 million as of June 30, 2014 and $134.5 million as of December 31, 2013.

12


 

Realized gains and losses calculated based on the specific identification method were immaterial for the three and six months ended June 30, 2014 and 2013.

The following is a summary of the amortized cost and estimated fair value of available-for-sale securities by contractual maturity:

 

 

June 30, 2014

 

 

Amortized

 

 

 

 

 

 

cost

 

 

Fair value

 

 

(in thousands)

 

Mature in less than one year

$

207,523

 

 

$

207,540

 

Mature in one to three years

 

201,508

 

 

 

201,446

 

Total

$

409,031

 

 

$

408,986

 

 

 

 

7.   INVENTORIES

Inventories consist of the following:

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

(in thousands)

 

Raw materials

$

5,653

 

 

$

6,962

 

Work in process

 

3,317

 

 

 

1,951

 

Finished goods

 

2,022

 

 

 

2,212

 

Inventories

$

10,992

 

 

$

11,125

 

 

 

8.   ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income, net of taxes, were as follows:

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

Foreign

 

 

Unrealized gains

 

 

other

 

 

currency

 

 

(losses) on

 

 

comprehensive

 

 

translation

 

 

securities

 

 

income

 

 

(in thousands)

 

Balance at December 31, 2013

$

711

 

 

$

63

 

 

$

774

 

Changes in components of other comprehensive income (loss)

 

88

 

 

 

(105

)

 

 

(17

)

Balance at June 30, 2014

$

799

 

 

$

(42

)

 

$

757

 

 

Realized gains and losses were immaterial and were reclassified to other income (expense) on the condensed consolidated statements of operations for the three and six months ended June 30, 2014 and 2013, respectively.

 

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9.   CONVERTIBLE NOTES

In June 2008, we issued $85.0 million in 5.00% convertible senior notes due 2015 (the “2015 Notes”). The 2015 Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of our existing senior notes, and rank senior in right of payment to all of our existing subordinated notes. Interest accrues from the date of issuance and is payable in arrears on March 1 and September 1 of each year commencing on September 1, 2008. The 2015 Notes will mature on March 1, 2015. Holders of the 2015 Notes may surrender their notes, in integral multiples of $1,000 principal amount, for conversion any time prior to the close of business on the second business day immediately preceding the maturity date. The initial conversion rate for each $1,000 aggregate principal amount of the 2015 Notes is 52.9661 shares of common stock, equivalent to a conversion price of approximately $18.88 per share. Offering expenses and underwriting discounts in the aggregate of approximately $0.6 million related to the sale of the 2015 Notes were recorded in other assets and are being amortized to interest expense using the effective interest method over the term of the 2015 Notes, which is approximately seven years from the date of issuance. At June 30, 2014, $18.4 million of principal remained outstanding under the 2015 Notes which comes due within 12 months of the reporting date and has been reclassified to current liabilities.

In September 2011, we issued $155.3 million in 2.50% convertible senior notes due 2018 (the “2018 Notes”). The 2018 Notes are general unsecured senior obligations of the Company and rank equal in right of payment with the Company’s other senior unsecured notes and rank senior in right of payment to all of our existing and future subordinated notes. Interest accrues from the date of issuance and is payable in arrears on September 15 and March 15 of each year commencing on March 15, 2012. The 2018 Notes will mature on September 15, 2018. Holders of the 2018 Notes may surrender their notes, in integral multiples of $1,000 principal amount, for conversion any time prior to the close of business on the second business day immediately preceding the maturity date. The initial conversion rate for each $1,000 aggregate principal amount of the 2018 Notes is 31.4465 shares of common stock, equivalent to a conversion price of approximately $31.80 per share. Offering expenses and underwriting discounts in the aggregate of approximately $5.0 million related to the sale of the 2018 Notes were recorded in other assets and are being amortized to interest expense using the effective interest method over the term of the 2018 Notes, which is approximately seven years from the date of issuance. At June 30, 2014, $155.3 million of principal remained outstanding under the 2018 Notes.

In January 2013, we completed a registered underwritten public offering of 15,525,000 shares of our common stock (“Common Stock Offering”) and a concurrent registered underwritten public offering of $120.8 million aggregate principal amount of 2.50% convertible senior notes due December 15, 2017 (the “2017 Notes” and the “Convertible Note Offering”). The resulting aggregate net proceeds from the Common Stock Offering were approximately $145.7 million, after deducting underwriting discounts and expenses. The resulting aggregate net proceeds from the Convertible Note Offering were approximately $116.8 million, after deducting underwriting discounts and expenses. Interest accrues from the date of issuance and is payable in arrears on June 15 and December 15 of each year commencing on June 15, 2013. The holders of the 2017 Notes may convert their 2017 Notes into shares of our common stock at a conversion rate of 77.7001 shares per $1,000 principal amount of notes, subject to adjustment (representing a conversion price of approximately $12.87 per share). We can settle conversion of the 2017 Notes by delivery of shares, cash or a combination of shares and cash at our election.

Conversion of the 2017 Notes may occur on any day prior to September 15, 2017, under the following conditions: a) during any fiscal quarter beginning after June 30, 2013, if the last reported sale price of our common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; b) during the five consecutive business day period after any five consecutive trading day period in which the trading price of the 2017 Notes falls below 98% of the product of (i) the last reported sale price of the Company’s common stock and (ii) the applicable conversion rate on each such trading date; c) if we call the 2017 Notes for redemption, at any time prior to the close of business on the second scheduled trading day prior to the redemption date; and d) upon the occurrence of specified corporate events, as defined in the 2017 Notes. From September 15, 2017 until the close of business on the second scheduled trading day immediately preceding the December 15, 2017 maturity date, holders of the 2017 Notes may convert their notes at any time, regardless of the foregoing circumstances.

On or after June 20, 2015, we may redeem for cash all or part of the 2017 Notes (except for Notes that holders have already required us to repurchase following certain fundamental changes defined within the agreement such as an acquisition or liquidation of the Company) but only if the last reported sale price of our common stock for 20 or more trading days in a period of 30 consecutive trading days ending within 10 trading days of immediately prior to the date we provide the notice of redemption exceeds 130% of the conversion price in effect on each such trading day. The redemption price in this case will equal 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the 2017 Notes do not contain any financial covenants and do not restrict us from paying dividends or issuing new securities or repurchasing any of our other securities. At June 30, 2014, $77.7 million of principal remained outstanding under the 2017 Notes.

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In January 2013, we used a portion of the net proceeds from the Convertible Note Offering to repurchase approximately $66.6 million of our outstanding 2015 Notes for proceeds of $72.2 million. This repurchase was accounted for as an extinguishment of notes and we recorded a loss on extinguishment of notes of $7.9 million which comprised $5.5 million of premium paid to the holders of the 2015 Notes, $2.2 million related to the excess of the deemed issuance fair value over the issuance price (par) of the 2017 Notes (but only for those holders of the repurchased 2015 Notes who subsequently invested in our 2017 Notes) and $0.2 million related to the write-off of the initial note issuance costs for these 2015 Notes.

In June 2014, we completed the exchange of $43.1 million in aggregate principal amount of 2017 Notes beneficially owned by certain existing holders of our 2017 Notes for an aggregate of 3,378,457 shares of our common stock (the “Exchange Shares”), valued at $47.22 per share, plus accrued but unpaid interest. The notes were exchanged at a rate of 78.3884 shares per $1,000 note, which represents an exchange price of approximately $12.77 per share and an approximate $0.10 discount from the original conversion price of the 2017 Notes of $12.87 per share. This exchange was accounted for as an extinguishment of notes and we recorded a loss on extinguishment of notes of $4.9 million which comprised $1.4 million of premium paid to the holders of the 2017 Notes, $2.9 million related to the excess of the deemed issuance fair value over the issuance price (par) of the Exchange Shares and $0.6 million related to the write-off of the initial note issuance costs for these notes.

The following is a summary of the interest expense recognized on the 2017 Notes:

 

 

Three Months

 

 

Six Months

 

 

Ended June 30,

 

 

Ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

(in thousands)

 

Contractual coupon interest expense

$

754

 

 

$

696

 

 

$

1,509

 

 

$

1,325

 

Amortization of convertible note discount

 

1,566

 

 

 

1,348

 

 

 

3,095

 

 

 

2,484

 

Amortization of convertible note issuance costs

 

193

 

 

 

199

 

 

 

385

 

 

 

329

 

Total interest expense recognized on the 2017 Notes

$

2,513

 

 

$

2,243

 

 

$

4,989

 

 

$

4,138

 

 

 

10. EMBEDDED CONVERSION DERIVATIVE

FASB Accounting Standards Codification (ASC) Topic 470 (ASC 470), Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement) requires the issuer of convertible debt that may be settled in shares or cash upon conversion at their option, such as our 2017 Notes, to account for their liability and equity components separately by bifurcating the embedded conversion derivative (the “derivative”) from the host debt instrument. Although ASC 470 has no impact on our actual past or future cash flows, it requires us to record non-cash interest expense as the debt discount is amortized.

As a result of the issuance of convertible notes in January 2013, our total potential outstanding common stock exceeded our authorized shares by approximately 4.3 million shares as of that date, and we were therefore required to value the derivative and recognize the fair value as a long-term liability. The fair value of this derivative at the time of issuance was $36.9 million and was recorded as the original debt discount for the purposes of accounting for the debt component of the 2017 Notes. This debt discount is being amortized as interest expense using an effective interest rate of 9.9% over the remaining 3.5 year term of the 2017 Notes.

In accordance with authoritative guidance, the embedded conversion derivative associated with the 2017 Notes required bifurcation from the 2017 Notes and was initially accounted for as a derivative liability. On May 30, 2013, upon obtaining stockholder approval for an amendment to our certificate of incorporation increasing the authorized number of shares of our common stock, the derivative liability was marked to fair value and reclassified to stockholders’ equity. Changes in the fair value were recorded in change in value of embedded conversion derivative in the condensed consolidated statements of operations. We determined the fair value of the derivative using a binomial lattice model. The key assumptions for determining the fair value at May 30, 2013 included the remaining time to maturity of 4.54 years, volatility of 50%, and the risk-free interest rate of 0.88%. The estimated fair value of the embedded conversion derivative was $34.5 million as of May 30, 2013 immediately prior to its reclassification to stockholders’ equity.

 

11. COMMITMENTS AND CONTINGENCIES

Details of our ongoing commitments and contingencies were described in Note 16 to our consolidated Financial Statements included in our 2013 Annual Report on Form 10-K for the fiscal year ended December 31, 2013. There have been no significant changes to these commitments and contingencies since December 31, 2013.

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Indemnity Agreement

On or about March 22, 2000, we entered into an Indemnity Agreement with W. Scott Harkonen M.D., who served as the Company’s Chief Executive Officer until September 30, 2003. The Indemnity Agreement obligates us to hold harmless and indemnify Dr. Harkonen against expenses (including attorneys’ fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts Dr. Harkonen becomes legally obligated to pay because of any claim or claims made against him in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, to which Dr. Harkonen is a party by reason of the fact that he was a director, officer, employee or other agent of the Company. The Indemnity Agreement establishes exceptions to our indemnification obligation, including but not limited to claims “on account of Dr. Harkonen’s conduct that is established by a final judgment as knowingly fraudulent or deliberately dishonest or that constituted willful misconduct,” claims “on account of Dr. Harkonen’s conduct that is established by a final judgment as constituting a breach of Dr. Harkonen’s duty of loyalty to the Company or resulting in any personal profit or advantage to which Dr. Harkonen was not legally entitled,” and claims “for which payment is actually made to Dr. Harkonen under a valid and collectible insurance policy.” The Indemnity Agreement, however, obligates us to advance all expenses, including attorneys’ fees, incurred by Dr. Harkonen in connection with such proceedings, subject to an undertaking by Dr. Harkonen to repay said amounts if it shall be determined ultimately that he is not entitled to be indemnified by the Company.

Dr. Harkonen was named as a defendant in certain civil action lawsuits instituted against us where the various complaints alleged that we fraudulently misrepresented the medical benefits of Actimmune for the treatment of IPF and promoted Actimmune for IPF. Ultimately, these complaints were dismissed. However, Dr. Harkonen also became the target of the investigation by the U.S. Department of Justice regarding the promotion and marketing of Actimmune. On March 18, 2008, a federal grand jury indicted Dr. Harkonen on two felony counts related to alleged improper promotion and marketing of Actimmune during the time Dr. Harkonen was employed by us (the “Criminal Action”). The trial in the criminal case resulted in a jury verdict on September 29, 2009, finding Dr. Harkonen guilty of one count of wire fraud related to a press release issued on August 28, 2002, and acquitting him of a second count of a misbranding charge brought under the Federal Food, Drug, and Cosmetic Act. On April 13, 2011, the Court denied Dr. Harkonen’s post-trial motions and sentenced Dr. Harkonen to three years of probation, including six months of home detention, 200 hours of community service and a fine of $20,000. The Court’s Judgment was filed on April 18, 2011. Dr. Harkonen appealed his conviction and sentence and the government cross-appealed his sentence. On March 4, 2013, the Ninth Circuit Court of Appeals issued an unpublished opinion affirming both the conviction and the sentence. Dr. Harkonen filed a petition for rehearing en banc which was denied by the Ninth Circuit Court of Appeals on May 7, 2013. On August 5, 2013, Dr. Harkonen filed a petition for a writ of certiorari seeking review by the United States Supreme Court. The U.S. Supreme Court denied Dr. Harkonen’s petition on December 16, 2013.

Prior to December 2008, insurers that issued directors & officers (“D&O”) liability insurance to the Company had advanced all of Dr. Harkonen’s expenses, including attorneys’ fees, incurred in the civil action lawsuits and Criminal Action. Those insurers included National Union Fire Insurance Company of Pittsburgh, PA (“AIG”), Underwriters at Lloyd’s, London (“Lloyd’s”), and Continental Casualty Company (“CNA”). On November 19, 2008, however, the insurer that issued a $5.0 million D&O insurance policy providing coverage excess of the monetary limits of coverage provided by AIG, Lloyd’s and CNA, Arch Specialty Insurance Company (“Arch”), advised the Company that the limits of the underlying coverage were expected to be depleted by approximately December 15, 2008; that Arch “disclaimed coverage” based on misstatements and misrepresentations allegedly made by Dr. Harkonen in documents provided in the application for the Arch policy and the underlying Lloyd’s policy; and that, based on that disclaimer, Arch would not be advancing any of Dr. Harkonen’s expenses, including attorneys’ fees, incurred in the civil action lawsuits and Criminal Action.

As a result of Arch’s disclaimer of coverage and refusal to advance expenses, including attorneys’ fees, the Company had, as of approximately December 15, 2008, become obligated to advance such expenses incurred by Dr. Harkonen in the civil action lawsuits and Criminal Action.

On January 13, 2009, we submitted to the American Arbitration Association (“AAA”) a Demand for Arbitration, InterMune, Inc. v. Arch Specialty Insurance Co., No. 74 194 01128 08 JEMO. Dr. Harkonen also is a party to the Arbitration. The Demand for Arbitration sought an award compelling Arch to advance Dr. Harkonen’s legal fees and costs incurred in the civil action lawsuits and the Criminal Action, and to advance other former officers’ legal fees and costs incurred in relation to the Department of Justice investigation.

The matter was heard by the arbitration panel and on May 29, 2009, the arbitration panel issued an Interim Arbitration Award granting our request for a partial award requiring Arch to advance Dr. Harkonen’s legal fees and costs incurred in the civil action lawsuits and Criminal Action. Arch subsequently advanced such fees and costs, including fees and costs previously paid by the Company. The question whether Arch ultimately will be required to cover the advanced fees and costs or, instead, may recoup those fees and costs as not covered by its policy, has not been determined. Unless and until the arbitration panel rules that such fees and costs are not covered, Arch remains obligated to advance such fees and costs.

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In late 2009, Arch advised us that Arch had exhausted the $5.0 million limit of liability of the Arch D&O insurance policy, and that defense cost invoices submitted to Arch collectively exceed the Arch policy