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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
---------------------------------
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
COMMISSION FILE NUMBER 0-29801
---------------------------------
INTERMUNE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 99-3296648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1710 GILBRETH ROAD, SUITE 301, BURLINGAME, CALIFORNIA 94010
(Address of principal executive offices)
(650) 409-2020
(Registrant's telephone number, including area code)
---------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
COMMON STOCK, $.001 PAR VALUE NASDAQ NATIONAL MARKET SYSTEM
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES NO X
--- ---
AS OF MAY 1, 2000, THERE WERE 21,963,860 OUTSTANDING SHARES OF
COMMON STOCK, PAR VALUE $.001 PER SHARE, OF INTERMUNE PHARMACEUTICALS, INC.
This report on Form 10-Q contains 14 pages.
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INTERMUNE PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
ITEM PART I. FINANCIAL INFORMATION NUMBER
------
<S> <C> <C>
1. Financial Statements (unaudited):
a. Condensed Balance Sheets at December 31, 1999 and March 31, 2000.......................... 3
b. Condensed Statements of Operations for the three months ended March 31, 1999 and 2000
and for the period from February 25, 1998 (inception) to March 31, 2000.................. 4
c. Condensed Statements of Cash Flows for the three months ended March 31, 1999 and 2000
and for the period from February 25, 1998 (inception) to March 31, 2000.................. 5
d. Notes to Condensed Financial Statements................................................... 6-8
2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 8-10
3. Quantitative and Qualitative Disclosures about Market Risk.................................... 10
PART II. OTHER INFORMATION
2. Changes in Securities and Use of Proceeds...................................................... 11
4. Submission of Matters to a Vote of Security Holders............................................ 11
6. Exhibits and Reports on Form 8-K............................................................... 12
Signatures..................................................................................... 13
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERMUNE PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 3,772,110 $ 127,399,645
Short-term investments, available for sale................................. 442,184 11,882,618
Accounts receivable, net................................................... 409,392 81,477
Receivable from Connetics.................................................. -- 746,447
Inventories................................................................ 831,145 280,910
Notes receivable from officer.............................................. 103,750 105,625
Other current assets and prepaid expenses ................................. 18,696 652,091
----------------- -----------------
Total current assets..................................................... 5,577,277 141,148,813
Office equipment, net......................................................... 27,901 407,316
Restricted cash balance....................................................... 250,000 250,000
----------------- -----------------
$ 5,855,178 $ 141,806,129
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .......................................................... $ 1,809,028 $ 2,076,954
Accrued offering costs..................................................... -- 550,000
Accrued payroll............................................................ 93,652 178,827
Payable to Connetics....................................................... 538,434 --
Royalty payable to Genentech............................................... 1,913,785 861,854
----------------- -----------------
Total current liabilities................................................ 4,354,899 3,667,635
Long-term obligations payable to Connetics.................................... 1,624,343 1,667,357
Redeemable convertible preferred stock........................................ 7,416,427 --
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, $ .001 par value; authorized:
5,000,000 shares; 1,835,000 shares at December 31, 1999 and
none at March 31, 2000................................................... 4,506,804 --
Common stock, $.001 par value; authorized: 45,000,000 shares; issued
and outstanding: 1,890,833 shares at December 31, 1999 and 21,963,860
shares at March 31, 2000................................................. 1,891 21,964
Additional paid-in capital................................................. 5,657,273 167,705,575
Deferred compensation related to stock options............................. (5,285,860) (13,110,910)
Notes receivable from stockholder.......................................... -- (89,600)
Accumulated other comprehensive income (loss).............................. 41 (3,196)
Deficit accumulated during the development stage........................... (12,420,640) (18,052,696)
----------------- -----------------
Total stockholders' equity (deficit)..................................... (7,540,491) 136,471,137
----------------- -----------------
$ 5,855,178 $ 141,806,129
================= =================
</TABLE>
See accompanying notes to Condensed Financial Statements.
3
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INTERMUNE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
FEBRUARY 25,
THREE MONTHS ENDED 1998
MARCH 31, (INCEPTION) TO
---------------------------------- MARCH 31,
1999 2000 2000
-------------- ----------------- -----------------
<S> <C> <C> <C>
Product sales, net......................... $ -- $ 105,967 $ 662,368
Costs and expenses:
Cost of goods sold........................ -- 55,470 295,272
Research and development.................. 489,320 4,037,059 8,155,237
Selling, general and administrative....... 392,946 1,294,724 4,584,391
Amortization of deferred compensation..... -- 758,440 1,103,451
Acquired pre-FDA approval rights.......... -- -- 5,093,750
-------------- ----------------- -----------------
Total costs and expenses............... 882,266 6,145,693 19,232,101
-------------- ----------------- -----------------
Loss from operations...................... (882,266) (6,039,726) (18,569,733)
Other income (expense):
Interest income.......................... 58,160 497,685 792,994
Interest expense......................... -- (90,015) (275,957)
-------------- ----------------- -----------------
Net loss................................... $(824,106) (5,632,056) (18,052,696)
==============
Preferred stock accretion.................. (268,970) (925,735)
Deemed redeemable preferred stock dividend. (27,762,000) (27,762,000)
----------------- -----------------
Net loss applicable to common stockholders. $(33,663,026) $(46,740,431)
================= =================
Basic and diluted net loss per share....... $ (2.17)
=================
Shares used in computing basic and
diluted net loss per common share......... 15,528,371
</TABLE>
See accompanying notes to Condensed Financial Statements.
4
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INTERMUNE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
THREE MONTHS ENDED FEBRUARY 25, 1998
MARCH 31, (INCEPTION) TO
------------------------------------ MARCH 31,
1999 2000 2000
---------------- ---------------- --------------------
<S> <C> <C> <C>
Cash flows used for operating activities:
Net loss..................................................... $(824,106) $(5,632,056) $(18,052,696)
Adjustments to reconcile net loss to net cash used
for operating activities:
Amortization of deferred compensation..................... -- 758,440 1,103,451
Compensation related to vested stock options issued to
consultants for services................................ -- 687,088 687,088
Accretion of long-term obligations payable to parent
(Connetics)........................................... -- 43,014 153,688
Stock issued for acquired pre-FDA approval rights......... -- -- 5,093,750
Forgiveness of related party obligation................... -- -- 253,000
Depreciation ............................................. -- 13,744 16,308
Changes in operating assets and liabilities:
Current and other assets.................................. (138,005) 242,880 (1,370,103)
Current liabilities....................................... 348,771 903,101 2,805,781
Payable to Connetics...................................... 46,233 (1,284,881) (1,246,447)
Royalty payable to Genentech.............................. 439,526 (1,051,931) 861,854
---------------- ---------------- --------------------
Net cash used for operating activities................. (127,581) (5,320,601) (9,694,326)
Cash flows from investing activities:
Purchase of capital and equipment............................ -- (393,159) (423,624)
Purchases of short-term investments.......................... (167,860) (135,622,450) (171,228,953)
Sales and maturities of short-term investments............... 122,577 124,178,779 159,343,139
---------------- ---------------- --------------------
Net cash used for investing activities................. (45,283) (11,836,830) (12,309,438)
Cash flows from financing activities:
Contributed capital for preferred stock...................... -- -- 6,395,600
Return of capital to Parent (Connetics)...................... -- (1,000,000) (6,221,877)
Net proceeds from initial public offering of common stock.... -- 115,528,473 115,528,473
Proceeds from redeemable preferred stock..................... -- 25,838,146 32,597,808
Proceeds from issuance of common stock....................... -- -- 663,350
Proceeds from exercise of stock options...................... -- 418,347 440,847
Repurchase of restricted stock............................... -- -- (792)
---------------- ---------------- --------------------
Net cash provided by financing activities.............. -- 140,784,966 149,403,409
---------------- ---------------- --------------------
Net increase (decrease) in cash and cash equivalents ........... (172,864) 123,627,535 127,399,645
Cash and cash equivalents at beginning of period................ 2,314,781 3,772,110 --
---------------- ---------------- --------------------
Cash and cash equivalents at end of period...................... $2,141,917 $127,399,645 $127,399,645
================ ================ ====================
Supplemental disclosure of cash flow information:
Return of capital on obligation to Parent (Connetics)..... -- -- $(2,013,669)
Long-term obligation on return of capital................. -- -- 1,513,669
Short-term obligation on return of capital................ -- 500,000 1,000,000
Deferred stock compensation............................... -- 8,583,490 14,214,361
</TABLE>
See accompanying notes to Condensed Financial Statements.
5
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
In the opinion of the management of InterMune Pharmaceuticals, Inc.,
("InterMune," "we," "our," or "us"), the accompanying unaudited financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly our financial position, results of
operations and cash flows for the periods presented. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with our financial statements and
notes thereto for the year ended December 31, 1999, which are contained in
our Registration Statement filed on Form S-1, as amended, declared effective
by the Securities and Exchange Commission on March 23, 2000 (File No.
333-96029). The results of operations for the interim periods presented are
not necessarily indicative of results that may be expected for any other
interim period or for the full fiscal year.
REVENUE RECOGNITION
Revenues from product sales are recognized upon shipment, net of
allowances for estimated returns, rebates and chargebacks. We are obligated
to accept from customers the return of pharmaceuticals that have reached
their expiration date. We monitor product ordering cycles and actual returns,
product date codes and wholesale inventory levels to estimate potential
product return rates. We believe that our product return reserves are
adequate, and we have not experienced any significant returns of expired
product.
Sales and related costs of sales and accounts receivable for sales
below the baseline amount are transacted for Connetics Corporation under the
Transition Agreement, dated April 27, 1999, that expires December 31, 2001.
For sales below the baseline amount, any amounts in excess of net revenues
less costs to produce and market are paid to Connetics under the Transition
Agreement. These sales, costs of sales and amounts receivable are recorded by
us on a net basis, which is equivalent to zero in the accompanying financial
statements. Thus, we do not record receivables or product returns for sales
transacted for Connetics in their financial statements. Such sales, costs of
sales and accounts receivable are not subject to the risks and rewards of
ownership by us.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of highly liquid investments with
original maturities when purchased of less than three months. We consider
investments with maturities beyond three months at the date of acquisition
and that mature within one year from the balance sheet date to be short-term
investments. We carry cash equivalents and short-term investments at fair
value, with unrealized gains and losses, net of tax, as a separate component
of stockholders' equity. The cost of securities sold is based on the specific
identification method.
Cash in excess of immediate requirements is invested with regard to
liquidity and return and, wherever possible, we seek to minimize the
potential effects of concentration and degrees of risk.
Investment securities are classified as available-for-sale and
unrealized holding gains and losses are included in comprehensive income
(loss). In accordance with Statement of Financial Standards (SFAS) No. 115,
6
<PAGE>
Accounting for Certain Investments in Debt and Equity Securities Realized
gains or losses, calculated based on the specific identification method, were
not material for any period.
NET LOSS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share, and SEC Staff
Accounting Bulletin (or SAB) No. 98, basic net income (loss) per share is
computed by dividing the net income (loss) for the period by the weighted
average number of common shares outstanding during the period. Shares subject
to repurchase are deducted from the outstanding shares in arriving at the
weighted average shares outstanding. Diluted net income (loss) per share is
computed by dividing the net income (loss) for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. We excluded potentially dilutive securities, composed of incremental
common shares issuable upon the exercise of stock options and common shares
issuable on conversion of preferred stock, from historical diluted loss per
share because of their anti-dilutive effect. No earnings per share
information is presented for the three months ended March 31, 1999, as
InterMune was a wholly owned subsidiary of Connetics.
DEFERRED COMPENSATION
We have recorded deferred compensation for options granted in fiscal
year 1999 and the three-month period ended March 31, 2000. As of March 31,
2000, we had recorded aggregate deferred stock compensation of $14.2 million,
representing the difference between the deemed fair value of our common stock
for financial reporting purposes on the date such options were granted and
the applicable exercise prices. Such amount is included as a reduction of
stockholders' equity and is being amortized using the graded vesting method
over the vesting period of the individual options, which is generally five
years. This graded vesting method provides for vesting of portions of the
overall award at interim dates and results in higher vesting in earlier years
than straight-line vesting. The total charges to be recorded in future
periods from amortization of deferred stock compensation as of March 31, 2000
are anticipated to be approximately $5.8 million, $3.8 million, $2.1 million,
$1.0 million and $0.4 million for the remaining nine months of 2000, and for
2001, 2002, 2003 and 2004, respectively.
FINANCING ACTIVITIES
On January 7 and 27, 2000, we issued an aggregate of 4,876,916
shares of Series B redeemable convertible preferred stock at $5.59 per share
for aggregate proceeds of $27.3 million. We incurred approximately $1.5
million of issuance costs, including 120,000 shares of Series B redeemable
convertible preferred stock valued at $5.59 per share paid as a commission to
the private placement agent.
On January 7, 2000, pursuant to the terms of the collaboration
agreement with Connetics, we also issued to Connetics 89,445 shares of Series
B convertible preferred stock.
We recorded a deemed dividend of $27.8 million in January 2000, upon
the issuance of the 4,876,916 shares of Series B redeemable preferred stock.
At the dates of issuance, we believed the per share price of $5.59
represented the fair value of the preferred stock and was in excess of the
deemed fair value of our common stock. Subsequent to the commencement of our
initial public offering process, we re-evaluated the deemed fair market value
of our common stock as of January 2000 and determined it to be $12.60 to
$14.40 per share. Accordingly, the incremental fair value is deemed to be the
equivalent of a preferred stock dividend. We recorded the deemed dividend at
the date of issuance by offsetting charges and credits to additional paid in
capital of $27.8 million, without any effect on total stockholders' equity.
The amount increased the loss applicable to common stockholders in the
calculation of basic net loss per share for the first quarter of 2000.
On March 29, 2000, we closed our initial public offering, in which
we sold 6,250,000 shares of our common stock at a price of $20.00 per share,
raising $125.0 million in gross proceeds. We received offering proceeds, net
of approximately $8.8 million in aggregate underwriters discounts and
commissions and $1.0 million in estimated related expenses, of approximately
$115.2 million. On the closing of the initial public offering, each
outstanding share of our preferred stock was converted into one share of
common stock.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this report on Form 10-Q contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this
document are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements. Our
actual results could differ materially from those described in our
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under the
heading "Risk Factors" and the risks and factors discussed in our
Registration Statement on Form S-1 declared effective on March 23, 2000 by
the Securities and Exchange Commission (File No. 333-96029).
InterMune's business is subject to significant risks, including, but
not limited to:
- - those discussed under the heading "Risk Factors" and the risks and
factors discussed in our Registration Statement on Form S-1 declared
effective on March 23, 2000 by the Securities and Exchange Commission
(File No. 333-96029);
- - the success of our research, development, commercialization, product
acceptance and capital raising efforts;
- - uncertainties associated with obtaining and enforcing patents important
to our business;
- - the lengthy and expensive regulatory process; and
- - possible competition from other products.
Even if our products appear promising at any stage of development,
they may not reach the market for a number of reasons. Such reasons include,
but are not limited to the possibilities that the potential products will:
- - be found ineffective during clinical trials,
- - fail to receive the necessary regulatory approvals,
- - be difficult to manufacture on a large scale,
- - be uneconomical to market or
- - be precluded from commercialization by the proprietary rights of third
parties.
Additional expenses, delays and losses of opportunities that may
arise out of these and other risks could have a material adverse impact on
our financial condition, results of operations and cash flows.
OVERVIEW
InterMune was formed in 1998 and began operations as a wholly owned
subsidiary of Connetics Corporation. We licensed from Genentech, Inc. and
Connetics the exclusive U.S. rights to ACTIMMUNE (Interferon gamma-1b)
Injection, an FDA-approved product. We currently market ACTIMMUNE in the
United States for the treatment of chronic granulomatous disease and
osteopetrosis. We have the rights and plan to develop ACTIMMUNE for a range
of diseases including idiopathic pulmonary fibrosis, infectious diseases and
cystic fibrosis.
We have sustained losses on a quarterly and an annual basis since
inception. As of March 31, 2000, we had an accumulated deficit of $18.1
million. Our net loss from operations was $6.0 million for the three-month
period ended March 31, 2000, and $0.9 million for the same period in 1999.
These losses resulted from significant costs incurred in the development and
marketing of our product.
Our expenses have consisted primarily of costs incurred in research
and development, sales and marketing and from general and administrative
costs associated with our operations. We expect our research and development
expenses to increase as we continue to commercialize ACTIMMUNE. Expansion of
our operations and the additional obligations of a public reporting entity
will also add to our expenses. As a result, we expect to incur losses for the
foreseeable future.
We have a limited history of operations and anticipate that our
quarterly results of operations will fluctuate for the foreseeable future due
to several factors, including market acceptance of current or new products,
patent conflicts, the introduction of new products by our competitors, the
timing and extent of our research and development efforts, and the timing of
significant orders. Our limited operating history makes accurate prediction
of future operating results difficult or impossible.
8
<PAGE>
Total sales of ACTIMMUNE, as reported by us to Connetics, were $1.8
million and $1.1 million for the three-month periods ended March 31, 2000 and
1999, respectively. Product sales as reported by InterMune for either the
three months ended March 31, 2000 or March 31, 1999 are not necessarily
indicative of product sales for any future period.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUE. Total revenues were $105,967 and $0 for the three
month-periods ended March 31, 2000 and 1999, respectively. The revenues in
2000 represent sales of ACTIMMUNE related to a new supply arrangement outside
the United States. The annual contractual baseline for ACTIMMUNE sales
established with Connetics increases nominally each year, until December 31,
2001, when it will be discontinued. Sales transacted for Connetics below the
annual contractual baseline are recorded on a net basis, which are zero, and
any amounts in excess of net revenues less costs to produce and market are
paid to Connetics.
COST OF GOODS SOLD. We recognized a total of $55,470 and $0 for the
three-month periods ended March 31, 2000 and 1999, respectively. Cost of
goods sold includes all product cost of goods sold including manufacturing
costs, royalties and distribution costs associated with our revenues. There
were no product sales in the period in 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $3,547,739 or 725%, to $4,037,059 for the three-month period
ended March 31, 2000, compared to $489,320 for the three-month period ended
March 31, 1999. The increase was due primarily to increased costs for
clinical trial expenses for ACTIMMUNE in new disease indications and the
expenses associated with our transfer of ACTIMMUNE to an additional
manufacturing facility. These costs have been recorded as research and
development expenses as the new facility is not yet operational. We expect
research and development expenses to increase significantly over the next
several years.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $1,294,724 and $392,946 for the three-month
periods ended March 31, 2000 and 1999, respectively, representing an
increase of 229%. This increase is attributable primarily to increased
staffing and related expenses necessary to manage the expansion of our
operations. We believe that selling, general and administrative expenses will
continue to increase in absolute dollars as a result of the anticipated
expansion of our administrative staff, increased marketing and selling
expenses for ACTIMMUNE in its approved diseases and the expenses associated
with being a public company, including but not limited to annual and public
reporting costs, directors' and officers' liability insurance and investor
relation programs.
AMORTIZATION OF DEFERRED COMPENSATION. We have recorded aggregate
deferred compensation charges of $14.2 million in connection with stock
options granted to our employees and non-employee directors through March 31,
2000. Amortization of deferred compensation was $758,440 and $0 for the
three-month periods ended March 31, 2000 and 1999, respectively. The deferred
compensation amounts are being amortized using the graded vesting method over
the vesting period of the individual options, which is generally five years.
INTEREST INCOME. Interest income increased to $497,685 for the
three-month period ended March 31, 2000, compared to $58,160 for the
three-month period ended March 31, 1999. The increase in interest income was
due to an increase in cash available for investments resulting from the
investment of the net proceeds from sales of our Series B redeemable
convertible preferred stock on January 7 and 27, 2000, and sale of our common
stock in our initial public offering, which closed on March 29, 2000.
INTEREST EXPENSE. Interest expense increased to $90,015 for the
three-month period ended March 31, 2000, compared to $0 for the three-month
period ended March 31, 1999. The increase in interest expense was due to
9
<PAGE>
$43,212 of imputed interest expense on the long-term obligation to Connetics
and $46,803 interest expense on the royalty payable obligation to Genentech,
Inc.
DEEMED DIVIDEND UPON ISSUANCE OF CONVERTIBLE PREFERRED STOCK. We
recorded a deemed dividend of $27,762,000 in January 2000, upon the issuance
of 4,876,916 shares of Series B redeemable preferred stock. At the dates of
issuance, we believed the per share price of $5.59 represented the fair value
of the preferred stock and was in excess of the deemed fair value of our
common stock. Subsequent to the commencement of our initial public offering
process, we re-evaluated the deemed fair value of our common stock as of
January 2000 and determined it to be $12.60 to $14.40 per share. Accordingly,
the incremental fair value is deemed to be the equivalent of a preferred
stock dividend. We recorded the deemed dividend at the date of issuance by
offsetting charges and credits to additional paid in capital of $27,762,000,
without any effect on total stockholders' equity. The amount increased the
loss applicable to common stockholders in the calculation of basic net loss
per share for first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
For the three-month period ended March 31, 2000, cash expenditures
for operating activities and additions to capital equipment were $5,713,760.
We anticipate that these expenditures will increase significantly in future
periods.
At March 31, 2000, we had available cash, cash equivalents and
short-term investments of $139,282,263. Our cash reserves are held in a
variety of interest-bearing instruments including high-grade corporate bonds,
commercial paper and money market accounts. Cash in excess of immediate
requirements is invested with regard to liquidity and return and, wherever
possible. We seek to minimize the potential effects of concentration and
degrees of risk.
At December 31, 1999, we had deferred payment of the royalties due
Genentech for 1999 of approximately $1.9 million under a series of
interest-bearing promissory notes that became due upon the closing of our
initial public offering on March 29, 2000. Genentech did not exercise their
option to convert these promissory notes into shares of our stock at a price
per share sold in our most recent financing. In March 2000, we paid all
monies due to Genentech in cash.
In addition, we made a cash payment of $1.0 million to Connetics
upon the closing of our initial public offering. This obligation was payable
at our option in cash or stock, and was contingent upon the closing of a
round of financing, an initial public offering or an acquisition of our
company. We recorded this payment as a "return of capital to parent."
We believe our existing cash, cash equivalents and short-term
investments, together with cash flows will be sufficient to fund our
operating expenses, debt obligations and capital requirements through at
least the end of 2001. Therefore, our capital requirements may increase in
future periods. As a result, we may require additional funds and may attempt
to raise additional funds through equity or debt financings, collaborative
arrangements with corporate partners or from other sources. We have no
commitments for any additional financings, additional funding may not be
available to finance our operations when needed or, if available, the terms
for obtaining such funds may not be favorable or may result in dilution to
our stockholders.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is confined to our cash and cash
equivalents, which have maturities of less than three months. We maintain an
investment portfolio of depository accounts, master notes and liquidity
optimized investment contracts. The securities in our investment portfolio
are not leveraged, are classified as available-for-sale and are, due to their
very short-term nature, subject to minimal interest rate risk. We currently
do not hedge interest rate exposure. Because of the short-term maturities of
our investments, we do not believe that an increase in market rates would
have any negative impact on the realized value of our investment portfolio.
10
<PAGE>
PART II - OTHER INFORMATION
INTERMUNE PHARMACEUTICALS, INC.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
1. In January 2000, we issued 4,876,916 aggregate shares of Series B
redeemable convertible preferred stock at $5.59 per share, for aggregate
cash proceeds of $27,262,000 and incurred approximately $1.5 million of
issuance costs, including 120,000 shares of Series B redeemable
convertible preferred stock valued at $5.59 per share. In addition, in
January 2000, pursuant to the terms of the collaboration agreement with
Connetics Corporation, InterMune issued to Connetics 89,445 shares of
series B convertible preferred stock. All of the preferred stock issued in
January 2000 was exempt from registration pursuant to Regulation D of the
Securities Act of 1933, as amended. All of InterMune's outstanding
preferred stock was converted into outstanding common stock upon the
closing of our initial public offering on March 29, 2000.
2. On March 29, 2000, we closed our initial public offering, at $20.00
per share, of 6,250,000 shares of common stock, pursuant to a registration
statement on Form S-1 as amended (Commission File No. 333-96029) that the
SEC had declared effective on March 23, 2000. The offering terminated
following the sale of 6,250,000 shares of registered securities. The
managing underwriters of the public offering were Warburg Dillon Read LLC,
Chase H&Q and Prudential Vector Securities. The aggregate offering price of
the shares offered by InterMune was $125.0 million, less underwriting
discounts and commissions of $8.8 million and expenses of approximately
$1.0 million. The offering proceeds of $115.2 million were to be and are
being used for clinical development and commercialization of our existing
products, working capital, payment of existing debt for royalties payable,
payment of obligations to Connetics, in-licensing new products and general
corporate purposes. The underwriters held a 30-day overallotment option to
purchase an additional 937,500 shares of our registered securities that
expired on April 24, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
11
<PAGE>
During the quarter ended March 31, 2000, we submitted one matter to our
shareholders by written consent in lieu of a shareholders meeting by which
our shareholders approved on March 20, 2000, among other things:
- InterMune's reincorporation in Delaware;
- an Amended and Restated Delaware Certificate of
Incorporation to be filed following the closing of the
initial public offering, which, among other things,
authorized 45,000,000 shares of common stock and 5,000,000
shares of preferred stock;
- an amendment and restatement of InterMune's Bylaws, which,
among other things:
(a) prohibit stockholders from calling a special
meeting of stockholders,
(b) enable the board of directors and/or at least
two-thirds of the stockholders to amend the
bylaws and
(c) provide for indemnification of officers and
directors of the Company to the full extent
authorized or permitted by Delaware law;
- InterMune's 2000 Equity Incentive Plan;
- InterMune's Employee Stock Purchase Plan;
- InterMune's 2000 Non-Employee Directors' Stock Option Plan;
- the form of indemnification agreement to be entered into
with each of InterMune's officers and directors;
- a classified board of directors with three classes;
- the board members' ability to elect directors and fix the
number of directors under specific circumstances;
- elimination of stockholder actions by written consent; and
- advance notice requirements for stockholders wishing to
propose business or director nominations to be brought
before a meeting of the stockholders.
There were no votes against any of the matters, and the number of shares of
each class and series outstanding cast for and/or withheld was as follows:
<TABLE>
<CAPTION>
IN FAVOR WITHHELD
--------------- -------------
<S> <C> <C>
Series A-1 Preferred Stock............ 1,835,000 None
Series A-2 Preferred Stock............ 6,000,000 None
Series B Preferred Stock.............. 4,821,554 144,807
Common Stock.......................... 1,640,833 1,151,666
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herein:
(10.20) Form of Change of Control Provisions for Officers.
(10.21) Employment Offer Letter, dated February 21, 2000, between
Registrant and David Cory.
(10.22) Employment Offer Letter, dated March 3, 2000, between
Registrant and Stephen N. Rosenfield.
(27) Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 2000, we filed no Current Reports
on Form 8-K.
12
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
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.
Date: May 11, 2000 InterMune Pharmaceuticals, Inc.
----------------------------
By: /s/ TIMOTHY P. LYNCH
----------------------------------
Timothy P. Lynch
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer and Duly
Authorized Officer)
13
<PAGE>
EXHIBIT 10.20
FORM OF CHANGE OF CONTROL PROVISION FOR OFFICERS:
If, within the thirteen (13) months following a Trigger Event (defined below),
Purchaser's service as an Employee is either (1) Involuntarily Terminated
Without Cause or (2) Constructively Terminated, then the Repurchase Option shall
lapse in full as to [ALTERNATIVES: all (for CEO, CFO and General Counsel) or one
half (for all other vice presidents)] of the shares that are subject to such
Repurchase Option on the date of such termination of service as an Employee.
However, if the benefit Purchaser would receive from such lapse of the
Repurchase Option by itself or when combined with any other payment or benefit
Purchaser receives (each a "Payment") would (i) constitute a "parachute payment"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"), and (ii) but for this sentence, be subject to the excise
tax imposed by Section 4999 of the Code (the "Excise Tax"), then the aggregate
value of such Payments shall be either (x) the full amount of such Payment or
(y) such lesser amount (any Payment in cash being reduced first and the order in
reduction of other Payments to be determined so as to provide the greatest
reduction in the amount subject to the Excise Tax with the least reduction in
the aggregate amount of Payments) as would result in no portion of the Payments
being subject to the Excise Tax, whichever of the foregoing amounts, taking into
account the applicable federal, state and local employment taxes, income taxes,
and the Excise Tax results in Purchaser's receipt, on an after-tax basis, of the
greater amount of the Payments notwithstanding that all or some portion of the
Payments may be subject to the Excise Tax. Purchaser shall be solely responsible
for the payment of all personal tax liability that is incurred as a result of
the payments and benefits received under this provision, and Purchaser will not
be reimbursed by the Company for any such payments.
"PARACHUTE PAYMENT" CALCULATION AND ADJUSTMENT. All determinations required to
be made under this Section __ regarding whether a Payment is a "parachute
payment" shall be made by the Company's independent auditors. Such auditors
shall provide detailed supporting calculations both to the Company and Purchaser
within fifteen (15) business days of the date that Purchaser's status as an
Employee terminates or such earlier time as is requested by the Company. For
purposes of making the calculations required by this Section __, the auditors
may make reasonable assumptions and approximations concerning applicable taxes
and may rely on reasonable, good faith determinations concerning the application
of the Code. The Company and Purchaser shall furnish to the auditors such
information and documents as the auditors may reasonably request in order to
make a determination under this Section __. The Company shall bear all costs the
auditors may reasonably incur in connection with any calculations contemplated
by this Section __. Any such determination by the Company's independent auditors
shall be binding upon the Company and Purchaser. Within five (5) days after
receipt of the calculations, the Company shall pay to or distribute to or for
the benefit of Purchaser such amounts as are then due to Purchaser under this
Agreement. As a result of the uncertainty in the application of Section 280G of
the Code at the time of the initial determination by the Company's independent
auditors hereunder, it is possible that a Payment or Payments, as the case may
be, will have been made by the Company that should not have been made
("Overpayment") or that an additional Payment or Payments, as the case may be,
which will not have been made by the Company could have been made
("Underpayment"), in each case, consistent with the calculations required to be
made hereunder. In the event that the Company's independent auditors, based upon
the assertion of the deficiency by the Internal Revenue Service against
Purchaser or the Company that the Company's independent auditors believe has a
high probability of success, determine that an Overpayment has been made, any
such overpayment paid or distributed by the Company to or for the benefit of
Purchaser shall be treated for all purposes as a loan AB INITIO to Purchaser
that Purchaser shall repay to the Company together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code; provided
however, that no such loan shall be deemed to have been made and no amount shall
be payable by Purchaser to the Company if and to the extent such deemed loan and
payment would not either reduce the amount on which Purchaser is subject to tax
under Section 1 and Section 4999 of the Code or generate a refund of such taxes.
In the event that the Company's independent auditors, based upon controlling
precedent or other substantial authority, determine that an Underpayment has
occurred, any such Underpayment shall be promptly paid by the Company to or for
the benefit of Purchaser together with interest at the applicable federal rate
provided for in Section 7872(f)(2) of the Code.
CONSTRUCTIVELY TERMINATED. For purposes of this Section __, Constructively
Terminated shall mean the voluntary termination by Purchaser of Purchaser's
service as an Employee after any of the following are undertaken without
Purchaser's express written consent: (a) the assignment to Purchaser of any
duties or responsibilities which result in a material diminution or adverse
change of Purchaser's position, status or circumstances of employment, but shall
not include a mere change in title or reporting relationship; (b) reduction in
Purchaser's base salary to less than Purchaser's base salary as in effect
immediately prior to the transaction; (c) any failure by the Company to continue
in effect any benefit plan or arrangement, including incentive plans or plans to
receive securities of the
<PAGE>
Company, in which Purchaser is participating (hereinafter referred to as
"Benefit Plans"), or the taking of any action by the Company which would
adversely affect Purchaser's participation in or reduce Purchaser's benefits
under any Benefit Plans or deprive Purchaser of any fringe benefit then
enjoyed by Purchaser, PROVIDED, HOWEVER, that Purchaser's termination is not
deemed to be Constructively Terminated if the Company offers a range of
benefit plans and programs which, taken as a whole, are comparable to the
Benefit Plans; (d) a relocation of Purchaser's office at which Purchaser
principally performs duties or the Company's principal business offices, if
Purchaser's principal office is at such offices, to a location more than
thirty-five (35) miles from the location at which Purchaser performs duties
prior to the Trigger Event, except for required travel by Purchaser on the
Company's business to an extent substantially consistent with Purchaser's
business travel obligations at the time of a Trigger Event; (e) any material
breach by the Company of any agreement between Purchaser and the Company
concerning Purchaser's employment; or (f) any failure by the Company to
obtain the assumption of any material agreement between Purchaser and the
Company concerning Purchaser's employment by any successor or assign of the
Company.
INVOLUNTARILY TERMINATED WITHOUT CAUSE. For purposes of this Section __,
Involuntarily Terminated Without Cause shall mean dismissal or discharge of
Purchaser for any reason other than Cause, death or disability. For purposes
herein, "Cause" means reasonable belief that Purchaser has committed one or more
of the following: (i) conviction of any felony or any crime involving moral
turpitude or dishonesty; (ii) participation in a fraud, misappropriation, or
embezzlement of Company funds or property or act of dishonesty against the
Company; (iii) material breach of the Company's policies, provided that the
Company has given Purchaser written notification of the breach and has provided
Purchaser with fifteen (15) days' opportunity to cure the breach; (iv) willful
conduct or gross negligence which is materially injurious to the reputation,
business or business relationships of the Company or results in material damage
to the Company's property; or (v) material breach of the Proprietary Information
and Inventions Agreement between Purchaser and the Company.
TRIGGER EVENT. For purposes of this Section __, Trigger Event shall mean a
transaction described in subparts (ii) and (iii) of subsection 11(c) of the Plan
in which the Company's stockholders immediately prior to such transaction do not
wield more than fifty percent (50%) of the voting power entitled to vote for
either Directors or members of the board of directors of the Company's ultimate
parent corporation immediately after such transaction. Any person who acquired
voting securities of the Company prior to the occurrence of a transaction
described in subparts (ii) and (iii) of subsection 11(c) of the Plan in
contemplation of such transaction, and who immediately after such transaction
possesses direct or indirect beneficial ownership of at least ten percent (10%)
of such voting power shall not be included in the group of stockholders of the
Company immediately prior to such transaction.
SHARES REPURCHASABLE AT PURCHASER'S ORIGINAL EXERCISE PRICE. The Company may
repurchase all or any of the Unvested Shares at a price ("Option Price") equal
to the Purchaser's Exercise Price for such shares of ______ dollars ($_______)
per share as indicated on Purchaser's Stock Option Grant Notice.
EXERCISE OF REPURCHASE OPTION. The Repurchase Option shall be exercised by
written notice signed by an Officer of the Company and delivered or mailed as
provided herein. Such notice shall identify the number of shares of Common Stock
to be purchased and shall notify Purchaser of the time, place and date for
settlement of such purchase, which shall be scheduled by the Company within the
term of the Repurchase Option set forth above. The Company shall be entitled to
pay for any shares of Common Stock purchased pursuant to its Repurchase Option
at the Company's option in cash or by offset against any indebtedness owing to
the Company by Purchaser (including without limitation any Note given in payment
for the Common Stock), or by a combination of both. Upon delivery of such notice
and payment of the purchase price in any of the ways described above, the
Company shall become the legal and beneficial owner of the Common Stock being
repurchased and all rights and interest therein or related thereto, and the
Company shall have the right to transfer to its own name the Common Stock being
repurchased by the Company, without further action by Purchaser.
<PAGE>
EXHIBIT 10.21
February 21, 2000
Mr. David A. Cory, R.Ph.
7500 Tanglewood Drive
Raleigh, North Carolina 27613
Dear David:
On behalf of InterMune Pharmaceuticals, Inc., we are pleased to offer you the
position of Vice President, Sales and Marketing, reporting to Scott Harkonen,
President and Chief Executive Officer.
The terms of your employment will be as follows:
Your starting salary will be $165,000 per year. As a full-time employee of
InterMune Pharmaceuticals, you will be eligible for the Company's standard
benefits package including medical and dental insurance coverage. Your position
is exempt, and you will not be eligible for overtime. In addition, the Company
provide you with a one-time sign-on bonus of $25,000 one month following your
first day of employment, and is subject to payback on a prorated basis if
employment is terminated before one year. In addition, the Company will provide
you with a $55,000 relocation package to include 6 month temporary housing at
$2,000 per month. The remaining balance is to be used at your discretion.
You will also be eligible for a performance bonus of 20% of your salary, based
on sales targets to be determined at a later date.
Subject to approval of the Board of Directors, on date of hire you will be
granted an option to purchase 100,000 shares of InterMune Pharmaceuticals, Inc.
stock. Your right to exercise the shares of this option will be subject to a
vesting schedule, such that 100,000 shares of your option will be fully vested
at the end of five years completed employment. The terms and conditions of this
option, including vesting, will be governed by an agreement that you will be
required to sign.
As a condition of your employment, you will be required to provide proof of US
citizenship or that you are legally entitled to work in the United States, and
to execute and be bound by the terms of the enclosed Proprietary Information and
Invention Agreement. In that regard, please be aware that Company policy
prohibits all employees from bringing to the Company, or using in performance of
their responsibilities at the Company, any confidential information, trade
secrets, or propriety material or processes of any previous employer. Employment
with the Company is at will, is not for any specific term and can be terminated
by you or the Company at any time for any reason with or without cause.
This offer remains open through Monday, February 28, 2000. Upon acceptance of
this offer, the terms described in this letter and in the Proprietary
Information and Invention Agreement shall be the terms of your employment,
superseding any other employment agreements or understandings with InterMune.
Any additions or modifications of these terms must be in writing and signed by
you and an officer of InterMune Pharmaceuticals, Inc. Your anticipated start
date will be on or before March 13, 2000.
Again, let me indicate how pleased we are to extend this offer, and how much we
at InterMune look forward to working with you. We anticipate that you will find
this an exciting and challenging position in a dynamic and growing company.
Please indicate your acceptance by signing and returning the enclosed duplicate
original of this letter to me.
Very truly yours,
/s/ Scott Harrison, M.D.
W. Scott Harkonen, M.D.
President and Chief Executive Officer
<PAGE>
UNDERSTOOD AND ACCEPTED:
/s/ David Cory 2/28/00
- -------------------------------------------------------------------
David Cory Date
<PAGE>
EXHIBIT 10.22
March 3, 2000
Stephen N. Rosenfield
Dear Stephen:
On behalf of InterMune Pharmaceuticals, Inc., I am pleased to offer you the
position of Senior Vice President of Legal Affairs and General Counsel reporting
to W. Scott Harkonen, President and CEO.
The terms of your employment will be as follows:
Your starting salary will be $205,000 per year. In addition, you will be
eligible for a bonus of up to 20% of your salary on an annual basis. Also, as a
full-time employee of InterMune Pharmaceuticals, you will be eligible for the
Company's standard benefits package including medical and dental insurance
coverage. Your position is exempt, and you will not be eligible for overtime.
You will be entitled to three weeks paid vacation per year. In addition, the
Company will provide you with a one-time sign-on bonus of $50,000, one month
following your first day of employment, and is subject to payback on a prorated
basis if employment is terminated by you before twelve months after your start
date.
Subject to approval of the Board of Directors, on date of hire you will be
granted an option to purchase 140,000 shares of InterMune Pharmaceuticals, Inc.
stock. Your right to exercise the shares of this option will be subject to a
vesting schedule, such that 140,000 shares of your option will be fully vested
at the end of five years completed employment, with vesting with a one year
cliff and monthly thereafter. In the event of a change in control of the
company's ownership and a significant change in your responsibilities at the
company, 100% of your outstanding, unvested options will fully vest. The terms
and conditions of this option, including vesting, will be governed by an
agreement that you will be required to sign.
In the event of termination of your employment with the Company other than for
cause, or a significant change in your responsibilities following a change in
control of the company, you will be entitled to receive continuation of salary
and benefits for six months following your termination date. In addition, you
will be entitled to continue all vesting with respect to Company stock during
such six-month period.
<PAGE>
As a condition of your employment, you will be required to provide proof of U.S.
citizenship or that you are legally entitled to work in the United States, and
to execute and be bound by the terms of the enclosed Proprietary Information and
Invention Agreement. In that regard, please be aware that Company policy
prohibits all employees from bringing to the Company, or using in performance of
their responsibilities at the Company, any confidential information, trade
secrets, or propriety material or processes of any previous employer. Employment
with the Company is at will, is not for any specific term and can be terminated
by you or the Company at any time for any reason with or without cause.
This offer remains open through Saturday, March 4, 2000. Upon acceptance of this
offer, the terms described in this letter and in the Proprietary Information and
Invention Agreement shall be the terms of your employment, superseding any other
employment agreements or understandings with InterMune. Any additions or
modifications of these terms must be in writing and signed by you and an officer
of InterMune Pharmaceuticals, Inc. Your anticipated date of your start of hire
is Saturday, March 4, 2000.
Again, let me indicate how pleased I am to extend this offer, and how much we at
InterMune look forward to working with you. We anticipate that you will find
this an exciting and challenging position in a dynamic and growing company.
Please indicate your acceptance by signing and returning the enclosed duplicate
original of this letter to me.
Very truly yours,
/s/ W. Scott Harkonen, M.D.
- ---------------------------
W. Scott Harkonen, M.D.
President and CEO
InterMune Pharmaceuticals, Inc.
UNDERSTOOD AND ACCEPTED:
/s/ Stephen N. Rosenfield 3/3/00
- -------------------------------------------------------------------------
Name Stephen N. Rosenfield Date
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE THREE MONTH PERIOD ENDING MARCH 31, 2000, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<CASH> 139,282
<SECURITIES> 0
<RECEIVABLES> 81
<ALLOWANCES> 0
<INVENTORY> 281
<CURRENT-ASSETS> 141,149
<PP&E> 424
<DEPRECIATION> (17)
<TOTAL-ASSETS> 141,806
<CURRENT-LIABILITIES> 3,668
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 136,449
<TOTAL-LIABILITY-AND-EQUITY> 141,806
<SALES> 106
<TOTAL-REVENUES> 106
<CGS> 55
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (6,090)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (90)
<INCOME-PRETAX> (5,632)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,632)
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<NET-INCOME> (5,632)
<EPS-BASIC> (2.17)
<EPS-DILUTED> (2.17)
</TABLE>
