<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 0-29801
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INTERMUNE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3296648
(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)
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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 X NO
--- ---
AS OF OCTOBER 18, 2000, THERE WERE 23,892,957 OUTSTANDING SHARES OF
COMMON STOCK, PAR VALUE $.001 PER SHARE, OF INTERMUNE PHARMACEUTICALS, INC.
This report on Form 10-Q contains 16 pages.
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<PAGE>
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 September 30, 2000 and December 31, 1999 ..................... 1
b. Condensed Statements of Operations for the three- and nine-month periods ended September
30, 2000 and 1999 ....................................................................... 2
c. Condensed Statements of Cash Flows for the nine-month periods ended September 30, 2000
and 1999................................................................................. 3
d. Notes to Condensed Financial Statements................................................... 4-7
2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 8-12
3. Quantitative and Qualitative Disclosures about Market Risk..................................... 12
PART II. OTHER INFORMATION
2. Changes in Securities and Use of Proceeds...................................................... 13
6. Exhibits and Reports on Form 8-K............................................................... 13
Signatures..................................................................................... 14
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERMUNE PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 141,416 $ 3,772
Short-term investments, available for sale................................. 55,935 442
Accounts receivable, net................................................... 1,535 409
Inventories................................................................ 1,200 831
Notes receivable from officer.............................................. 109 104
Product revenue rights from Connetics, net................................. 2,633 --
Other current assets and prepaid expenses ................................. 657 19
--------------- --------------
Total current assets..................................................... 203,485 5,577
Property and equipment, net................................................... 766 28
Restricted cash balance....................................................... 250 250
--------------- --------------
$ 204,501 $ 5,855
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .......................................................... $ 2,714 $ 1,809
Accrued payroll............................................................ 367 94
Payable to Connetics....................................................... 883 538
Royalty payable to Genentech............................................... 397 1,914
--------------- --------------
Total current liabilities................................................ 4,361 4,355
Long-term obligations payable to Connetics.................................... -- 1,624
Redeemable convertible preferred stock........................................ -- 7,417
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, $ .001 par value; authorized:
5,000,000 shares; issued and outstanding: none at September
30, 2000 and 1,835,000 shares at December 31, 1999....................... -- 4,507
Common stock, $ .001 par value; authorized: 45,000,000 shares; issued
and outstanding: 23,892,957 shares at September 30, 2000 and 1,890,833
shares at December 31, 1999.............................................. 24 2
Additional paid-in capital................................................. 239,332 5,657
Deferred compensation related to stock options............................. (8,741) (5,286)
Notes receivable from stockholder.......................................... (90) --
Accumulated other comprehensive loss....................................... (16) --
Retained deficit........................................................... (30,369) (12,421)
--------------- --------------
Total stockholders' equity (deficit)..................................... 200,140 (7,541)
--------------- --------------
$ 204,501 $ 5,855
=============== ==============
</TABLE>
See accompanying notes to Condensed Financial Statements.
1
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ----------------------------
2000 1999 2000 1999
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Product sales, net..................... $ 3,831 $ -- $ 6,964 $ --
Costs and expenses:
Cost of goods sold..................... 1,457 -- 3,397 --
Amortization of product revenue
rights............................... 557 -- 1,777 --
Research and development............... 5,210 697 13,275 1,754
Selling, general and administrative.... 4,534 603 11,534 1,499
Acquired pre-FDA approval rights....... -- -- -- 1,094
---------- ---------- ------------ ------------
Total costs and expenses..... 11,758 1,300 29,983 4,347
---------- ---------- ------------ ------------
Loss from operations................... (7,927) (1,300) ( 23,019) (4,347)
Other income (expense):
Interest income..................... 2,537 58 5,232 173
Interest expense.................... (27) (64) (161) (103)
---------- ---------- ------------ ------------
Net loss............................... (5,417) (1,306) (17,948) (4,277)
---------- ---------- ------------ ------------
Preferred stock accretion.............. -- (247) (269) (411)
Deemed redeemable preferred stock
dividend............................. -- -- (27,762) --
---------- ---------- ------------ ------------
Net loss applicable to common
stockholders......................... $ (5,417) $ (1,553) $ (45,979) $ (4,688)
========== ========== ============ ============
Historical basic and diluted net loss
per common share..................... $ (0.25) $ (1.33) $ (3.03) $ (7.52)
========== ========== ============ ============
Weighted average shares used in
computing historical basic and
diluted net loss per common share.... 21,757 1,165 15,169 623
========== ========== ============ ============
Pro forma basic and diluted net loss
per common share..................... $ (0.25) $ (0.16) $ (2.41) $ (0.58)
========== ========== ============ ============
Weighted average shares used in
computing pro forma basic and
diluted net loss per common share.... 21,757 8,067 18,944 7,347
========== ========== ============ ============
</TABLE>
See accompanying notes to Condensed Financial Statements.
2
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
Cash flows used for operating activities: 2000 1999
-------------- -------------
<S> <C> <C>
Net loss..................................................... $ (17,948) $ (4,277)
Adjustments to reconcile net loss to net cash used
for operating activities:
Amortization of deferred compensation..................... 5,128 --
Compensation related to vested stock options issued to
consultants for services................................ 1,172 --
Accretion of long-term obligations payable to parent
(Connetics)........................................... 87 63
Stock issued for acquired pre-FDA approval rights......... -- 1,094
Depreciation ............................................. 91 --
Changes in operating assets and liabilities:
Current and other assets.................................. (4,770) (628)
Current liabilities....................................... 1,180 601
Payable to Connetics...................................... (1,367) (164)
Royalty payable to Genentech.............................. (1,516) 1,638
-------------- -------------
Net cash used for operating activities................. (17,943) (1,673)
Cash flows from investing activities:
Purchase of capital equipment................................ (830) (19)
Purchases of short-term investments.......................... (97,687) 2,307
Sales and maturities of short-term investments............... 42,178 (2,350)
-------------- -------------
Net cash used for investing activities................. (56,339) (62)
Cash flows from financing activities:
Contributed capital for preferred stock...................... -- 396
Return of capital to Parent (Connetics)...................... (1,000) (5,722)
Net proceeds from initial public offering of common stock.... 114,970 --
Net proceeds from private placement of common stock.......... 71,318 --
Proceeds from redeemable preferred stock..................... 26,176 7,005
Proceeds from issuance of common stock....................... -- 419
Proceeds from exercise of stock options...................... 462 --
-------------- -------------
Net cash provided by financing activities.............. 211,926 2,098
-------------- -------------
Net increase in cash and cash equivalents ...................... 137,644 363
Cash and cash equivalents at beginning of period................ 3,772 2,315
-------------- -------------
Cash and cash equivalents at end of period...................... $ 141,416 $ 2,678
============== =============
Supplemental disclosure of cash flow information:
Return of capital, obligation to Parent (Connetics)....... $ -- $(2,014)
Long-term obligation, return of capital................... -- 1,514
Short-term obligation on return of capital................ 500 --
Deferred stock compensation............................... 8,583 --
</TABLE>
See accompanying notes to Condensed Financial Statements.
3
<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 usually 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 on October 30, 2000
(File No. 333-45460). 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.
On June 27, 2000, we entered into the Revenue Adjustment Agreement with
Connetics Corporation by which we acquired from Connetics the rights to those
ACTIMMUNE-Registered Trademark- revenues under the baseline that we did not
already own (established by the Transition Agreement, dated April 27, 1999).
Beginning with the three-month period ended June 30, 2000, we recorded all
ACTIMMUNE revenues and related expenses that had been previously transacted for
Connetics. These sales, costs of sales and amounts receivable were recorded by
us on a net basis, in the accompanying financial statements for the three-month
period ended March 31, 2000, and the three and nine-month periods ended
September 30, 1999. Such sales, costs of sales and accounts receivable were not
subject to the risks and rewards of ownership by us. The Revenue Adjustment
Agreement terminated the Transition Agreement, Collaboration Agreement and
Section 5.2 of the Assignment Agreement with Connetics.
Total sales of ACTIMMUNE were $3.8 million and $1.5 million for the
three-month periods ended September 30, 2000 and 1999, respectively, and $8.8
million and $3.8 million for the nine-month periods ended September 30, 2000 and
1999, respectively. Sales for the three-month period ended March 31, 2000, and
the three and nine-month periods ended September 30, 1999, were reported by us
to Connetics and are not included in our financial statements. Product sales as
reported by InterMune for either the three-months ended September 30, 2000 and
1999, or the nine-month periods ended September 30, 2000 and 1999, are not
necessarily indicative of product sales for any future period.
4
<PAGE>
On June 27, 2000, through the Revenue Adjustment Agreement, we paid to
Connetics $5.2 million in cash in conjunction with the purchase of all the
rights to ACTIMMUNE from Connetics that we did not already own. The amount paid
to Connetics included $857,000 as the prepayment of obligations owed to them and
$4.4 million for product revenue rights that was capitalized as a current asset
and will be amortized based upon product units shipped over the next 12 months
of operations. Prior to this transaction, Connetics had the right to recognize
all ACTIMMUNE revenue and related expenses associated with approximately the
first $6.5 million in ACTIMMUNE sales in the United States in each of the years
2000 and 2001.
INVENTORIES
Inventories consist principally of finished goods products and are
stated at the lower of cost or market. Cost is determined by the first-in,
first-out (FIFO) method.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include highly liquid investments with
original maturities from the date of purchase. 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 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, 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. Unrealized losses total $16,000 and $0 at September 30, 2000 and
1999, respectively.
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. Earnings per share data for the nine months ended
September 30, 1999 does not include shares prior to April 27, 1999, because we
were a wholly owned subsidiary of Connetics.
Pro forma net loss per share has been computed as described above
and also gives effect to common equivalent shares arising from preferred
stock that automatically converted upon the closing of the Company's initial
public offering on March 24, 2000 (using the as-if converted method from
original date of issuance). For the nine months ended September 30, 1999, the
pro forma shares also reflect the common equivalent shares of preferred and
common stock issued on April 27, 1999, in connection with the reorganization
as though they had been outstanding for the entire year. The pro forma net
loss per share for the nine months ended September 30, 2000, includes the
impact of the deemed preferred stock dividend and excludes the preferred
stock accretion.
5
<PAGE>
The calculation of historical and pro forma basic and diluted net loss
per share is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ----------------------------
2000 1999 2000 1999
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Actual:
Net loss............................ $ (5,417) $ (1,306) $ (17,948) $ (4,277)
Preferred stock accretion........ -- (247) (269) (411)
Deemed dividend to preferred
shareholders .................. -- -- (27,762) --
---------- ---------- ------------ ------------
Net loss allocable to common
Shareholders................... $ (5,417) $ (1,553) $ (45,979) $ (4,688)
========== ========== ============ ============
Historical basic and diluted:
Weighted-average shares of
Common stock outstanding....... 22,864 1,790 16,348 994
Less: weighted-average shares
subject to repurchase.......... (1,107) (625) (1,179) (371)
---------- ---------- ------------ ------------
Weighted-average shares used in
computing basic and diluted net
loss per common share.......... 21,757 1,165 15,169 623
========== ========== ============ ============
Basic and diluted net loss per
Common share................... $ (0.25) $ (1.33) $ (3.03) $ (7.52)
========== ========== ============ ============
Pro forma basic and diluted:
Net loss allocable to common
stockholders .................. $ (5,417) $ (1,553) $ (45,979) $ (4,688)
Add: Preferred stock accretion... -- 247 269 411
---------- ---------- ------------ ------------
Net loss before preferred stock
accretion...................... $ (5,417) $ (1,306) $ (45,710) $ (4,277)
========== ========== ============ ============
Shares used above ............... 21,757 1,165 15,169 623
Pro forma adjustment to reflect
weighted average effect of
assumed conversion of preferred
stock.......................... -- 6,902 3,775 3,775
Pro forma adjustment to reflect
the common equivalent shares of
preferred and common stock
issued in connection with the
reorganization................. -- -- --- 2,949
Weighted-average shares used in
computing pro forma basic and
diluted net loss per common ---------- ---------- ------------ ------------
share ......................... 21,757 8,067 18,944 7,347
========== ========== ============ ============
Pro forma basic and diluted net
loss per common share.......... $(0.25) $ (0.16) $ (2.41) $ (0.58)
========== ========== ============ ============
</TABLE>
6
<PAGE>
DEFERRED COMPENSATION
We have recorded deferred compensation for options granted in fiscal
year 1999 and the nine-month period ended September 30, 2000. As of September
30, 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. A total of $0.3 million and $5.1 million of deferred
compensation expense has been recognized in fiscal 1999 and for the nine-month
period ended September 30, 2000, respectively. The total charges to be recorded
in future periods from amortization of deferred stock compensation as of
September 30, 2000 are anticipated to be approximately $1.4 million, $3.8
million, $2.1 million, $1.0 million and $0.4 million for the remaining three
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, and in connection with the above stock issuance, 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 4,966,361 shares of Series B redeemable preferred stock. At the
date 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
three and nine-month periods ended September 30, 2000.
On March 24, 2000, we sold 6,250,000 shares of our common stock in an
initial public offering 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 $1.2 million in
estimated related expenses, of approximately $115.0 million. On the closing of
the initial public offering, each outstanding share of our preferred stock was
converted into one share of common stock.
On August 18, 2000, we closed a private financing, in which we sold
2,000,000 shares of our common stock at a price of $38.00 per share, raising
$76.0 million in gross proceeds. We received net proceeds of approximately $71.0
million after deducting placement agent fees of $4.6 million and estimated
related expenses of $0.4 million from the aggregate proceeds of $76.0 million.
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 filed with the
Securities and Exchange Commission on October 30, 2000 (File No. 333-45460).
InterMune's business is subject to significant risks, including, but
not limited to:
- those discussed under heading "Risk Factors" and the risks and
factors discussed in our Registration Statement on Form S-1
filed with the Securities and Exchange Commission
on October 30, 2000 (File No. 333-45460);
- 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 an early 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. through
a sublicense with Connetics Corporation the exclusive U.S. rights to
commercialize ACTIMMUNE-Registered Trademark- (Interferon gamma-1b)
Injection, an FDA-approved product. We currently market ACTIMMUNE in the
United States for the treatment of chronic granulomatous disease and severe,
malignant osteopetrosis. We have the rights and plan to develop ACTIMMUNE for
a range of diseases including idiopathic pulmonary fibrosis, infectious
diseases, ovarian cancer and cystic fibrosis. In June 2000, through the
Assignment and Option Agreement, Connetics assigned the Genentech license
rights to us that we had sublicensed from Connetics. In addition, through the
Consent to Assignment Agreement, Genentech expanded those rights to include
the commercialization of ACTIMMUNE in Canada.
We have sustained losses on a quarterly and an annual basis since
inception. As of September 30, 2000, we had an accumulated deficit of $30.4
million. Our net loss from operations was $23.0 million for the nine-month
8
<PAGE>
period ended September 30, 2000, and $4.3 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.
On June 27, 2000, we entered into the Revenue Adjustment Agreement
with Connetics Corporation by which we acquired from Connetics the rights to
those ACTIMMUNE revenues under the baseline that we did not already own
(established by the Transition Agreement, dated April 27, 1999). Beginning
with the three-month period ended June 30, 2000, we recorded all ACTIMMUNE
revenues and related expenses that had been previously transacted for
Connetics. These sales, costs of sales and amounts receivable were recorded
by us on a net basis, which is equivalent to zero in the accompanying
financial statements for the three-month period ended March 31, 2000 and the
three and nine-month periods ended September 30, 1999. 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 were
not subject to the risks and rewards of ownership by us. The Revenue
Adjustment Agreement terminated the Transition Agreement, Collaboration
Agreement and Section 5.2 of the Assignment Agreement with Connetics.
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.
Total sales of ACTIMMUNE were $3.8 million and $1.5 million for the
three-month periods ended September 30, 2000 and 1999, respectively, and $8.8
million and $3.8 million for the nine-month periods ended September 30, 2000 and
1999, respectively. Sales for the three-month period ended March 31, 2000, and
the nine-month period ended September 30, 1999, were reported by us to Connetics
and are not included in our financial statements. Product sales as reported by
InterMune for either the three-months ended September 30, 2000 and 1999, or the
nine-month periods ended September 30, 2000 and 1999, are not necessarily
indicative of product sales for any future period.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUE. Total revenues were $3,831,000 and $0 for the three-month
periods ended September 30, 2000 and 1999, respectively. The revenues in 2000
represent all sales of ACTIMMUNE in the United States and sales outside the
United States, which relate to a supply arrangement in Canada. On June 27, 2000
through the Revenue Adjustment Agreement, we terminated the annual baseline
agreement with Connetics for ACTIMMUNE sales below a contractual baseline. As a
result, all sales for ACTIMMUNE beginning with the three month-period ended June
30, 2000, have been reflected in the accompanying financial statements. Sales
transacted for Connetics below the annual contractual baseline were previously
recorded on a net basis, and any amounts received in excess of net revenues less
costs to produce and market were paid to Connetics for the three-month period
ended September 30, 1999.
COST OF GOODS SOLD. We recognized a total of $1,457,000 and $0 for the
three-month periods ended September 30, 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.
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AMORTIZATION OF PRODUCT REVENUE RIGHTS. We recorded a total of $557,000
and $0 for the three-month periods ended September 30, 2000 and, 1999,
respectively. On June 27, 2000 through the Revenue Adjustment Agreement, we
purchased rights to all of the ACTIMMUNE revenues and related expenses that had
been previously transacted for Connetics. The amortization of those rights is
expensed for sales activities under the previous contractual baseline for the
year 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $4,513,000 or 647%, to $5,210,000 for the three-month period
ended September 30, 2000, compared to $697,000 for the three-month period
ended September 30, 1999. The increase was due primarily to increased costs
for clinical trial expenses for ACTIMMUNE in new disease indications. We
expect these costs to continue to increase over the next several years, as we
expand development of ACTIMMUNE for additional disease indications. The
increase in research and development expenses was also due to expenses
associated with our transfer of ACTIMMUNE to an additional manufacturing
facility and non-cash stock-based compensation. Included in research and
development expenses is the amortization of deferred compensation expense of
$514,000 in the three-month period ended September 30, 2000 and $0 in the
same period in 1999. 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 $4,534,000 and $603,000 for the three-month periods
ended September 30, 2000 and 1999, respectively, representing an increase of
652%. Of the $3,931,000 increase, $1,542,000 was related to the amortization of
deferred compensation expense. The remaining 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 relations programs.
INTEREST INCOME. Interest income increased to $2,537,000 for the
three-month period ended September 30, 2000, compared to $58,000 for the
three-month period ended September 30, 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 sales of our common stock in our
initial public offering, which closed on March 29, 2000, and sale of our common
stock in a private placement which closed on August 18, 2000.
INTEREST EXPENSE. Interest expense decreased to $27,000 for the
three-month period ended September 30, 2000, compared to $64,000 for the
three-month period ended September 30, 1999. The decrease in interest expense
was due to no interest expense on certain royalty payable obligations to
Genentech that were paid in full in conjunction with our initial public offering
on March 24, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUE. Total revenues were $6,964,000 and $0 for the nine
month-periods ended September 30, 2000 and 1999, respectively. The revenues in
2000 represent all sales of ACTIMMUNE in the United States for the six-month
period ended September 30, 2000, and sales outside the United States related to
a supply arrangement in Canada for the nine-month period ended September 30,
2000. On June 27, 2000 through the Revenue Adjustment Agreement, we terminated
the annual baseline agreement with Connetics for ACTIMMUNE sales below a
contractual baseline. As a result, all sales for ACTIMMUNE beginning with the
three month-period ended June 30, 2000, have been reflected in the accompanying
financial statements. Sales transacted for Connetics below the annual
contractual baseline were previously recorded on a net basis, and any amounts
received in excess of net revenues less costs to produce and market were paid to
Connetics for the three-month period ended March 31, 2000 and the nine-month
period ended September 30, 1999.
COST OF GOODS SOLD. We recognized a total of $3,397,000 and $0 for the
nine-month periods ended September 30, 2000 and 1999, respectively. Cost of
goods sold includes all product cost of goods sold including
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manufacturing costs, royalties and distribution costs associated with our
revenues. There were no product sales in the period in 1999.
AMORTIZATION OF PRODUCT REVENUE RIGHTS. We recorded a total of
$1,777,000 and $0 for the nine-month periods ended September 30, 2000 and,
1999, respectively. On June 27, 2000, we purchased rights to all of the
ACTIMMUNE revenues and related expenses that had been previously transacted for
Connetics. The amortization of those rights is expensed for sales activities
under the previous contractual baseline for the year 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $11,521,000 or 657%, to $13,275,000 for the nine-month period
ended September 30, 2000, compared to $1,754,000 for the nine-month period
ended September 30, 1999. The increase was due primarily to increased costs
for clinical trial expenses for ACTIMMUNE in new disease indications. We
expect these costs to continue to increase over the next several years, as we
expand development of ACTIMMUNE for additional disease indications. The
increase in research and development expenses was also due to expenses
associated with our transfer of ACTIMMUNE to an additional manufacturing
facility and non-cash stock-based compensation. These costs have been
recorded as research and development expenses as the new facility is not yet
operational. Also included in research and development expenses is the
amortization of deferred compensation expense of $1,282,000 in the nine-month
period ended September 30, 2000 and $0 in the same period in 1999. 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 $11,534,000 and $1,499,000 for the nine-month
periods ended September 30, 2000 and 1999, respectively, representing an
increase of 669%. Of the $10,035,000 increase, $3,845,000 was related to the
amortization of deferred compensation expense. The remaining 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 relations programs.
ACQUIRED PRE-FDA APPROVAL RIGHTS. We recorded a total of $0 and
$1,094,000 for the nine-month periods ended September 30, 2000, and 1999,
respectively. The amount paid in 1999 was for the acquisition of additional
development rights for ACTIMMUNE from Genentech Inc. The full amount was paid
with 875,000 shares of common stock.
INTEREST INCOME. Interest income increased to $5,232,000 for the
nine-month period ended September 30, 2000, compared to $173,000 for the
nine-month period ended September 30, 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, sale of our common stock in our
initial public offering, which closed on March 29, 2000, and sale of our common
stock in a private placement which closed on August 18, 2000.
INTEREST EXPENSE. Interest expense increased to $161,000 for the
nine-month period ended September 30, 2000, compared to $103,000 for the
nine-month period ended September 30, 1999. The increase in interest expense was
due to increases in the amount of imputed interest expense on short and
long-term obligations to Connetics.
DEEMED DIVIDEND UPON ISSUANCE OF CONVERTIBLE PREFERRED STOCK. We
recorded a deemed dividend of $27,762,000 in January 2000, upon the issuance of
4,966,361 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 the nine-month
period ended September 30, 2000.
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LIQUIDITY AND CAPITAL RESOURCES
For the nine-month period ended September 30, 2000, cash expenditures
for operating activities and additions to capital equipment were $18,773,000. We
anticipate that these expenditures will increase significantly in future
periods.
At September 30, 2000, we had available cash, cash equivalents and
short-term investments of $197,351,000. 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.
On June 27, 2000, through the Revenue Adjustment Agreement, we paid to
Connetics $5.2 million in cash in conjunction with the purchase of all the
rights to ACTIMMUNE from Connetics that we did not already own. The amount paid
to Connetics included $857,000 as the prepayment of obligations owed to them and
$4.4 million for product revenue rights that was capitalized as a current asset
and will be amortized based upon product units shipped over the next 12 months
of operations. Prior to this transaction, Connetics had the right to recognize
all ACTIMMUNE revenue and related expenses associated with approximately the
first $6.5 million in ACTIMMUNE sales in the United States in each of the years
2000 and 2001.
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 its 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
2003. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 1999, the Financial Accounting Standards Board, or FASB,
announced the delay of the effective date of Statement of Financial
Accounting Standards 133, or FAS 133, "Accounting for Derivative Instruments
and Hedging Activities," for one year, to the first quarter of 2001. Also, in
June 2000, the FASB issued FAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." FAS 133 as amended by FAS 138 is
intended to be comprehensive guidance on accounting for derivatives and
hedging activities. It requires companies to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those
instruments at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting under FAS 133 and
138. The impact of FAS 133 and 138 on our financial position and results of
operations is not expected to be material.
On March 31, 2000, the FASB issued Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation," which
provides guidance on several implementation issues related to Accounting
Principles Board Opinion No. 25. The most significant of these issues are
clarification of the definition of employee for purposes of applying Opinion
25 and the accounting for options that have been repriced. Under the
interpretation, the employer-employee relationship would be based on case law
and Internal Revenue Service regulations. The FASB granted an exception to
this definition for outside directors. Under the interpretation, a
modification that reduces the exercise price of a fixed stock option award,
commonly referred to as repricing, effectively changes the terms of the award
to a variable award subject to compensation expense. We currently do not have
any options that have been repriced. The impact of the interpretation on our
financial position and results of operations is not material.
In June 2000, the Securities and Exchange Commission delayed the
implementation date of Staff Accounting Bulletin No. 101, or SAB 101,
"Revenue Recognition in Financial Statements," until no later than the fourth
quarter of 2000. SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
We will adopt SAB 101 as required in the fourth quarter of 2000, and we are
currently evaluating the effect that such adoption, and the related
"Frequently Asked Questions" document, may have on our financial position and
results of operations.
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. At September
30, 2000, the average maturity of our short-term investments was 65 days.
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PART II - OTHER INFORMATION
INTERMUNE PHARMACEUTICALS, INC.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
1. On August 18, 2000, we closed a private financing, in which we sold 2,000,000
shares of our common stock at a price of $38.00 per share, raising $76.0 million
in gross proceeds. We received net proceeds of approximately $71.0 million after
deducting placement agent fees of $4.6 million and estimated related expenses of
$0.4 million from the aggregate proceeds of $76.0 million. The 2,000,000
shares were registered on September 21, 2000 pursuant to an S-1 registration
statement (Registration No. 333-45460).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herein:
(27) Financial Data Schedule.
(b) Reports on Form 8-K
On August 23, 2000, the Company filed a report on Form 8-K.
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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: October 30, 2000 InterMune Pharmaceuticals, Inc.
----------------------------
By: /S/ TIMOTHY P. LYNCH
----------------------------
Timothy P. Lynch
Chief Financial Officer
and Vice President,
(Principal Financial and
Accounting Officer and Duly
Authorized Officer)
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