<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 2000
REGISTRATION NO. 333-45460
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
POST-EFFECTIVE AMENDMENT NO. 1
ON
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
INTERMUNE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8731 94-3296648
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
</TABLE>
1710 GILBRETH ROAD, SUITE 301
BURLINGAME, CA 94010
(650) 409-2020
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
W. SCOTT HARKONEN, M.D.
CHIEF EXECUTIVE OFFICER AND PRESIDENT
1710 GILBRETH ROAD, SUITE 301
BURLINGAME, CA 94010
(650) 409-2020
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
Copies to:
LAURA BEREZIN, ESQ.
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
(650) 843-5000
--------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE>
REGISTRATION NO. 333-45460
2,000,000 SHARES
[LOGO]
COMMON STOCK
As of September 21, 2000, selling stockholders were selling 2,000,000 shares
of our common stock. We sold the shares to the selling stockholders on
August 18, 2000, in a private placement. We are not selling any shares of our
common stock under the prospectus and will not receive any of the proceeds from
the sale of shares by selling stockholders. Since September 21, 2000, selling
stockholders have sold an aggregate of 150,040 shares under the prospectus. We
provide more information on the selling stockholders and the 1,849,960 remaining
shares for sale under this prospectus in the section titled "Principal and
Selling Stockholders" on page 52.
Our common stock is traded on the Nasdaq National Market under the symbol
"ITMN." On October 27, 2000, the last reported sales price for our common stock
was $50.00 per share.
The selling stockholders may sell the shares of common stock described in
this prospectus in a number of different ways and at varying prices. We provide
more information about how the selling stockholders may sell their shares in the
section titled "Plan of Distribution" on page 56.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT RISKS THAT YOU SHOULD CONSIDER BEFORE
BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is October 30, 2000.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF
INVESTING IN OUR COMMON STOCK DISCUSSED UNDER "RISK FACTORS."
OUR BUSINESS
InterMune Pharmaceuticals develops and commercializes innovative products
for the treatment of serious pulmonary and infectious diseases and congenital
disorders. We have the exclusive license rights in the United States and Canada
to ACTIMMUNE for a range of diseases, including:
- chronic granulomatous disease, a life-threatening congenital disorder of
the immune system;
- osteopetrosis, a life-threatening congenital disorder causing an
overgrowth of bony structures;
- idiopathic pulmonary fibrosis, a life-threatening lung condition;
- infections caused by a type of bacteria known as mycobacteria
(mycobacterial infections), such as tuberculosis;
- infections caused by various fungi that attack patients with weakened
immune systems (systemic fungal infections), such as cryptococcal
meningitis and pneumonia;
- ovarian cancer, as well as other types of cancer, a life-threatening
disease caused by uncontrolled growth of cells; and
- cystic fibrosis, a congenital disorder that leads to chronic pulmonary
infections in children.
We currently market ACTIMMUNE in the United States for chronic granulomatous
disease and severe, malignant osteopetrosis. We have active development programs
underway for the other disease areas, several of which are in mid-or
advanced-stage human testing, known as clinical trials. Idiopathic pulmonary
fibrosis ($2.5 billion), mycobacterial infections ($500 million), systemic
fungal infections ($500 million), ovarian cancer ($500 million) and cystic
fibrosis ($500 million) are serious and difficult to treat diseases that we
believe represent a combined maximum market opportunity for ACTIMMUNE of
approximately $4.5 billion annually in the United States.
Interferon gamma-1b, the active ingredient in ACTIMMUNE, is a human protein
which plays a key role in preventing the formation of excessive scar, or
fibrotic, tissue and is a potent stimulator of the immune system. Interferon
gamma is biologically distinct from interferon alpha and interferon beta, two
related proteins that are currently marketed for the treatment of diseases such
as hepatitis B infection and multiple sclerosis. Interferon gamma has a superior
safety profile as compared to interferon alpha and interferon beta because it
results in fewer and less severe adverse side effects.
ACTIMMUNE--MARKETED DISEASE TREATMENTS
CHRONIC GRANULOMATOUS DISEASE. The U.S. Food and Drug Administration has
approved ACTIMMUNE for the treatment of chronic granulomatous disease, and we
currently market and sell ACTIMMUNE in the United States for this disease.
Chronic granulomatous disease causes patients to be vulnerable to severe
recurrent infections. This disease affects children, and no other FDA-approved
treatment specific to this disease currently exists. ACTIMMUNE was approved by
the FDA based on its ability to reduce the frequency and severity of infections
in these patients.
OSTEOPETROSIS. In February 2000, we received approval from the FDA for the
use of ACTIMMUNE for the treatment of severe, malignant osteopetrosis, and we
currently market and sell ACTIMMUNE in the United States for this disease. The
FDA has granted ACTIMMUNE orphan drug status for the treatment of osteopetrosis.
Osteopetrosis is a life-threatening, congenital disorder that results in
increased susceptibility to infection and an overgrowth of bony structures that
may lead to blindness
1
<PAGE>
and/or deafness. This disorder primarily affects children, and no other
effective treatment is currently available.
ACTIMMUNE--DISEASE TREATMENTS IN DEVELOPMENT
IDIOPATHIC PULMONARY FIBROSIS. We believe the most significant near-term
use of ACTIMMUNE is for the treatment of idiopathic pulmonary fibrosis, which
afflicts approximately 50,000 persons in the United States. Idiopathic pulmonary
fibrosis is characterized by progressive scarring of the lungs, which leads to
their deterioration and destruction. The prognosis of patients with idiopathic
pulmonary fibrosis is poor and most patients die from progressive loss of lung
function, which leads to suffocation. Treatment options for idiopathic pulmonary
fibrosis are limited and only minimally effective.
The results of testing to determine dosing and efficacy, known as a Phase II
clinical trial, published in October 1999 in THE NEW ENGLAND JOURNAL OF MEDICINE
showed statistically significant evidence that interferon gamma-1b can halt and
reverse the progression of idiopathic pulmonary fibrosis. In October 2000, we
commenced enrollment in a clinical trial for idiopathic pulmonary fibrosis by
which we intend to provide sufficient data for approval, known as a Phase III
pivotal clinical trial.
OTHER DISEASES. We are also developing ACTIMMUNE to treat a variety of
other diseases, including infectious diseases, ovarian cancer and cystic
fibrosis. Preclinical studies and clinical trials have demonstrated the
therapeutic potential of ACTIMMUNE against a broad range of infectious diseases,
notably mycobacterial and systemic fungal infections. A study published in
May 1997 in THE LANCET showed that interferon gamma-1b was effective in the
treatment of multidrug-resistant tuberculosis, a type of mycobacterial
infection. As a result of these studies, in July 2000, we commenced enrollment
in a Phase III pivotal clinical trial for ACTIMMUNE in the treatment of
multidrug-resistant tuberculosis. In January 2000, we commenced enrollment in a
Phase II clinical trial in cryptococcal meningitis, a type of systemic fungal
infection. The results of a Phase II trial published in March 2000 in the
BRITISH JOURNAL OF CANCER showed that interferon gamma-lb prolonged progression-
free survival when added to standard cisplatin-based treatment regimens. As a
result of this study, we intend to initiate a Phase III clinical trial in
ovarian cancer. We also intend to initiate Phase II clinical trials in cystic
fibrosis and in atypical mycobacterial infections, which are infections caused
by mycobacteria that differ appreciably from those that cause tuberculosis.
We believe that the risks and time required to obtain FDA approval for the
treatment of new diseases with ACTIMMUNE may be reduced because ACTIMMUNE has
proven to be safe for patients since its approval by the FDA in 1990 for the
treatment of chronic granulomatous disease.
OTHER PRODUCTS IN DEVELOPMENT
We also have two preclinical development programs that address infections
caused by two types of bacteria, pseudomonas aeruginosa and staphylococcus
aureus.
STRATEGY
We plan to pursue a growth strategy through:
- growing product revenue;
- expanding the number of FDA-approved indications for ACTIMMUNE;
- developing a sales and marketing organization to serve pulmonologists and
infectious disease specialists; and
- in-license or acquire preclinical and development-stage programs.
2
<PAGE>
BACKGROUND
InterMune was formed in 1998 and began operations as a wholly owned
subsidiary of Connetics Corporation. In 1998, Connetics acquired from
Genentech, Inc., and subsequently sublicensed to us, rights to develop and
commercialize ACTIMMUNE for a broad range of diseases. We initially focused on
marketing ACTIMMUNE for chronic granulomatous disease and developing it for
serious infectious diseases and congenital disorders. We have since expanded our
development and commercialization plans to include idiopathic pulmonary fibrosis
as well as other life-threatening pulmonary diseases. In June 2000, Connetics
assigned the Genentech license to us.
Our principal executive offices are located at 1710 Gilbreth Road, Suite
301, Burlingame, CA 94010. Our telephone number is (650) 409-2020. Our websites
are http://www.intermune.com and http://www.actimmune.com. We do not intend for
the information found on our website to be incorporated into or be a part of
this prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by us........................... 0 shares
Common stock offered by the selling stockholders..... 2,000,000 shares (as of September 21, 2000)
Common stock to be outstanding after this offering... 23,892,957 shares
Use of proceeds...................................... We will not receive any proceeds from the sale
of common stock by the selling stockholders.
</TABLE>
The foregoing information on outstanding common stock is based upon shares
outstanding as of October 18, 2000, and does not include 1,111,653 shares that
are issuable upon the exercise of outstanding options granted as of October 18,
2000.
InterMune is a trademark of InterMune Pharmaceuticals, Inc.
ACTIMMUNE-Registered Trademark- is a trademark licensed by us from
Genentech, Inc.
3
<PAGE>
SUMMARY FINANCIAL DATA
We have prepared this information using our audited financial statements for
the period from February 25, 1998 (inception) to December 31, 1998, and the year
ended December 31, 1999, and using our unaudited financial statements for the
nine months ended September 30, 1999 and 2000. The following summary historical
data should be read in conjunction with our financial statements and the related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FEBRUARY 25,
FOR THE PERIOD FROM 1998 NINE MONTHS ENDED
FEBRUARY 25, 1998 (INCEPTION) TO SEPTEMBER 30,
(INCEPTION) TO YEAR ENDED DECEMBER 31, -------------------------
STATEMENTS OF OPERATIONS DATA: DECEMBER 31, 1998 DECEMBER 31, 1999 1999 1999 2000
------------------------------ ------------------- ------------------ -------------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product sales, net......... $ -- $ 556 $ 556 $ -- $ 6,964
Costs and expenses:
Cost of goods sold....... -- 240 240 -- 3,397
Amortization of product
revenue rights......... -- -- -- -- 1,777
Research and development... 1,235 2,969 4,204 1,754 13,275
Selling, general and
administrative......... 892 2,656 3,548 1,499 11,534
Acquired pre-FDA approval
rights................. 4,000 1,094 5,094 1,094 --
------- ------- -------- ------- --------
Total costs and expenses... 6,127 6,959 13,086 4,347 29,983
Loss from operations....... (6,127) (6,403) (12,530) (4,347) (23,019)
Interest income.......... 55 240 295 173 5,232
Interest expense......... -- (186) (186) (103) (161)
------- ------- -------- ------- --------
Net loss................... $(6,072) $(6,349) $(12,421) $(4,277) $(17,948)
======= ------- -------- ------- --------
Preferred stock accretion... (657) (657) (411) (269)
Redeemable preferred stock
dividend................. -- -- -- (27,762)
------- -------- ------- --------
Net loss applicable to common
stockholders............. $(7,006) $(13,078) $(4,688) $(45,979)
======= ======== ======= ========
Historical basic and diluted
net loss per share....... $ (9.12) $ (7.52) $ (3.03)
======= ======= ========
Shares used in computing
historical basic and diluted
net loss per share....... 768 623 15,169
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
--------------------------
ACTUAL
--------------------------
(IN THOUSANDS, UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $197,351
Working capital............................................. 199,124
Total assets................................................ 204,501
Accumulated deficit......................................... (30,369)
Total stockholders' equity.................................. 200,140
</TABLE>
4
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW TOGETHER WITH ALL OF
THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT
DECISION.
RISKS RELATED TO OUR BUSINESS
WE ARE AN EARLY STAGE COMPANY AND MAY NOT SUCCEED IN OUR DEVELOPMENT EFFORTS.
We commenced operations in 1998 and are at an early stage of development. We
have incurred significant losses to date, and our revenues have been limited
primarily to sales of ACTIMMUNE for chronic granulomatous disease. Although we
are developing ACTIMMUNE for the treatment of idiopathic pulmonary fibrosis,
multidrug-resistant tuberculosis, cryptococcal meningitis and cystic fibrosis,
ACTIMMUNE will not be marketed for any of these diseases before 2003, if at all.
IF WE FAIL TO OBTAIN THE CAPITAL NECESSARY TO FUND OUR OPERATIONS, WE WILL BE
UNABLE TO SUCCESSFULLY EXECUTE OUR BUSINESS PLAN.
We believe that existing cash, investment securities and cash flow from
sales of ACTIMMUNE will be sufficient to meet our capital requirements through
at least the end of 2003. We also expect capital outlays and operating
expenditures to increase over the next several years as we expand our
infrastructure and research and development activities. We may need to spend
more money than currently expected because we may need to change our product
development plans or product offerings to address difficulties with clinical
studies or preparing for commercial sales for new diseases. We have no committed
sources of capital and do not know whether additional financing will be
available when needed, or, if available, that the terms will be favorable to our
stockholders or us. If additional funds are not available, we may be forced to
delay or terminate clinical trials, curtail operations or obtain funds through
collaborative and licensing arrangements that may require us to relinquish
commercial rights or potential markets or grant licenses on terms that are not
favorable to us. If adequate funds are not available, we will not be able to
execute our business plan.
IF WE CONTINUE TO INCUR NET LOSSES FOR A PERIOD LONGER THAN WE ANTICIPATE, WE
MAY BE UNABLE TO CONTINUE OUR BUSINESS.
We have lost money since we commenced operations in August 1998, and our
accumulated deficit was approximately $30.4 million at September 30, 2000. We
expect to incur substantial additional net losses for at least the next three to
five years. The extent of our future net losses and the timing of our
profitability are highly uncertain, and we may never achieve profitable
operations. We are planning to expand the number of diseases for which ACTIMMUNE
may be marketed, and this expansion will require significant expenditures. To
date, we have generated revenues primarily through the sale of ACTIMMUNE for
chronic granulomatous disease. After consideration of the direct costs of
marketing ACTIMMUNE for chronic granulomatous disease and severe, malignant
osteopetrosis, and royalties we must pay to Genentech, Inc. on sales of
ACTIMMUNE, we do not currently generate any operating profits on those sales.
Even if we succeed in developing ACTIMMUNE for additional diseases, we expect to
incur net losses for at least the next three to five years and expect that these
net losses will increase as we expand our research and development activities.
If the time required to achieve profitability is longer than we anticipate, we
may not be able to continue our business.
5
<PAGE>
IF OUR CLINICAL TRIALS FAIL TO DEMONSTRATE THAT ACTIMMUNE IS SAFE AND EFFECTIVE
FOR THE TREATMENT OF ADDITIONAL DISEASES, THE FDA AND FOREIGN REGULATORY
AUTHORITIES WILL NOT PERMIT US TO MARKET ACTIMMUNE FOR THOSE DISEASES.
In order to obtain the regulatory approvals we need for the additional
diseases we have targeted, we must conduct clinical trials to establish that
ACTIMMUNE is safe and effective for treating them. Clinical trials are an
expensive and lengthy process and the results are inherently unpredictable.
ACTIMMUNE may not be successful in clinical trials intended to confirm and
expand upon those trials. In addition, the commencement or completion of our
clinical trials may be delayed or halted for various reasons, including that:
- ACTIMMUNE is not effective, or physicians think that ACTIMMUNE is not
effective, for a particular disease;
- a country's regulatory authority does not approve our clinical trial
protocol;
- patients experience severe adverse side effects during or following
treatment;
- patients die during a clinical trial because their disease is too advanced
or because they experience medical problems that are not related to
ACTIMMUNE;
- a sufficient quantity of patients do not enroll in the clinical trials at
the rate we expect; and
- the supply of ACTIMMUNE is not sufficient to treat the patients in some or
all of the proposed clinical trials.
In addition, the FDA and foreign regulatory authorities have substantial
discretion in the approval process and may impose more than one pivotal clinical
trial before approval and/or ongoing requirements for post-marketing studies.
IF THE FDA WITHDRAWS ITS APPROVAL FOR ACTIMMUNE FOR ANY DISEASE FOR WHICH IT HAS
BEEN APPROVED, WE COULD NO LONGER MARKET ACTIMMUNE FOR THAT DISEASE, AND OUR
REVENUES WOULD SUFFER.
The manufacturing, distribution, advertising and marketing of
pharmaceuticals are subject to extensive regulation. Any new disease approval
that we receive could include significant restrictions on the use or marketing
of ACTIMMUNE. Later discovery of previously unknown problems with ACTIMMUNE or
its manufacturing process or facility may result in further restrictions,
including withdrawal of ACTIMMUNE from the market. Our existing approvals for
chronic granulomatous disease, severe, malignant osteopetrosis and any new
approval for any other disease that we have targeted, if granted, could be
withdrawn for failure to comply with regulatory requirements. In addition,
governmental authorities could seize our inventory of ACTIMMUNE or force us to
recall ACTIMMUNE already in the market if we fail to comply with strictly
enforced FDA regulations.
WE COULD LOSE OUR RIGHT TO MARKET AND DEVELOP ACTIMMUNE IF OUR LICENSE AGREEMENT
WITH GENENTECH TERMINATES.
We license ACTIMMUNE from Genentech, Inc. If Genentech terminates its
agreement with us, we will have no further rights to utilize the patents or
trade secrets covered by the agreement to develop and market ACTIMMUNE. This
license also has the following risks:
- if we breach our agreement with Genentech, Genentech could terminate the
license, and we could lose our rights to develop and market ACTIMMUNE; and
- if Genentech fails to maintain the intellectual property licensed to us,
we may lose our rights to develop and market ACTIMMUNE and may be forced
to incur substantial additional costs to maintain the intellectual
property or to force Genentech to do so.
6
<PAGE>
DISCOVERIES OR DEVELOPMENTS OF NEW TECHNOLOGIES BY ESTABLISHED DRUG COMPANIES OR
OTHERS MAY MAKE ACTIMMUNE OBSOLETE.
Our commercial opportunities will be reduced or eliminated if our
competitors develop and market products that are more effective, have fewer or
less severe adverse side effects or are less expensive than ACTIMMUNE for
chronic granulomatous disease, osteopetrosis, idiopathic pulmonary fibrosis,
multidrug-resistant tuberculosis, atypical mycobacterial infections,
cryptococcal meningitis, cystic fibrosis or any other disease that we target.
With respect to our drug discovery programs in pseudomonas aeruginosa and
staphylococcus aureus, other companies have product candidates or research
programs that are further advanced in development than any of our potential
products and may result in effective, commercially successful products. Even if
we are successful in developing effective drugs, our products may not compete
effectively with these products or other successful products. Researchers are
continually learning more about diseases, which may lead to new technologies for
treatment. Our competitors may succeed in developing and marketing products
either that are more effective than those that we may develop, alone or with our
collaborators, or that are marketed before any products we develop are marketed.
Our competitors include fully integrated pharmaceutical companies and
biotechnology companies that currently have drug and target discovery efforts,
as well as universities and public and private research institutions. Many of
the organizations competing with us have substantially greater capital
resources, larger research and development staffs and facilities, greater
experience in drug development and in obtaining regulatory approvals and greater
marketing capabilities than we do.
EVEN IF REGULATORY AUTHORITIES APPROVE ACTIMMUNE FOR THE TREATMENT OF THE
DISEASES WE ARE TARGETING, ACTIMMUNE MAY NOT BE COMMERCIALLY SUCCESSFUL.
ACTIMMUNE is an expensive drug, and we anticipate that the annual cost for
treatment under each of the diseases for which we are seeking approval will be
significant. Market acceptance of and demand for ACTIMMUNE will depend largely
on the following factors:
- acceptance by physicians and patients of ACTIMMUNE as a safe and effective
therapy for a particular disease;
- pricing of alternative products, for example, many of the existing
treatments for mycobacterial infections cost less than ACTIMMUNE;
- relative convenience and ease of administration of ACTIMMUNE; and
- prevalence and severity of adverse side effects associated with ACTIMMUNE.
IF THIRD-PARTY PAYORS WILL NOT PROVIDE COVERAGE OR REIMBURSE PATIENTS FOR
ACTIMMUNE, OUR REVENUES AND PROFITABILITY WILL SUFFER.
Our ability to commercialize ACTIMMUNE in additional diseases may depend in
part on the extent to which coverage and reimbursement for ACTIMMUNE will be
available from:
- governmental payors, such as Medicare and Medicaid;
- private health insurers, including managed care organizations; and
- other third-party payors.
Significant uncertainty exists as to the coverage and reimbursement status
of pharmaceutical products. If governmental and other third-party payors do not
provide adequate coverage and reimbursement levels for ACTIMMUNE, the market
acceptance of ACTIMMUNE will be reduced, and our sales will suffer.
7
<PAGE>
THE PRICING AND PROFITABILITY OF OUR PRODUCTS MAY BE SUBJECT TO CONTROL BY THE
GOVERNMENT AND OTHER THIRD-PARTY PAYORS.
The continuing efforts of governmental and other third-party payors to
contain or reduce the cost of health care through various means may adversely
affect our ability to successfully commercialize products. For example, in some
foreign markets, pricing and profitability of prescription pharmaceuticals are
subject to governmental control. In the United States, we expect that there will
continue to be federal and state proposals to implement similar governmental
control. In addition, increasing emphasis on managed care in the United States
will continue to put pressure on the pricing of pharmaceutical products. Cost
control initiatives could decrease the price that we would receive for ACTIMMUNE
or any products in the future, which would reduce our revenues and
profitability.
IF PRODUCT LIABILITY LAWSUITS ARE BROUGHT AGAINST US, WE MAY INCUR SUBSTANTIAL
LIABILITIES.
The testing, marketing, and sale of medical products entail an inherent risk
of product liability. If losses exceed our liability insurance coverage, we may
incur substantial liabilities. Whether or not we were ultimately successful in
product liability litigation, such litigation would consume substantial amounts
of our financial and managerial resources, and might result in adverse
publicity, all of which would impair our business. We may not be able to
maintain our clinical trial insurance or product liability insurance at an
acceptable cost, if at all, and this insurance may not provide adequate coverage
against potential claims or losses.
IF WE ARE UNABLE TO CONTRACT WITH THIRD PARTIES TO MANUFACTURE ACTIMMUNE IN
SUFFICIENT QUANTITIES, ON A TIMELY BASIS OR AT AN ACCEPTABLE COST, WE MAY BE
UNABLE TO MEET DEMAND FOR ACTIMMUNE AND MAY LOSE POTENTIAL REVENUES.
We do not have the resources, facilities or experience to manufacture
ACTIMMUNE ourselves. Completion of our clinical trials and commercialization of
ACTIMMUNE for new diseases requires access to, or development of, facilities to
manufacture a sufficient supply of ACTIMMUNE. The FDA must approve manufacturing
facilities for ACTIMMUNE. We rely on third parties with FDA-approved
manufacturing facilities for the manufacture of ACTIMMUNE for pre-clinical,
clinical, and commercial purposes. Our manufacturers of ACTIMMUNE are subject to
an initial approval and ongoing periodic inspection by the FDA and corresponding
state agencies for compliance with strictly enforced good manufacturing
practices regulations and similar foreign standards. We do not have control over
our manufacturers' compliance with these regulations and standards.
Boehringer Ingelheim Austria GmbH supplies us with ACTIMMUNE for clinical
trials. Before we can obtain approval for a new disease for ACTIMMUNE, we must
demonstrate to the FDA's satisfaction that the drug supplied by Boehringer
Ingelheim and used in the clinical trials was substantially equivalent to the
commercial drug manufactured by Genentech.
We are relying on Genentech to supply us with commercially marketed
ACTIMMUNE through at least the fourth quarter of 2001 and on Boehringer
Ingelheim thereafter. Although we believe that the transition from Genentech to
Boehringer Ingelheim will not cause any delays in supply of commercial product,
our manufacturing strategy presents the following risks:
- We expect that the FDA will approve Boehringer Ingelheim as a manufacturer
of commercially marketed ACTIMMUNE by the fourth quarter of 2001. However,
there can be no assurance if or when the FDA will approve Boehringer
Ingelheim as a manufacturer of commercially marketed ACTIMMUNE.
- Delays in increasing existing manufacturing capacity to meet our needs for
multiple clinical trials and commercial product could delay clinical
trials, regulatory submissions, and commercialization of ACTIMMUNE.
8
<PAGE>
- If market demand for ACTIMMUNE increases suddenly, our manufacturer might
not be able to fulfill our commercial needs, which may result in
substantial delays in meeting market demand.
- If market demand for ACTIMMUNE is less than our purchase obligations to
our manufacturers, we may incur substantial penalties.
- Our supply arrangements with our manufacturers may be seriously
interrupted.
- We may not have intellectual property rights, or may have to share
intellectual property rights, to any improvements in the manufacturing
processes or new manufacturing processes for ACTIMMUNE.
Any of these factors could delay clinical trials or commercialization of
ACTIMMUNE for new diseases, interfere with current sales, entail higher costs
and result in our being unable to effectively sell ACTIMMUNE.
BECAUSE IT IS DIFFICULT AND COSTLY TO PROTECT OUR PROPRIETARY RIGHTS, WE MAY NOT
BE ABLE TO PROTECT THEM.
Our commercial success will depend in part on obtaining and maintaining
patent protection on our products and successfully defending these patents
against third party challenges. The patent positions of pharmaceutical and
biotechnology companies can be highly uncertain and involve complex legal and
factual questions. No consistent policy regarding the breadth of claims allowed
in biotechnology patents has emerged to date. Accordingly, we cannot predict the
breadth of claims that may be allowed in other companies' patents. In addition,
we could incur substantial costs in litigation if we are required to defend
against patent suits brought by third parties or if we initiate these suits.
Others may have filed and in the future may file patent applications
covering interferon gamma-1b and its uses and other products in our development
program. For example, we are aware that the principal investigator of Phase I/II
and Phase II clinical trials of interferon gamma-lb for the treatment of
idiopathic pulmonary fibrosis has filed a patent application in several European
countries claiming the use of interferon gamma-lb for this disease. We cannot be
certain that the investigator or any other third party has not filed and will
not obtain a U.S. patent claiming the use of interferon gamma-lb for the
treatment of idiopathic pulmonary fibrosis or any of the other diseases for
which we are developing ACTIMMUNE. If a third party were issued a patent that
blocked our ability to commercialize ACTIMMUNE for any of the diseases we are
targeting, a legal action could result.
Any legal action against our collaborators or us claiming damages and
seeking to enjoin commercial activities relating to the affected products and
processes could, in addition to subjecting us to potential liability for
damages, require our collaborators or us to obtain a license to continue to
manufacture or market the affected products and processes. We cannot predict
whether we or our collaborators would prevail in any of these actions or that
any license required under any of these patents would be made available on
commercially acceptable terms, if at all. We believe that there may be
significant litigation in our industry regarding patent and other intellectual
property rights.
In addition, we generally do not control the patent prosecution of
technology that we license from others. Accordingly, we are unable to exercise
the same degree of control over this intellectual property as we would exercise
over technology that we own.
We rely on trade secrets to protect technology where we believe patent
protection is not appropriate or obtainable. However, trade secrets are
difficult to protect. While we require employees, academic collaborators and
consultants to enter into confidentiality agreements, which generally provide
that proprietary information developed or inventions conceived during the
relationship shall be our exclusive property, we may not be able to adequately
protect our trade secrets or other proprietary information.
9
<PAGE>
Our research collaborators and scientific advisors have rights to publish
data and information in which we have rights. If we cannot maintain the
confidentiality of our technology and other confidential information in
connection with our collaborations, then our ability to receive patent
protection or protect our proprietary information will be impaired.
FAILURE TO ATTRACT, RETAIN AND MOTIVATE SKILLED PERSONNEL AND CULTIVATE KEY
ACADEMIC COLLABORATIONS WILL DELAY OUR PRODUCT DEVELOPMENT PROGRAMS AND OUR
BUSINESS DEVELOPMENT EFFORTS.
We have only 48 employees as of October 18, 2000, and our success depends on
our continued ability to attract, retain and motivate highly qualified
management and scientific personnel and on our ability to develop relationships
with leading academic scientists. Competition for personnel and academic
collaborations is intense. We are highly dependent on our current management and
key scientific and technical personnel, including W. Scott Harkonen, Chief
Executive Officer, President and Chairman of our board of directors, as well as
the other principal members of our management. Our success will depend in part
on retaining the services of our existing management and key personnel and
attracting and retaining new highly qualified personnel. In addition, we may
need to hire additional personnel and develop additional collaborations as we
continue to expand our research and development activities. We do not know if we
will be able to attract, retain or motivate personnel or cultivate academic
collaborations. Our inability to hire, retain or motivate qualified personnel or
cultivate academic collaborations would harm our business and hinder the planned
expansion of our business.
WE RELY ON THIRD PARTIES TO CONDUCT CLINICAL TRIALS FOR ACTIMMUNE, AND THOSE
THIRD PARTIES MAY NOT PERFORM SATISFACTORILY.
If third parties do not successfully carry out their contractual duties or
meet expected deadlines, we will not be able to obtain regulatory approvals for
ACTIMMUNE and will not be able to successfully commercialize ACTIMMUNE for new
diseases. We do not have the ability to independently conduct clinical studies
for ACTIMMUNE, and we rely on third parties to perform this function. If these
third parties do not perform satisfactorily, we may not be able to locate
acceptable replacements or enter into favorable agreements with them, if at all.
RISKS RELATED TO THIS OFFERING
IF OUR OFFICERS, DIRECTORS AND LARGEST STOCKHOLDERS CHOOSE TO ACT TOGETHER, THEY
MAY BE ABLE TO CONTROL OUR MANAGEMENT AND OPERATIONS, ACTING IN THEIR BEST
INTERESTS AND NOT NECESSARILY THOSE OF OTHER STOCKHOLDERS.
As of October 18, 2000, our directors, executive officers and principal
stockholders and their affiliates beneficially owned approximately 37% of our
issued and outstanding common stock. Accordingly, they collectively may have the
ability to determine the election of all of our directors and to determine the
outcome of most corporate actions requiring stockholder approval. They may
exercise this ability in a manner that advances their best interests and not
necessarily those of other stockholders.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would benefit our stockholders.
These provisions:
- establish a classified board of directors so that not all members of our
board may be elected at one time;
- authorize the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and hinder a takeover attempt;
10
<PAGE>
- limit who may call a special meeting of stockholders;
- prohibit stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
- establish advance notice requirements for nominations for election to our
board of directors or for proposing matters that can be acted upon at
stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law, which
prohibits business combinations between us and one or more significant
stockholders unless specified conditions are met, may discourage, delay or
prevent a third party from acquiring us.
OUR STOCK PRICE MAY BE VOLATILE, AND YOUR INVESTMENT IN OUR STOCK COULD DECLINE
IN VALUE.
The trading price of our common stock has been and is likely to continue to
be extremely volatile. Our stock price could be subject to wide fluctuations in
response to a variety of factors, including the following:
- actual or anticipated variations in quarterly operating results;
- adverse results or delays in clinical trials;
- announcements of technological innovations;
- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts;
- announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments by us or our competitors;
- sales of common stock; and
- other events or factors, many of which are beyond our control.
In addition, the stock market in general, and the Nasdaq National Market and
biotechnology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of these companies. Broad market and industry factors may negatively
affect the market price of our common stock, regardless of actual operating
performance. In the past, following periods of volatility in the market price of
a company's securities, securities class action litigation has often been
instituted against companies. This type of litigation, if instituted, could
result in substantial costs and a diversion of management's attention and
resources, which would harm our business.
SUBSTANTIAL SALES OF SHARES MAY IMPACT THE MARKET PRICE OF OUR COMMON STOCK.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, the market price of our
common stock may decline. These sales also might make it more difficult for us
to sell equity or equity-related securities in the future at a time and price
that we deem appropriate. We are unable to predict the effect that sales may
have on the then prevailing market price of our common stock. As of October 18,
2000, we had outstanding 23,892,957 shares of common stock. Of these shares, the
2,000,000 shares sold in this offering and the 6,250,000 shares sold and
purchased in our initial public offering are freely tradable without restriction
or further regulation, other than shares purchased by our "affiliates" within
the meaning of Rule 144 under the Securities Act of 1933.
The remaining 15,642,957 shares of common stock held by existing
stockholders may not be sold publicly unless they are registered under the
Securities Act or are sold pursuant to Rule 144 or another
11
<PAGE>
exemption from registration. We have filed a registration statement covering
shares of common stock issuable upon exercise of options and other grants
pursuant to our stock plans. In addition, the holders of 13,656,361 shares of
common stock are entitled to registration rights.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing such forward-looking statements are found
in the material set forth under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as in this prospectus generally. When used
in this prospectus, the words "anticipate," "believe," "expect," "estimate" and
similar expressions are generally intended to identify forward-looking
statements. Our actual results could differ materially from those anticipated in
the forward-looking statements as a result of certain factors, including the
risks described in "Risk Factors" and elsewhere in this prospectus.
USE OF PROCEEDS
We will not receive any proceeds from sales, if any, of common stock by the
selling stockholders. The purpose of this offering is to register our common
stock for resale by the selling stockholders.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our stock. We currently
intend to retain earnings, if any, to support the research and development of
our business and do not anticipate paying cash dividends for the foreseeable
future.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "ITMN" since our initial public offering in March 2000. As of
October 18, 2000, there were 91 holders of record of our common stock. The
following table sets forth, for the periods indicated, the high and low sales
prices for our common stock as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
SALE PRICE
-------------------
CALENDAR YEAR HIGH LOW
------------- -------- --------
<S> <C> <C>
First Quarter (from March 24, 2000)......................... $32.00 $19.00
Second Quarter.............................................. 47.25 11.00
Third Quarter............................................... 55.38 37.75
Fourth Quarter (through October 27, 2000.................... 54.19 44.25
</TABLE>
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<PAGE>
SELECTED FINANCIAL DATA
The following selected historical financial data should be read in
conjunction with our financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The statement of the
operations data for the period from February 25, 1998 (inception) to
December 31, 1998, for the year ended December 31, 1999, and for the period from
February 25, 1998 (inception) to December 31, 1999, and the balance sheet data
at December 31, 1998 and 1999, are derived from our financial statements which
have been audited by Ernst & Young LLP, independent auditors and are included
elsewhere in this prospectus.
The statement of operations data for the nine months ended September 30,
1999 and 2000, and the balance sheet at September 30, 2000, are derived from our
unaudited financial statements included elsewhere in this prospectus, and
include all adjustments that we consider necessary for a fair presentation of
the financial position and results of operations for such periods. The selected
data in this section is not intended to replace our financial statements.
Historical results are not necessarily indicative of the results to be expected
in the future.
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FEBRUARY 25,
FOR THE PERIOD FROM 1998 NINE MONTHS ENDED
FEBRUARY 25, 1998 (INCEPTION) TO SEPTEMBER 30,
(INCEPTION) TO YEAR ENDED DECEMBER 31, -------------------
STATEMENT OF OPERATIONS DATA: DECEMBER 31, 1998 DECEMBER 31, 1999 1999 1999 2000
----------------------------- ------------------- ------------------ -------------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product sales, net................ $ -- $ 556 $ 556 $ -- $ 6,964
Costs and expenses:
Cost of goods sold.............. -- 240 240 -- 3,397
Amortization of product revenue
rights........................ -- -- -- -- 1,777
Research and development........ 1,235 2,969 4,204 1,754 13,275
Selling, general and
administrative................ 892 2,656 3,548 1,499 11,534
Acquired pre-FDA approval
rights........................ 4,000 1,094 5,094 1,094 --
------- ------- -------- ------- --------
Total costs and expenses.......... 6,127 6,959 13,086 4,347 29,983
Loss from operations.............. (6,127) (6,403) (12,530) (4,347) (23,019)
Interest income................. 55 240 295 173 5,232
Interest expense................ -- (186) (186) (103) (161)
------- ------- -------- ------- --------
Net loss.......................... $(6,072) $(6,349) $(12,421) $(4,277) $(17,948)
======= ------- -------- ------- --------
Preferred stock accretion......... (657) (657) (411) (269)
Redeemable preferred stock
dividend........................ -- -- -- (27,762)
------- -------- ------- --------
Net loss applicable to common
stockholders.................... $(7,006) $(13,078) $(4,688) $(45,979)
======= ======== ======= ========
Historical basic and diluted net
loss per share.................. $ (9.12) $ (7.52) $ (3.03)
======= ======= ========
Shares used in computing
historical basic and diluted net
loss per share.................. 768 623 15,169
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1998 1999 2000
-------- -------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $4,720 $ 4,214 $197,351
Working capital............................................. 4,181 1,222 199,124
Total assets................................................ 4,720 5,855 204,501
Redeemable convertible preferred stock...................... -- 7,417 --
Accumulated deficit......................................... (6,072) (12,421) (30,369)
Total stockholders' equity (deficit)........................ 4,181 (7,541) 200,140
</TABLE>
Please see note 2 of our financial statements for an explanation of the
method used to calculate the net loss per share and the number of shares used in
the computation of per share amounts. Earnings per share data for 1998 has not
been presented as we were a wholly owned subsidiary during 1998.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH
OUR "SELECTED FINANCIAL DATA," OUR FINANCIAL STATEMENTS AND THE RELATED NOTES
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We have been primarily involved in the research and development of ACTIMMUNE
for the treatment of serious infectious and pulmonary diseases and congenital
disorders. We license from Genentech, Inc. the exclusive U.S. and Canadian
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 severe, malignant osteopetrosis. We have the rights
and plan to develop ACTIMMUNE in the United States and Canada for a range of
diseases, including idiopathic pulmonary fibrosis, infectious diseases and
cystic fibrosis, and in Japan for infectious diseases and chronic granulomatous
disease.
Since our inception, we have incurred significant losses and, as of
September 30, 2000, we had an accumulated deficit of $30,369,000.
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 in the future as we expand our clinical trial activities for our
target diseases. Our sales and marketing expenses will 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.
On June 27, 2000, through the Revenue Adjustment Agreement, we paid to
Connetics $5.2 million in cash in conjunction with the purchase from Connetics
of all the rights to ACTIMMUNE 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.
STOCK 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 $5.2 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
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<PAGE>
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.
RESULT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
REVENUE. Total revenues were $0 and $6,964,000 for the nine month-periods
ended September 30, 1999 and 2000, 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 $0 and $3,397,000 for the
nine-month periods ended September 30, 1999 and 2000, 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.
AMORTIZATION OF PRODUCT REVENUE RIGHTS. We recorded a total of $0 and
$1,777,000 for the nine-month periods ended September 30, 1999 and 2000,
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 were
$1,754,000 and $13,275,000 for the nine-month periods ended September 30, 1999,
and 2000, respectively, representing an increase of $11,521,000, or 657%. 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 $0 and
$1,282,000 for the nine-month periods ended September 30, 1999, and 2000,
respectively. 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 $1,499,000 and $11,534,000 for the nine-month
periods ended September 30, 1999 and 2000, respectively, representing an
increase of $10,035,000, or 669%. Of the $10,035,000 increase, $3,845,000 is
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
15
<PAGE>
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 $1,094,000 and $0
for the nine-month periods ended September 30, 1999, and 2000, 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
Series A-1 convertible preferred stock, which was converted to common stock upon
the closing of our initial public offering.
INTEREST INCOME. Interest income increased from $173,000 for the nine-month
period ended September 30, 1999, to $5,232,000 for the nine-month period ended
September 30, 2000. 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 from $103,000 for the
nine-month period ended September 30, 1999, to $161,000 for the nine-month
period ended September 30, 2000. 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.
YEARS ENDED DECEMBER 31, 1998 AND 1999
REVENUE. We recognized no product sales of ACTIMMUNE for the period from
February 25, 1998 (inception) to December 31, 1998 and $556,000 for the year
ended December 31, 1999. The sales in 1999 represent our portion of ACTIMMUNE
sales that exceeded the annual contractual baseline established with Connetics,
which increases nominally each year, until 2002, when it is discontinued. Sales
transacted for Connetics are recorded on a net basis, which are zero, because
any amounts in excess of net revenues less costs to produce and market are paid
to Connetics. We made no payments to Connetics in 1998 and a total of $1,357,000
for 1999. Please see notes 2 and 3 of our financial statements.
Connetics is entitled to net sales of ACTIMMUNE up to a predetermined
baseline for the period from January 15, 1999 through December 31, 2001, less
associated cost of goods sold and marketing expenses. The predetermined baseline
is preset for each calendar year under our agreement.
COST OF GOODS SOLD. We recognized no cost of goods sold for the period from
February 25, 1998 (inception) to December 31, 1998 because we had no product
sales. For the year ended December 31, 1999, cost of goods sold totaled
$240,000, which included all product cost of goods sold, royalties, and
distribution costs associated with our revenues.
16
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased from $1,235,000 for the period from February 25, 1998 (inception) to
December 31, 1998, to a total of $2,969,000 in 1999. The increase resulted
primarily from increased costs for clinical trial study expenses for ACTIMMUNE
in additional diseases. We expect research and development expenses to increase
significantly over the next several years.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $892,000 for the period from
February 25, 1998 (inception) to December 31, 1998, to a total of $2,656,000 in
1999. The increase in expenses for 1999 was primarily attributed to increased
costs for additional personnel and a full 12-month period of operations.
ACQUIRED PRE-FDA APPROVAL RIGHTS. Acquired pre-FDA approval rights totaled
$4,000,000 for the period from February 25, 1998 (inception) to December 31,
1998 in connection with the sublicensed rights of ACTIMMUNE and a total of
$1,094,000 for the year ended December 31, 1999 in connection with the
acquisition of additional development rights for ACTIMMUNE. Amounts in both
periods were expensed as acquired pre-FDA approval rights. Please see note 3 of
our financial statements.
INTEREST INCOME. Interest income increased from $55,000 for the period from
February 25, 1998 (inception) to December 31, 1998, to a total of $240,000 in
1999. The increase was due to higher average balances of cash and cash
equivalents and short-term investments in 1999, resulting from the investment of
the net proceeds from the sale of Series A-2 convertible preferred stock in
April 1999.
INTEREST EXPENSE. We recognized a total of $111,000 for imputed interest
expense on our long-term obligation to Connetics and $75,000 interest expense on
the royalty payable obligation to Genentech for the year ended December 31,
1999. The obligation to Connetics was incurred in April 1999, as part of our
collaboration agreement with them. The long-term obligation is described in
greater detail in note 3 of our financial statements. We had no interest expense
for the period from February 25, 1998 (inception) to December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations from inception through sales of equity
securities and (net) contributions from Connetics. 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.
Net cash used in operations for the nine months ended September 30, 2000,
totaled $17.9 million compared to $1.7 million for the same period in 1999. A
net loss of $17.9 million for the nine-month period ended September 30, 2000,
included non-cash charges of $5.1 million for the amortization of deferred
compensation, $1.2 for stock options issued to consultants for services, $91,000
for depreciation and $87,000 for the accretion of obligations payable to
Connetics.
Net cash provided by financing activities for the nine months ended
September 30, 2000, totaled $211.9 million and represents $26.2 million in net
proceeds from the sale of Series B preferred stock to investors in January 2000
and $115.0 million in net proceeds from the sale of common stock in our initial
public offering and $71.3 million in net proceeds from a private placement of
common stock which closed on August 18, 2000, and from stock option exercises
offset by $1.0 million paid to Connetics upon the closing of our initial public
offering. We recorded this payment as a "return of capital to parent."
Working capital of $1.2 million at December 31, 1999, increased to
$199.1 million at September 30, 2000. The increase in working capital was
primarily due to our financing activities.
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<PAGE>
On June 27, 2000 through the Revenue Adjustment Agreement, we paid to
Connetics $5.2 million in cash in conjunction with the purchase from Connetics
of all the rights to ACTIMMUNE 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. We are obligated to pay approximately $943,000 to Connetics by
March 31, 2001.
At December 31, 1999, we had deferred payment of the royalties due to
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 common stock at a
price per share in our then-most recent financing. In March 2000, we paid all
monies due to Genentech in cash.
We have entered into a supply agreement with Boehringer Ingelheim under
which it will manufacture both clinical and commercial supplies of ACTIMMUNE.
Under this agreement, we are required to maintain a standby letter of credit in
the amount of approximately $530,000. The amount of the standby letter of credit
approximates 20% of the total payment obligation under this agreement with
respect to Boehringer Ingelheim's establishment of comparability between its
product and Genentech's product.
Beginning on January 1, 2002, we are obligated to pay to Connetics a royalty
of 0.25% of our net U.S. sales for ACTIMMUNE until our net U.S. sales surpass
$1 billion. Thereafter, we are obligated to pay a royalty of 0.5% of our net
U.S. sales.
In March 1999, we entered into a License Agreement with the Medical College
of Wisconsin under which we received exclusive, worldwide rights to technology
owned by the College relating to PcrV protein. We are obligated to pay the
college one-time payments of up to an aggregate of $2,050,000 on the occurrence
of milestone events, as well as a royalty on the sales of products covered by
this technology.
In January 2000, we entered into a Sponsored Research and License Agreement
with Panorama Research, Inc. under which we received exclusive, worldwide rights
to technology owned by Panorama relating to staphylococcus aureus, as well as to
technology to be developed by Panorama pursuant to the staphylococcus aureus
research program that we support. We will pay to Panorama one-time payments on
the occurrence of milestone events, as well as a royalty on the sales of
products covered by this technology. Within 30 days of our receipt of FDA
approval of a new drug application for a product, we are obligated to pay
$500,000 to Panorama.
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. Our
future capital uses and requirements depend on numerous factors, including:
- our progress with research and development;
- our ability to introduce and sell new products;
- our sales and marketing expenses;
- expenses associated with litigation;
- costs and timing of obtaining new patent rights; and
- regulatory changes and competition and technological developments in the
market.
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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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BUSINESS
OVERVIEW OF OUR BUSINESS
InterMune Pharmaceuticals develops and commercializes innovative products
for the treatment of serious pulmonary and infectious diseases and cancer. We
have the exclusive license rights in the United States and Canada to ACTIMMUNE
for a range of diseases, including:
- chronic granulomatous disease, a life-threatening congenital disorder of
the immune system;
- osteopetrosis, a life-threatening congenital disorder causing an
overgrowth of bony structures;
- idiopathic pulmonary fibrosis, a life-threatening lung condition;
- infections caused by a type of bacteria known as mycobacteria
(mycobacterial infections), such as tuberculosis;
- infections caused by various fungi that attack patients with weakened
immune systems (systemic fungal infections), such as cryptococcal
meningitis and pneumonia;
- ovarian cancer, as well as other types of cancer, a life-threatening
disease caused by uncontrolled growth of cells; and
- cystic fibrosis, a congenital disorder that leads to chronic pulmonary
infections in children.
We have active development programs underway for these disease areas,
several of which are in mid- or advanced-stage trials. The FDA has approved
ACTIMMUNE for the treatment of chronic granulomatous disease and severe,
malignant osteopetrosis, and we currently market and sell ACTIMMUNE in the
United States for these diseases.
We believe the most significant near-term use of ACTIMMUNE is for the
treatment of idiopathic pulmonary fibrosis, which afflicts approximately 50,000
persons in the United States. We are conducting a clinical trial by which we
intend to provide sufficient data for approval, known as a Phase III pivotal
clinical trial, to test the efficacy of ACTIMMUNE for the treatment of this
condition. We have commenced enrollment in a Phase III pivotal clinical of
ACTIMMUNE for the treatment of multidrug-resistant tuberculosis. We are
currently conducting a clinical trial to determine dosing and efficacy, known as
a Phase II clinical trial, of ACTIMMUNE for the treatment of cryptococcal
meningitis, a type of systemic fungal infection. We plan to initiate a Phase III
trial of ACTIMMUNE for the treatment of ovarian cancer. We also intend to
initiate Phase II clinical trials of ACTIMMUNE for the treatment of cystic
fibrosis and atypical mycobacterial infections, infections caused by
mycobacteria that differ appreciably from those that cause tuberculosis.
Interferon gamma-1b, the active ingredient in ACTIMMUNE, is a human protein
which plays a key role in preventing the formation of excessive scar, or
fibrotic, tissue and is a potent stimulator of the immune system. The results of
a clinical trial published in October 1999 in THE NEW ENGLAND JOURNAL OF
MEDICINE showed statistically significant evidence that interferon gamma-1b can
halt and reverse the progression of idiopathic pulmonary fibrosis. In addition,
both animal studies, known as preclinical studies, and clinical trials have
demonstrated the therapeutic potential of interferon gamma-1b against a broad
range of infectious diseases, notably mycobacterial and systemic fungal
infections. A study published in May 1997 in THE LANCET showed that ACTIMMUNE
was effective in the treatment of multidrug-resistant tuberculosis, a type of
mycobacterial infection.
Idiopathic pulmonary fibrosis ($2.5 billion), mycobacterial infections
($500 million), systemic fungal diseases ($500 million), ovarian cancer ($500
million) and cystic fibrosis ($500 million) are serious and difficult to treat
diseases that we believe represent a combined maximum market opportunity for
ACTIMMUNE of approximately $4.5 billion annually in the United States.
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In addition to our late stage product development efforts with ACTIMMUNE, we
have two additional products in preclinical development to treat infections
caused by pseudomonas aeruginosa and staphylococcus aureus.
ACTIMMUNE
The active ingredient in ACTIMMUNE is interferon gamma-1b. Interferons are
comprised of two families of related proteins that are secreted by a variety of
cells in the body. Interferon alpha and interferon beta, which are included in
one family, have been approved and are currently marketed for the treatment of
diseases such as hepatitis B infection and multiple sclerosis. However,
interferon alpha and interferon beta are associated with serious adverse side
effects that may result in discontinuation of therapy. Interferon gamma, which
is included in a separate family of interferons, is biologically distinct from
interferon alpha and interferon beta. Interferon gamma has a superior safety
profile as compared to interferon alpha and interferon beta because it results
in fewer and less severe adverse side effects.
ACTIMMUNE performs two important activities in the human body. First,
ACTIMMUNE activates the immune system by stimulating a class of immune cells
known as macrophages. This action results in increased killing and removal of
infectious organisms, such as bacteria and fungi. We believe that interferon
gamma-1b may have the broadest range of therapeutic activity in bacterial and
fungal diseases of any protein yet identified. This activity enhances the body's
ability to fight infection and is the reason we are developing ACTIMMUNE for use
in the treatment of infectious diseases.
ACTIMMUNE's second important activity in the body is to regulate the
activity of the body's scar-forming cells, called fibroblasts. ACTIMMUNE
directly blocks the multiplication of fibroblasts and also inhibits the
production and action of TGF-beta, a potent scar-inducing molecule. The result
of these actions is the prevention of excessive scarring, which is known as
anti-fibrotic activity. The anti-fibrotic activity of ACTIMMUNE has been
demonstrated in both preclinical studies and in clinical trials. We are pursuing
a Phase III pivotal clinical trial using ACTIMMUNE for the treatment of
idiopathic pulmonary fibrosis because prior clinical trials have demonstrated
its anti-fibrotic activity.
BACKGROUND
InterMune was formed in 1998 and began operations as a wholly owned
subsidiary of Connetics Corporation. In 1998, Connetics acquired from Genentech
and subsequently sublicensed to us, the rights to develop and commercialize
ACTIMMUNE for a broad range of diseases, including infectious diseases,
congenital disorders, idiopathic pulmonary fibrosis and cancer. We initially
focused on expanding the sales of ACTIMMUNE for chronic granulomatous disease
and on developing ACTIMMUNE to treat serious infectious diseases and congenital
disorders. In April 1999, we became an independent company through venture
capital funding. We have since expanded our development and commercialization
plans to include idiopathic pulmonary fibrosis as well as other life-threatening
pulmonary diseases. In February 2000, we received FDA approval for the use of
ACTIMMUNE for severe, malignant osteopetrosis. In June 2000, Connetics assigned
the Genentech license to us.
STRATEGY
We plan to pursue a growth strategy through the following:
GROW PRODUCT REVENUE. We assumed commercial operations for ACTIMMUNE in
January 1999. In the first nine months of 2000, we were able to increase the
sales of ACTIMMUNE by approximately 134% in the United States, compared to the
first nine months of 1999. We accomplished this increase in sales through a
product price increase and by increasing awareness of ACTIMMUNE through direct
mailings, trade shows, medical science liaisons and other activities. Although
ACTIMMUNE is currently approved for only chronic granulomatous disease and
severe, malignant osteopetrosis, we believe that some physicians may prescribe
ACTIMMUNE to treat patients with idiopathic pulmonary fibrosis, as
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well as other diseases, based on available clinical data and publications of
such data in THE NEW ENGLAND JOURNAL OF MEDICINE, THE LANCET and other
peer-reviewed publications.
EXPAND THE NUMBER OF FDA-APPROVED DISEASES FOR ACTIMMUNE. We plan to
develop ACTIMMUNE for a number of diseases where preclinical studies and
clinical trials have shown promise for interferon gamma-lb as a potential
treatment. Some of the diseases for which ACTIMMUNE has demonstrated therapeutic
activity include idiopathic pulmonary fibrosis, mycobacterial infections,
systemic fungal infections and cystic fibrosis. We believe that the risks and
time required to obtain FDA approval of ACTIMMUNE for new diseases may be
reduced because of its established safety profile. We also believe that the
life-threatening nature of some of the diseases that we intend to treat may
enable us to obtain accelerated, or fast track, approval for ACTIMMUNE for some
of these diseases.
DEVELOP A SALES AND MARKETING ORGANIZATION TO SERVE PULMONOLOGISTS AND
INFECTIOUS DISEASE SPECIALISTS. Pulmonologists are the physicians who generally
treat idiopathic pulmonary fibrosis, and infectious disease specialists are the
physicians who generally treat multidrug-resistant tuberculosis, atypical
mycobacterial and systemic fungal infections. Accordingly, we intend to develop
a sales and marketing force to target the approximately 6,000 pulmonologists and
4,000 infectious disease specialists practicing in the United States. In
addition, because these pulmonologists and infectious disease specialists are
primarily hospital-based and concentrated in major metropolitan areas, we
believe that a focused marketing organization and specialized sales force can
effectively serve them.
CONTINUE TO IN-LICENSE PRECLINICAL AND DEVELOPMENT-STAGE PROGRAMS. We plan
to continue to in-license and acquire rights to preclinical and
development-stage programs, especially those for the treatment of
life-threatening pulmonary and infectious diseases. To date, we have in-licensed
ACTIMMUNE, our pseudomonas aeruginosa program and our staphylococcus aureus
program. We believe that our development expertise and focus, as well as our
substantial financial resources will provide us with significant opportunities
to in-license or acquire additional products and programs from pharmaceutical
and biotechnology companies and research and academic institutions.
MARKETED PRODUCT AND PRODUCT DEVELOPMENT
The following table summarizes key information concerning the diseases for
which we intend to develop and commercialize, or are currently commercializing,
ACTIMMUNE and the status of our product development:
<TABLE>
<CAPTION>
PRODUCT/PROGRAM DISEASE STATUS
--------------- ----------------------------- -----------------------------
<S> <C> <C>
ACTIMMUNE Chronic granulomatous disease Marketed
ACTIMMUNE Severe, Malignant Marketed
Osteopetrosis
ACTIMMUNE Idiopathic pulmonary fibrosis Phase III clinical trial
ongoing
ACTIMMUNE MYCOBACTERIAL INFECTIONS
- Multidrug-resistant Phase III clinical trial
tuberculosis ongoing
- Atypical mycobacterial Developing Phase II clinical
infections trial
ACTIMMUNE SYSTEMIC FUNGAL INFECTIONS
- Cryptococcal meningitis Phase II clinical trial
ongoing
ACTIMMUNE Ovarian Cancer Developing Phase III clinical
trial
ACTIMMUNE Cystic fibrosis Developing Phase II clinical
trial
Pseudomonas aeruginosa Pseudomonas aeruginosa Preclinical studies
program infection
Staphylococcus aureus program Staphylococcus aureus Preclinical studies
infection
</TABLE>
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ACTIMMUNE--MARKETED DISEASE TREATMENTS
CHRONIC GRANULOMATOUS DISEASE
ACTIMMUNE is currently approved for the treatment of chronic granulomatous
disease, a life-threatening congenital disorder of the immune system that
affects children. This disorder causes patients to be vulnerable to severe
recurrent bacterial and fungal infections that result in frequent and prolonged
hospitalizations and are commonly a cause of death.
In 1990, ACTIMMUNE was approved by the FDA for the treatment of chronic
granulomatous disease based on its ability to reduce the frequency and severity
of infections in these patients. A randomized, double blind, placebo-controlled
study of ACTIMMUNE in patients with chronic granulomatous disease demonstrated
that ACTIMMUNE effectively reduced the frequency and severity of serious
infections associated with chronic granulomatous disease. Overall, patients
treated with ACTIMMUNE had 67% fewer disease-related infections compared to the
placebo group. Additionally, ACTIMMUNE reduced hospitalizations associated with
chronic granulomatous disease by 67% compared to the placebo group.
There are an estimated 400 patients with chronic granulomatous disease in
the United States for whom treatment with ACTIMMUNE may be appropriate, and
there is no FDA-approved treatment specifically for this disease other than
ACTIMMUNE. Based on the indicated dosage levels of 100 micrograms of ACTIMMUNE
three times per week, the annual cost per patient is approximately $25,000.
Accordingly, we believe that chronic granulomatous disease represents a maximum
annual market opportunity of approximately $10 million in the United States for
ACTIMMUNE.
OSTEOPETROSIS
In February 2000, the FDA approved ACTIMMUNE for the treatment of severe,
malignant osteopetrosis and granted ACTIMMUNE orphan drug status for the
treatment of osteopetrosis. Osteopetrosis is a life-threatening, congenital
disorder that results in increased susceptibility to infection and an overgrowth
of bony structures that may lead to blindness and/or deafness. This disorder
primarily affects children, and no other effective treatment is currently
available other than ACTIMMUNE.
The results of a Phase II clinical trial, which were published in
June 1995, in THE NEW ENGLAND JOURNAL OF MEDICINE, demonstrated that
osteopetrosis patients treated with ACTIMMUNE had a statistically significant
improvement in the course of the disease. In addition, patients treated with
ACTIMMUNE in a Phase III clinical trial experienced a statistically significant
reduction in the rate of disease progression compared to the placebo group.
There are approximately 400 patients with osteopetrosis in the United States
for whom treatment with ACTIMMUNE may be appropriate. Based on the indicated
dosage levels for osteopetrosis patients of 100 micrograms of ACTIMMUNE three
times per week, the annual cost per patient is approximately $25,000.
Accordingly, we believe that severe, and malignant osteopetrosis represents a
maximum annual market opportunity of approximately $10 million in the United
States for ACTIMMUNE.
ACTIMMUNE--DISEASE TREATMENTS UNDER DEVELOPMENT
IDIOPATHIC PULMONARY FIBROSIS
Idiopathic pulmonary fibrosis is a life-threatening disease characterized by
progressive scarring, or fibrosis, of the lungs, which leads to their
deterioration and destruction. The cause of idiopathic pulmonary fibrosis is
unknown. The prognosis is poor for patients with idiopathic pulmonary fibrosis,
which occurs primarily in persons 40 to 70 years old. Most patients die from
progressive loss of lung function, which leads to suffocation. The median life
span for patients suffering from idiopathic
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pulmonary fibrosis is approximately three to five years from the time of
diagnosis. There are approximately 50,000 patients in the United States with
idiopathic pulmonary fibrosis. In October 2000, we commenced enrollment in a
Phase III pivotal clinical trial for this disease.
CURRENT THERAPY. Treatment options for idiopathic pulmonary fibrosis are
limited and only minimally effective. Approximately 70% to 80% of patients with
idiopathic pulmonary fibrosis do not respond to any currently available drug
therapy. Attempted drug therapies include high dose corticosteroids and
anti-cancer drugs, both of which are minimally effective and may result in
significant adverse side effects. For these reasons, treatment with
corticosteroids and anti-cancer drugs is not recommended for all patients with
idiopathic pulmonary fibrosis. As a last resort, a small percentage of patients
undergo lung transplantation, but donors are limited, and many patients die
while awaiting a transplant.
PRIOR CLINICAL TRIALS OF INTERFERON GAMMA-1B AS A TREATMENT FOR IDIOPATHIC
PULMONARY FIBROSIS. Independent investigators conducted two clinical trials of
interferon gamma-1b for the treatment of idiopathic pulmonary fibrosis. The
results of these clinical trials demonstrated that interferon gamma-1b can be
safely administered with minimal adverse side effects and can halt and reverse
the deterioration in lung function in patients.
The results of one of these clinical trials, a Phase II clinical trial
published in October 1999 in THE NEW ENGLAND JOURNAL OF MEDICINE, demonstrated
that interferon gamma-1b may be effective in the treatment of idiopathic
pulmonary fibrosis. Investigators at the University of Vienna conducted the
clinical trial with 18 patients who had not responded to treatment with
corticosteroids or anti-cancer agents. Nine patients were treated for 12 months
with oral prednisolone, a corticosteroid, and nine patients were treated with a
combination of interferon gamma-1b and prednisolone.
Lung function, as measured by total lung capacity and blood oxygen levels,
deteriorated in all nine patients in the group given prednisolone alone. Total
lung capacity decreased from a mean of 66% at the start of the trial to 62%
after 12 months. In contrast, in the group receiving interferon gamma-1b plus
prednisolone, total lung capacity increased from a mean of 70% at the start of
the trial to 79% after 12 months. Similarly, in the nine patients in the group
given prednisolone alone, blood oxygen levels of patients at rest decreased from
a mean of 65% at the start of the trial to 62% after 12 months. In the group
receiving interferon gamma-1b plus prednisolone, blood oxygen levels of patients
at rest increased from a mean of 65% at the start of the trial to 76% after
12 months. Both of these results are statistically significant, each with a p
value < 0.001. This means that, applying widely-used statistical methods, the
chance that these results occurred by accident is less than 1 in 1000. All
patients treated with interferon gamma-1b exhibited improved pulmonary function
for the trial period of 12 months. In contrast, patients receiving treatment
with prednisolone alone showed gradual impairment of their pulmonary function,
and two of them died following the 12-month clinical trial.
These results confirmed the observations of an initial clinical trial in
patients, or Phase I/II clinical trial, by the same investigators. In this
initial clinical trial, the investigators tested safety and dosing of interferon
gamma-1b in combination with prednisolone for the treatment of idiopathic
pulmonary fibrosis in 30 patients. The clinical data showed that the ten
patients who received 200 micrograms of ACTIMMUNE demonstrated overall
improvement in lung function. In the ten patients that received 100 micrograms
of interferon gamma-1b, four showed improvement. None of the ten patients in the
control group, who were not treated with interferon gamma-1b, improved. Overall,
the investigators concluded that patients who received interferon gamma-1b in
combination with prednisolone showed significant improvement in lung function
compared to the control group that received prednisolone alone.
OUR PHASE III PIVOTAL CLINICAL TRIAL. We are continuing the clinical
development of ACTIMMUNE in idiopathic pulmonary fibrosis through our Phase III
pivotal clinical trial. Our clinical trial is enrolling
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patients with documented idiopathic pulmonary fibrosis who have not responded to
previous treatment with corticosteroids and who have evidence of deteriorating
lung function. We expect that our trial will compare 200 micrograms of ACTIMMUNE
in combination with corticosteriods to a control group that receives
corticosteriods alone. Outcomes will include several measures of lung function,
including lung capacity, blood oxygen levels, and several measures of quality of
life.
IDIOPATHIC PULMONARY FIBROSIS MARKET. We believe that there are
approximately 50,000 patients with idiopathic pulmonary fibrosis in the United
States. Based on the expected dosing level of 200 micrograms of ACTIMMUNE three
times per week for idiopathic pulmonary fibrosis patients, the annual cost per
patient would be approximately $50,000. Assuming this treatment regimen, we
believe that idiopathic pulmonary fibrosis represents a maximum annual market
opportunity of approximately $2.5 billion in the United States for ACTIMMUNE. In
addition, if ACTIMMUNE is approved to treat idiopathic pulmonary fibrosis, we
anticipate that it may also be used to treat some other forms of pulmonary
fibrosis, including fibrosis caused by sarcoidosis, radiation, some
environmental exposures, and connective tissue diseases such as scleroderma.
MYCOBACTERIAL INFECTIONS
Mycobacteria are the cause of several infectious diseases, including
tuberculosis, multidrug-resistant tuberculosis, and atypical mycobacterial
infections. Tuberculosis is a major worldwide health threat. Tuberculosis is a
difficult disease to treat and requires multidrug regimens of at least six
months for eradication. It is estimated that 1% to 10% of tuberculosis cases,
classified as multidrug-resistant tuberculosis, are caused by mycobacteria that
are resistant to standard drug therapy. During the past ten years,
multidrug-resistant tuberculosis has emerged as a global health issue.
In the United States, each year there are approximately 17,000 new cases of
tuberculosis, of which approximately 170 are multidrug-resistant tuberculosis,
and 4,000 cases of atypical mycobacterial infection. In Japan, where we have
commercial rights for the use of ACTIMMUNE in the treatment of infectious
diseases, including tuberculosis, there are approximately 43,000 new cases of
tuberculosis each year, of which approximately 2,000 are multidrug-resistant
tuberculosis. Based upon expected dosing levels of 100 to 500 micrograms of
ACTIMMUNE three times per week, we believe that mycobacterial infections
represent a maximum annual market opportunity of approximately $500 million for
ACTIMMUNE in the United States.
MULTIDRUG-RESISTANT TUBERCULOSIS. A recent clinical trial conducted at
Bellevue Hospital in New York and published in THE LANCET in May 1997 found that
patients with multidrug-resistant tuberculosis were able to respond to
conventional tuberculosis drugs when ACTIMMUNE was added to their treatment
regimen. In contrast, none of these patients had responded to conventional
tuberculosis drugs alone after an average of 13 months of therapy. In
July 2000, we commenced enrollment in a Phase III clinical trial of ACTIMMUNE
for the treatment of multidrug-resistant tuberculosis.
ATYPICAL MYCOBACTERIAL INFECTION. In May 1994, THE NEW ENGLAND JOURNAL OF
MEDICINE published the results of a clinical trial showing ACTIMMUNE to be
successful in reducing fever and other signs of infection in patients with
atypical mycobacterial infection. We plan to initiate a Phase II clinical trial
for this disease.
SYSTEMIC FUNGAL INFECTIONS--CRYPTOCOCCAL MENINGITIS
Systemic fungal infections, such as cryptococcal meningitis, an infection of
the lining of the brain, and pneumonia, are life-threatening diseases caused by
various fungi that attack patients with weakened immune systems. Currently
available therapies for these infections are often ineffective and result in
serious adverse side effects. Mortality from systemic fungal infections remains
high. There is a clear need for new, effective, and less toxic drugs to treat
them. Recent research results support the potential
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benefit of combining ACTIMMUNE with conventional antifungal therapy in the
treatment of several of the most prevalent types of systemic fungal infections.
Because ACTIMMUNE works by acting directly on the immune system, we believe that
new antifungal agents will also have greater efficacy when combined with
ACTIMMUNE.
Our strategy for the development of ACTIMMUNE for the treatment of systemic
fungal diseases is twofold. We plan to conduct clinical trials and seek
regulatory approval in cryptococcal meningitis and one other systemic fungal
disease. To this end, we are currently conducting a Phase II clinical trial
designed to determine dose and efficacy of ACTIMMUNE in combination therapy for
the treatment of cryptococcal meningitis. Upon regulatory approval in two
specific systemic fungal diseases, we plan to seek broad labeling from the FDA
for systemic fungal diseases in general. There are approximately 100,000
patients with systemic fungal infections in the United States. Based on expected
dosing levels of 100 micrograms of ACTIMMUNE three times per week for these
patients, we believe that systemic fungal infections represent a maximum annual
market opportunity of approximately $500 million for ACTIMMUNE in the United
States.
OVARIAN CANCER
Ovarian cancer is the third most common cancer in women, and accounts for
over 14,000 deaths in the United States per year. Current treatment with
chemotherapy is suboptimal, with a five-year survival of only 44%. Interferon
gamma has been shown to be directly toxic to ovarian cancer cells, and
interferon gamma stimulates the body's immune system to enhance the removal of
cancer cells. A recent study from Europe in 148 women showed that the addition
of interferon gamma to conventional chemotherapy increased the time to disease
progression from an average of 17 months to 48 months. Complete responses were
seen in 68% of women receiving interferon gamma and conventional therapy
compared to 56% of women receiving conventional therapy alone. We plan to
initiate a Phase III clinical trial of ACTIMMUNE in combination therapy for the
treatment of ovarian cancer.
In 1998, ovarian cancer affected 189,000 women in the United States. We
believe that 25,000 new cases are diagnosed annually in the United States. We
believe that ovarian cancer represents a maximum annual market opportunity of
approximately $500 million for ACTIMMUNE in the United States.
CYSTIC FIBROSIS
Cystic fibrosis is a congenital disorder that leads to chronic pulmonary
infections in children, usually by four years of age. These infections result in
an exaggerated inflammatory response, leading to clogging and obstruction of the
airways. Chronic pulmonary infection is the major cause of mortality in these
patients. Due to its ability to regulate the immune system, we believe that
ACTIMMUNE may have the potential to modify many of the processes that lead to
the exaggerated inflammation and to reduce the chronic inflammation in the
lungs. By preventing excessive inflammation in the airways, ACTIMMUNE may be
able to slow the progression of pulmonary deterioration.
We are currently evaluating ACTIMMUNE in animal models of cystic fibrosis
and plan to initiate a Phase II clinical trial of ACTIMMUNE in patients with
cystic fibrosis. Cystic fibrosis affects an estimated 23,000 persons in the
United States. We believe that cystic fibrosis represents a maximum annual
market opportunity of approximately $500 million for ACTIMMUNE in the United
States.
OTHER PROGRAMS
PSEUDOMONAS AERUGINOSA INFECTION
Pseudomonas aeruginosa is a bacterial infection that often affects patients
using respirators and catheters as well as patients with a number of conditions,
including burns, low white blood cell counts,
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and cystic fibrosis. Because the types of patients at risk generally have
pre-existing illnesses, pseudomonas aeruginosa infection most often occurs in a
hospital setting.
Scientists at the Medical College of Wisconsin have identified a protein,
designated PcrV, on the surface of pseudomonas aeruginosa bacteria that enables
the bacteria to invade human tissue. By directing antibodies against the PcrV
protein, they have been able to demonstrate highly effective treatment, as well
as prevention, of infections caused by pseudomonas in animal models. We are
currently working with a third party to generate a human monoclonal antibody
directed against the PcrV protein as a therapeutic, in combination with
antibiotics. This antibody would treat pseudomonas aeruginosa infection and
prevent infection in high-risk patients.
Pseudomonas aeruginosa infections account for 71,000 annual cases in the
United States of pneumonia in hospitalized patients, 30% to 40% of which die
from their pneumonia. Furthermore, chronic pseudomonas aeruginosa is the leading
cause of pulmonary infection and resulting mortality in patients with cystic
fibrosis, which annually affects an estimated 23,000 persons in the United
States.
STAPHYLOCOCCUS AUREUS INFECTION
Staphylococcus aureus is a bacteria that causes diseases ranging from minor
skin infections to life-threatening deep tissue infections such as pneumonia,
meningitis, heart valve infections, post-operative wound infections, bloodstream
infections, and toxic shock syndrome. The emergence of antibiotic resistance has
made many anti-infective agents ineffective. We are working with collaborators
to discover protein fragments, known as peptides, that block infections caused
by staphylococcus aureus. The efficacy of one of these peptides, known as VIF,
has been demonstrated in animal models, and we intend to develop one or more
peptides as therapy to be used in conjunction with antibiotics in the treatment
of infections caused by staphylococcus aureus. We are also in the early stages
of development for a vaccine for the prevention of infections caused by
staphylococcus aureus in high-risk populations.
In the United States, there are at least 500,000 infections caused by
staphylococcus aureus a year. These infections extend hospitalization and
increase required medical and nursing care, and it would be highly
cost-effective to immunize these high-risk patient groups with a staphylococcal
vaccine.
LICENSE AND OTHER AGREEMENTS
GENENTECH, INC. LICENSE AGREEMENT (ACTIMMUNE)
In August 1998, we entered into an agreement with Connetics Corporation
under which we obtained an exclusive sublicense under the rights granted to
Connetics by Genentech through a license agreement relating to interferon
gamma-1b. We also agreed to assume many of Connetics' obligations to Genentech
under that license agreement. We entered into an agreement with Connetics in
April 1999 in order to broaden the scope of rights granted to us. In June 2000,
we entered into an assignment and option agreement with Connetics, by which
Connetics assigned the Genentech license to us. The agreement with Genentech
terminates on the later of May 5, 2018 and the date that the last of the patents
licensed under the agreement expires.
Our licensed rights include exclusive and non-exclusive rights. The
exclusive rights are to commercialize ACTIMMUNE in the United States for the
treatment and prevention of all human diseases and conditions, including
infectious diseases, pulmonary fibrosis and cancer, but excluding arthritis and
cardiac and cardiovascular diseases and conditions. The non-exclusive rights
include the right to commercialize ACTIMMUNE for gene therapy in the United
States, except for cardiac and cardiovascular diseases and conditions. In Japan,
we have the exclusive license rights to commercialize interferon gamma-1b for
all infectious diseases. We also have the opportunity, under specified
conditions, to obtain further rights to interferon gamma-1b in Japan. We pay to
both Connetics and Genentech royalties on the sales of ACTIMMUNE, and make
one-time payments to Genentech upon the occurrence of specified milestone
events. We must satisfy specified obligations under the agreement
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with Genentech to maintain our license from Genentech. We are obligated under
the agreement to develop and commercialize ACTIMMUNE for a number of diseases.
CONNETICS CORPORATION
Through the Assignment and Option Agreement with Connetics, beginning on
January 1, 2002 we are obligated to pay to Connetics a royalty of 0.25% of our
net U.S. sales for ACTIMMUNE until our net U.S. sales surpass $1 billion.
Thereafter, we are obligated to pay a royalty of 0.5% of our net U.S. sales.
Until April 2004, Connetics has an option under the Assignment and Option
Agreement to obtain the exclusive, royalty-free right to commercialize ACTIMMUNE
for dermatological diseases in the United States. If Connetics exercises its
option, then it will make one-time payments to us upon the occurrence of
milestones. Connetics also has a first right of negotiation to become our
marketing partner for the sale of ACTIMMUNE to dermatologists for diseases that
are not primarily dermatological in origin.
MEDICAL COLLEGE OF WISCONSIN (PCRV PROTEIN)
In March 1999, we entered into a License Agreement with the Medical College
of Wisconsin under which we received exclusive, worldwide rights to technology
owned by the college relating to PcrV protein. We are obligated to pay the
college one-time payments on the occurrence of milestone events, as well as a
royalty on the sales of products covered by this technology. We have also
entered into a research agreement with the college to sponsor basic research
relating to pseudomonas aeruginosa.
PANORAMA RESEARCH, INC. (STAPHYLOCOCCUS AUREUS)
In January 2000, we entered into a Sponsored Research and License Agreement
with Panorama Research, Inc. under which we received exclusive, worldwide rights
to technology owned by Panorama relating to staphylococcus aureus, as well as to
technology to be developed by Panorama pursuant to the staphylococcus aureus
research program that we support. We will pay to Panorama one-time payments on
the occurrence of milestone events, as well as a royalty on the sales of
products covered by this technology. Within 30 days of our receipt of FDA
approval of a new drug application for a product, we are obligated to pay
$500,000 to Panorama.
MANUFACTURING
We contract with qualified third-party manufacturers to produce our
products. This manufacturing strategy enables us to direct financial resources
to the development and commercialization of products rather than diverting
resources to establishing a manufacturing infrastructure.
GENENTECH, INC. SUPPLY AGREEMENT (ACTIMMUNE)
Genentech manufactures and formulates bulk active ingredient and fills and
finishes ACTIMMUNE destined for commercial supply. Connetics and Genentech
entered into a supply agreement, dated May 5, 1998, for the supply of ACTIMMUNE
for clinical use and commercial sale. Connetics assigned all rights and
obligations under the supply agreement to us in April 1999. The agreement
terminates upon the earlier of May 5, 2001 or the date on which a mutually
agreed upon third-party manufacturer, with whom we will have entered into a
supply agreement to manufacture ACTIMMUNE, receives an FDA license to
manufacture ACTIMMUNE. We have entered into such a supply agreement with
Boehringer Ingelheim for the supply of ACTIMMUNE, and upon the earlier of its
receipt of a license from the FDA for the manufacture of ACTIMMUNE or May 5,
2001, the Genentech supply agreement will either terminate or may be extended by
Genentech in its sole discretion. We expect that Genentech will continue
supplying us with a sufficient supply of commercial ACTIMMUNE to meet our needs
through at least the fourth quarter of 2001.
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BOEHRINGER INGELHEIM SUPPLY AGREEMENT (ACTIMMUNE)
We have a supply agreement with Boehringer Ingelheim to manufacture both
clinical and commercial supply of ACTIMMUNE. Boehringer Ingelheim currently
manufactures and formulates bulk active ingredient and fills and finishes
ACTIMMUNE for clinical supply. Boehringer Ingelheim is also pursuing
qualification by the FDA to manufacture ACTIMMUNE for our commercial supply to
enable Boehringer Ingelheim to succeed Genentech as our commercial supplier of
ACTIMMUNE. We believe that the transition from Genentech to Boehringer Ingelheim
will not cause any delays in supply of commercial product. We expect that the
FDA will approve Boehringer Ingelheim as a manufacturer of commercially marketed
ACTIMMUNE by the fourth quarter of 2001. However, there can be no assurance if
or when the FDA will approve Boehringer Ingelheim as a manufacturer of
commercially marketed ACTIMMUNE.
The supply agreement with Boehringer Ingelheim also generally provides for
the mutual exclusive supply by Boehringer Ingelheim and purchase by us of
interferon gamma-1b. If we do not purchase a minimum amount of interferon
gamma-1b, we pay a penalty. If Boehringer Ingelheim is not able to supply all of
our requirements for interferon gamma-1b, we may choose an additional
manufacturer. Under this agreement, we are required to maintain a standby letter
of credit in the amount of approximately $530,000. The amount of the standby
letter of credit approximates 20% of the total payment obligation under this
agreement with respect to Boehringer Ingelheim's establishment of comparability
between its product and Genentech's. The term of the agreement expires on
December 31, 2006 and automatically renews for successive terms, except if
either Boehringer Ingelheim or we choose not to continue at a defined time prior
to the expiration of the then current term.
PATENTS AND PROPRIETARY RIGHTS
The proprietary nature of, and protection for, our products, product
candidates, processes and know-how are important to our business. We plan to
prosecute and defend aggressively our patents and proprietary technology. Our
policy is to patent or in-license the technology, inventions and improvements
that we consider important to the development of our business. We also rely on
trade secrets, know-how and continuing innovation to develop and maintain our
competitive position.
We have acquired proprietary rights in the United States, Canada, and Japan
to make, use and sell interferon gamma-1b, ACTIMMUNE, in particular fields in
connection with our license agreement with Genentech. This license agreement
covers 12 U.S. patents and 9 corresponding Japanese patents. We have also
licensed a patent application in the area of pseudomonas vaccine methods and
have filed patent applications in the area of interferon gamma treatment methods
and compositions and treatment methods for staphylococcus infections. We expect
to continue to protect our proprietary technology with additional filings as
appropriate.
The degree of future protection for our proprietary rights is uncertain, and
we cannot ensure that:
- we were the first to make the inventions covered by each of our pending
patent applications;
- we were the first to file patent applications for these inventions;
- others will not independently develop similar or alternative technologies
or duplicate any of our technologies;
- any of our pending patent applications will result in issued patents;
- any patents issued to us or our collaborators will provide a basis for
commercially viable products or will provide us with any competitive
advantages or will not be challenged by third parties;
- we will develop additional proprietary technologies that are patentable;
or
- the patents of others will not have an adverse effect on our business.
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We attempt to ensure that our technology does not infringe the rights of
others. We are not aware of any asserted or unasserted claims that our
technology violates the proprietary rights of others. We are aware that the
principal investigator of Phase I and Phase II clinical trials of interferon
gamma-1b for the treatment of idiopathic pulmonary fibrosis has filed a patent
application in several European countries claiming the use of interferon
gamma-1b for this disease. We do not believe that a corresponding patent
application has been filed in the United States. Further, we believe it is
unlikely that the investigator could successfully obtain patent protection in
the United States for the use of interferon gamma-1b to treat idiopathic
pulmonary fibrosis. However, we cannot be certain that the investigator or a
third party has not filed and will not obtain a U.S. patent claiming the use of
interferon gamma-1b for the treatment of idiopathic pulmonary fibrosis or any of
the other diseases for which we are developing ACTIMMUNE. If a third party were
issued a patent that blocked our ability to commercialize ACTIMMUNE for any of
the diseases we are targeting, we and our collaborators would be subject to
legal action, unless we obtained a license under that patent in order to
continue our commercialization efforts for those diseases.
COMPETITION
ACTIMMUNE is the only FDA-approved therapy for each of chronic granulomatous
disease and severe, malignant osteopetrosis. There is no currently available
effective therapy for the treatment of idiopathic pulmonary fibrosis. We believe
that the main potential competition for ACTIMMUNE in idiopathic pulmonary
fibrosis is the development of Avonex interferon beta by Biogen, Inc. Biogen,
which currently markets Avonex for multiple sclerosis, is conducting a Phase II
clinical trial of Avonex for idiopathic pulmonary fibrosis. We believe that
successful development of Avonex for idiopathic pulmonary fibrosis will have a
limited impact on ACTIMMUNE for idiopathic pulmonary fibrosis due to the more
favorable side effect profile of ACTIMMUNE relative to interferon beta.
We believe that the primary competition for ACTIMMUNE in serious infectious
diseases such as mycobacterial and systemic fungal infections consists of:
- the potential development of new generations of advanced antibiotics and
anti-fungal agents that successfully treat these diseases; and
- the current treatment regimens, which may be less effective in many cases,
but cost substantially less than the current price for ACTIMMUNE.
The primary competition for ACTIMMUNE in cystic fibrosis are the
FDA-approved drugs marketed by Genentech and Pathogenesis Corporation.
SALES AND MARKETING
We are currently marketing ACTIMMUNE in the United States for the treatment
of chronic granulomatous disease and severe, malignant osteopetrosis. We have
hired 12 medical science liaisons and plan to hire additional medical science
liaisons to market and sell ACTIMMUNE for FDA-approved diseases and to educate
physicians and increase their awareness of ACTIMMUNE. We sponsor speaker
programs, medical symposia and continuing medical education programs regarding
ACTIMMUNE.
Our marketing efforts also consist of the following:
- direct mailings to physicians;
- advertisements for ACTIMMUNE;
- our ACTIMMUNE.com website, which contains product and disease information
for physicians and patients; and
- attendance at physician trade shows.
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GOVERNMENTAL REGULATION AND PRODUCT APPROVAL
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the clinical
development, manufacture, and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our products. We believe that our products will be regulated as
biologics by the FDA.
The process required by the FDA before our products, or new diseases for
approved products, may be marketed in the United States generally involves the
following:
- preclinical laboratory and animal tests;
- submission of an investigational new drug, or IND, application, which must
become effective before clinical trials may begin;
- adequate and well-controlled human clinical trials to establish the safety
and efficacy of the proposed drug for its intended use; and
- FDA approval of a new biologics license application, or BLA, supplement.
The testing and approval process requires substantial time, effort, and
financial resources, and we cannot be certain that any new approvals for
ACTIMMUNE will be granted on a timely basis, if at all.
Prior to commencing a clinical trial, we must submit an IND application to
the FDA. The IND automatically becomes effective 30 days after receipt by the
FDA, unless the FDA, within the 30-day time period, raises concerns or questions
about the conduct of the trial. In such a case, the IND sponsor and the FDA must
resolve any outstanding concerns before the clinical trial can begin. Our
submission of an IND may not result in FDA authorization to commence a clinical
trial. Further, an independent institutional review board at the medical center
proposing to conduct the clinical trial must review and approve the plan for any
clinical trial before it commences.
Human clinical trials are typically conducted in three sequential phases
that may overlap:
- Phase I: The drug is initially introduced into healthy human subjects or
patients and tested for safety, dosage tolerance, absorption, metabolism,
distribution and excretion.
- Phase II: Involves studies in a limited patient population to identify
possible adverse effects and safety risks, to determine the efficacy of
the product for specific targeted diseases and to determine dosage
tolerance and optimal dosage.
- Phase III: When Phase II evaluations demonstrate that a dosage range of
the product is effective and has an acceptable safety profile, Phase III
trials are undertaken to further evaluate dosage, clinical efficacy and to
further test for safety in an expanded patient population at
geographically dispersed clinical study sites.
- In the case of products for severe or life-threatening diseases such as
idiopathic pulmonary fibrosis, the initial human testing is often
conducted in patients rather than in healthy volunteers. Because these
patients already have the target disease, these studies may provide
initial evidence of efficacy traditionally obtained in Phase II trials,
and thus these trials are frequently referred to as Phase I/II trials.
We may not successfully complete Phase I, Phase II or Phase III testing of
ACTIMMUNE within any specific time period, if at all. Furthermore, the FDA or an
institutional review board or the sponsor may suspend a clinical trial at any
time on various grounds, including a finding that the subjects or patients are
being exposed to an unacceptable health risk.
The results of product development, preclinical studies and clinical studies
are submitted to the FDA as part of a BLA, or a BLA supplement, for approval of
a new disease if the product is already approved for a disease. The FDA may deny
a BLA or BLA supplement if the applicable regulatory
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criteria are not satisfied, or it may require additional clinical data and/or a
second Phase III pivotal clinical trial. Even if such data is submitted, the FDA
may ultimately decide that the BLA or BLA supplement does not satisfy the
criteria for approval. Once issued, the FDA may withdraw product approval if
compliance with regulatory standards is not maintained or if problems occur
after the product reaches the market. In addition, the FDA may require testing
and surveillance programs to monitor the effect of approved products which have
been commercialized, and the FDA has the power to prevent or limit further
marketing of a product based on the results of these post-marketing programs.
The FDA's fast track program is intended to facilitate the development and
expedite the review of drugs intended for the treatment of serious or
life-threatening diseases and that demonstrate the potential to address unmet
medical needs for such conditions. Under this program, the FDA can, for example,
review portions of a BLA for a fast track product before the entire application
is complete, thus potentially beginning the review process at an earlier time.
We cannot guarantee that the FDA will grant any of our requests for fast track
designation, that any fast track designation would affect the time of review, or
that the FDA will approve the BLA submitted for any of our drug candidates,
whether or not fast track designation is granted. Additionally, the FDA's
approval of a fast track product can include restrictions on the product's use
or distribution, such as permitting use only for specified medical procedures or
limiting distribution to physicians or facilities with special training or
experience. Approval of fast track products can be conditional with a
requirement for additional clinical studies after approval.
Satisfaction of FDA requirements or similar requirements of state, local and
foreign regulatory agencies typically takes several years and the actual time
required may vary substantially, based upon the type, complexity and novelty of
the product or disease. Government regulation may delay or prevent marketing of
potential products or new diseases for a considerable period of time and to
impose costly procedures upon our activities. We cannot be certain that the FDA
or any other regulatory agency will grant additional approvals for ACTIMMUNE on
a timely basis, if at all. Success in early stage clinical trials does not
assure success in later stage clinical trials. Data obtained from clinical
activities is not always conclusive and may be susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. Even
if a product receives regulatory approval, the approval may be significantly
limited to specific diseases and dosages. Further, even after regulatory
approval is obtained, later discovery of previously unknown problems with a
product may result in restrictions on the product or even complete withdrawal of
the product from the market. Delays in obtaining, or failures to obtain
additional regulatory approvals for ACTIMMUNE would harm our business. In
addition, we cannot predict what adverse governmental regulations may arise from
future U.S. or foreign governmental action.
Any products manufactured or distributed by us pursuant to FDA approvals are
subject to continuing regulation by the FDA, including record-keeping
requirements and reporting of adverse experiences with the drug. Drug
manufacturers and their subcontractors are required to register their
establishments with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state agencies for
compliance with good manufacturing practices, which impose certain procedural
and documentation requirements upon us and our third party manufacturers. We
cannot be certain that we or our present or future suppliers will be able to
comply with the good manufacturing practices regulations and other FDA
regulatory requirements.
Physicians may prescribe drugs for uses that are not described in the
product's labeling for uses that differ from those tested by us and approved by
the FDA. Such off-label uses are common across medical specialties. Physicians
may believe that such off-label uses are the best treatment for many patients in
varied circumstances. The FDA does not regulate the behavior of physicians in
their choice of treatments. The FDA does, however, restrict manufacturer's
communications on the subject of off-label use. Companies cannot actively
promote FDA-approved drugs for off-label uses, but may in
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some circumstances disseminate to physicians articles published in peer-reviewed
journals, like THE NEW ENGLAND JOURNAL OF MEDICINE, that discuss off-label uses
of approved products.
The FDA's policies may change and additional government regulations may be
enacted which could prevent or delay regulatory approval of our potential
products or new diseases for ACTIMMUNE. We cannot predict the likelihood,
nature, or extent of adverse governmental regulation that might arise from
future legislative or administrative action, either in the United States or
abroad.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs intended to treat a rare disease or condition, which is generally a
disease or condition that affects fewer than 200,000 individuals in the United
States. Orphan drug designation must be requested before submitting a BLA. After
the FDA grants orphan drug designation, the generic identity of the therapeutic
agent and its potential orphan use are disclosed publicly by the FDA. Orphan
drug designation does not convey any advantage in or shorten the duration of the
regulatory review and approval process. If a product that has orphan drug
designation subsequently receives FDA approval for the disease for which it has
such designation, the product is entitled to orphan exclusivity for seven years,
i.e., the FDA may not approve any other applications to market the same drug for
the same disease, except in very limited circumstances, for seven years. We
intend to file for orphan drug designation for those ACTIMMUNE diseases that
meet the criteria for orphan exclusivity. Although obtaining FDA approval to
market a product with orphan drug exclusivity can be advantageous, there can be
no assurance that it would provide us with a material commercial advantage.
RESEARCH AND DEVELOPMENT
We direct financial resources efficiently to goal-oriented projects by
reducing the time and infrastructure spent on research and development. We do
not conduct in-house preclinical research and development. Instead, we contract
these activities to qualified third-party research and development institutions
such as academia or private contract labs. We have two contracted research and
development programs. The first is with the Medical College of Wisconsin and is
focused on the development of monoclonal antibodies against pseudomonas
aeruginosa. The other program is in collaboration with Panorama Research and is
focused on the development of peptides that block staphylococcus aureus
infections.
EMPLOYEES
As of October 18, 2000, we had 48 full-time employees. Of the full-time
employees, 21 were engaged in research and development and 27 were engaged in
sales, general and administrative positions. We believe our relations with our
employees are good.
FACILITIES
Our facilities consist of approximately 8,000 square feet of office space
located at 1710 Gilbreth Road, Suite 301, Burlingame, California that is leased
to us until 2004. We currently have no option to renew this lease. We have no
laboratory or research facilities. We believe that suitable additional space is
available to accommodate expansion of our operations on commercially reasonable
terms.
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MANAGEMENT
The following table provides information regarding our directors, executive
officers, and key employees as of September 8, 2000:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- -------- ------------------------------------------
<S> <C> <C>
W. Scott Harkonen, M.D.................... 48 Chief Executive Officer, President and
Chairman of the Board of Directors
Timothy P. Lynch.......................... 30 Chief Financial Officer, Vice President of
Finance and Administration
Stephen N. Rosenfield..................... 50 Senior Vice President of Legal Affairs,
General
Counsel and Secretary
Peter Van Vlasselaer, Ph.D................ 41 Senior Vice President of Technical
Operations
John J. Wulf.............................. 48 Senior Vice President of Corporate
Development
David A. Cory, R.Ph....................... 37 Vice President of Sales and Marketing
Christine W. Czarniecki, Ph.D............. 50 Vice President of Regulatory Affairs
J. Woodruff Emlen, M.D.................... 54 Vice President of Scientific Affairs
Edgar Engleman, M.D....................... 55 Director
James I. Healy, M.D., Ph.D................ 35 Director
John L. Higgins........................... 30 Director
Wayne T. Hockmeyer, Ph.D.................. 56 Director
Jonathan S. Leff.......................... 32 Director
Nicholas J. Simon......................... 46 Director
</TABLE>
W. SCOTT HARKONEN, M.D. Dr. Harkonen founded InterMune in February 1998 and
has served as a member of our board of directors since inception and is
currently the Chairman of the Board. Dr. Harkonen has been our Chief Executive
Officer and President since inception. From September 1995 to April 1999,
Dr. Harkonen served as Senior Vice President of Product Development and
Operations at Connetics Corporation, a biopharmaceutical company. From
March 1991 to September 1995, Dr. Harkonen served as Vice President of Medical
and Regulatory Affairs at Univax Biologics, a biopharmaceutical company.
Dr. Harkonen holds an M.D. from the University of Minnesota and an M.B.A. from
the Haas School of Business at the University of California at Berkeley.
TIMOTHY P. LYNCH. Mr. Lynch has served as our Chief Financial Officer and
Vice President of Finance and Administration since November 1999. From
July 1999 to October 1999, Mr. Lynch served as the Director of Business
Development at ePhysician, Inc., an internet healthcare company. From
August 1997 to July 1999, Mr. Lynch served as Director of Strategic Planning at
Elan Corporation, plc., a pharmaceutical company. From August 1993 to
June 1995, Mr. Lynch was employed by Goldman, Sachs & Co. in the investment
banking division. From June 1992 to August 1993, Mr. Lynch was employed by Chase
Securities, Inc. in the investment banking division. Mr. Lynch holds an M.B.A.
from the Harvard Graduate School of Business.
STEPHEN N. ROSENFIELD. Mr. Rosenfield has served as our Senior Vice
President of Legal Affairs and General Counsel since March 2000. From
February 1996 to February 2000, Mr. Rosenfield was an associate at Cooley
Godward LLP. From September 1992 to January 1996, Mr. Rosenfield was an
associate at Coblentz Cahen McCabe & Breyer LLP. Mr. Rosenfield holds a J.D.
from Northeastern University School of Law.
PETER VAN VLASSELAER, PH.D. Dr. Van Vlasselaer has served as our Senior
Vice President of Technical Operations since November 1999. From July 1993 to
November 1999, Dr. Van Vlasselaer served as Vice President of Development at
Dendreon Corporation, a biopharmaceutical company.
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Dr. Van Vlasselaer holds a Ph.D. from the University of Leuven in Belgium and
was an immunology fellow at Stanford University.
JOHN J. WULF. Mr. Wulf has served as our Senior Vice President of Business
Development since June 2000. From April 1998 until June 2000, Mr. Wulf served as
Vice President of Business Development at Axys Pharmaceuticals, Inc., a
biopharmaceutical company, where he was responsible for corporate partnering of
research programs and in-licensing of preclinical and clinical product
opportunities. Prior to joining Axys, Mr. Wulf was employed by Genentech, Inc.,
a biotechnology company, in various positions in business, product and process
development. From 1996 until April 1998, Mr. Wulf served as Director of Business
Development and Far East Representative. From 1994 until 1996, he served as
Licensing Manager. Mr. Wulf holds an M.B.A. from San Francisco State University
and an M.S. from Oregon State University.
DAVID A. CORY, R.PH. Mr. Cory has served as our Vice President of Sales and
Marketing since February 2000. From November 1999 to January 2000, Mr. Cory was
a pharmaceutical industry consultant. From November 1988 to October 1999,
Mr. Cory served in both sales and marketing management capacities, most recently
as Commercial Director of Marketing, at Glaxo Wellcome, Inc., a pharmaceutical
company. Mr. Cory holds a degree in Pharmacy from the University of Cincinnati.
CHRISTINE W. CZARNIECKI, PH.D. Dr. Czarniecki has served as our Vice
President of Regulatory Affairs since January 2000. From March 1997 to
January 2000, Dr. Czarniecki served as Director of Regulatory Affairs and
Quality at Axys Pharmaceuticals, Inc. From July 1993 to March 1997,
Dr. Czarniecki served as Director of Regulatory Affairs at ICOS Corporation, a
pharmaceutical company. Dr. Czarniecki holds a Ph.D. from Georgetown University.
J. WOODRUFF EMLEN, M.D. Dr. Emlen has served as our Vice President of
Scientific Affairs since October 1998. From August 1997 to October 1998,
Dr. Emlen served as Vice President of Exploratory Medicine at Connetics
Corporation. From September 1987 to August 1997, Dr. Emlen served as a professor
of medicine and immunology at the University of Colorado Health Services Center.
Dr. Emlen holds an M.D. from the University of California at San Diego.
EDGAR ENGLEMAN, M.D. Dr. Engleman has served as a member of our board of
directors since April 1999. Dr. Engleman joined BioAsia Investments, LLC in 1997
and is currently a general partner of BioAsia Investments, LLC. Dr. Engleman has
served on the faculty of Stanford University Medical School since 1978 and is
currently Professor of Pathology and Medicine. Dr. Engleman serves on the board
of directors of several private companies and is a director of Insmed
Pharmaceuticals, Inc., a publicly held biotechnology company. Dr. Engleman holds
an M.D. from Columbia University School of Medicine.
JAMES I. HEALY, M.D., PH.D. Dr. Healy has served as a member of our board
of directors since April 1999 and as the interim chairman of the board of
directors from October 1999 through January 2000. Since June 2000, Dr. Healy has
served as a general partner and managing director at Sofinnova Ventures. From
January 1998 to March 2000, Dr. Healy was a partner at Sanderling Ventures. From
August 1997 to December 1997, Dr. Healy was a Novartis Foundation Fellow at
Brigham & Women's Hospital. From August 1990 to July 1997 he was employed by the
Howard Hughes Medical Institute and Stanford University. Dr. Healy serves on the
board of directors of several private companies. Dr. Healy holds an M.D. and a
Ph.D. from Stanford University.
JOHN L. HIGGINS. Mr. Higgins has served as a member of our board of
directors since April 1999. Mr. Higgins joined Connetics Corporation in
September 1997 and currently serves as Chief Financial Officer and Executive
Vice President of Finance and Administration. From August 1994 to
September 1997, Mr. Higgins worked at BioCryst Pharmaceuticals, Inc. serving in
various management positions, including Executive Vice President of Corporate
Development.
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WAYNE T. HOCKMEYER, PH.D. Dr. Hockmeyer has served as a member of our board
of directors since February 2000. Dr. Hockmeyer founded MedImmune, Inc., a
biotechnology company, in April 1988. He served as its chief executive officer
from April 1988 until September 2000 and has served as chairman of its board of
directors since May 1993. Dr. Hockmeyer is also a director of Digene
Corporation, a biotechnology company, and Aviron, a biopharmaceutical company,
both of which are publicly held. Dr. Hockmeyer holds a Ph.D. from the University
of Florida.
JONATHAN S. LEFF. Mr. Leff has served as a member of our board of directors
since January 2000. Mr. Leff joined E.M. Warburg, Pincus & Co., LLC in 1996 and
is currently a managing director. Mr. Leff serves on the board of directors of
Transkaryotic Therapies, Inc., and Visible Genetics, Inc., both of which are
publicly held biotechnology companies, and is on the board of directors of
several private companies. Mr. Leff holds an M.B.A. from Stanford University.
NICHOLAS J. SIMON. Mr. Simon has served as a member of our board of
directors since August 1999. Mr. Simon joined Genentech, Inc. in December 1989
and since 1994 served as Vice President of Business and Corporate Development.
In April 2000, Mr. Simon resigned from Genentech and founded iO Pharmaceuticals,
where he has been the Chief Executive Officer and a director since April 2000.
Mr. Simon is also a director of Biostreet.com, a private company. Mr. Simon
serves on the board of directors of several private companies. Mr. Simon holds
an M.B.A. from Loyola College.
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed. There are no family
relationships among any of our directors or executive officers. Although no
director has a contractual right to serve as a member of our board of directors,
pursuant to the Amended and Restated Investor Rights Agreement, dated
January 7, 2000, among the holders of some of our common stock and us, we have
agreed to use reasonable efforts to elect:
- a representative designated by Sanderling Ventures until the earlier of
January 7, 2004 or such time as the entities affiliated with Sanderling
Ventures beneficially own less than 95% of the aggregate capital stock
beneficially owned by them at the closing of our Series B preferred stock
financing in January 2000; and
- a representative designated by Warburg, Pincus Equity Partners, L.P. until
the earlier of January 7, 2004 or such time as the entities affiliated
with Warburg, Pincus Equity Partners, L.P. beneficially own less than 95%
of the aggregate capital stock beneficially owned by them at the closing
of our Series B preferred stock financing in January 2000.
BOARD COMPOSITION
Dr. Harkonen is currently the chairman of our board of directors. We are
searching for an independent chairman.
Our board of directors consists of seven directors. Our board of directors
is divided into three classes:
- Class I directors, Mr. Higgins and Dr. Hockmeyer, whose term will expire
at the annual meeting of stockholders to be held in 2001;
- Class II directors, Drs. Engleman, Harkonen and Healy, whose term will
expire at the annual meeting of stockholders to be held in 2002; and
- Class III directors, Messrs. Leff and Simon, whose term will expire at the
annual meeting of stockholders to be held in 2003.
At each annual meeting of stockholders, the successors to directors whose
terms will then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election. Any additional
directorships resulting from an increase in the number of directors
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<PAGE>
will be distributed among the three classes so that, as nearly as possible, each
class will consist of one-third of the directors. This classification of our
board of directors may have the effect of delaying or preventing changes in
control or management of us.
COMMITTEES OF THE BOARD
AUDIT COMMITTEE. Our audit committee currently consists of Drs. Engleman
and Hockmeyer and Mr. Simon. The audit committee reviews our internal accounting
procedures and consults with and reviews the services provided by our
independent auditors.
COMPENSATION COMMITTEE. Our compensation committee currently consists of
Messrs. Leff and Simon and Dr. Harkonen. The compensation committee approves,
reviews and recommends to our board of directors the compensation and benefits
of our officers and establishes and reviews general policies relating to
compensation and benefits of our employees. Mr. Leff has the authority to grant
stock and stock options to non-officer employees.
COMPENSATION OF DIRECTORS
We provide annual cash compensation of $15,000, plus $2,500 for each board
meeting attended, to board members for serving on our board of directors.
Members of our board of directors are reimbursed for some out-of-pocket expenses
in connection with attendance at board and committee meetings. In July 1999,
each of Drs. Engleman and Healy and Mr. Higgins, three of our non-employee
directors, received option grants to purchase 30,000 shares of common stock at
an exercise price of $0.125 per share. In October 1999, Mr. Simon, one of our
non-employee directors, received an option grant to purchase 30,000 shares of
common stock at an exercise price of $0.125 per share. In January 2000,
Mr. Leff, one of our non-employee directors, received an option grant to
purchase 30,000 shares of common stock at an exercise price of $4.50 per share.
Under this grant, the option shares vest over a three-year period in monthly
installments. In July 1999, Drs. Engleman and Healy each received an option
grant for the purchase of 70,000 shares of fully vested common stock at an
exercise price of $0.125 per share. In February 2000, Dr. Hockmeyer, a
non-employee director, received an option grant to purchase 30,000 shares of
common stock at an exercise price of $4.50 per share. Under the 30,000 share
grant, the option shares vest monthly over a three-year period. In
February 2000, each of Drs. Engleman, Healy and Hockmeyer and Messrs. Higgins,
Leff and Simon received an option grant for the purchase of 10,000 shares of
common stock at an exercise price of $4.50 per share. Under each of the 10,000
share grants, the option shares vest monthly over a one-year period. Our 2000
Non-Employee Directors' Stock Option Plan provides for ongoing option grants to
our non-employee directors. See "Management--Stock Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Except for our Chief Executive Officer, Dr. Harkonen, no member of our
compensation committee has at any time been an officer or employee of ours. No
interlocking relationship exists between our board of directors or compensation
committee and the board of directors or compensation committee of any other
company, nor has any interlocking relationship existed in the past.
EMPLOYMENT AGREEMENTS
In April 1999, we entered into an executive employment agreement with
Dr. Harkonen, and this agreement was amended in June 2000. The employment
agreement provides for an annual salary of $275,000 and the payment of bonuses
upon the achievement of milestones to be agreed to on an annual basis. In
connection with his employment with us, we sold to Dr. Harkonen 690,000 shares
of common stock subject to a five-year vesting schedule. If Dr. Harkonen's
employment is terminated by us in an involuntary termination, other than for
cause, as these terms are defined in the employment
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<PAGE>
agreement, including circumstances involving a change in control, he will be
entitled to receive his salary for an additional six months, and an additional
28% of his options will vest.
In October 1999, we entered into an employment offer letter with Mr. Lynch,
our Chief Financial Officer and Vice President of Finance and Administration.
The offer letter provides for an annual salary of $160,000. It also provides
that if we terminate Mr. Lynch's employment other than for cause, he will be
entitled to receive salary and benefits for an additional six months, and his
stock options will continue to vest for this additional six-month period.
In October 1999, we entered into an employment offer letter with Dr. Van
Vlasselaer, our Senior Vice President of Technical Operations. The offer letter
provides for an annual salary of $165,000. It also provides that if we terminate
Dr. Van Vlasselaer's employment other than for cause, he will be entitled to
receive salary and benefits for an additional three months, and his stock
options will continue to vest for this additional three-month period.
In December 1999, we entered into an employment offer letter with
Dr. Czarniecki, our Vice President of Regulatory Affairs. The offer letter
provides for an annual salary of $175,000. It also provides that if we terminate
Dr. Czarniecki's employment other than for cause, she will be entitled to
receive salary and benefits for an additional four months, and her stock options
will continue to vest for this additional four-month period.
In February 2000, we entered into an employment offer letter with Mr. Cory,
our Vice President of Sales and Marketing. The offer letter provides for an
annual salary of $165,000, a $25,000 signing bonus and a $55,000 relocation
allowance.
In March 2000, we entered into an employment offer letter with
Mr. Rosenfield, our Senior Vice President of Legal Affairs, General Counsel and
Secretary. The offer letter provides for an annual salary of $205,000 and a
$50,000 signing bonus. It also provides that if we terminate Mr. Rosenfield's
employment other than for cause, he will be entitled to receive salary and
benefits for an additional six months, and his stock options will continue to
vest for this additional six-month period.
In June 2000, we entered into an employment offer letter with Mr. Wulf, our
Senior Vice President of Corporate Development. The offer letter provides for an
annual salary of $210,000 and a $40,000 signing bonus. It also provides that if
we terminate Mr. Wulf's employment other than for cause, he will be entitled to
receive salary and benefits for an additional six months, and his stock options
will continue to vest for this additional six-month period.
We have entered into change of control agreements with Dr. Harkonen,
Mr. Lynch, Mr. Rosenfield, Dr. Van Vlasselaer, Mr. Wulf, Mr. Cory,
Dr. Czarniecki and Dr. Emlen that provide for accelerated vesting of each
officer's unvested stock upon a change of control and either a termination of
the officer's employment by the acquiror or a material change in the officer's
compensation, duties, responsibilities, or working conditions. The accelerated
vesting of the unvested stock for Dr. Harkonen, Mr. Lynch, Mr. Rosenfield and
Mr. Wulf will be 100% of their unvested shares, and for Dr. Van Vlasselaer,
Mr. Cory, Dr. Czarniecki and Dr. Emlen, it will be 50% of their unvested shares.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation that
we paid during 1999 to our Chief Executive Officer and our other most highly
compensated executive officers whose salary and bonus for such year was in
excess of $100,000 on an annualized basis. We refer to these people as our
"named executive officers." All option grants were made under our 1999 equity
incentive plan.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------ ------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) OPTIONS ($)(1)
--------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
W. Scott Harkonen, M.D.
Chief Executive Officer, President and Chairman of
the Board of Directors............................... $212,534 -- $10,749
Timothy P. Lynch
Chief Financial Officer and Vice President of Finance
and Administration................................... $ 26,667 180,000 $10,024
Peter Van Vlasselaer, Ph.D.
Senior Vice President of Technical Operations........ $ 21,240 160,000 $10,042
J. Woodruff Emlen, M.D.
Vice President of Scientific Affairs................. $155,294 90,000 $ 5,439
Nzeera Virani-Ketter, M.D.(2)
Vice President of Clinical Research.................. $ 60,000 120,000 $ 186
</TABLE>
------------------------
(1) Includes term-life insurance premiums paid by us on behalf of these named
executive officers, signing and annual bonuses and excess long-term
disability.
(2) Dr. Virani-Ketter resigned her employment with us effective as of March 10,
2000.
OPTION GRANTS
The following table sets forth summary information regarding the option
grants made to our Chief Executive Officer and each of our named executive
officers during 1999. Options granted to purchase shares of our common stock
under our 1999 equity incentive plan are generally immediately exercisable by
the optionee but are subject to a right of repurchase pursuant to the vesting
schedule of each specific grant. In the event that a purchaser ceases to provide
service to us, we have the right to repurchase any of that person's unvested
shares of common stock at the original option exercise price. The exercise price
per share is equal to the fair market value of our common stock on the date of
grant as determined by our board of directors. The percentage of total options
was calculated based on options to purchase an aggregate of 1,170,000 shares of
common stock granted under our 1999 equity incentive plan in 1999. The potential
realizable value was calculated based on the ten-year term of the options and
assumed rates of stock appreciation of 5% and 10%, compounded annually from the
date the options were granted to their expiration date based on the closing
price of the common stock on October 18, 2000. Under the 1999 Equity Incentive
Plan for our employees and officers, 20% of the option grant generally vests on
the one-year anniversary of employment, and the remainder vests in a series of
equal monthly installments beginning on the one-year anniversary of employment
and continuing over the next four years of service. See "Stock Plans" for a
description of the material terms of these options.
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<PAGE>
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR (PER SHARE) DATE 5% 10%
---- ---------- ------------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
W. Scott Harkonen, M.D.......... -- -- -- -- -- --
Timothy P. Lynch................ 165,000 14.10% $0.125 11/16/09 $12,359,618 $19,692,842
15,000 1.28% 0.125 11/16/09 $ 1,123,602 $ 1,790,258
Peter Van Vlasselaer, Ph.D...... 160,000 13.68% 0.125 11/16/09 $11,985,084 $19,096,089
J. Woodruff Emlen, M.D.......... 70,000 5.98% 0.125 7/29/09 $ 5,243,474 $ 8,354,539
20,000 1.71% 0.125 11/16/09 $ 1,498,135 $ 2,387,011
Nzeera Virani-Kitta, M.D........ 120,000 10.26% 0.125 11/16/09 $ 8,988,813 $14,322,067
</TABLE>
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by our Chief
Executive Officer and our other most highly compensated executive officers with
annualized base salaries in excess of $100,000 as of December 31, 1999. Options
granted to purchase shares of our common stock under our 1999 equity incentive
plan are generally immediately exercisable by optionees but are subject to a
right of repurchase pursuant to the vesting schedule of each specific grant. For
the 1999 equity incentive plan, the repurchase option generally lapses over a
five-year period with 20% lapsing after the first year and 1.667% lapsing
monthly thereafter. If a purchaser ceases to provide service to us or our
affiliates, we have the right to repurchase any of that person's unvested shares
of common stock at the original option exercise price. Amounts shown in the
value realized column were calculated based on the difference between the option
exercise price and the closing price of the common stock on October 18, 2000,
without taking into account any taxes that may be payable in connection with the
transaction, multiplied by the number of shares of common stock underlying the
option. The exercise price for all options granted in 1999 was $0.125.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS MONEY OPTIONS AT
SHARES AT DECEMBER 31, 1999 DECEMBER 31, 1999(2)
ACQUIRED ON VALUE --------------------- -----------------------------
NAME EXERCISE REALIZED(1) VESTED UNVESTED EXERCISABLE UNEXERCISABLE
---- ----------- ----------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
W. Scott Harkonen, M.D............ -- -- -- -- -- --
Timothy P. Lynch.................. 180,000 $8,268,840 -- 180,000 $8,268,840 --
Peter Van Vlasselaer, Ph.D........ -- -- -- 160,000 7,350,080 --
J. Woodruff Emlen, M.D............ -- -- 16,333 73,667 4,134,420 --
Nzeera Virani-Ketter, M.D......... -- -- -- 120,000 5,512,560 --
</TABLE>
------------------------
(1) Based on the $46.063 closing price of our common stock on October 18, 2000
per share, minus the per share exercise price, multiplied by the number of
shares issued upon exercise of the option.
(2) The value of unexercised in-the-money options is calculated based on the
difference between the $46.063 closing price of our common stock as of
October 18, 2000 and the exercise price for those shares of common stock,
multiplied by the number of shares underlying the option.
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<PAGE>
STOCK PLANS
2000 EQUITY INCENTIVE PLAN
Our board of directors adopted the 2000 plan in January 2000 and our
stockholders approved the 2000 plan in March 2000. The 2000 plan became
effective on March 24, 2000.
SHARE RESERVE. A total of 2,000,000 shares of our common stock have been
reserved for issuance under the 2000 plan. On January 1 of each year, commencing
with January 1, 2001, the share reserve will increase by the least of the
following:
- 3% of our total outstanding common stock (on a fully diluted, as converted
basis) at the time of an increase;
- an amount less than that above as determined by our board of directors.
No more than 10,000,000 of the shares reserved can be issued through the
exercise of incentive stock options. When a stock award expires or is terminated
before it is exercised, the shares not acquired pursuant to the stock award
again become available for issuance under the 2000 plan.
ADMINISTRATION. Our board of directors administers the 2000 plan. Our board
of directors, however, may delegate this authority to a committee of one or more
board members. The board or a committee of the board has the authority to
construe, interpret and amend the 2000 plan as well as to determine:
- the recipient of any stock award;
- the number of stock awards a recipient may receive;
- the grant date of a stock award;
- the number of shares subject to a stock award;
- the exercisability and vesting of a stock award;
- the exercise price of a stock award;
- the type of consideration to receive stock under a stock award; and
- the other terms of a stock award.
Our board of directors may amend or modify the 2000 plan at any time.
However, no amendment or modification shall adversely affect the rights and
obligations with respect to stock awards unless the holder consents to that
amendment or modification. In addition, our board of directors may, if required
or desirable, seek the approval of our stockholders to:
- increase the maximum number of shares issuable under incentive stock
options under the 2000 plan or the rate at which shares are added to the
reserve of the 2000 plan (except for permissible adjustments in the event
of certain changes in our capitalization);
- materially modify the eligibility requirements for participation; or
- materially increase the benefits accruing to participants.
ELIGIBILITY. The 2000 plan permits granting stock awards to employees,
directors and consultants of ours or certain of our affiliates. A stock award
may be an "incentive stock option" (ISO), within the meaning of Section 422 of
the Internal Revenue Code, a nonstatutory stock option (NSO), a right to
purchase restricted stock, or a restricted stock bonus.
Section 162(m) of the Internal Revenue Code, among other things, denies a
deduction to publicly held corporations for compensation paid to the chief
executive officer or any of the four highest
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<PAGE>
compensated officers (excluding the chief executive officer) in a taxable year
to the extent that the compensation of that officer exceeds $1,000,000. To
prevent options granted under the 2000 plan from being included in this
compensation, in any calendar year the board may not grant options under the
2000 plan to an employee covering an aggregate of more than 1,000,000 shares.
STOCK OPTION PROVISIONS GENERALLY. In general, the duration of a stock
option granted under the 2000 plan cannot exceed ten years. The exercise price
of an ISO cannot be less than 100% of the fair market value of the common stock
on the date of grant. The exercise price of an NSO cannot be less than 50% of
the fair market value of the common stock on the date of grant. An ISO may be
transferred only on death, but an NSO may also be transferable to the extent
permitted in the stock option agreement.
Unless the terms of an optionholder's stock option agreement provide for
earlier or later termination, if all of an optionholder's service relationships
with us and our affiliates terminate, then generally that optionholder (or that
optionholder's beneficiary if that optionholder has died) may exercise vested
options within:
- 18 months after that date if termination is due to death;
- 12 months after that date if termination is due to disability; or
- 3 months after that date if termination is for any reason other than
disability or death.
ISOs may be granted only to our employees (including those of certain
affiliates). The aggregate fair market value, determined at the time of grant,
of shares of our common stock with respect to which ISOs are exercisable for the
first time by an optionholder during any calendar year under all of our stock
plans may not exceed $100,000. An ISO granted to a person who at the time of
grant owns or is deemed to own more than 10% of the total combined voting power
of us or any of our affiliates must have a term of no more than five years and
an exercise price that is at least 110% of fair market value at the time of
grant.
PROVISIONS OF OTHER STOCK AWARDS GENERALLY. The board or a committee of the
board determines the purchase price of other stock awards, which for
nonstatutory stock options and stock purchase awards cannot be less than 50% of
the stock's fair market value at the time of grant. Stock bonuses, however, may
be awarded in consideration of past services without additional payment. Shares
that we sell or award under the 2000 plan may, but need not be, restricted and
subject to a repurchase option in our favor in accordance with a vesting
schedule. The board or committee, however, may accelerate the vesting of
restricted stock.
EFFECT ON STOCK AWARDS OF A CHANGE IN CONTROL. The 2000 plan provides that
in the event of a change in control in the beneficial ownership of us, the
surviving entity may assume all outstanding stock awards or substitute similar
stock awards for them. If the surviving entity determines not to assume or
substitute for these stock awards, the vesting in full of stock awards held by
persons whose service with us or our affiliates has not already terminated will
accelerate prior to this change in control. Awards not assumed or substituted
and not exercised prior to the effective date of the change in control shall
terminate and cease to be outstanding on the effective date of the change in
control.
OTHER PROVISIONS. If there is a transaction or event not involving our
receipt of consideration, including a merger, consolidation, reorganization,
stock dividend, or stock split, the board will appropriately adjust the class
and the maximum number of shares subject to the 2000 plan, the maximum number of
shares available for ISOs, and the Section 162(m) limit.
PLAN TERMINATION. The 2000 plan terminates on January 30, 2010.
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<PAGE>
OPTIONS ISSUED. As of October 18, 2000, we had granted stock awards,
including options, for the purchase of up to 364,000 shares of our common stock
under the 2000 plan.
1999 EQUITY INCENTIVE PLAN
Our board of directors adopted and our stockholders approved our 1999 equity
incentive plan in June 1999. The 1999 plan was amended in December 1999, and our
stockholders approved such amendment. An aggregate of 2,000,000 shares of common
stock currently are authorized for issuance under the 1999 plan. As of
March 24, 2000, stock awards were no longer granted under the 1999 plan. Stock
awards granted under the 1999 plan have substantially the same terms as apply to
grants under the 2000 plan. With respect to change in control provisions, all
outstanding options under the 1999 plan may be either assumed or substituted by
any surviving entity. If the surviving entity determines not to assume or
substitute such awards, the vesting schedule of all outstanding awards held by
persons whose service with us or our affiliates has not already terminated shall
accelerate, and all such outstanding awards will be immediately exercisable.
Awards not assumed or substituted and not exercised prior to the effective date
of the change in control shall terminate and cease to be outstanding on the
effective date of the change in control. As of October 18, 2000, we had issued
1,130,763 shares upon the exercise of options under the 1999 plan, and granted
options to purchase 747,653 shares at a weighted average exercise price of $3.56
per share were outstanding. As of October 18, 2000, our board had not granted
any stock bonuses or restricted stock under the 1999 plan.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted our 2000 employee stock purchase plan in
January 2000, and our stockholders approved the purchase plan in March 2000.
SHARE RESERVE. A total of 200,000 shares of common stock have currently
been authorized for issuance under the purchase plan. On each January 1,
beginning with January 1, 2001, and including and ending on January 1, 2009, the
share reserve will increase by the least of the following:
- 1% of our total outstanding common stock, on a fully-diluted, as converted
basis;
- 400,000 shares; or
- a lesser amount as determined by our board at or prior to the date of an
increase.
The purchase plan is intended to qualify as an "employee stock purchase
plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as
amended. Under the purchase plan, eligible employees will be able to purchase
common stock at a discount price in periodic offerings. The purchase plan and
the first offering under the purchase plan commenced on March 24, 2000.
ELIGIBILITY. All employees are eligible to participate in the purchase plan
so long as they are employed by us, or a U.S. incorporated subsidiary designated
by the board of directors, for at least 20 hours per week and are customarily
employed by us, or a subsidiary designated by the board of directors, for at
least five months per calendar year. Any employee who is a 5% stockholder is not
eligible to participate in the purchase plan.
OFFERINGS. Under the purchase plan, the board may specify offerings of up
to 27 months. Unless our board determines otherwise, common stock will be
purchased for accounts of participating employees at a price per share equal to
the lower of:
- 85% of the fair market value of a share of our common stock on the first
day of the offering; or
- 85% of the fair market value of a share of our common stock on the
purchase date.
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<PAGE>
The first offering began on March 24, 2000, and the shares were registered
on a Form S-8 registration statement on April 11, 2000. The fair market value of
the shares on March 24, 2000 was $20.00, the price per share at which our shares
were first sold to the public. Otherwise, fair market value generally means the
closing sales price (rounded up where necessary to the nearest whole cent) for
these shares (or the closing bid, if no sales were reported) as quoted on the
Nasdaq National Market on the last trading day prior to the relevant
determination date, as reported in THE WALL STREET JOURNAL.
The board may provide that employees who become eligible to participate
after the offering period begins nevertheless may enroll in the offering. These
employees will purchase our stock at the lower of:
- 85% of the fair market value of a share on the day they began
participating in the purchase plan; or
- 85% of the fair market value of a share on the purchase date.
Participating employees may authorize payroll deductions of up to 15% of
their compensation for the purchase of stock under the purchase plan. Employees
may end their participation in an offering before a purchase period ends.
Participation ends automatically on termination of employment.
OTHER PROVISIONS. The board may grant eligible employees purchase rights
under the purchase plan only if the purchase rights together with any other
purchase rights granted under other employee stock purchase plans established by
us or by our affiliates, if any, do not permit the employee's rights to purchase
our stock to accrue at a rate which exceeds $25,000 worth of our stock (based on
its fair market value at the time the purchase right was granted) for each
calendar year in which the purchase rights are outstanding.
Upon a change in control, the successor corporation may either assume or
replace outstanding purchase rights. Alternatively, the time for exercise of
purchase rights under the ongoing offering period(s) will be accelerated and our
stock will be purchased for the participants immediately before the change in
control.
SHARES ISSUED. The purchase plan became effective on March 24, 2000. As of
the date hereof, no shares of common stock have been purchased under the
purchase plan. The first purchase date is October 31, 2000.
PLAN TERMINATION. The purchase plan has no set termination date.
2000 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
Our board adopted the 2000 non-employee directors' stock option plan in
January 2000 and our stockholders approved the plan in March 2000. The
directors' plan provides for the automatic grant to our non-employee directors
of options to purchase shares of our common stock.
SHARE RESERVE. We have reserved a total of 180,000 shares of our common
stock for issuance under the directors' plan. On January 1 of each year,
commencing with January 1, 2001, the share reserve will automatically be
increased by 180,000 shares. However, the automatic increase is subject to
reduction by the board. If an optionholder does not purchase the shares subject
to his or her option before the option expires or otherwise terminates, the
shares that are not purchased will again become available for issuance under the
directors' plan.
ADMINISTRATION. The board administers the directors' plan. The board has
the authority to construe, interpret and amend the directors' plan but the
directors' plan specifies the essential terms of the options, including:
- the option recipients;
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<PAGE>
- the grant dates;
- the number of shares subject to the option;
- the exercisability and vesting of the option;
- the exercise price; and
- the type of consideration.
ELIGIBILITY. Options will automatically be granted under the directors'
plan to our non-employee directors as follows:
- Each non-employee director who on the date of initial election or
appointment to our board as a non-employee director does not already hold
at least one stock option granted by us, will automatically be granted an
option for 30,000 shares and an option for 10,000 shares.
- On the date that a non-employee director's most recent stock option grant
for 10,000 shares becomes fully vested, each non-employee director who is
continuing as a non-employee director will be granted an additional option
for 10,000 shares under the directors' plan.
As long as the non-employee director continues to serve with us or with an
affiliate of ours (whether in the capacity of a director, consultant, or an
employee) each option granted under the directors' plan to such person will vest
commencing one month after the date of its grant, at the rate of 1/36th of the
total number of shares for 30,000 share grants and 1/12th of the total number of
shares for 10,000 share grants until fully vested and will remain exercisable
throughout its term.
OPTION TERMS. Options have an exercise price equal to 100% of the fair
market value of our common stock on the grant date. The option term is ten years
but it generally will terminate three months after the optionholder's service
terminates. If termination is due to the optionholder's disability, however, the
post-termination exercise period is extended to 12 months. If this termination
is due to the optionholder's death or if the optionholder dies within three
months after his or her service terminates, the post-termination exercise period
is extended to 18 months following death.
The optionholder may transfer the option by gift to immediate family or for
estate-planning purposes. The optionholder also may designate a beneficiary to
exercise the option following the optionholder's death. Otherwise, the option
exercise rights will pass by the optionholder's will or by the laws of descent
and distribution.
OTHER PROVISIONS. Transactions not involving our receipt of consideration,
including a merger, consolidation, reorganization, stock dividend, and stock
split, may change the class and number of shares subject to the directors' plan
and to outstanding options. In that event, the board will appropriately adjust
the directors' plan as to the class and the maximum number of shares subject to
the directors' plan and to the automatic option grants. The board will also
adjust outstanding options as to the class, number of shares, and price per
share subject to the options.
In the event of a change in control, the surviving entity may either assume
or replace outstanding options under the directors' plan. If this does not
occur, then generally for options held by persons then performing services as an
employee or director of, or consultant to, us or our affiliates, the vesting of
their options will accelerate, and unexercised options will terminate
immediately prior to the event. Even if assumption or substitution does occur,
the vesting of options held by non-employee directors will accelerate and vest
in full. A change in control includes the following:
- a dissolution, liquidation or sale of all or substantially all of our
assets;
- a merger or consolidation in which we are not the surviving corporation;
or
45
<PAGE>
- a reverse merger in which we are the surviving corporation but the shares
of our common stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property.
OPTIONS ISSUED. The directors' plan became effective on March 24, 2000. As
of the date hereof, we have not issued any options under the directors' plan.
PLAN TERMINATION. The directors' plan has no stated termination date.
401(k) PLAN
We sponsor a 401(k) plan, a defined contribution plan intended to qualify
under Section 401(a) of the Internal Revenue Code of 1986. All employees are
eligible to participate. Participants may make pre-tax contributions to the
401(k) plan of up to 15% of their eligible earnings, subject to a statutorily
prescribed annual limit ($10,500 in calendar year 2000). Under the 401(k) plan,
each employee is fully vested in his or her deferred salary contributions.
Employee contributions are held and invested by the 401(k) plan's trustee.
Each participant's contributions, and the corresponding investment earnings,
are generally not taxable to the participants until withdrawn. Individual
participants may direct the trustee to invest their accounts in authorized
investment alternatives.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which a director derives an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and officers, and may indemnify our employees and other agents, to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in such capacity and certain other capacities, such as
serving as a director of another corporation at the request of our board of
directors.
We entered into agreements to indemnify our directors and officers in
addition to indemnification provided for in our certificate of incorporation and
our bylaws. These agreements, among other things, will provide for
indemnification of our directors and officers for expenses specified in the
agreements, including attorneys' fees, judgments, fines and settlement amounts
incurred by any of these persons in any action or proceeding arising out of
these persons' services as a director or officer for us, any of our subsidiaries
or any other entity to which the person provides services at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted.
46
<PAGE>
RELATED PARTY TRANSACTIONS
The following executive officers, directors or holders of more than five
percent of our voting securities purchased securities in the amounts as of the
dates shown below. All shares of preferred stock were converted to common stock
on the closing of our initial public offering.
<TABLE>
<CAPTION>
COMMON STOCK SERIES A-1 SERIES A-2 SERIES B
--------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
W. Scott Harkonen......................... 690,000 -- -- 4,472
Timothy P. Lynch.......................... 182,500 -- -- 4,472
Peter Van Vlassalaer...................... 160,000 -- -- --
J. Woodruff Emlen......................... 90,000 -- -- 4,472
Nzeera Virani-Ketter(1)................... -- -- -- 894
Nicholas J. Simon......................... 40,000 -- -- 4,472
John L. Higgins........................... 32,000 -- -- 4,472
James I. Healy............................ 100,000 -- -- 4,472
Edgar Engleman............................ 100,000 -- -- 4,472
5% STOCKHOLDERS
Connetics Corporation(2).................. -- 960,000 -- 89,445
Entities affiliated with Sanderling
Ventures(3)............................. 600,000 -- 2,400,000 313,060
Entities affiliated with BioAsia
Investments, LLC(4)..................... 312,500 -- 1,200,000 201,253
Entities affiliated with E.M. Warburg,
Pincus & Co. LLC(5)..................... -- -- -- 3,130,590
Entities affiliated with Sofinnova
Ventures(3)............................. -- -- 1,200,000 183,363
Price Per Share........................... $0.001 to $.125 $1.25 $1.25 $5.59
Date(s) of Purchase....................... 4/99 to 10/00 4/99 4/99 1/00
</TABLE>
------------------------
(1) Nzeera Virani-Ketter resigned her employment with us effective as of
March 10, 2000.
(2) John L. Higgins, one of our directors, is the chief financial officer of
Connetics Corporation.
(3) James I. Healy, one of our directors, is a former partner of Sanderling
Ventures and a current general partner and managing director of Sofinnova
Ventures.
(4) Edgar Engleman, one of our directors, is a managing member of BioAsia
Investments, LLC.
(5) Jonathan S. Leff, one of our directors, is a general partner of E.M.
Warburg, Pincus & Co. LLC.
We have entered into the following agreements with our executive officers,
directors and holders of more than five percent of our voting securities.
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT. We have entered into an
agreement with certain common stockholders, under which these stockholders have
registration rights with respect to their shares of common stock. See
"Description of Capital Stock--Registration Rights" for a further description of
the terms of this agreement.
AGREEMENTS WITH CONNETICS CORPORATION. Since April 1999, we have entered
into the following six agreements with Connetics:
- Amended and Restated Service Agreement, dated April 7, 1999;
- Amended and Restated Exclusive Sublicense Agreement, dated April 27, 1999;
- Collaboration Agreement, dated April 27, 1999;
47
<PAGE>
- Transition Agreement, dated April 27, 1999;
- Assignment and Option Agreement, dated June 23, 2000; and
- Revenue Adjustment Agreement, dated June 27, 2000.
Under the Assignment and Option Agreement, Connetics assigned to us its
license from Genentech, Inc. for the commercialization of ACTIMMUNE in the
United States, Canada and Japan. For a summary of the terms of this agreement,
please see "Business--License Agreements." Prior to the Assignment and Option
Agreement, we had sublicensed these commercialization rights under the Genentech
license from Connetics under the Amended and Restated Exclusive Sublicense
Agreement, which has been terminated.
In June 2000, we entered into the Revenue Adjustment Agreement to purchase
all rights to ACTIMMUNE revenues under the baseline that had previously been
recorded by Connetics, as established by the Transition Agreement. Beginning
with the three-month period ended June 30, 2000, all ACTIMMUNE revenues and
related expenses that had been previously transacted for Connetics are now
recorded by us. These sales, costs of sales and amounts receivable are on a net
basis. The Revenue Adjustment Agreement terminated the Transition Agreement,
Collaboration Agreement and Section 5.2 of the Assignment and Option Agreement
with Connetics.
Under the Amended and Restated Service Agreement, Connetics provided to us,
for a fee, information services, payroll, facilities, human resources,
accounting, employee benefits and administration services. We have discontinued
all services under the Amended and Restated Service Agreement, which has been
terminated.
Under the Collaboration Agreement, we made cash payments to Connetics of
approximately $500,000, committed to pay Connetics an additional $500,000 in
2001 and committed to issue shares of Series B preferred stock to Connetics,
which shares were issued. Under the Transition Agreement, Connetics booked the
net sales for ACTIMMUNE, up to a baseline amount through December 2001 less
associated cost of goods sold and marketing expenses. After December 31, 2001,
the net sales for ACTIMMUNE were to fully revert to us. We were obligated to pay
to Connetics gross margins on sales of ACTIMMUNE for chronic granulomatous
disease below the baseline units until December 31, 2001.
INDEBTEDNESS OF MANAGEMENT. In connection with Dr. Harkonen's employment
transition from Connetics to us, we assumed an outstanding loan of $100,000 made
by Connetics to Dr. Harkonen pursuant to a secured loan agreement and promissory
note dated September 19, 1997. The interest rate on the promissory note is 7.5%
per annum. The principal and accrued interest are due on October 30, 2000.
STOCK OPTIONS. Stock option grants to our executive officers and directors
are described in this prospectus under the captions "Management--Director
Compensation" and "--Executive Compensation."
EXECUTIVE EMPLOYMENT AGREEMENTS. In April 1999, we entered into an
executive employment agreement with Dr. Harkonen, our Chief Executive Officer
and President, and this agreement was amended in June 2000. In October, November
and December 1999, we entered into employment offer letters with Dr. Van
Vlassalaer, our Senior Vice President of Technical Operations; Mr. Lynch, our
Chief Financial Officer and Vice President of Finance and Administration; and
Dr. Czarniecki, our Vice President of Regulatory Affairs. In February and March
of 2000, we entered into employment offer letters with Mr. Cory, our Vice
President of Sales and Marketing and Mr. Rosenfield, our Senior Vice President
of Legal Affairs, General Counsel and Secretary. In June 2000, we entered into
an employment offer letter with Mr. Wulf, our Senior President of Corporate
Development. We have also entered into change of control agreements with all of
these executive officers. See "Management--Employment Agreements."
48
<PAGE>
INDEMNIFICATION AGREEMENTS. We have entered into indemnification agreements
with our directors and officers for the indemnification of these persons to the
full extent permitted by law. We also intend to execute these agreements with
our future directors and officers.
49
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our outstanding common stock as of October 18, 2000, and
as adjusted to reflect the sale of our common stock by this prospectus, by:
- our Chief Executive Officer and each of our named executive officers;
- each director;
- all directors and executive officers as a group;
- each stockholder who is known by us to own beneficially 5% or more of our
common stock; and
- each selling stockholder
Percentage of ownership in the following table is calculated based on
23,892,957 shares of common stock outstanding as of October 18, 2000.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of October 18, 2000 are deemed
outstanding. Those shares, however, are not deemed outstanding for the purposes
of computing the percentage ownership of any other person. Except as indicated
in the footnotes to the table, the persons named in the table have sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to community property laws, where
applicable. Unless otherwise indicated, the address of each of the individuals
named below is: 1710 Gilbreth Road, Suite 301, Burlingame, CA 94010.
AMOUNT AND NATURE OF SHARES BENEFICIALLY OWNED AS OF OCTOBER 18, 2000
<TABLE>
<CAPTION>
PRINCIPAL STOCKHOLDERS
SHARES BENEFICIALLY
NUMBER OF OWNED AFTER THIS
SHARES SHARES OFFERING
BENEFICIALLY SUBJECT TO -----------------------
OWNED(1) REPURCHASE(2) PERCENTAGE NUMBER PERCENTAGE
------------ ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
W. Scott Harkonen...................... 326,472 368,000 2.91% 694,472 2.91%
Timothy P. Lynch....................... 21,972 165,000 * 186,972 *
Peter Van Vlassalaer................... -- 160,000 * 160,000 *
J. Woodruff Emlen...................... 38,107 56,365 * 94,472 *
Nzeera Virani-Ketter................... 894 -- * 894 *
Edgar Engleman(3)...................... 1,803,225 15,000 7.61 1,818,225 7.61
James I. Healy(4)...................... 1,472,835 15,000 6.23 1,487,835 6.23
John L. Higgins(5)..................... 1,070,917 15,000 4.55 1,085,917 4.55
Wayne T. Hockmeyer..................... 8,333 31,667 * 40,000 *
Jonathon S. Leff(6).................... 3,130,590 -- 13.10 3,130,590 13.10
Nicholas J. Simon...................... 24,472 20,000 * 44,472 *
Entities affiliated with Warburg,
Pincus Equity Partners(6)............ 3,130,590 -- 13.10 3,130,590 13.10
Entities affiliated with Sanderling
Ventures(7).......................... 3,313,060 -- 13.86 3,313,060 13.86
Entities affiliated with BioAsia
Investments(3)....................... 1,713,753 -- 7.18 1,713,753 7.18
Entities affiliated with Sofinnova
Ventures(4).......................... 1,383,363 -- 5.79 1,383,363 5.79
All directors and executive officers as
a group(8)........................... 7,897,817 846,032 36.60 8,743,849 36.60
</TABLE>
--------------------------
* Less than 1% of the outstanding shares of common stock.
50
<PAGE>
(1) Excludes shares subject to repurchase.
(2) The unvested portion of the shares of common stock is subject to a right of
repurchase, at the original option price, in the event the holder ceases to
provide services to us and its affiliates or upon a change of control of us.
The repurchase rights lapse at a rate of 20% at the end of the first year of
service, and at a rate of 1/48th of the remaining purchased shares for each
continuous month of service thereafter. The option exercise prices range
from $0.01 to $4.50.
(3) Includes 1,205,201 shares held by Biotechnology Development Fund, L.P.,
58,140 shares held by Biotechnology Development Fund II, L.P., and 450,412
shares held by Biotechnology Development Fund III, L.P. Dr. Engleman is a
managing member of BioAsia Investments, LLC. BioAsia Investments, LLC is a
general partner of Biotechnology Development Fund, L.P., Biotechnology
Development Fund II, L.P., and Biotechnology Development Fund III, L.P.
Dr. Engleman disclaims beneficial ownership of these shares, except to the
extent of his proportionate partnership interest in these shares.
(4) Includes 1,340,971 shares held by Sofinnova Venture Partners IV, L.P., 4,472
shares held by Sofinnova Management IV, LLC and 37,920 shares held by
Sofinnova Venture Affiliates IV, L.P. Sofinnova Management IV, LLC is the
general partner of Sofinnova Venture Partners IV, LP and Sofinnova Venture
Affiliates IV, LP. Sofinnova Ventures is an administrative entity of
Sofinnova Management IV LLC. Sofinnova Ventures is located at 140 Geary
Street, 10(th) Floor, San Francisco, CA 94108. Dr. Healy is a general
partner and managing director at Sofinnova Ventures. Dr. Healy disclaims
beneficial ownership of all shares owned by the Sofinnova entities, except
to the extent of his proportionate partnership interest in these shares.
(5) Includes 1,049,445 shares held by Connetics Corporation. Mr. Higgins is the
Chief Financial Officer of Connetics Corporation and disclaims beneficial
ownership of these shares, except to the extent of his pecuniary interest in
these shares.
(6) Includes 2,958,407 shares held by Warburg, Pincus Equity Partners, L.P.,
93,918 shares held by Warburg, Pincus Netherlands Equity Partners I, C.V.,
62,612 shares held by Warburg, Pincus Netherlands Equity Partners II, C.V.,
and 15,653 shares held by Warburg, Pincus Netherlands Equity Partners III,
C.V. Warburg, Pincus Equity Partners, L.P. and its three Dutch affiliates
are referred to as the "WPEP Group." Warburg, Pincus & Co. ("WP") is the
sole general partner of each of the four partnerships in the WPEP Group. WP
is managed by E.M. Warburg, Pincus & Co., LLC ("EMWP"). Lionel I. Pincus is
the managing partner of WP and the managing member of EMWP, and may be
deemed to control both entities. Mr. Leff is a managing director and member
of EMWP and a general partner of WP. Mr. Leff may be deemed to have an
indirect pecuniary interest in an indeterminate portion of the shares
beneficially owned by the WPEP Group. All shares indicated as owned by
Mr. Leff are included because of his affiliation with the Warburg Pincus
entities. Mr. Leff disclaims beneficial ownership of all shares owned by the
Warburg Pincus entities.
(7) Includes 1,510,462 shares held by Sanderling Venture Partners IV, L.P.,
588,016 shares held by Sanderling IV Biomedical, L.P., 580,963 shares held
by Sanderling IV Limited Partnership, L.P., 189,394 shares held by
Sanderling Venture Management, 178,891 shares held by Sanderling IV
Biomedical Co-Investment Fund, L.P., 167,581 shares held by Sanderling Feri
Trust Venture Partners IV, L.P., 8,307 shares held by Sanderling IV Limited,
L.P. and 89,446 shares held by Sanderling IV Co-Investment Fund, L.P.
Sanderling Ventures is located at 2730 Sand Hill Road, Suite 200, Menlo
Park, CA 94025.
(8) Total number of shares includes 8,743,849 shares of common stock held by
entities affiliated with directors and executive officers.
51
<PAGE>
THE INFORMATION PROVIDED IN THE TABLE BELOW WITH RESPECT TO EACH SELLING
STOCKHOLDER HAS BEEN OBTAINED SOLELY FROM SUCH SELLING STOCKHOLDERS AS OF
OCTOBER 26, 2000.
<TABLE>
<CAPTION>
SELLING STOCKHOLDERS
SHARES BENEFICIALLY
NUMBER OF NUMBER OF OWNED AFTER THIS
SHARES SHARES OFFERING
BENEFICIALLY BEING -----------------------
OWNED(1) PERCENTAGE OFFERED NUMBER PERCENTAGE
------------ ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Baystar Capital, L.P...................... 50,000 * 50,000 -- --
BlackRock Funds, Small Cap Growth Fund.... 256,100 * 225,000 -- --
Brookside Capital Partners Fund, L.P...... 75,000 * 75,000 -- --
IDS Life Series Fund, Inc--Equity
Portfolio............................... 500,000 2.09 500,000 -- --
The Kaufman Fund, Inc..................... 170,000 * 170,000 -- --
Moore Global Investments, Ltd............. 68,000 * 68,000 -- --
Morgan Stanley Dean Witter Health Sciences
Trust................................... 60,000 * 60,000 -- --
Putnam Health Sciences Trust.............. 420,000 1.57 374,800 -- --
Putnam Variable Trust--Putnam VT Health
Sciences Fund........................... 30,900 * 25,200 -- --
Remington Investment Strategies, L.P...... 17,000 * 17,000 -- --
Seligman Frontier Fund, Inc............... 78,000 * 78,000 -- --
Seligman Global Fund Series,
Inc.--Seligman Global Smaller Companies
Portfolio............................... 58,900 * 58,900 -- --
Seligman Global Horizon Funds--Seligman
Horizon Global Smaller Companies Fund... 1,360 * 1,360 -- --
Seligman Portfolios, Inc.--Global Smaller
Companies Portfolio..................... 2,000 * 2,000 -- --
Seligman Portfolios, Inc.--Seligman
Frontier Portfolio...................... 4,700 * 4,700 -- --
United Capital Management, Inc............ 70,000 * 70,000 -- --
Vector Later-Stage Equity Fund II, L.P.
(1)..................................... 17,500 * 17,500 -- --
Vector Later-Stage Equity Fund II (Q.P.),
L.P. (1)................................ 52,500 * 52,500 -- --
</TABLE>
--------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Vector Later-Stage Equity Fund II, L.P. and Vector Later-Stage Equity Fund
II (Q.P.), L.P. (the "Vector Funds") are private limited partnerships which
specialize in investments in healthcare and life sciences equity and
equity-related securities. The general partner of the Vector Funds is Vector
Fund Management II, L.L.C., which is not owned by Prudential Vector
Healthcare Group. The Vector Funds are not broker-dealers and invest in
securities for their limited partners for long-term investment. Prudential
Vector Healthcare Group acted as placement agent for the shares we issued in
connection with the private placement transaction. Prudential Vector
Healthcare Group also acted as an underwriter in connection with our initial
public offering of shares of common stock in March 2000.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 45,000,000 shares of common stock,
$0.001 par value, and 5,000,000 shares of undesignated preferred stock, $0.001
par value. The following description of our capital stock does not purport to be
complete and is subject to, and qualified in its entirety by, our certificate of
incorporation and bylaws, which are incorporated by reference as exhibits to the
registration statement of which this prospectus forms a part.
COMMON STOCK
As of October 18, 2000, there were 23,892,957 shares of common stock
outstanding, assuming no exercise of outstanding stock options after
October 18, 2000, and no preferred stock outstanding. In addition, as of
October 18, 2000, there were 1,111,653 shares of common stock subject to
outstanding options.
Each share of common stock entitles its holder to one vote on all matters to
be voted upon by stockholders. Subject to preferences that may apply to any
outstanding preferred stock, holders of common stock may receive ratably any
dividends that the board of directors may declare out of funds legally available
for that purpose. In the event of our liquidation, dissolution or winding up,
the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities and any liquidation preference of
preferred stock that may be outstanding. The common stock has no preemptive
rights, conversion rights or other subscription rights or redemption or sinking
fund provisions. All outstanding shares of common stock are fully paid and
non-assessable.
PREFERRED STOCK
According to our amended and restated certificate of incorporation, our
board of directors will have the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of preferred stock in one or more
series. Our board shall designate the rights, preferences, privileges and
restrictions of the preferred stock, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preference, sinking fund
terms and number of shares constituting any series or the designation of any
series. The issuance of preferred stock could have the effect of restricting
dividends on the common stock, diluting the voting power of the common stock,
impairing the liquidation rights of the common stock or delaying or preventing a
change in control without further action by the stockholders. We have no present
plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
The holders of 13,656,361 shares of common stock outstanding are entitled to
require us to register the sales of their shares under the Securities Act of
1933 until March 23, 2005, under the terms of an investor rights agreement
between us and the holders of these securities. Subject to limitations specified
in the agreement, these registration rights include the following:
- right to two demand registrations that holders may exercise no sooner than
180 days after our initial public offering, which require us to register
sales of a holder's shares, subject to the discretion of our board of
directors to delay the registration not more than twice in any twelve
month period;
- right to an unlimited number of piggyback registrations that require us to
register sales of a holder's shares when we undertake a public offering,
subject to the discretion of the managing underwriter of the offering to
decrease the amount that holders may register to not less than thirty
percent (30%) of the total offering; and
- rights to an unlimited number of sales of shares on Form S-3, a short form
of registration statement permitted to be used by some companies, which
holders may exercise if they request
53
<PAGE>
registration of the sale of more than $1,000,000 of common stock provided
that Form S-3 is available for such offering and subject to the discretion
of our board of directors to delay the registration not more than twice in
any twelve-month period.
We will bear all registration expenses if these registration rights are
exercised, other than underwriting discounts and commissions. These registration
rights terminate as to a holder's shares when that holder may sell those shares
under Rule 144(k) of the Securities Act, which for most parties means two years
after the acquisition of the shares from us or when a holder owning less than
one percent of our outstanding common stock may sell such holder's shares under
Rule 144 during any 90-day period.
ANTI-TAKEOVER PROVISIONS
DELAWARE LAW
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates acquisitions of Delaware corporations. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a business
combination with an interested stockholder for a period of three years following
the date the person becomes an interested stockholder, unless:
- our board of directors approved the business combination or the
transaction in which the person became an interested stockholder prior to
the date the person attained this status;
- upon consummation of the transaction that resulted in the person becoming
an interested stockholder, the person owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
- on or subsequent to the date the person became an interested stockholder,
our board of directors approved the business combination and the
stockholders other than the interested stockholder authorized the
transaction at an annual or special meeting of stockholders.
Section 203 defines a "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- in general, any transaction that results in the issuance or transfer by
the corporation of any stock of the corporation to the interested
stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges, or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an "interested stockholder" as any person
who, together with the person's affiliates and associates, owns, or within three
years prior to the determination of interested stockholder status did own, 15%
or more of a corporation's voting stock.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Our amended and restated certificate of incorporation and bylaws, divide our
board into three classes, with each class serving a three-year term. The terms
are staggered, so that one-third of the board is to be elected each year. The
classification of our board could have the effect of making it more difficult
than otherwise for a third party to acquire control of us, because it would
typically take more than a year for a majority of the stockholders to elect a
majority of our board. In addition, our certificate of incorporation and bylaws
provide that any action required or permitted to be taken by our
54
<PAGE>
stockholders at an annual or special meeting may be taken only if it is properly
brought before the meeting, and may not be taken by written action in lieu of a
meeting. The bylaws also limit who may call a special meeting of the
stockholders. Under our bylaws, stockholders wishing to propose business to be
brought before a meeting of stockholders will be required to comply with various
advance notice requirements. Finally, our certificate of incorporation and
bylaws will not permit stockholders to take any action without a meeting.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services LLC. The transfer agent's address is 235 Montgomery Street,
23rd floor, San Francisco, CA 94104.
55
<PAGE>
PLAN OF DISTRIBUTION
The selling stockholders may sell the shares from time to time. The selling
stockholders will act independently of us in making decisions regarding the
timing, manner and size of each sale. The sales may be made on one or more
exchanges or in the over-the-counter market or otherwise, at prices and at terms
then prevailing or at prices related to the then current market price, or in
privately negotiated transactions. The selling stockholders may effect these
transactions by selling the shares to or through broker-dealers. The selling
stockholders may sell their shares in one or more of, or a combination of:
- a block trade in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as principal
to facilitate the transaction,
- purchases by a broker-dealer as principal and resale by a broker-dealer
for its account under this prospectus,
- an exchange distribution in accordance with the rules of an exchange,
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers, and
- privately negotiated transactions.
To the extent required, this prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution. If the plan of
distribution involves an arrangement with a broker-dealer for the sale of shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, the amendment or supplement
will disclose:
- the name of each selling stockholder and of the participating
broker-dealer(s),
- the number of shares involved,
- the price at which the shares were sold,
- the commissions paid or discounts or concessions allowed to the
broker-dealer(s), where applicable,
- that a broker-dealer(s) did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus,
and
- other facts material to the transaction.
From time to time, a selling stockholder may transfer, pledge, donate or
assign its shares of common stock to lenders or others and each of such persons
will be deemed to be a "selling stockholder" for purposes of this prospectus.
The number of shares of common stock beneficially owned by the selling
stockholder will decrease as and when it takes such actions. The plan of
distribution for the selling stockholders' shares of common stock sold under
this prospectus will otherwise remain unchanged, except that the transferees,
pledgees, donees or other successors will be selling stockholders hereunder. The
selling stockholders may enter into hedging transactions with broker-dealers in
connection with distributions of the shares or otherwise. In these transactions,
broker-dealers may engage in short sales of the shares in the course of hedging
the positions they assume with selling stockholders. The selling stockholders
also may sell shares short and redeliver the shares to close out short
positions.
The selling stockholders may enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the shares.
The broker-dealer may then resell or otherwise transfer the shares under this
prospectus. The selling stockholders also may loan or pledge the shares to a
broker-dealer. The broker-dealer may sell the loaned shares, or upon a default
the broker-dealer may sell the pledged shares under this prospectus.
56
<PAGE>
In effecting sales, broker-dealers engaged by the selling stockholders may
arrange for other broker-dealers to participate in the resales. Broker-dealers
or agents may receive compensation in the form of commissions, discounts or
concessions from selling stockholders. Broker-dealers or agents may also receive
compensation from the purchasers of the shares for whom they act as agents or to
whom they sell as principals, or both. Compensation as to a particular
broker-dealer might be in excess of customary commissions and will be in amounts
to be negotiated in connection with the sale. Broker-dealers or agents and any
other participating broker-dealers or the selling stockholders may be deemed to
be "underwriters" within the meaning of Section 2(11) of the Securities Act of
1933, as amended, in connection with sales of the shares. Accordingly, any
commission, discount or concession received by them and any profit on the resale
of the shares purchased by them may be deemed to be underwriting discounts or
commissions under the Securities Act. Because selling stockholders may be deemed
to be "underwriters" within the meaning of Section 2(11) of the Securities Act,
the selling stockholders will be subject to the prospectus delivery requirements
of the Securities Act. In addition, any securities covered by this prospectus
that qualify for sale under Rule 144 promulgated under the Securities Act may be
sold under Rule 144 rather than under this prospectus. The selling stockholders
have advised that they have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
securities. There is no underwriter or coordinating broker acting in connection
with the proposed sale of shares by the selling stockholders.
The shares will be sold only through registered or licensed brokers or
dealers if required under applicable state securities laws. In addition, in some
states the shares may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
Under applicable rules and regulations under the Securities Exchange Act of
1934, as amended, any person engaged in the distribution of the shares may not
simultaneously engage in market making activities with respect to our common
stock for a period of two business days prior to the commencement of the
distribution. In addition, each selling stockholder will be subject to
applicable provisions of the Exchange Act and the associated rules and
regulations under the Exchange Act, including Regulation M, which provisions may
limit the timing of purchases and sales of shares of our common stock by the
selling stockholders. We will make copies of this prospectus available to the
selling stockholders and have informed them of the need to deliver copies of
this prospectus to purchasers at or prior to the time of any sale of the shares.
We will bear all costs, expenses and fees in connection with the
registration of the shares. The selling stockholders will bear all commissions
and discounts, if any, attributable to the sales of the shares. The selling
stockholders may agree to indemnify any broker-dealer or agent that participates
in transactions involving sales of the shares against specific liabilities,
including liabilities arising under the Securities Act. The selling stockholders
have agreed to indemnify specific persons, including broker-dealers and agents,
against specific liabilities in connection with the offering of the shares,
including liabilities arising under the Securities Act.
We have agreed to maintain the effectiveness of this registration statement
until each selling stockholder can sell all of the shares it holds under Rule
144(k) promulgated under the Securities Act. The selling stockholders may sell
all, some or none of the shares offered by this prospectus.
LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be passed
upon for us by Cooley Godward LLP, Palo Alto, California. As of the date of this
prospectus, certain partners and associates of Cooley Godward LLP own an
aggregate of 17,889 shares of common stock through an investment partnership.
57
<PAGE>
EXPERTS
Our financial statements as of December 31, 1998 and 1999 and for the period
from February 25, 1998 (inception) to December 31, 1998, the year ended
December 31, 1999 and for the period from February 25, 1998 (inception) through
December 31, 1999, included in this prospectus and registration statement have
been audited by Ernst & Young LLP, independent auditors, as stated in their
report appearing in this prospectus and registration statement, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement (of which this prospectus forms a part) on Form S-1 with respect to
the common stock being offered by this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedule thereto. For further information with respect to us and
the shares of common stock offered hereby, reference is made to the registration
statement, including the exhibits and schedules thereto. Statements contained in
this prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete and, where any contract is an exhibit to the
registration statement, each statement with respect to the contract is qualified
in all respects by the provisions of the relevant exhibit, to which reference is
hereby made. You may read and copy any document we file at the Public Reference
Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and the Securities and Exchange Commission's
Regional Offices located at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048. You may call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information about the operation of the
public reference rooms.
We are subject to the information and reporting requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, will file periodic
reports, proxy statements and other information with the Securities and Exchange
Commission. Upon approval of the common stock for quotation on the Nasdaq
National Market, such reports, proxy and information statements and other
information may also be inspected at the National Association of Securities
Dealers, Inc., 1735 K Street, NW, Washington, D.C. 20006.
The Securities and Exchange Commission maintains a World Wide Website that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission. The address of the Securities and Exchange Commission's website is
HTTP://WWW.SEC.GOV.
58
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Ernst & Young, LLP, independent auditors.......... F-2
Balance sheets as of December 31, 1998 and 1999, and
June 30, 2000............................................. F-3
Statements of operations for the period from February 25,
1998 (inception) to December 31, 1998, the year ended
December 31, 1999, for the period from February 25, 1998
(inception) to December 31, 1999, and for the nine-month
periods ended September 30, 1999 and 2000................. F-4
Statements of cash flows for the period from February 25,
1998 (inception) to December 31, 1998, the year ended
December 31, 1999, for the period from February 25, 1998
(inception) to December 31, 1999, and for the nine-month
periods ended September 30, 1999 and 2000................. F-5
Statement of changes in redeemable convertible preferred
stock and stockholders' equity (deficit) for the period
from February 25, 1998 (inception) to September 30,
2000...................................................... F-6
Notes to financial statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
InterMune Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of InterMune
Pharmaceuticals, Inc. (a development stage company) as of December 31, 1998 and
1999 and the related statements of operations, redeemable convertible preferred
stock and stockholders' equity (deficit), and cash flows for the period from
February 25, 1998 (inception) to December 31, 1998, the year ended December 31,
1999, and for the period from February 25, 1998 (inception) to December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InterMune
Pharmaceuticals, Inc. (a development stage company) at December 31, 1998 and
1999, and the results of its operations and its cash flows for the period from
February 25, 1998 (inception) to December 31, 1998, and the year ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
Palo Alto, California
January 28, 2000, except for the second and sixth
paragraphs under
"Stock Compensation Plans" in note 6 to the
financial statements and the third paragraph
under "Deferred Compensation" in note 6 to the
financial statements as to which the date is
February 29, 2000
F-2
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1999 2000
(IN THOUSANDS EXCEPT SHARE DATA) ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 2,315 $ 3,772 $ 141,416
Short-term investments, available for sale............... 2,405 442 55,935
Accounts receivable, net................................. -- 409 1,535
Inventories.............................................. -- 831 1,200
Notes receivable from officer............................ -- 104 109
Product revenue rights from Connetics, net............... -- -- 2,633
Other current assets and prepaid expenses................ -- 19 657
-------- -------- ---------
Total current assets................................... 4,720 5,577 203,485
Property and equipment, net................................ -- 28 766
Restricted cash balance.................................... -- 250 250
-------- -------- ---------
$ 4,720 $ 5,855 $ 204,501
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 121 $ 1,809 $ 2,714
Accrued payroll.......................................... 70 94 367
Payable to Connetics..................................... 348 538 883
Royalty payable to Genentech............................. -- 1,914 397
-------- -------- ---------
Total current liabilities.................................. 539 4,355 4,361
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: 11,200,000
shares at December 31, 1998 and 1,835,000 shares at
December 31, 1999, no shares at September 30, 2000..... 10,253 4,507 --
Common stock, $.001 par value; authorized: 45,000,000
shares; issued and outstanding: none at December 31,
1998 and 1,890,833 shares at December 31, 1999,
23,892,957 shares at September 30, 2000................ -- 2 24
Additional paid-in capital................................. -- 5,657 239,332
Deferred compensation related to stock options............. -- (5,286) (8,741)
Notes receivable from stockholder.......................... -- -- (90)
Accumulated other comprehensive loss....................... -- -- (16)
Accumulated deficit........................................ (6,072) (12,421) (30,369)
-------- -------- ---------
Total stockholders' equity (deficit)....................... 4,181 (7,541) 200,140
-------- -------- ---------
$ 4,720 $ 5,855 $ 204,501
======== ======== =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE
FROM PERIOD FROM
FEBRUARY 25, FEBRUARY 25,
1998 1998 NINE MONTHS ENDED
(INCEPTION) YEAR ENDED (INCEPTION) TO SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------
1998 1999 1999 1999 2000
(IN THOUSANDS EXCEPT PER SHARE DATA) --------------- ------------ -------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product sales, net.................. $ -- $ 556 $ 556 $ -- $ 6,964
Costs and expenses:
Cost of goods sold................ -- 240 240 -- 3,397
Amortization of product revenue
rights.......................... -- -- -- -- 1,777
Research and development.......... 1,235 2,969 4,204 1,754 13,275
Selling, general and
administrative.................. 892 2,656 3,548 1,499 11,534
Acquired pre-FDA approval
rights.......................... 4,000 1,094 5,094 1,094 --
------- ------- -------- ------- --------
Total costs and expenses........ 6,127 6,959 13,086 4,347 29,983
------- ------- -------- ------- --------
Loss from operations................ (6,127) (6,403) (12,530) (4,347) (23,019)
Other income (expense):
Interest income................... 55 240 295 173 5,232
Interest expense.................. -- (186) (186) (103) (161)
------- ------- -------- ------- --------
Net loss............................ $(6,072) (6,349) (12,421) (4,277) (17,948)
======= ------- -------- ------- --------
Preferred stock accretion........... (657) (657) (411) (269)
Deemed redeemable preferred stock
dividend.......................... -- -- -- (27,762)
------- -------- ------- --------
Net loss applicable to common
stockholders...................... $(7,006) $(13,078) $(4,688) $(45,979)
======= ======== ======= ========
Historical basic and diluted net
loss per share.................... $ (9.12) $ (7.52) $ (3.03)
======= ======= ========
Shares used in computing historical
basic and diluted net loss per
common share...................... 768 623 15,169
======= ======= ========
Pro forma basic and diluted net loss
per share......................... $ (0.82) $ (0.58) $ (2.41)
======= ======= ========
Pro forma basic and diluted weighted
average shares outstanding........ 7,770 7,347 18,944
======= ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD FROM PERIOD FROM
FEBRUARY 25, FEBRUARY 25,
1998 1998 FOR THE NINE-MONTHS
(INCEPTION) TO YEAR ENDED (INCEPTION) TO ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, ---------------------
1998 1999 1999 1999 2000
-------------- ------------- -------------- --------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows used for operating activities:
Net loss................................... $ (6,072) $ (6,349) $(12,421) $(4,277) $(17,948)
Adjustments to reconcile net loss to net
cash used for operating activities:
Amortization of deferred
compensation......................... -- 345 345 -- 5,128
Compensation related to vested stock
options issued to consultants for
services............................. -- -- -- -- 1,172
Accretion of long-term obligations
payable to parent (Connetics)........ -- 111 111 63 87
Stock issued for acquired pre-FDA
approval rights...................... 4,000 1,094 5,094 1,094 --
Forgiveness of related party
obligation........................... 253 -- 253 -- --
Depreciation........................... -- 3 3 -- 91
Changes in operating assets and
liabilities:
Current and other assets............... -- (1,613) (1,613) (628) (4,770)
Current liabilities.................... 191 1,710 1,901 601 1,180
Payable to Connetics................... 348 (309) 39 (164) (1,367)
Royalty payable to Genentech........... -- 1,914 1,914 1,638 (1,516)
-------- -------- -------- ------- --------
Net cash used for operating
activities......................... (1,280) (3,094) (4,374) (1,673) (17,943)
Cash flows from investing activities:
Purchase of capital equipment............ -- (30) (30) (19) (830)
Purchases of short-term investments...... (11,409) (24,198) (35,607) 2,307 (97,687)
Sales and maturities of short-term
investments............................ 9,004 26,160 35,164 (2,350) 42,178
-------- -------- -------- ------- --------
Net cash (used) provided for
investing activities............... (2,405) 1,932 (473) (62) (56,339)
Cash flows from financing activities:
Contributed capital for preferred
stock.................................. 6,000 396 6,396 396 --
Return of capital to Parent
(Connetics)............................ -- (5,222) (5,222) (5,722) (1,000)
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.................................. -- 6,760 6,760 7,005 26,176
Proceeds from issuance of common stock... -- 663 663 419 --
Proceeds from exercise of stock
options................................ -- 23 23 -- 462
Repurchase of restricted stock........... -- (1) (1) -- --
-------- -------- -------- ------- --------
Net cash provided by financing
activities......................... 6,000 2,619 8,619 2,098 211,926
-------- -------- -------- ------- --------
Net increase in cash and cash
equivalents.............................. 2,315 1,457 3,772 363 137,644
Cash and cash equivalents at beginning of
period................................... -- 2,315 -- 2,315 3,772
-------- -------- -------- ------- --------
Cash and cash equivalents at end of
period................................... $ 2,315 $ 3,772 $ 3,772 $ 2,678 $141,416
======== ======== ======== ======= ========
Supplemental disclosure of cash flow
information:
Return of capital, obligation to Parent
(Connetics)............................ $ -- $ (2,014) $ (2,014) $(2,014) $ --
Long-term obligation, return of
capital................................ $ -- $ 1,514 $ 1,514 $ 1,514 $ --
Short-term obligation on return of
capital................................ $ -- $ 500 $ 500 $ -- $ 500
Deferred stock compensation.............. $ -- $ 5,631 $ 5,631 $ -- $ 8,583
</TABLE>
See accompanying notes.
F-5
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM FEBRUARY 25, 1998 (INCEPTION) TO SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE -----------------------------------------------------------------------
CONVERTIBLE CONVERTIBLE NOTES DEFERRED
PREFERRED STOCK PREFERRED STOCK COMMON STOCK RECEIVABLE COMPENSATION
------------------- ------------------- ------------------- FROM RELATED TO
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHAREHOLDER STOCK OPTIONS
-------- -------- -------- -------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders for $0.001 per share on
March 4, 1998.................... -- -- -- -- 1,600 1,600 -- --
Repurchase of common stock at
$0.001 per share on August 21,
1998............................. -- -- -- -- (1,600) (1,600) -- --
Capital transactions with Parent
(Connetics):
Issuance of Series A convertible
preferred stock for contributed
capital at $0.915 per share in
August and October 1998
Intellectual capital
contributed by Parent
(Connetics)................... -- -- 4,369 4,000 -- -- -- --
Cash........................... -- -- 6,831 6,253 -- -- -- --
Gain on investments................ -- -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- -- --
------- ------- ------- ------ ------ ------- --- -------
BALANCE AT DECEMBER 31, 1998....... -- -- 11,200 10,253 -- -- -- --
Issuance of restricted common stock
to founders for cash at $0.01 per
share on June 1, 1999............ -- -- -- -- 815 8 -- --
Capital transactions with Parent
(Connetics):
Exchange of convertible preferred
shares on April 27, 1999:
Return of Series A............. -- -- (11,200) -- -- -- -- --
Issuance of Series A-1 at $1.25
per share..................... -- -- 960 -- -- -- -- --
Contributed capital from Parent
(Connetics) (cash)............. -- -- -- 396 -- -- -- --
Return of capital to Parent
(Connetics) (cash)............. -- -- -- (4,722) -- -- -- --
Return of capital to Parent
(Connetics) (cash and/or stock
on April 27, 1999)............. -- -- -- (2,514) -- -- -- --
Issuance of Series A-1 convertible
preferred stock for license
rights at $1.25 per share on
April 27, 1999................... -- -- 875 1,094 -- -- -- --
Issuance of Series A-2 redeemable
convertible preferred stock for
cash, net of issuance costs of
$95 at $1.116 per share on April
27, 1999......................... 4,800 5,260 -- -- -- -- -- --
Issuance of common stock for cash
at $0.672 per share on April 27,
1999............................. -- -- -- -- 975 655 -- --
Issuance of Series A-2 redeemable
convertible preferred stock for
cash at $1.25 per share on August
6, 1999.......................... 800 1,000 -- -- -- -- -- --
Issuance of Series A-2 redeemable
convertible preferred stock for
cash at $1.25 per share in
September 1999................... 400 500 -- -- -- -- -- --
Repurchase of common stock at $0.01
per share on December 15, 1999... -- -- -- -- (79) (1) -- --
Exercise of stock options.......... -- -- -- -- 180 23 -- --
Gain on investments................ -- -- -- -- -- -- -- --
Deferred compensation.............. -- -- -- -- -- 5,631 -- (5,631)
Amortization of deferred
compensation..................... -- -- -- -- -- -- -- 345
Preferred stock accretion.......... -- 657 -- -- -- (657) -- --
Net loss........................... -- -- -- -- -- -- -- --
------- ------- ------- ------ ------ ------- --- -------
BALANCE AT DECEMBER 31, 1999....... 6,000 7,417 1,835 4,507 1,891 5,659 -- (5,286)
Issuance of Series B redeemable
convertible preferred stock for
cash, net of issuance costs of
$1,424 at $5.59 per share on
January 7 and 27, 2000
(unaudited)...................... 4,757 25,166 -- -- -- -- -- --
Issuance of Series B redeemable
convertible preferred stock to
agent upon completion of private
placement financing on
January 7, 2000 (unaudited)...... 120 671 -- -- -- -- -- --
Issuance of Series B redeemable
convertible preferred stock as
milestone payment to Connetics on
January 7, 2000 (unaudited)...... 89 500 -- -- -- -- -- --
Exercise of stock options
(unaudited)...................... -- -- -- -- 1,074 485 (90) --
Repurchase of common stock at
$0.125 per share on February 25,
2000 (unaudited)................. -- -- -- -- (129) (18) -- --
Preferred stock accretion
(unaudited)...................... -- 269 -- -- -- (269) -- --
Conversion of redeemable
convertible and convertible
preferred stock to common stock
upon completion of the Company's
initial public offering on
March 24, 2000 (unaudited)....... (10,966) (34,023) (1,835) (4,507) 12,801 38,530 -- --
Issuance of common stock in the
Company's initial public offering
for cash, net of issuance costs
of $10,052 at $20 per share on
March 24, 2000 (unaudited)....... -- -- -- -- 6,250 114,948 -- --
Return of capital to Connetics
(cash) in accordance with the
collaboration agreement on
March 30, 2000 (unaudited)....... -- -- -- -- -- (1,000) -- --
Issuance of common stock, net of
issuance costs of $4,714 at $38
per share on August 18, 2000
(unaudited)...................... -- -- -- -- 2,000 71,286 -- --
Stock issued for consulting
services (unaudited)............. -- -- -- -- -- 1,172 -- --
Loss on investments (unaudited).... -- -- -- -- -- -- -- --
Deferred compensation
(unaudited)...................... -- -- -- -- -- 8,583 -- (8,583)
Amortization of deferred
compensation (unaudited)......... -- -- -- -- -- -- -- 5,128
Net loss (unaudited)............... -- -- -- -- -- -- -- --
------- ------- ------- ------ ------ ------- --- -------
BALANCE AT SEPTEMBER 30, 2000
(UNAUDITED)...................... -- -- -- -- 23,893 239,356 (90) (8,741)
======= ======= ======= ====== ====== ======= === =======
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
INCOME DEFICIT EQUITY
------------- ------------ -------------
<S> <C> <C> <C>
Issuance of common stock to
founders for $0.001 per share on
March 4, 1998.................... -- -- 1,600
Repurchase of common stock at
$0.001 per share on August 21,
1998............................. -- -- (1,600)
Capital transactions with Parent
(Connetics):
Issuance of Series A convertible
preferred stock for contributed
capital at $0.915 per share in
August and October 1998
Intellectual capital
contributed by Parent
(Connetics)................... -- -- 4,000
Cash........................... -- -- 6,253
Gain on investments................ -- -- --
Net loss........................... -- (6,072) (6,072)
--- ------- -------
BALANCE AT DECEMBER 31, 1998....... -- (6,072) 4,181
Issuance of restricted common stock
to founders for cash at $0.01 per
share on June 1, 1999............ -- -- 8
Capital transactions with Parent
(Connetics):
Exchange of convertible preferred
shares on April 27, 1999:
Return of Series A............. -- -- --
Issuance of Series A-1 at $1.25
per share..................... -- -- --
Contributed capital from Parent
(Connetics) (cash)............. -- -- 396
Return of capital to Parent
(Connetics) (cash)............. -- -- (4,722)
Return of capital to Parent
(Connetics) (cash and/or stock
on April 27, 1999)............. -- -- (2,514)
Issuance of Series A-1 convertible
preferred stock for license
rights at $1.25 per share on
April 27, 1999................... -- -- 1,094
Issuance of Series A-2 redeemable
convertible preferred stock for
cash, net of issuance costs of
$95 at $1.116 per share on April
27, 1999......................... -- -- --
Issuance of common stock for cash
at $0.672 per share on April 27,
1999............................. -- -- 655
Issuance of Series A-2 redeemable
convertible preferred stock for
cash at $1.25 per share on August
6, 1999.......................... -- -- --
Issuance of Series A-2 redeemable
convertible preferred stock for
cash at $1.25 per share in
September 1999................... -- -- --
Repurchase of common stock at $0.01
per share on December 15, 1999... -- -- (1)
Exercise of stock options.......... -- -- 23
Gain on investments................ -- -- --
Deferred compensation.............. -- -- --
Amortization of deferred
compensation..................... -- -- 345
Preferred stock accretion.......... -- -- (657)
Net loss........................... -- (6,349) (6,349)
--- ------- -------
BALANCE AT DECEMBER 31, 1999....... -- (12,421) (7,541)
Issuance of Series B redeemable
convertible preferred stock for
cash, net of issuance costs of
$1,424 at $5.59 per share on
January 7 and 27, 2000
(unaudited)...................... -- -- --
Issuance of Series B redeemable
convertible preferred stock to
agent upon completion of private
placement financing on
January 7, 2000 (unaudited)...... -- -- --
Issuance of Series B redeemable
convertible preferred stock as
milestone payment to Connetics on
January 7, 2000 (unaudited)...... -- -- --
Exercise of stock options
(unaudited)...................... -- -- 375
Repurchase of common stock at
$0.125 per share on February 25,
2000 (unaudited)................. -- -- (18)
Preferred stock accretion
(unaudited)...................... -- -- (269)
Conversion of redeemable
convertible and convertible
preferred stock to common stock
upon completion of the Company's
initial public offering on
March 24, 2000 (unaudited)....... -- -- 34,023
Issuance of common stock in the
Company's initial public offering
for cash, net of issuance costs
of $10,052 at $20 per share on
March 24, 2000 (unaudited)....... -- -- 114,948
Return of capital to Connetics
(cash) in accordance with the
collaboration agreement on
March 30, 2000 (unaudited)....... -- -- (1,000)
Issuance of common stock, net of
issuance costs of $4,714 at $38
per share on August 18, 2000
(unaudited)...................... -- -- 71,286
Stock issued for consulting
services (unaudited)............. -- -- 1,172
Loss on investments (unaudited).... (16) -- (16)
Deferred compensation
(unaudited)...................... -- -- --
Amortization of deferred
compensation (unaudited)......... -- -- 5,128
Net loss (unaudited)............... -- (17,948) (17,948)
--- ------- -------
BALANCE AT SEPTEMBER 30, 2000
(UNAUDITED)...................... (16) (30,369) 200,140
=== ======= =======
</TABLE>
F-6
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
1. ORGANIZATION
OVERVIEW
InterMune Pharmaceuticals, Inc. ("InterMune" or the "Company") develops and
commercializes innovative products for the treatment of serious pulmonary and
infectious diseases and congenital disorders. The Company has the exclusive
license rights in the United States to ACTIMMUNE (Interferon gamma-1b) Injection
for a range of indications, including chronic granulomatous disease,
osteopetrosis, idiopathic pulmonary fibrosis, mycobacterial infections, systemic
fungal infections and cystic fibrosis. The Company has active development
programs underway for these indications, several of which are in mid- or
advanced-stage human testing, known as clinical trials. The FDA has approved
ACTIMMUNE for the treatment of chronic granulomatous disease, and the Company
markets and sells ACTIMMUNE in the United States for this disease. In
August 1999, the Company filed a supplement to its biologics license
application, or BLA, with the FDA for the expanded use of ACTIMMUNE for the
treatment of severe, malignant osteopetrosis. In February 2000, the FDA approved
the BLA application for ACTIMMUNE for the treatment of severe, malignant
osteopetrosis, and the Company markets and sells ACTIMMUNE in the United States
for this disease.
The Company was incorporated on February 25, 1998 in the State of California
and commenced operations as a wholly owned subsidiary of Connetics in May of
1998. Beginning in May 1998, Connetics contributed certain development rights
and intellectual property valued at $4 million, cash of $6 million and
unreimbursed operating costs of $0.3 million to InterMune, then its wholly-owned
subsidiary. The value of the development rights and intellectual property
contributed was determined by the amount Connetics had paid Genentech for those
same rights in May 1998. The entire value of these rights had been allocated to
in-process research and development by Connetics and has also been reflected in
InterMune's statement of operations for the period from February 25, 1998
(inception) through December 31, 1998, as acquired pre-FDA approval rights with
a corresponding increase to capital contributed by parent. The determination of
the portion of the value of the rights allocable to in-process research and
development was made based upon the discounted cash flows of the rights acquired
projected over a ten year period, and included the costs of research and
development efforts necessary to prove efficacy of the molecule to which the
rights pertain. The Company reincorporated in Delaware on March 21, 2000.
On April 27, 1999, the Company obtained venture capital funding and was
reorganized pursuant to the Series A-1 and A-2 Preferred Stock Purchase
Agreement (see note 3). At the time of the reorganization, approximately
$4.7 million of the $10.3 million of capital originally contributed by Connetics
to InterMune, its wholly owned subsidiary, was returned to Connetics in the form
of cash. The Company also recorded a liability for $3.0 million to be paid to
Connetics over the next several years in cash and stock (see note 3), the
present value of which was recorded as a return of capital to Connetics. The
Company cancelled all of the 11.2 million shares of Series A preferred stock it
had originally issued to Connetics. Connetics also received 960,000 shares of
InterMune's Series A-1 preferred stock and net sales of ACTIMMUNE (as well as
incurring associated costs and expenses) up to a baseline amount through
December 2001, both in exchange for the remaining $3.4 million of Connetics'
contributed capital. See note 3 for a more complete description of the
April 27, 1999 agreements. At that time, Connetics retained approximately 9.0%
ownership in the Company.
F-7
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
1. ORGANIZATION (CONTINUED)
On June 27, 2000, the Company entered into the Revenue Adjustment Agreement
with Connetics Corporation by which the Company acquired from Connetics the
rights to those ACTIMMUNE revenues under the baseline that the Company did not
already own (established by the Transition Agreement, dated April 27, 1999).
Beginning with the three-month period ended June 30, 2000, the Company 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 the Company on a net basis, in the accompanying financial statements for the
three-month period ended March 31, 2000 and the three and six-month periods
ended June 30, 1999. Such sales, costs of sales and accounts receivable were not
subject to the risks and rewards of ownership by the Company. The Revenue
Adjustment Agreement terminated the Transition Agreement, Collaboration
Agreement and Section 5.2 of the Assignment Agreement with Connetics.
BASIS OF ACCOUNTING
The accompanying financial statements include the operations of InterMune
for the period from February 25, 1998 to April 27, 1999, as a wholly-owned
subsidiary of Connetics. The Company's financial statements include all costs of
doing business during the period it was a wholly owned subsidiary. Separate
accounting records for the Company were maintained during this period, but were
included in the consolidated financial statements of Connetics. Connetics
provides InterMune with certain information services, accounting activities,
employee benefit administration and research and development services as
described in note 3. InterMune is charged the actual time incurred plus an
allocation of overhead costs based upon time incurred. The Company believes the
allocation methodology is reasonable.
Prior to the date of InterMune's incorporation, February 25, 1998, Connetics
had licensed certain rights to ACTIMMUNE for dermatological indications from
Genentech and has retained an option to such dermatological rights. In
April 1998, after the incorporation of InterMune, Connetics licensed the rights
to ACTIMMUNE from Genentech for different indications, including the treatment
of serious infectious and pulmonary diseases and congenital disorders, for
$4 million of Connetics stock. Those rights were subsequently sublicensed to
InterMune in exchange for InterMune convertible preferred stock. On April 27,
1999, InterMune issued to Genentech 875,000 shares of InterMune Series A
preferred stock valued at $1,094,000 in exchange for additional ACTIMMUNE
development rights in Japan and a reduction of future royalties on potential
ACTIMMUNE net product revenues through its sublicense agreement with Connetics.
Through December 31, 1999, the Company is considered to be a development
stage company. Since inception, the Company has incurred significant losses and,
as of December 31, 1999, had deficit accumulated during the development stage of
$12,421,000.
During the nine-months ended September 30, 2000, the Company commenced
generating revenue, and management no longer considered the Company to be a
development stage company. As of September 30, 2000, the Company had an
accumulated deficit of $30,369,000.
F-8
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
1. ORGANIZATION (CONTINUED)
LIQUIDITY AND FINANCIAL VIABILITY
In the course of its development activities, the Company has sustained
continuing operating losses and expects such losses to continue for at least the
next several years. The Company's future capital uses and requirements depend on
numerous factors, including the progress of its research and development
programs, the progress of clinical and advanced-stage clinical testing, the time
and costs involved in obtaining regulatory approvals, the cost of filing,
prosecuting, and enforcing patent claims and other intellectual property rights,
competing technological and market developments, the ability of the Company to
establish collaborative arrangements, the level of product sales of ACTIMMUNE,
the possible acquisition of new products and technologies, and the initiation of
significant commercialization activities. Therefore, such capital uses and
requirements may increase in future periods. As a result, the Company may
require substantial additional funds prior to reaching profitability and plans
to continue to finance its operating activities with a combination of stock
sales, product revenue, bank loans and/or debt financing. The inability to
obtain sufficient funds may require the Company to delay, scale back or
eliminate some or all of its research and product development programs, limit
the marketing of its product, or license to third parties the rights to
commercialize products or technologies that the Company would otherwise seek to
develop and market itself.
INTERIM FINANCIAL INFORMATION
The financial information at September 30, 2000, and for the nine months
ended September 30, 1999 and 2000, is unaudited, but in the opinion of
management, has been prepared on the same basis as the annual financial
statements and includes all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of the
financial position at such date and the operating results and cash flows for
those periods. Results for the interim periods are not necessarily indicative of
the results to be expected for any subsequent period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. Investments with maturities
beyond three months at the date of acquisition and that mature within one year
from the balance sheet date are considered to be short-term investments. Cash
equivalents and short-term investments are carried at fair value, with
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. The cost of securities sold is based on the specific
identification method.
Management of the Company believes it has established guidelines for
investment of its excess cash relative to diversification and maturities that
maintain safety and liquidity.
CONCENTRATION OF CREDIT RISK
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, Accounting for Certain Investments in Debt and Equity Securities, the
Company's investment securities are
F-9
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
classified as available-for-sale and unrealized holding gains or losses are
included in comprehensive income (loss). Realized gains or losses, calculated
based on the specific identification method, were not material for any period.
INVENTORIES
Inventories consist principally of finished good products and are stated at
the lower of cost or market. Cost is determined by the first-in, first-out
(FIFO) method.
PRODUCT REVENUE RIGHTS
On June 27, 2000 through the Revenue Adjustment Agreement, the Company paid
to Connetics $5.2 million in cash in conjunction with the purchase of all the
rights to ACTIMMUNE from Connetics that the Company did not already own. The
amount paid to Connetics included $857,000 as the prepayment of long-term
obligations owed to them and $4.4 million for product revenue rights that were
capitalized as a current asset and will be amortized based upon product units
shipped over the next 12 months of operations.
OFFICE EQUIPMENT
Equipment is stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets, generally 3 to 5 years.
NOTES RECEIVABLE
In connection with Dr. Harkonen's transition from Connetics to InterMune,
the Company assumed his outstanding loan of $100,000 by Connetics to
Dr. Harkonen pursuant to a secured loan agreement and promissory note dated
July 1, 1999. The interest rate on the promissory note is 7.5% per annum. The
principal and accrued interest are due on October 30, 2000.
RESTRICTED CASH
On December 18, 1999, the Company entered into a facility-operating lease
requiring a letter of credit secured by a restricted cash balance with the
Company's bank. The amount of the letter of credit approximates 12 months of
operating rent payable to the landlord of the facility.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be disposed of, if indicators of impairment
exist, the Company assesses the recoverability of the affected long-lived assets
by determining whether the carrying value of such assets can be recovered
through undiscounted future operating cash flows. If impairment is indicated,
the Company will measure the amount of such impairment by comparing the carrying
value of the asset to the present value of the expected future cash flows
associated with the use of the asset. To date, no such indicators of impairment
have been identified.
F-10
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities, and long-term royalty
payable, are carried at cost, which management believes approximates fair value
because of the short-term maturity of these instruments.
REVENUE RECOGNITION
Revenues from product sales are recognized upon shipment, net of allowances
for estimated returns, rebates and chargebacks. The Company is obligated to
accept from customers the return of pharmaceuticals that have reached their
expiration date. The Company monitors product ordering cycles and actual
returns, product date codes and wholesale inventory levels to estimate potential
product return rates. The Company believes that its product return reserves are
adequate. The Company has 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 under the Transition Agreement (see
note 3). 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, the Company does 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 the Company.
On June 27, 2000, the Company entered into the Revenue Adjustment Agreement
with Connetics Corporation to purchase all rights to ACTIMMUNE revenues under
the baseline that had previously been recorded by Connetics established by the
Transition Agreement, dated April 27, 1999 (see note 3). Beginning with the
three-month period ended June 30, 2000, all ACTIMMUNE revenues and related
expenses that had been previously transacted for Connetics would now be recorded
by the Company. These sales, costs of sales and amounts receivable are on a net
basis, in the accompanying financial statements for the six-month period ended
June 30, 1999. Such sales, costs of sales and accounts receivable were not
subject to the risks and rewards of ownership by the Company. The Revenue
Adjustment Agreement terminated the Transition Agreement, Collaboration
Agreement and Section 5.2 of the Assignment Agreement with Connetics.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed in the period incurred.
INCOME TAXES
In accordance with SFAS No. 109, Accounting for Income Taxes, a deferred tax
asset or liability is determined based on the difference between the financial
statement and tax basis of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse.
F-11
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company provides a valuation allowance against net deferred tax assets
unless, based upon the available evidence, it is more likely than not that the
deferred tax assets will be realized.
PATENT COSTS
Costs related to patent prosecution are expensed as incurred as
recoverability of such expenditures is uncertain.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, ("APB 25") and related Interpretations
in accounting for stock-based employee compensation. Under APB 25, if the
exercise price of the Company's employee and director stock options equals or
exceeds the deemed fair value of the underlying stock on the date of grant, no
compensation expense is recognized.
When the exercise price of the employee or director stock options is less
than the deemed fair value of the underlying stock on the grant date, the
Company records deferred compensation for the difference. Deferred compensation
is being amortized using the graded vesting method over the vesting period of
the original award, generally five years. Options or stock awards issued to
non-employees are recorded at their fair value as determined in accordance with
SFAS No. 123 and recognized over the related service period.
COMPREHENSIVE INCOME (LOSS)
As of July 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income (loss).
SEGMENT REPORTING
The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, during 1998. SFAS No. 131 requires the use
of a management approach in identifying segments of an enterprise. Management
has determined that the Company operates in one business segment.
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)
F-12
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for the period by the weighted average number of common and common equivalent
shares outstanding during the period. Potentially dilutive securities composed
of incremental common shares issuable upon the exercise of stock options and
common shares issuable on conversion of preferred stock, were excluded from
historical diluted loss per share because of their anti-dilutive effect.
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 year ended December 31, 1999, and 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. Earnings per share data for 1998 has not been
presented as the Company was a wholly owned subsidiary during the period.
F-13
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The calculation of historical and pro forma basic and diluted net loss per
share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED NINE MONTHS ENDED
1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
(IN THOUSANDS EXCEPT PER SHARE DATA) ------------ ------------------ ------------------
<S> <C> <C> <C>
Historical:
Net loss applicable to common stockholders.... $(7,006) $(4,688) $(45,979)
======= ======= ========
Weighted average shares of common stock
outstanding................................. 1,202 994 16,348
Less: weighted average shares of common stock
that may be repurchased..................... (434) (371) (1,179)
------- ------- --------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share.................. 768 623 15,169
======= ======= ========
Basic and diluted net loss per share.......... $ (9.12) $ (7.52) $ (3.03)
======= ======= ========
Pro forma:
Net loss applicable to common stockholders.... $(7,006) $(4,688) $(45,979)
Add preferred stock accretion................. 657 411 269
------- ------- --------
Net loss before preferred stock accretion..... (6,349) (4,277) (45,710)
======= ======= ========
Weighted average shares used in computing
basic and diluted net loss per share (from
above)...................................... 768 623 15,169
Adjustment to reflect the effect of the
assumed conversion of preferred stock to
common stock from the date of issuance...... 4,790 3,775 3,775
Adjustment to reflect the common equivalent
shares of preferred and common stock issued
in connection with the reorganization....... 2,212 2,949 --
------- ------- --------
Weighted average shares used in computing pro
forma basic and diluted net loss per
share....................................... 7,770 7,347 18,944
======= ======= ========
Pro forma basic and diluted net loss per
share....................................... $ (0.82) $ (0.58) $ (2.41)
======= ======= ========
</TABLE>
If the Company had reported net income, the calculation of historical and
pro forma diluted earnings per share would have included approximately an
additional 260,612 common equivalent shares related to the outstanding stock
options not included above (determined using the treasury method) for the year
ended December 31, 1999.
F-14
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain 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.
NEW ACCOUNTING PRONOUNCEMENTS
The Company expects to adopt SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective January 1, 2001. SFAS No. 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. The Company does not anticipate that the adoption of the SFAS No. 133
will have a significant effect on its results of operations or financial
position.
3. COLLABORATION, LICENSE AND SERVICE AGREEMENTS WITH RELATED PARTIES
SUBLICENSE AND COLLABORATION AGREEMENTS
On August 21, 1998, the Company and Connetics entered into an exclusive
sublicense agreement (the sublicense agreement), pursuant to which:
(a) Connetics granted an exclusive sublicense to InterMune under the Genentech
License for ACTIMMUNE for specific indications; (b) InterMune granted to
Connetics the exclusive option to practice such sublicensed rights in the
dermatology field and; (c) InterMune agreed to pay all amounts owed by Connetics
to Genentech related to ACTIMMUNE net sales except with respect to sales made by
Connetics in the event Connetics exercises its option. Under the sublicense
agreement, InterMune agreed to be responsible for all costs of development and
commercialization of ACTIMMUNE in the specified indications, to pay specified
payments to Genentech upon completion of certain development and
commercialization milestones, and to pay future royalties on net annual
ACTIMMUNE sales annually.
On April 27, 1999, Connetics amended the terms of its license agreement with
Genentech and obtained additional rights to ACTIMMUNE, which it simultaneously
sublicensed to InterMune.
On April 27, 1999, InterMune and Connetics also signed a Collaboration
Agreement, which was terminated in June 2000 through the Revenue Adjustment
Agreement. As a result of the sublicense, transition, service, and collaboration
agreements between InterMune and Connetics, Connetics received 960,000 shares of
InterMune's Series A-1 preferred stock, rights to net sales of ACTIMMUNE up to a
baseline amount through December 2001, less associated cost of goods sold and
marketing expenses, a nominal royalty on ACTIMMUNE net sales, and the following
payments of cash and stock, all of which represent the return of a portion of
Connetics' invested capital: $4.7 million of cash on April 27, 1999; an
additional $500,000 cash payment on April 27, 1999; $500,000 cash due on
March 31, 2001; $1.5 million payable in installments of cash or stock beginning
on March 31, 2002 and due in full by March 31, 2004; and an additional
$1.5 million payable in stock and cash. The $500,000 due on March 31, 2001 and
the $1.5 million payable in installments of cash and stock due through
March 31, 2004 were recorded at their net present value of $1,624,000 as
long-term obligations payable to
F-15
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
3. COLLABORATION, LICENSE AND SERVICE AGREEMENTS WITH RELATED PARTIES
(CONTINUED)
Connetics as of December 31, 1999. The Company originally planned return of
these capital payments to Connetics on April 27, 1999, but the Company and
Connetics agreed to defer such payments to provide the Company with additional
working capital. The Company and Connetics agreed to increase the amounts to be
repaid from approximately $1.6 million to $2.0 million reflective of the imputed
interest resulting from the deferral at a rate of interest equal to prime plus
2%. Of the additional $1.5 million, $500,000 was accrued in "payable to
Connetics" as of December 31, 1999, in the accompanying financial statements as
a reduction of capital contributed by parent. This amount was paid to Connetics
in Series B preferred stock on January 7, 2000. The remaining additional
$1 million obligation payable in cash or InterMune stock was contingent upon a
subsequent closing of a round of financing, an initial public offering or the
acquisition of the Company.
The $1 million contingent return of capital was paid to Connetics in cash on
March 30, 2000. In connection with the Revenue Adjustment Agreement, the
remaining payments due to Connetics of $500,000 and $1.5 million due on
March 2001, and March 2004, were renegotiated and $843,000 was paid on June 30,
2000, and $943,000 is scheduled to be paid before March 31, 2001. The net
present value of the $943,000 obligation is $883,000 and is included in the
financial statements as of September 30, 2000. See Revenue Adjustment Agreement
below.
SERVICE AGREEMENT
On October 12, 1998, the Company entered into a five-year agreement, as
amended, whereby Connetics provided to the Company certain information services,
accounting activities, facilities, employee benefit administration and research
and development services. This agreement has been terminated. The Company paid
to Connetics a total of $362,000 and $1,190,000 for the period from
February 25, 1998 (inception) to December 31, 1998 and for the year ended
December 31, 1999, respectively, under this agreement.
TRANSITION AGREEMENT
On April 27, 1999, the Company and Connetics entered into a three-year
Transition Agreement, which was terminated in June 2000 through the Revenue
Adjustment Agreement. This agreement effectively transferred certain ACTIMMUNE
distribution, sales and marketing responsibilities from Connetics to InterMune.
Under the terms of the agreement InterMune was obligated to:
- Provide to Connetics certain product management services including order
entry, packaging, shipping, invoicing and credit and collection activities
related to the sales of ACTIMMUNE units. Reimbursements for product
management costs are netted against the costs incurred. Total product
management costs and reimbursements from Connetics totaled $73,000 and
$348,000 for the period from February 25, 1998 (inception) to
December 31, 1998, and for the year ended December 31, 1999, respectively.
- Pay Connetics each month the net sales of ACTIMMUNE up to a predetermined
baseline for the period from January 15, 1999 through December 31, 2001,
less associated cost of goods sold and marketing expenses. The
predetermined baseline is preset for each calendar year under the
F-16
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
3. COLLABORATION, LICENSE AND SERVICE AGREEMENTS WITH RELATED PARTIES
(CONTINUED)
agreement. The Company paid to Connetics $1,357,000 under this arrangement
for the year ended December 31, 1999 and $149,000 for the three month
period ended March 31, 2000. After December 31, 2001, the net sales for
ACTIMMUNE will fully revert to the Company.
- Transition manufacturing of ACTIMMUNE from Genentech to a third-party
alternative manufacturer. In order to expedite and effect this transfer of
manufacturing, Connetics will pay a percentage of all actual costs, up to
a pre-determined cap, to complete the transfer of manufacturing of
ACTIMMUNE to a third-party alternative manufacturer. Approximately
$100,000 has been incurred by InterMune from inception through
December 31, 1999.
REVENUE ADJUSTMENT AGREEMENT
On June 27, 2000, the Company entered into the Revenue Adjustment Agreement
with Connetics Corporation by which the Company acquired from Connetics the
rights to those ACTIMMUNE revenues under the baseline that the Company did not
already own (as established by the Transition Agreement). Beginning with the
three-month period ended June 30, 2000, the Company owned and 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
the Company on a net basis, in the accompanying financial statements for the
three months ended March 31, 2000, and for the nine months ended September 30,
1999. Such sales, costs of sales and accounts receivable were not subject to the
risks and rewards of ownership by the Company. The Revenue Adjustment Agreement
terminated the Transition Agreement, Collaboration Agreement and Section 5.2 of
the Assignment Agreement with Connetics.
ACQUIRED PRE-FDA APPROVAL RIGHTS
InterMune licenses its development and marketing rights for ACTIMMUNE from
Genentech, Inc. Connetics had obtained these rights for ACTIMMUNE through the
Genentech License in May 1998, as amended in April 1999, and had sublicensed
these rights to InterMune through the License Agreement. On June 23, 2000,
through the Assignment and Option Agreement, Connetics assigned these rights to
InterMune. InterMune's associated rights to ACTIMMUNE include uses in chronic
granulomatous disease, osteopetrosis, pulmonary fibrosis, infectious diseases,
and cystic fibrosis. Connetics had sublicensed the rights to all of these
disease indications, except for net sales of ACTIMMUNE up to a baseline amount
through December 2001, to InterMune. ACTIMMUNE has been approved by the FDA for
use in the treatment of chronic granulomatous disease and severe, malignant
osteopetrosis. For other indications ACTIMMUNE is in development. The Company
will incur significant costs to develop and prove efficacy in each of the other
indications.
Connetics paid Genentech $4 million for these rights in May 1998. The
Company valued its sublicensed rights from Connetics at $4 million based on this
amount paid by the Company's then parent company, Connetics. A discounted cash
flow analysis of the projected revenues and costs based on the potential market,
the estimated costs to obtain the required approvals and costs to manufacture
and market ACTIMMUNE for each indication shows a negative cash flow for the
chronic
F-17
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
3. COLLABORATION, LICENSE AND SERVICE AGREEMENTS WITH RELATED PARTIES
(CONTINUED)
granulomatous disease indication and positive cash flows for several of the
other indications with larger patient populations. Negative cash flows from
chronic granulomatous disease result from a small U.S. market of only 400 to
1000 patients, high costs of manufacturing due to small quantities, a royalty
payable to Genentech and significant costs to market the product. Because
realization of the non-chronic granulomatous disease indications' revenue
streams is uncertain, due to the early stages of development and the high costs
to develop, the Company has expensed the $4 million acquisition cost.
On April 27, 1999, InterMune acquired additional ACTIMMUNE development
rights in Japan as well as reduction of future royalties of potential ACTIMMUNE
annual net sales above a certain threshold. For these rights, InterMune issued
Genentech 875,000 shares of Series A-1 convertible preferred stock. The acquired
rights were valued at $1.1 million, the purchase price of the stock issued, as
paid by new investors in the then most recent round of financing. The acquired
development rights were estimated to have no immediate realizable value, as no
approvals for ACTIMMUNE have been obtained in Japan and significant costs will
be incurred to obtain such approvals. The reduction of the royalty rate was
similarly deemed to have no current realizable value because sales of ACTIMMUNE
for chronic granulomatous disease (the only FDA approved use of ACTIMMUNE at the
time) were not likely to exceed the annual sales threshold due to the small U.S.
market size of 400 to 1,000 patients. Accordingly, a $1.1 million charge to
acquired pre-FDA approval rights was recorded.
Also see Note 9, ACTIMMUNE Product Sales and Long-Term Royalty Payable to
Genentech.
4. SHORT-TERM INVESTMENTS AVAILABLE FOR SALE
At September 30, 2000, short-term investments consisted of the following (in
thousands):
<TABLE>
<CAPTION>
UNREALIZED GAIN
AMORTIZED COST MARKET VALUE (LOSS)
-------------- ------------ ---------------
<S> <C> <C> <C>
Obligations of U.S. government agencies...... $ 1,810 $ 1,810 $ --
Corporate debt securities.................... 54,141 54,125 (16)
------- ------- ----
Total short-term investments................. $55,951 $55,935 $(16)
======= ======= ====
</TABLE>
At December 31, 1999, short-term investments consisted of the following (in
thousands):
<TABLE>
<CAPTION>
UNREALIZED GAIN
AMORTIZED COST MARKET VALUE (LOSS)
-------------- ------------ ---------------
<S> <C> <C> <C>
Obligations of U.S. government agencies...... $ -- $ -- $ --
Corporate debt securities.................... 442 442 --
---- ---- ---------
Total short-term investments................. $442 $442 $ --
==== ==== =========
</TABLE>
F-18
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
4. SHORT-TERM INVESTMENTS AVAILABLE FOR SALE (CONTINUED)
At December 31, 1998, short-term investments consisted of the following (in
thousands):
<TABLE>
<CAPTION>
UNREALIZED GAIN
AMORTIZED COST MARKET VALUE (LOSS)
-------------- ------------ ---------------
<S> <C> <C> <C>
Obligations of U.S. government agencies...... $ -- $ -- $ --
Corporate debt securities.................... 2,405 2,405 --
------ ------ ---------
Total short-term investments................. $2,405 $2,405 $ --
====== ====== =========
</TABLE>
The net unrealized holding gain (loss) on available-for-sale investments
included as a separate component of stockholders' equity at December 31, 1998
and 1999, were nominal amounts less than $1,000, respectively. Unrealized losses
total $16,000 at September 30, 2000. The gross realized losses on sales of
available-for-sale investments for the period from February 25, 1998 (inception)
to December 31, 1998, and for the year ended December 31, 1999, were nominal
amounts less than $1,000, respectively. Realized gains and losses were
calculated based on the specific identification method.
5. OFFICE EQUIPMENT
Office equipment and related accumulated depreciation is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1999 2000
(IN THOUSANDS) ------------ ------------ -------------
<S> <C> <C> <C>
Computer equipment.............................. $ -- $ 6 $293
Office furniture and fixtures................... -- 24 444
Leasehold improvements.......................... -- -- 122
--------- --- ----
-- 30 859
Less accumulated depreciation................... -- (2) (93)
--------- --- ----
$ -- $28 $766
========= === ====
</TABLE>
Total depreciation expense amounted to $2,000 for the year ended
December 31, 1999 and $91,000 for the nine-month period ended September 30,
2000.
F-19
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Redeemable convertible preferred stock and convertible preferred stock are
issuable in series, with rights and preferences designated by series. As of
December 31, 1999, the shares designated and outstanding are listed below. Upon
the completion of the Company's initial public offering on March 24, 2000, all
redeemable convertible preferred shares were converted on a one for one basis
into shares of common stock of the Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES DOLLAR AMOUNTS
------------------------ ------------------------------------------
CUMULATIVE
AGGREGATE UNDECLARED
ISSUED AND LIQUIDATION PREFERRED
DESIGNATED OUTSTANDING PREFERENCE CARRYING AMOUNT DIVIDENDS
---------- ----------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Redeemable convertible preferred stock:
Series A-2....................... 6,000,000 6,000,000 $7,500,000 $ 6,759,662 $364,603
Series B......................... 5,200,000 -- -- -- --
11,200,000 6,000,000 7,500,000 6,759,662 364,603
Accretion of preferred stock..... 656,765
11,200,000 6,000,000 7,500,000 7,416,427 364,603
Series A-1....................... 1,835,000 1,835,000 2,293,750 4,506,804 125,182
Series A-3....................... 6,000,000 -- -- -- --
Series A-4....................... 1,835,000 -- -- -- --
Series B-1....................... 5,200,000 -- -- -- --
14,870,000 1,835,000 2,293,750 4,506,804 125,182
Total............................ 26,070,000 7,835,000 $9,793,750 $11,623,916 $489,785
</TABLE>
On January 7 and January 27, 2000, the Company issued 4,876,916 aggregate
shares of Series B redeemable convertible preferred stock at $5.59 per share for
aggregate proceeds of $27,262,000. The Company incurred approximately
$1.4 million of issuance costs.
On January 7, 2000, pursuant to the terms of the collaboration agreement
with Connetics, the Company also issued to Connetics 89,445 shares of Series B
redeemable convertible preferred stock. This stock issuance has been reflected
as a return of capital to Connetics in the accompanying December 31, 1999
financial statements as the Company had concluded that the event triggering the
issuance (the closure of the Series B financing) was probable at December 31,
1999.
CONVERSION
Redeemable convertible preferred stock and convertible preferred stock are
collectively referred to as "preferred stock." Each share of preferred stock
automatically converts into one share of common stock in the event of an initial
public offering of the Company's common stock in which gross offering proceeds
exceed $15,000,000 and the offering price is at least $7.50 per share or: for
Series B and B-1 preferred stock upon affirmative vote of each of the holders of
not less than a majority of the outstanding shares of Series B and B-1 preferred
stock voting as a separate class; for Series A-2 and A-3 upon affirmative vote
of each of the holders of not less than 65% of the outstanding shares of
Series A-2 and A-3 preferred stock, voting together as a separate class; and for
Series A-1 and A-4
F-20
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
preferred stock, upon affirmative vote of the holders of not less than 55% of
the outstanding shares of Series A-1 and A-4 preferred stock, voting together as
a separate class.
No dividends will be declared or paid to the holders of Series A-1 or A-2
preferred stock or common stock unless the holders of Series B, Series B-1,
Series A-2, and Series A-3 preferred stock have been paid in full for all of the
dividends to which they are entitled. After full cumulative dividends have been
declared and paid to holders of preferred stock, the board of directors may
declare additional dividends to be prorated to all holders of the Company stock
based on the number of common shares held assuming full conversion of preferred
stock.
Upon the completion of the Company's initial public offering on March 24,
2000, all shares of preferred stock were converted on a one for one basis into
shares of common stock of the Company. No dividends were declared or paid from
January 1, 2000, through the date of the initial public offering on March 24,
2000.
LIQUIDATION
Upon any liquidation, dissolution, or winding up of the Company, the holders
of Series B and B-1 preferred and Series A-2 and A-3 preferred stock shall be
entitled to be paid out of any assets of the Company legally available, an
amount per share of $5.59 and $1.25, respectively, plus all declared and unpaid
dividends on such shares of Series B and B-1 preferred and Series A-2 and A-3
preferred (subject to certain adjustments) held. If the assets of the Company
are insufficient to permit payment in full, the entire assets of the Company
available for distribution will be distributed ratably among the holders of the
Series B and B-1 preferred and Series A-2 and A-3 preferred in proportion to the
full amount to which they would otherwise be respectively entitled.
After full payment of the holders of Series B, B-1, A-2 and A-3 as described
above, upon liquidation, dissolution or winding up of the Company, holders of
Series A-1 and A-4 are entitled to $1.25 per share plus all declared and unpaid
dividends. If the assets and funds are insufficient for a full $1.25 per share
payment, the entire assets and funds legally available shall be distributed
ratably among the holders of Series A-1 and A-4 in proportion to the full amount
to which they would otherwise be entitled. After full payment of preferred
shareholders, the remaining assets of the Company shall be distributed ratably
among the holders of the common stock.
Upon the completion of the Company's initial public offering on March 24,
2000, all shares of preferred stock were converted on a one for one basis into
shares of common stock of the Company. All liquidation rights and preferences
were cancelled upon the conversion of all preferred stock into shares of common
stock.
REDEMPTION
Series A-1, A-3, A-4 and B-1 preferred shares are not redeemable. After
April 15, 2004, any outstanding shares of Series A-2 and Series B may be
redeemed upon vote or written consent of at least 75% of the outstanding shares
of Series A-2 and B, provided that the Company had revenues of
F-21
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
at least $20 million for twelve full months immediately preceding the
redemption. Redemption will be completed in four annual installments of cash for
a total of $11.18 per share of Series B and $2.50 per share of Series A-2, plus
declared and unpaid dividends. Accretion of redemption value from the date of
issuance of the Series A-2 redeemable convertible preferred stock (April 27,
1999) through December 31, 1999 was $656,765.
DEEMED DIVIDEND UPON ISSUANCE OF CONVERTIBLE PREFERRED STOCK
In January 2000, the Company issued Series B redeemable convertible
preferred stock at a per share price of $5.59. The deemed fair value of the
common stock as of the date of issuance was determined to be $12.60 to $14.40
per share. As a result, the Company recorded a deemed dividend of $27,762,000
upon the issuance of Series B redeemable convertible preferred stock in
January 2000. The deemed dividend was recorded by offsetting charges and credits
to additional paid in capital, 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.
COMMON STOCK SUBJECT TO REPURCHASE
In connection with the issuance of common stock to founders and the exercise
of options pursuant to the Company's 1999 and 2000 Stock Option/Stock Issuance
Plan, employees and non-employee directors entered into restricted stock
purchase agreements with the Company. Under the terms of these agreements, the
Company has a right to repurchase any unvested shares at the original exercise
price of the shares. With continuous employment or services provided to the
company, generally the repurchase rights lapse at a rate of 20% at the end of
the first year and at a rate of 1/48th of the remaining purchased shares for
each continuous month of service thereafter. As of December 31, 1999, 663,000
shares were subject to repurchase by the Company. As of September 30, 2000,
1,090,168 shares were subject to repurchase by the Company.
STOCK COMPENSATION PLANS
In May 1999, the Company adopted the 1999 Stock Option/Stock Issuance Plan
("1999 Plan"). The 1999 Plan provides for the granting of options to purchase
common stock and the issuance of shares of common stock, subject to Company
repurchase rights, to directors, employees and consultants. Certain options are
immediately exercisable, at the discretion of the board of directors. Shares
issued pursuant to the exercise of an unvested option are subject to the
Company's right of repurchase which lapses over periods specified by the board
of directors, generally five years from the date of grant. In March 2000, the
Company terminated all remaining unissued shares under the 1999 Plan.
In January 2000, the Board of Directors adopted the 2000 Equity Incentive
Plan and the 2000 Non-Employee Directors' Stock Option Plans. A total of
2,000,000 shares of common stock were reserved for issuance under the 2000
Equity Incentive Plan and 180,000 shares under the 2000 Non-Employee Directors'
Stock Option Plan.
F-22
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
The 2000 Equity Incentive Plan and 2000 Non-Employee Directors' Stock Option
Plans provide for the granting of options to purchase common stock and the
issuance of shares of common stock, subject to Company repurchase rights, to
directors, employees and consultants. Certain options are immediately
exercisable, at the discretion of the board of directors. Shares issued pursuant
to the exercise of an unvested option are subject to the Company's right of
repurchase which lapses over periods specified by the board of directors,
generally four years from the date of grant.
The stock option activity is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------------
SHARES AVAILABLE NUMBER OF WEIGHTED AVERAGE
FOR GRANT SHARES PRICE PER SHARE
---------------- ---------- ----------------
<S> <C> <C> <C>
Balance at February 25, 1998........................ -- -- --
Authorized........................................ -- -- --
Granted........................................... -- -- --
Cancelled......................................... -- -- --
Exercised......................................... -- -- --
---------- ---------- -------
Balance at December 31, 1998........................ -- -- --
Authorized........................................ 2,000,000 -- --
Granted........................................... (1,170,000) 1,170,000 $ 0.125
Cancelled......................................... -- -- --
Exercised......................................... -- (180,000) $ 0.125
---------- ---------- -------
Balance at December 31, 1999........................ 830,000 990,000 $ 0.125
Authorized........................................ 2,180,000 -- --
Shares terminated under 1999 Plan................. (121,584) -- --
Granted........................................... (1,249,500) 1,249,500 $11.279
Cancelled......................................... 53,334 (53,334) $ 4.500
Repurchased....................................... 123,750 -- $ 0.125
Exercised......................................... -- (1,074,513) $ 0.431
---------- ---------- -------
Balance at September 30, 2000....................... 1,816,000 1,111,653 $12.156
========== ========== =======
</TABLE>
At December 31, 1999, 830,000 shares were available for future option
grants. The weighted average grant-date fair value of options granted in 1999
was $0.125.
In December 1999, the Company repurchased 79,167 shares of common stock at
$0.01 per share from one of its founders pursuant to a stock repurchase
agreement.
In January 2000, the Board of Directors granted options to purchase 443,500
common shares at a weighted average exercise price of $2.82 per share. In
February 2000, the Board of Directors granted options to purchase 295,000 common
shares at a weighted average exercise price of $4.50 per share.
F-23
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
At September 30, 2000, 1,816,000 shares were available for future option
grants. The weighted average grant-date fair value of options granted in 2000
was $11.68.
The following table summarizes the information about options outstanding at
December 31, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
--------------------- --------- ---------------- -------------- --------- --------------
<C> <C> <S> <C> <C> <C>
$0.125 990,000 9.5 years $0.125 990,000 $0.125
</TABLE>
The following table summarizes information about options outstanding at
September 30, 2000.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
--------------------- --------- ---------------- -------------- --------- --------------
<C> <C> <S> <C> <C> <C>
$0.125 70,528 9.1 years $ 0.125 70,528 $0.125
$1.120 117,625 9.3 years $ 1.120 117,625 $1.120
$4.500 559,500 9.4 years $ 4.500 559,500 $4.500
$19.875 65,000 9.5 years $19.875 -- $ --
$28.000 204,000 9.8 years $28.000 -- $ --
$39.875 - $41.750 95,000 9.9 years $40.540 -- --
</TABLE>
The fair value of these options was estimated at the date of grant using the
Black-Scholes option valuation model with the following weighted average
assumptions for 1999: risk-free interest rate of 6%; dividend yield of 0%;
volatility of 70% and a weighted-average life of the options of five years. The
Company recorded deferred stock compensation based upon deemed fair value of the
options which exceeded the Black-Scholes valuation. Therefore, pro forma
disclosure of earnings (loss) per share is not required under SFAS 123.
EMPLOYEE STOCK PURCHASE PLAN
To provide employees with an opportunity to purchase common stock of
InterMune through payroll deductions, InterMune established the 2000 Employee
Stock Purchase Plan. Under this plan, employees, subject to certain
restrictions, may purchase shares of common stock at 85% of the fair market
value at either the date of eligibility for enrollment or the date of purchase,
whichever is less. As of October 18, 2000, the Company has not issued any shares
under this plan, and 200,000 shares remain available for future issuance.
COMMON STOCK
InterMune's Certificate of Incorporation provides for the issuance of up to
45,000,000 shares of common stock. The holder of each share of common stock has
a right to one vote.
F-24
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1999, common stock subject to future issuance is as follows:
<TABLE>
<S> <C>
Conversion of convertible redeemable preferred stock........ 7,835,000
Outstanding common stock options............................ 990,000
Common stock available for grant under stock option plan.... 830,000
---------
9,655,000
=========
</TABLE>
At September 30, 2000, common stock subject to future issuance is as
follows:
<TABLE>
<S> <C>
Outstanding common stock options............................ 1,111,653
Common stock available for grant under stock option plans... 1,816,000
Common stock available for grant under the 2000 Employee
Stock Purchase Plan....................................... 200,000
---------
3,127,653
=========
</TABLE>
On March 29, 2000, the Company closed an initial public offering, in which
the Company sold 6,250,000 shares of common stock at a price of $20.00 per
share, raising $125.0 million in gross proceeds. The Company received offering
proceeds of approximately $115.0 million which is net of approximately
$8.8 million in aggregate underwriters discounts and commissions and
$1.2 million in estimated related expenses. On the closing of the initial public
offering, each outstanding share of preferred stock was converted into one share
of common stock.
On August 18, 2000, the Company closed a private financing, in which the
Company sold 2,000,000 shares of common stock at a price of $38.00 per share,
raising $76.0 million in gross proceeds. The Company received gross 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.
DEFERRED COMPENSATION
In January 2000, the Company issued 133,000 options to purchase shares of
common stock at a weighted average exercise price of $0.37 per share to
consultants in exchange for research and development consulting services.
Compensation expense is recorded as services are provided each quarter and as
the options vest based upon the fair value of the option, determined quarterly
using the Black-Scholes pricing model.
In connection with the grant of certain stock options to employees for the
year ended December 31, 1999, the Company recorded deferred stock compensation
within stockholders' deficit of approximately $5.6 million, representing the
difference between the deemed fair value of the common stock for accounting
purposes and the option exercise price of these options at the date of grant.
The Company recorded amortization of deferred compensation of approximately
$345,000 for the year ended December 31, 1999.
F-25
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
In connection with the grant of options to employees from January 1 through
February 29, 2000, the Company recorded an additional $7.1 million of deferred
stock compensation during the first quarter of 2000. The deferred stock
compensation expense is being amortized using the graded vesting method over the
vesting period of the individual award, generally five years. This method is in
accordance with Financial Accounting Standards Board Interpretation No. 28.
Accordingly, at February 29, 2000, the remaining deferred compensation of
approximately $12.4 million will be amortized as follows: $5.9 million during
fiscal 2000, $3.4 million during fiscal 2001, $1.8 million during fiscal 2002,
$0.9 million during fiscal 2003 and $0.4 million during fiscal 2004. The
amortization expense relates to options awarded to employees in all operating
expense categories. The amortization of deferred stock compensation has not been
separately allocated to these categories. The amount of deferred compensation
expense to be recorded in future periods could decrease if options for which
accrued but unvested compensation has been recorded are forfeited. The deemed
fair value of common stock ranges between $0.67 and $16.20, and was calculated
by management of the Company based on an analysis of significant events which
have occurred since inception of the Company. In determining the deemed fair
value of common stock for these periods, the Company considered the issuance of
Series A preferred stock in May, August and September 1999. The Company also
considered the positive results published October 21, 1999, in THE NEW ENGLAND
JOURNAL OF MEDICINE, the issuance of Series B preferred stock in January 2000,
the proposed initial public offering price as of March 6, 2000, and the addition
of key senior management over the past 12 months.
In connection with the grant of options to employees from March 1 through
September 30, 2000, the Company recorded an additional $1.5 million of deferred
stock compensation during the nine-months ended September 30, 2000. In total,
the Company has recorded aggregate deferred stock compensation for options
granted in fiscal year 1999 and the nine-month period ended September 30, 2000,
of $14.2 million. 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.
7. INCOME TAXES
At December 31, 1999, the Company has federal and state tax net operating
loss carryforwards of approximately $7,500,000. The Company also had state
research and development tax credit carryforwards of approximately $100,000. The
federal net operating loss and credit carryforwards will expire at various dates
beginning in the year 2018 through 2019 if not utilized. The state of California
net operating losses will expire in the year 2006, if not utilized.
Utilization of the federal and state net operating loss and credit
carryforwards may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986. The
annual limitation may result in the expiration of net operating losses and
credits before utilization.
F-26
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
7. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets for financial reporting and the amount
used for income tax purposes. Significant components of the Company's deferred
tax assets for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $ 900 $ 3,000
Research and development credits.................. -- 100
In-process research............................... 1,500 1,800
Total deferred tax assets........................... 2,400 4,900
------- -------
Valuation allowance................................. (2,400) (4,900)
------- -------
Net deferred tax assets............................. $ -- $ --
======= =======
</TABLE>
Due to the Company's lack of earnings history, the net deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $2,400,000 and $2,500,000 during the period from February 25, 1998
(inception) to December 31, 1998, and for the year ended December 31, 1999,
respectively.
8. COMMITMENTS
LEASES
In December 1999, the Company entered into a facility lease of office space
that extends through December 2004. Total rent expense under this lease was
approximately $19,000 in 1999 and approximately $112,000 for the six-month
period ended June 30, 2000.
The following is a schedule by year of future minimum lease payments at
December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
OPERATING
YEAR LEASES
---- ---------
<S> <C>
2000........................................................ $ 224
2001........................................................ 232
2002........................................................ 240
2003........................................................ 248
2004........................................................ 235
------
$1,179
======
</TABLE>
CONSULTING AGREEMENTS
Beginning in January 2000 the Company entered into consulting agreements
with a number of individuals for scientific advisory services. Each individual
receives a certain number of nonqualified
F-27
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
8. COMMITMENTS (CONTINUED)
stock options. In certain cases, the options vest ratably over the duration of
the contract. In other cases, the options vest ratably over a specified period,
generally two years. Compensation expense is measured and recorded as the
service is completed in accordance with EITF 96-18. Total compensation expense
recorded through September 30, 2000, related to these agreements was
approximately $1,172,000.
SUPPLY AGREEMENT
In January 2000, the Company entered into a supply agreement with Boehringer
Ingelheim under which it will manufacture both clinical and commercial supplies
of ACTIMMUNE. As security for payments due Boehringer Ingelheim under this
agreement, a standby letter of credit is required with a term through April 30,
2001 in the amount equal to approximately $530,000. The amount of the standby
letter of credit approximates 20% of the total payment obligation.
9. ACTIMMUNE PRODUCT SALES AND LONG-TERM ROYALTY PAYABLE TO GENENTECH
Product sales consist of ACTIMMUNE unit sales in excess of the annual
predetermined baseline for the year ended December 31, 1999. In connection with
the Genentech License and the sublicense agreement with Connetics, InterMune is
obligated to pay royalties on ACTIMMUNE sales to Genentech beginning
January 15, 1999. At December 31, 1999, deferred payment of the royalties due
Genentech for 1999 totaled approximately $1.9 million under a series of
interest-bearing promissory notes that were payable on the earlier of March 31,
2002 or upon the completion of an initial public offering in cash or common
stock. Interest accrues on unpaid quarterly royalties at the then prevailing
prime plus 2% at the end of each quarter. Interest rates ranged from 9.75% to
10.50%, as of December 31, 1999. Genentech had an option to convert any or all
unpaid royalties plus accrued interest into InterMune equity securities at a per
share price equal to the Company's last equity financing. As of December 31,
1999, accrued royalties and related interest of $1,914,000 were classified as
current, due to the authorization of the Board of Directors for the Company to
proceed with an initial public offering of its common stock.
Genentech did not exercise its option to convert these unpaid royalties plus
accrued interest into shares of the Company's stock at a price per share sold in
the most recent financing. In March 2000, all monies due to Genentech were paid
in cash.
10. SPONSORED RESEARCH AND LICENSE AGREEMENTS
LICENSE AGREEMENT WITH MCW RESEARCH FOUNDATION
Under an agreement with MCW Research Foundation, dated March 25, 1999, the
Company acquired an exclusive worldwide license to develop, manufacture and sell
the Pseudomonas V Antigen in the field of human disease therapy. The Company
paid a license fee of $50,000, agreed to make future milestone payments upon the
completion of specified developmental milestones and to pay a royalty on net
sales of licensed product. The Company can terminate the agreement at any time
upon giving at least 90 days written notice.
F-28
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000, AND FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 2000, ARE UNAUDITED)
10. SPONSORED RESEARCH AND LICENSE AGREEMENTS (CONTINUED)
SPONSORED RESEARCH AND LICENSE AGREEMENT
Under a three-year agreement with Panorama Research, Inc., dated January 1,
2000, the Company acquired an exclusive worldwide license to develop and
commercialize peptides that block staphylococcus aureus infections. The Company
agreed to fund research as incurred, make future milestone payments upon
completion of specified developmental milestones and to pay a royalty on net
sales of licensed product. The Company can terminate the agreement at any time
upon giving at least 30 days written notice.
11. SAVINGS PLAN
On May 1, 1999, the Company adopted a 401(k) defined contribution plan that
covers all full time employees, as defined, who meet certain length-of-service
requirements. Employees may contribute up to a maximum of 15% of their annual
compensation (subject to a maximum limit imposed by federal tax law). The
Company makes no matching contributions.
F-29
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY
SHARES OF INTERMUNE PHARMACEUTICALS, INC. COMMON STOCK ONLY IN JURISDICTIONS
WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE
TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF THE INTERMUNE COMMON
STOCK.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Prospectus Summary................... 1
The Offering......................... 3
Summary Financial Data............... 4
Risk Factors......................... 5
Forward-Looking Statements........... 12
Use of Proceeds...................... 12
Dividend Policy...................... 12
Price Range of Common Stock.......... 12
Selected Financial Data.............. 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 14
Business............................. 20
Management........................... 34
Related Party Transactions........... 47
Description of Capital Stock......... 53
Plan of Distribution................. 56
Legal Matters........................ 57
Experts.............................. 58
Where You Can Find More Information.. 58
Index to Financial Statements........ F-1
Information Not Required in
Prospectus......................... II-1
</TABLE>
PROSPECTUS
2,000,000 SHARES
[LOGO]
COMMON STOCK
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the common stock being registered. All the amounts
shown are estimates.
<TABLE>
<S> <C>
Registration fee............................................ $ 20,693
Blue sky qualification fees and expenses.................... 5,000
Printing and engraving expenses............................. 85,000
Legal fees and expenses..................................... 190,000
Accounting fees and expenses................................ 90,000
Miscellaneous............................................... $ 9,307
Total....................................................... $400,000
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director of ours will be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:--for any breach of duty of loyalty to us or to
our stockholders;--for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;--under Section 174 of the
Delaware General Corporation Law; or--for any transaction from which the
director derived an improper personal benefit.
Our amended and restated certificate of incorporation further provides that
we must indemnify our directors and executive officers and may indemnify its
other officers and employees and agents to the fullest extent permitted by
Delaware law. We believe that indemnification under our amended and restated
certificate of incorporation covers negligence and gross negligence on the part
of indemnified parties.
We have entered into indemnification agreements with each of our directors
and officers. These agreements, among other things, require us to indemnify each
director and officer for some expenses including attorneys' fees, judgments,
fines and settlement amounts incurred by any of these persons in any action or
proceeding, including any action by or in the right of InterMune, arising out of
person's services as our director or officer, any subsidiary of ours or any
other company or enterprise to which the person provides services at our
request.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since inception in February 1998, we have sold and issued the following
unregistered securities:
(1) From June 1999 through October 18, 2000, we have granted stock options
to purchase 1,878,416 shares of the our common stock to employees,
consultants and directors pursuant to our 1999 equity incentive plan. Of
these stock options, 1,130,763 shares have been exercised, a total of
123,750 shares have been repurchased, and 747,653 shares remain
outstanding.
(2) In March 1998, we issued an aggregate of 1,600,000 shares of common
stock to two purchasers at a purchase price of $0.001 per share for an
aggregate purchase price of $1,600.00.
(3) In October 1998, we issued 11,200,000 shares of Series A preferred
stock to a single purchaser at a purchase price of $1.00 per share for an
aggregate purchase price of $11,200,000.00.
II-1
<PAGE>
(4) In April 1999, we issued an aggregate of 1,790,000 shares of common
stock to ten purchasers at a purchase price of $0.01 per share for an
aggregate purchase price of $17,900.00.
(5) In April 1999, we issued an aggregate of 4,800,000 shares of
Series A-2 preferred stock to nine purchasers at a purchase price of
$1.25 per share for an aggregate purchase price of $6,000,000.00. We
simultaneously issued an aggregate of 1,835,000 shares of Series A-1
preferred stock to two purchasers at a purchase price of $1.25 per share
for an aggregate purchase price of $2,293,750.00. Shares of Series A-1
and A-2 preferred stock are convertible into shares of common stock at
the rate of one share of common stock for each share of Series A-1 and
A-2 preferred stock owned.
(6) In August 1999, we issued an aggregate of 800,000 shares of Series A-2
preferred stock to two purchasers at a purchase price of $1.25 per share
for an aggregate purchase price of $1,000,000.00.
(7) In September 1999, we issued an aggregate of 400,000 shares of
Series A-2 preferred stock to two purchasers at a purchase price of $1.25
per share for an aggregate purchase price of $500,000.00.
(8) In January 2000, we issued an aggregate of 4,846,361 shares of
Series B preferred stock to 50 purchasers at a purchase price of $5.59
per share for an aggregate purchase price of $27,091,157.99. Shares of
Series B preferred stock are convertible into shares of common stock at
the rate of one share of common stock for each share of Series B
preferred stock owned.
(9) In January 2000, we issued 120,000 shares of Series B preferred stock
to a placement agent as partial consideration for services rendered.
(10) In August 2000, we issued 2,000,000 shares of common stock to 19
purchasers at a purchase price of $38.00 per share for an aggregate
purchase price of $76,000,000. These securities became registered
pursuant to this registration statement on September 21, 2000.
With respect to the grant of options described in paragraph (1) above, an
exemption from registration was unnecessary in that none of the transactions
involved a "sale" of securities as such term is used in section 2(3) of the Act.
The sales and issuances of securities described in paragraph (1) above were
deemed to be exempt from registration under the Securities Act by virtue of
Rule 701 of the Securities Act in that they were offered and sold either
pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation, as provided by Rule 701. The sales and
issuances of securities described in paragraphs (2) through (10) above were
deemed to be exempt from registration under the Securities Act by virtue of
Rule 4(2), Regulation D or Regulation S promulgated thereunder.
Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. All recipients either received adequate
information about the Registrant or had access, through employment or other
relationships, to such information.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation of Registrant.(1)
3.3 Bylaws of Registrant.(1)
4.1 Specimen Common Stock Certificate.(1)
4.2 Amended and Restated Investor Rights Agreement, dated
January 7, 2000, between Registrant and certain holders of
the common stock.(1)
5.1 Opinion of Cooley Godward LLP.(2)
10.1 Form of Indemnity Agreement.(1)
10.2 1999 Equity Incentive Plan and related documents.(1)
10.3 2000 Equity Incentive Plan and related documents.(1)
10.4 2000 Employee Stock Purchase Plan and related documents.(1)
10.5 2000 Non-Employee Directors' Stock Option Plan and related
documents.(1)
10.6 Lease Agreement, dated November 9, 1999, between Registrant
and American Heart Association, Western States Affiliate.(1)
10.7 Employment Agreement, dated April 27, 1999, between
Registrant and W. Scott Harkonen.(1)
10.8 Employment Offer Letter, dated October 28, 1999, between
Registrant and Timothy P. Lynch.(1)
10.9 Employment Offer Letter, dated October 22, 1999, between
Registrant and Peter Van Vlasselaer.(1)
10.10 Employment Offer Letter, dated December 19, 1999, between
Registrant and Christine W. Czarniecki.(1)
10.11 Secured Loan Agreement, Secured Promissory Note, and
Security Agreement, dated July 1, 1999, between Registrant
and W. Scott Harkonen.(1)
10.12* Amended and Restated Exclusive Sublicense Agreement, dated
April 27, 1999, between Registrant and Connetics
Corporation.(1)
10.13 Collaboration Agreement, dated April 27, 1999, between
Registrant and Connetics Corporation.(1)
10.14* Transition Agreement, dated April 27, 1999, between
Registrant and Connetics Corporation.(1)
10.15 Amended and Restated Service Agreement, dated April 7, 1999,
between the Registrant and Connetics Corporation.(1)
10.16* Supply Agreement, dated May 5, 1998, between Registrant (as
successor in interest to Connetics Corporation by
assignment) and Genentech, Inc.(1)
10.17* Sponsored Research and License Agreement, dated January 1,
2000, between Registrant and Panorama Research, Inc.(1)
10.18* License Agreement, dated March 25, 1999, between Registrant
and MCW Research Foundation, Inc.(1)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------------------------------------------
<C> <S>
10.19* Data Transfer, Clinical Trial, and Market Supply Agreement,
dated January 27, 1999, between the Registrant and
Boehringer Ingleheim.(1)
10.20 Form of Change of Control Provisions for Officers.(3)
10.21 Employment Offer Letter, dated February 21, 2000, between
Registrant and David A. Cory.(3)
10.22 Employment Offer Letter, dated March 3, 2000, between
Registrant and Stephen N. Rosenfield.(3)
10.24 Assignment and Option Agreement, dated June 23, 2000,
between Registrant and Connetics Corporation.(4)
10.25 Consent to Assignment Agreement, dated June 23, 2000,
between Registrant, Connetics Corporation and Genentech,
Inc.(4)
10.26 Revenue Adjustment Agreement, dated June 27, 2000, between
Registrant and Connetics Corporation.(4)
10.27 Notice re: Return of Rights to Gamma Interferon for
Treatment of Infectious Diseases in Japan, dated July 25,
2000, between Registrant and Genentech, Inc.(4)
10.28 Lease Agreement, dated May 15, 2000, between Registrant and
American Heart Association, Western States Affiliate.(4)
10.29 Form of common stock Purchase Agreement, dated August 11,
2000, between the Company and Investors.(5)
10.30 Employment Offer Letter, dated May 15, 2000, between
Registrant and John Wulf.(2)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.(2)
24.1 Power of Attorney. Reference is made to the signature page.
27.1 Financial Data Schedule (as at December 31, 1999).(2)
27.2 Financial Data Schedule (as at June 30, 2000), as amended.
27.3 Financial Data Schedule (as at September 30, 2000).
</TABLE>
------------------------
* Confidential treatment has been granted with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on February 2, 2000
(No. 333-96029), as amended by Amendment No. 1 filed with the Commission on
February 18, 2000, as amended by Amendment No. 2 filed with the Commission
on March 6, 2000, as amended by Amendment No. 3 filed with the Commission on
March 22, 2000, as amended by Amendment No. 4 filed with the Commission on
March 23, 2000 and as amended by Amendment No. 5 filed with the Commission
on March 23, 2000.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on September 8, 2000 (No.
333-45460).
(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000.
(4) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000.
(5) Filed as an exhibit to the Registrant's Current Report on Form 8-K on
August 23, 2000.
II-4
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because they are not applicable, or because the
information is included in the Financial Statements or the Notes thereto.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section
do not apply if the registration statement is on Form S-3, Form S-8 or
Form F-3, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(b) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has caused this Post-Effective Amendment No. 1 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of San Mateo, State of California, on the 30th day of
October, 2000.
<TABLE>
<S> <C>
INTERMUNE PHARMACEUTICALS, INC.
By: /s/ TIMOTHY P. LYNCH
--------------------------------------------
Timothy P. Lynch
CHIEF FINANCIAL OFFICER AND VICE PRESIDENT
</TABLE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
President and Chief Executive
* Officer and Director
------------------------------------------- (principal executive October 30, 2000
W. Scott Harkonen officer)
Chief Financial Officer and
/s/ TIMOTHY P. LYNCH Vice President (principal
------------------------------------------- financial and accounting October 30, 2000
Timothy P. Lynch officer)
*
------------------------------------------- Director October 30, 2000
James I. Healy
*
------------------------------------------- Director October 30, 2000
Edgar Engleman
*
------------------------------------------- Director October 30, 2000
John L. Higgins
*
------------------------------------------- Director October 30, 2000
Wayne T. Hockmeyer
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
*
------------------------------------------- Director October 30, 2000
Jonathan S. Leff
*
------------------------------------------- Director October 30, 2000
Nicholas J. Simon
</TABLE>
<TABLE>
<S> <C> <C> <C>
* /s/ TIMOTHY P. LYNCH
-----------------------------------------
Timothy P. Lynch
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- ------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation of Registrant.(1)
3.3 Bylaws of Registrant.(1)
4.1 Specimen Common Stock Certificate.(1)
4.2 Amended and Restated Investor Rights Agreement, dated
January 7, 2000, between Registrant and certain holders of
the common stock.(1)
5.1 Opinion of Cooley Godward LLP.(2)
10.1 Form of Indemnity Agreement.(1)
10.2 1999 Equity Incentive Plan and related documents.(1)
10.3 2000 Equity Incentive Plan and related documents.(1)
10.4 2000 Employee Stock Purchase Plan and related documents.(1)
10.5 2000 Non-Employee Directors' Stock Option Plan and related
documents.(1)
10.6 Lease Agreement, dated November 9, 1999, between Registrant
and American Heart Association, Western States Affiliate.(1)
10.7 Employment Agreement, dated April 27, 1999, between
Registrant and W. Scott Harkonen.(1)
10.8 Employment Offer Letter, dated October 28, 1999, between
Registrant and Timothy P. Lynch.(1)
10.9 Employment Offer Letter, dated October 22, 1999, between
Registrant and Peter Van Vlasselaer.(1)
10.10 Employment Offer Letter, dated December 19, 1999, between
Registrant and Christine W. Czarniecki.(1)
10.11 Secured Loan Agreement, Secured Promissory Note, and
Security Agreement, dated July 1, 1999, between Registrant
and W. Scott Harkonen.(1)
10.12* Amended and Restated Exclusive Sublicense Agreement, dated
April 27, 1999, between Registrant and Connetics
Corporation.(1)
10.13 Collaboration Agreement, dated April 27, 1999, between
Registrant and Connetics Corporation.(1)
10.14* Transition Agreement, dated April 27, 1999, between
Registrant and Connetics Corporation.(1)
10.15 Amended and Restated Service Agreement, dated April 7, 1999,
between the Registrant and Connetics Corporation.(1)
10.16* Supply Agreement, dated May 5, 1998, between Registrant (as
successor in interest to Connetics Corporation by
assignment) and Genentech, Inc.(1)
10.17* Sponsored Research and License Agreement, dated January 1,
2000, between Registrant and Panorama Research, Inc.(1)
10.18* License Agreement, dated March 25, 1999, between Registrant
and MCW Research Foundation, Inc.(1)
10.19* Data Transfer, Clinical Trial, and Market Supply Agreement,
dated January 27, 1999, between the Registrant and
Boehringer Ingleheim.(1)
10.20 Form of Change of Control Provisions for Officers.(3)
10.21 Employment Offer Letter, dated February 21, 2000, between
Registrant and David A. Cory.(3)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- ------------------------------------------------------------
<C> <S>
10.22 Employment Offer Letter, dated March 3, 2000, between
Registrant and Stephen N. Rosenfield.(3)
10.24 Assignment and Option Agreement, dated June 23, 2000,
between Registrant and Connetics Corporation.(4)
10.25 Consent to Assignment Agreement, dated June 23, 2000,
between Registrant, Connetics Corporation and Genentech,
Inc.(4)
10.26 Revenue Adjustment Agreement, dated June 27, 2000, between
Registrant and Connetics Corporation.(4)
10.27 Notice re: Return of Rights to Gamma Interferon for
Treatment of Infectious Diseases in Japan, dated July 25,
2000, between Registrant and Genentech, Inc.(4)
10.28 Lease Agreement, dated May 15, 2000, between Registrant and
American Heart Association, Western States Affiliate.(4)
10.29 Form of common stock Purchase Agreement, dated August 11,
2000, between the Company and Investors.(5)
10.30 Employment Offer Letter, dated May 15, 2000, between
Registrant and John Wulf.(2)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.(2)
24.1 Power of Attorney. Reference is made to the signature page.
27.1 Financial Data Schedule (as at December 31, 1999).(2)
27.2 Financial Data Schedule (as at June 30, 2000), as amended.
27.3 Financial Data Schedule (as at September 30, 2000).
</TABLE>
------------------------
* Confidential treatment has been granted with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on February 2, 2000
(No. 333-96029), as amended by Amendment No. 1 filed with the Commission on
February 18, 2000, as amended by Amendment No. 2 filed with the Commission
on March 6, 2000, as amended by Amendment No. 3 filed with the Commission on
March 22, 2000, as amended by Amendment No. 4 filed with the Commission on
March 23, 2000 and as amended by Amendment No. 5 filed with the Commission
on March 23, 2000.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on September 8, 2000 (No.
333-45460).
(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000.
(4) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000.
(5) Filed as an exhibit to the Registrant's Current Report on Form 8-K on
August 23, 2000.
