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PROSPECTUS March 24, 2000
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6,250,000 Shares
[LOGO]
Common Stock
- ------------------------------------------------------------
This is our initial public offering of shares of common stock. No public market
currently exists for our common stock. The public offering price is $20.00 per
share.
Our common stock has been approved for listing on the Nasdaq National Market
under the symbol "ITMN."
BEFORE BUYING ANY SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF
INVESTING IN OUR COMMON STOCK UNDER "RISK FACTORS" BEGINNING ON PAGE 7.
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.
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
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Public offering price $ 20.00 $ 125,000,000
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Underwriting discounts and commissions $ 1.40 $ 8,750,000
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Proceeds, before expenses, to InterMune $ 18.60 $ 116,250,000
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</TABLE>
The underwriters may also purchase up to 937,500 shares of common stock from us
at the public offering price, less the underwriting discounts and commissions,
within 30 days from the date of this prospectus. This option may be exercised to
cover over-allotments, if any. If the option is exercised in full, the total
underwriting discounts and commissions will be $10,062,500, and the total
proceeds, before expenses, to InterMune Pharmaceuticals, Inc. will be
$133,687,500.
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about March 29, 2000.
Warburg Dillon Read LLC
Chase H&Q
Prudential Vector Healthcare
a unit of Prudential Securities
<PAGE>
DESCRIPTION OF GRAPHICS
[1. Title: ACTIMMUNE
2. Photograph of ACTIMMUNE packaging
3. Horizontal bar chart showing the FDA-approval status of our product and
prospective products.]
"InterMune" and the InterMune logo are trademarks of InterMune Pharmaceuticals,
Inc. Other trademarks and trade names appearing in this prospectus are the
property of their holders.
<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 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; and
- cystic fibrosis, a congenital disorder that leads to chronic pulmonary
infections in children.
We currently market ACTIMMUNE for chronic granulomatous disease and
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, mycobacterial
infections and systemic fungal infections ($500 million) are serious and
difficult to treat diseases that we believe represent a combined maximum market
opportunity for ACTIMMUNE of approximately $3.5 billion annually in the United
States, based on $2.5 billion for idiopathic pulmonary fibrosis, $500 million
for mycobacterial infections and $500 million for systemic fungal infections.
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 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
leads to blindness, deafness and increased susceptibility to infection. 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 at least 50,000 persons in the United States. Idiopathic pulmonary
fibrosis is characterized by progressive scarring of the lungs, which leads
3
<PAGE>
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 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 halts and reverses
the progression of idiopathic pulmonary fibrosis. We are continuing the clinical
development of ACTIMMUNE for idiopathic pulmonary fibrosis by initiating an
accelerated clinical trial intended to provide sufficient data for approval,
known as a Phase II/III pivotal clinical trial, during the first half of 2000.
OTHER DISEASES. We are also developing ACTIMMUNE to treat a variety of
other diseases, including infectious diseases 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 ACTIMMUNE was effective in the treatment of multidrug-resistant
tuberculosis, a type of mycobacterial infection. As a result of these studies,
we are initiating a clinical trial intended to provide sufficient data for
approval, known as a Phase III pivotal clinical trial, for ACTIMMUNE in the
treatment of multidrug-resistant tuberculosis and have commenced a Phase II
clinical trial in cryptococcal meningitis, a type of systemic fungal infection.
We 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, in the second half
of 2000.
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 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 diseases for ACTIMMUNE;
- enhancing physician awareness and education;
- developing a sales and marketing organization to serve pulmonologists and
infectious disease specialists; and
- continuing to in-license preclinical and development-stage programs.
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.
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THIS OFFERING
UNLESS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS ASSUMES:
- THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF OUR PREFERRED STOCK
INTO SHARES OF COMMON STOCK UPON THE CLOSING OF THIS OFFERING;
- THE ISSUANCE OF 4,966,361 SHARES OF OUR SERIES B PREFERRED STOCK IN
JANUARY 2000; AND
- NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
The following information assumes that the underwriters do not exercise the
over-allotment option granted by us to purchase additional shares in this
offering.
<TABLE>
<S> <C>
Common stock offered by us................ 6,250,000 shares
Common stock to be outstanding after this
offering................................ 20,942,194 shares(1)
Nasdaq National Market symbol............. ITMN
Use of proceeds........................... We intend to use the net proceeds from this offering for
clinical development and commercialization of our
existing products, working capital, payment of existing
debt for royalties payable, payment of obligations to
Connetics, in-licensing new products and general
corporate purposes. See "Use of Proceeds."
</TABLE>
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(1) The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of December 31, 1999, and
excludes:
- 285,000 shares of common stock underlying options outstanding as of
December 31, 1999 at a weighted average exercise price of $0.125 per
share;
- 705,000 shares of common stock underlying options exercised in January
2000, at a weighted average exercise price of $0.238 per share;
- 765,500 shares of common stock issuable upon the exercise of options
granted from January 1 through March 6, 2000 at a weighted average
exercise price of $4.21 per share;
- 64,500 shares of common stock available for issuance as of March 6, 2000
under our 1999 Equity Incentive Plan;
- 2,180,000 shares available for issuance or future grant under our 2000
Equity Incentive Plan and 2000 Non-Employee Directors' Stock Option Plan;
- 200,000 shares available for issuance under our 2000 Employee Stock
Purchase Plan; and
- 342,359 shares of stock available for issuance in connection with
convertible promissory notes for royalties payable.
Our principal executive offices are located at 1710 Gilbreth Road,
Suite 301, Burlingame, CA 94010. Our telephone number is (650) 409-2020. Our
website is http://www.intermune.com. We do not intend for the information found
on our website to be incorporated into or be a part of this prospectus.
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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. 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 FOR THE
PERIOD FROM PERIOD FROM
FEBRUARY 25, FEBRUARY 25,
1998 1998
(INCEPTION) TO YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
STATEMENT OF OPERATIONS DATA: 1998 1999 1999
- ----------------------------- -------------- ------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Product sales, net...................................... $ -- $ 556 $ 556
Costs and expenses:
Cost of goods sold.................................... -- 240 240
Research and development.............................. 1,235 2,969 4,204
General and administrative............................ 892 2,656 3,548
Acquired pre-FDA approval rights...................... 4,000 1,094 5,094
------- ------- --------
Total costs and expenses................................ 6,127 6,959 13,086
Loss from operations.................................... (6,127) (6,403) (12,530)
Other income (expense):
Interest income....................................... 55 240 295
Interest expense...................................... -- (186) (186)
------- ------- --------
Net loss................................................ $(6,072) $(6,349) $(12,421)
======= ------- --------
Preferred stock accretion............................... (657) (657)
Net loss applicable to common stockholders.............. $(7,006) $(13,078)
======= ========
Net loss per share, basic and diluted................... $ (9.12)
=======
Shares used in computing net loss per share,
basic and diluted..................................... 768
=======
</TABLE>
The pro forma balance sheet data reflects:
- the receipt of the net proceeds of approximately $25,762,000 from the sale
of 4,876,916 shares of our Series B preferred stock in a private placement
completed on January 7 and 27, 2000;
- the issuance on January 7, 2000 of 89,445 shares of our Series B preferred
stock to Connetics Corporation in payment of the $500,000 short-term
obligation payable to Connetics as of December 31, 1999; and
- the automatic conversion of all preferred shares into shares of our common
stock on a one-for-one basis upon the closing of this offering.
The pro forma as adjusted balance sheet reflects:
- the sale of 6,250,000 shares of our common stock in this offering at a
price to the public of $20.00 per share, after deducting the underwriting
discounts and commissions and estimated offering expenses, resulting in
net proceeds of approximately $115.2 million;
- the payment of the contingent liability to Connetics in the amount of
$1,000,000, which will occur on the closing of this offering; and
- the payment of royalties payable to Genentech in the amount of $1,913,785.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
PRO FORMA
BALANCE SHEET DATA: ACTUAL PRO FORMA AS ADJUSTED
- ------------------- -------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments........... $ 4,214 $ 29,976 $ 142,212
Working capital............................................. 1,222 27,484 141,634
Total assets................................................ 5,855 31,617 143,853
Redeemable convertible preferred stock...................... 7,416 -- --
Deficit accumulated during the development stage............ (12,421) (12,421) (12,421)
Total stockholders' equity (deficit)........................ (7,540) 26,138 140,288
</TABLE>
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RISK FACTORS
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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 to
sales of ACTIMMUNE for only one disease, 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 the net proceeds from this offering, 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 2001. However, 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 the
deficit accumulated during the development stage was approximately $12.4 million
at December 31, 1999. 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 through the sale of ACTIMMUNE
for chronic granulomatous disease. After consideration of the direct costs of
marketing ACTIMMUNE for chronic granulomatous disease and 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.
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IF OUR CLINICAL TRIALS FAIL TO DEMONSTRATE THAT ACTIMMUNE IS SAFE AND EFFECTIVE
FOR THE TREATMENT OF ADDITIONAL DISEASES, THE FDA 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. We must also conduct similar
clinical trials in Japan to obtain approval to market ACTIMMUNE in Japan for the
treatment of tuberculosis.
Clinical trials are inherently unpredictable. Although ACTIMMUNE appears
promising in these diseases based on past clinical trials, ACTIMMUNE may not be
successful in later clinical trials intended to confirm and expand upon those
trials. Our proposed clinical trials in these diseases might 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;
- the FDA 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 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, and 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 and osteopetrosis and any new approval for 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 SUBLICENSE
AGREEMENT WITH CONNETICS CORPORATION TERMINATES, OR IF CONNETICS' LICENSE
AGREEMENT WITH GENENTECH TERMINATES.
We sublicense ACTIMMUNE from Connetics, which licenses ACTIMMUNE from
Genentech. If Connetics terminates its agreement with us or Genentech terminates
its agreement with Connetics, we will have no further rights to utilize the
patents or trade secrets covered by these agreements to develop and market
ACTIMMUNE. This two-tier license of ACTIMMUNE has the following risks:
- our sublicense agreement provides for termination by Connetics in the
event we breach that agreement, including our failure to pay royalties and
other fees on a timely basis;
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- if Connetics breaches its agreement with Genentech, and we are unable to
cure that breach, Genentech could terminate its license to Connetics, and
we could lose our rights to develop and market ACTIMMUNE; and
- if Genentech fails to maintain the intellectual property licensed to
Connetics, 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.
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 pseudonomas 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;
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- 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.
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 depend on third parties with FDA-approved
manufacturing facilities for the manufacture of ACTIMMUNE for pre-clinical,
clinical, and commercial purposes. We presently rely on Genentech, Inc. for the
manufacture of commercially marketed ACTIMMUNE and on Boehringer Ingelheim
Austria GmbH for the supply of ACTIMMUNE for clinical trials. Our manufacturing
strategy presents the following risks:
- Before we can obtain approval for a new disease for ACTIMMUNE, we must
demonstrate to the FDA's satisfaction that the drug used in the clinical
trials is substantially equivalent to the commercial drug manufactured by
Genentech.
- Delays in increasing existing manufacturing capacity to meet our needs for
multiple clinical trials could delay clinical trials, regulatory
submissions and commercialization of ACTIMMUNE.
- Our current manufacturers of ACTIMMUNE are subject to ongoing periodic
inspection by the FDA and corresponding state agencies for compliance with
strictly enforced good manufacturing
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practices regulations and similar foreign standards, and we do not have
control over our third-party manufacturers' compliance with these
regulations and standards.
- If we need to change to other manufacturers, the FDA and comparable
foreign regulators must approve these manufacturers prior to our use. This
would require new testing and compliance inspections. The new
manufacturers would have to be educated in, or themselves develop,
substantially equivalent processes necessary for the production of
ACTIMMUNE. In addition, the FDA or comparable foreign regulators would
need to approve the new manufacturers.
- If market demand for ACTIMMUNE increases suddenly, our current
manufacturers might not be able to fulfill our commercial needs, which
would require us to seek new manufacturing arrangements and 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.
11
<PAGE>
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.
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 23 employees as of March 6, 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.
Following completion of this offering, our directors, executive officers and
principal stockholders and their affiliates will beneficially own approximately
65% of our common stock. Accordingly, they collectively will 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.
12
<PAGE>
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW MAY
MAKE AN ACQUISITION OF US, WHICH MAY BE BENEFICIAL TO OUR STOCKHOLDERS, MORE
DIFFICULT.
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;
- 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.
Prior to this offering, there has been no public market for our common
stock, and an active public market for our common stock may not develop or be
sustained after this offering. The initial public offering price of our common
stock was determined by negotiations between the representatives of the
underwriters and us and may not be indicative of future market prices. The
following factors were among those considered in determining the initial public
offering price of our common stock:
- clinical trial data;
- prevailing market conditions;
- estimates of our business potential and earnings prospects; and
- an assessment of our management.
If the market price of our common stock after this offering does not exceed
the initial public offering price, you may not realize any return on your
investment in us and may lose some or all of your investment.
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. After completion
of this offering, we will have outstanding 20,942,194 shares of common stock,
assuming no exercise of outstanding options after December 31, 1999 and no
exercise of the underwriters' over-allotment option. Of these shares, the
6,250,000 shares sold in this offering will be freely tradeable without
restriction or further regulation, other than shares purchased by our officers,
directors or other "affiliates" within the meaning of Rule 144 under the
Securities Act of 1933.
13
<PAGE>
The remaining 14,692,194 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 exemption from
registration. These shares will become eligible for public resale at various
times over a period of less than one year following the completion of this
offering, subject to volume limitations.
We, our officers and directors and all of our current stockholders, have
agreed not to sell or offer to sell or otherwise dispose of any shares of common
stock held by us or them for a period of 180 days after the date of this
prospectus without the prior written consent of Warburg Dillon Read LLC. Warburg
Dillon Read LLC may release any or all of the shares subject to lock-up
agreements at any time without notice.
We further expect to file 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.
THIS OFFERING WILL CAUSE DILUTION IN NET TANGIBLE BOOK VALUE.
Purchasers in this offering of our common stock will experience immediate
and substantial dilution in pro forma net tangible book value of $13.30 per
share. Additional dilution is likely to occur upon the exercise of options
granted by us. To the extent we raise additional capital by issuing equity
securities, our stockholders may experience additional substantial dilution.
14
<PAGE>
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 estimate that the net proceeds from the sale of the 6,250,000 shares of
common stock that we are offering will be $115.2 million after deducting
underwriters' discounts and commissions and estimated offering expenses, based
on an initial public offering price of $20.00 per share. If the underwriters'
over-allotment option is exercised in full, we estimate that the net proceeds
will be $132.6 million. We anticipate using the net proceeds from this offering
for:
<TABLE>
<S> <C>
- - clinical development...................................... $55.0 million
- - commercialization of our existing products................ $35.0 million
- - working capital........................................... $14.0 million
- - payment of existing debt for royalties payable............ $1.9 million
- - payment of obligations to Connetics....................... $1.0 million
- - in-licensing new products and general corporate
purposes.................................................. $8.3 million
</TABLE>
We will retain broad discretion over the use of the net proceeds of this
offering. The amounts and timing of the expenditures may vary significantly
depending on numerous factors, such as the progress of our research and
development efforts, technological advances and the competitive environment for
our products. We also might use a portion of the net proceeds to acquire or
invest in complementary businesses, products and technologies. We are not
currently planning any acquisition, and no portion of the net proceeds has been
allocated for any specific acquisition.
Under the terms of a license agreement, payment of existing debt for
royalties are payable by us to Genentech 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 may, at its option, convert any or all unpaid
royalties plus accrued interest into our equity securities at a per share price
equal to our last equity financing. As of December 31, 1999, accrued royalties
and related interest of $1,913,785 are classified as current.
We believe that the net proceeds of this offering, 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 2001. Pending the use of the
net proceeds, we intend to invest the net proceeds in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
- --------------------------------------------------------------------------------
We have never declared or paid any cash dividends on our capital shares. 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.
15
<PAGE>
DILUTION
- --------------------------------------------------------------------------------
The pro forma net tangible book value (deficit) of our common stock as of
December 31, 1999 was ($124,064) or ($0.01) per share, assuming conversion of
outstanding preferred stock into 7,835,000 shares of common stock. The pro forma
net tangible book value of our common stock as of December 31, 1999 was $26.1
million or $1.78 per share, assuming:
- the issuance of 4,876,916 shares of our Series B preferred stock for cash
on January 7 and 27, 2000 for net proceeds of $25.8 million;
- the issuance of 89,445 shares of our Series B preferred stock to Connetics
on January 7, 2000, in payment of our $500,000 short-term obligation to
them as of December 31, 1999; and
- the conversion of our outstanding preferred stock into 12,801,361 shares
of common stock.
The adjusted pro forma net tangible book value of our common stock as of
December 31, 1999 would have been $140.3 million, or $6.70 per share, assuming:
- the sale of common stock pursuant to this offering at the initial public
offering price of $20.00 per share assuming that the underwriters'
over-allotment option is not exercised;
- the payment of estimated underwriting discount and offering expenses for
net proceeds of $115.2 million;
- the payment of royalties payable to Genentech of $1,913,785; and
- the payment of our contingent liability to Connetics in the amount of
$1,000,000.
The pro forma net tangible book value per share before this offering has
been determined by dividing net tangible book value (total tangible assets less
total liabilities) by the number of shares of common stock outstanding at
December 31, 1999 assuming conversion of outstanding preferred stock into common
stock. There was an increase in net tangible book value of $1.79 per share
attributable to the Series B preferred stock financing. This offering will
result in an increase in adjusted pro forma net tangible book value per share of
$4.92 to existing stockholders and dilution in adjusted pro forma net tangible
book value per share of $13.30 to new investors who purchase shares in this
offering. Dilution is determined by subtracting pro forma net tangible book
value per share after this offering from the initial public offering price of
$20.00 per share. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price............................... $20.00
Pro forma net tangible book value per share at
December 31, 1999....................................... $ (0.01)
Increase attributable to Series B preferred stock
financing............................................... $ 1.79
Increase attributable to new investors.................... $ 4.92
Adjusted pro forma net tangible book value per share after
this offering............................................. $ 6.70
------
Dilution in net tangible book value to new investors........ $13.30
</TABLE>
If the underwriters' over-allotment option were exercised in full, the pro
forma net tangible book value per share after this offering would be $7.21 per
share, the increase in net tangible book value per share to existing
stockholders would be $5.43 per share and the dilution in net tangible book
value to new investors would be $12.79 per share.
The following table summarizes, on a pro forma basis as of December 31, 1999
as adjusted for the January 2000 issuances of Series B preferred stock described
above, the differences between the total consideration paid and the average
price per share paid by the existing stockholders and the new investors with
respect to the number of shares of common stock purchased from us based on the
public offering price of $20.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 14,692,194 70.2% $ 39,808,358 24.2% $ 2.71
New investors........................... 6,250,000 29.8 $125,000,000 75.8 $20.00
---------- ------ ------------ ------
Total................................... 20,942,194 100.0% $164,808,358 100.0%
========== ====== ============ ======
</TABLE>
The tables and calculations above assume no exercise of outstanding options.
At December 31, 1999, there were:
- 990,000 shares issuable upon the exercise of options outstanding at a
weighted average exercise
price of $0.125 per share; and
- 663,000 shares subject to repurchase by us at a weighted average price of
$0.041 per share.
16
<PAGE>
CAPITALIZATION
- --------------------------------------------------------------------------------
The following table shows our actual capitalization as of December 31, 1999.
Our capitalization is presented in the column labeled pro forma to give effect
to:
- the issuance of 4,876,916 shares of our Series B preferred stock in
conjunction with the private placement on January 7 and 27, 2000 for net
proceeds of $25.8 million;
- the issuance of 89,445 shares of our Series B preferred stock on January
7, 2000 to Connetics Corporation (in payment of the $500,000 short-term
payable as of December 31, 1999); and
- the automatic conversion of all preferred shares into shares of our common
stock on a one-for-one basis upon the closing of this offering.
Our capitalization is also presented in the column labeled pro forma as
adjusted to give effect to the receipt of the estimated net proceeds from this
sale of 6,250,000 shares of stock offered by this prospectus at the initial
public offering price of $20.00 per share for net proceeds of $115.2 million.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
Long-term obligations payable to Connetics.......... $ 1,624,343 $ 1,624,343 $ 1,624,343
============ ============ ============
Redeemable convertible preferred stock, no par value
Authorized shares--11,200,000 actual, pro forma
and pro forma as adjusted
Issued and outstanding shares 6,000,000 actual,
none pro forma and pro forma as adjusted...... 7,416,427 -- --
Stockholders' equity (deficit):
Convertible preferred stock, no par value
Authorized shares--14,870,000 actual, pro forma
and pro forma as adjusted
Issued and outstanding shares 1,835,000 actual
and pro forma and none pro forma as
adjusted...................................... 4,506,804 -- --
Common stock, no par value
Authorized shares--30,000,000 actual
Issued and outstanding shares 1,890,833 actual,
14,692,194 pro forma and 20,942,194 pro forma
as adjusted................................... 5,659,164 43,844,349 157,994,349
Deferred compensation related to stock options.... (5,285,860) (5,285,860) (5,285,860)
Accumulated other comprehensive income............ 41 41 41
Deficit accumulated during the development
stage........................................... (12,420,640) (12,420,640) (12,420,640)
------------ ------------ ------------
Total stockholders' equity (deficit)................ $ (7,540,491) $ 26,137,890 $140,287,890
============ ============ ============
</TABLE>
The outstanding share information in the table above excludes
990,000 shares of common stock issuable upon the exercise of options outstanding
as of December 31, 1999 at a weighted average exercise price of $0.125 per
share, and 765,500 shares of common stock issuable upon the exercise of options
granted from January 1 through March 6, 2000 at a weighted average exercise
price of $4.21 per share.
17
<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 operations
data for the period from February 25, 1998 (inception) to December 31, 1998 and
for the year ended 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 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 FOR THE
PERIOD FROM PERIOD FROM
FEBRUARY 25, FEBRUARY 25,
1998 1998
(INCEPTION) TO YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
STATEMENT OF OPERATIONS DATA: 1998 1999 1999
- ----------------------------- -------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Product sales, net...................................... $ -- $ 556 $ 556
Costs and expenses:
Cost of goods sold.................................... -- 240 240
Research and development.............................. 1,235 2,969 4,204
General and administrative............................ 892 2,656 3,548
Acquired pre-FDA approval rights...................... 4,000 1,094 5,094
------- ------- --------
Total costs and expenses................................ 6,127 6,959 13,086
Loss from operations.................................... (6,127) (6,403) (12,530)
Other income (expense):
Interest income....................................... 55 240 295
Interest expense...................................... -- (186) (186)
------- ------- --------
Net loss................................................ $(6,072) $(6,349) $(12,421)
======= ------- --------
Preferred stock accretion............................... (657) (657)
Net loss applicable to common stockholders.............. $(7,006) $(13,078)
======= ========
Net loss per share, basic and diluted................... $ (9.12)
=======
Shares used in computing net loss per share, basic and
diluted............................................... 768
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
BALANCE SHEET DATA: 1998 1999
- ------------------- ---------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments........... $ 4,720 $ 4,214
Working capital............................................. 4,181 1,222
Total assets................................................ 4,720 5,855
Redeemable convertible preferred stock...................... -- 7,416
Deficit accumulated during the development stage............ (6,072) (12,421)
Total stockholders' equity (deficit)........................ 4,181 (7,540)
</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.
18
<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 licensed from Genentech, Inc. and Connetics Corporation the
exclusive U.S. rights to ACTIMMUNE (interferon gamma-1b injection), a
FDA-approved product. We currently market ACTIMMUNE in the United States for the
treatment of chronic granulomatous disease and osteopetrosis. We have the rights
and plan to develop ACTIMMUNE for a range of diseases including idiopathic
pulmonary fibrosis, infectious diseases and cystic fibrosis.
Since our inception, we have incurred significant losses and, as of
December 31, 1999, we had an accumulated deficit of $12,420,640.
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.
STOCK COMPENSATION
During the year ended December 31, 1999, in connection with the grant of
stock options to employees, we recorded deferred stock compensation totaling
$5,630,871, 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. We recorded amortization of deferred
stock compensation of $345,011 for the year ended December 31, 1999. At
December 31, 1999, we had a total of $5,285,860 remaining to be amortized over
the vesting periods of the stock options. Please see notes 2 and 6 of our
financial statements.
SUBSEQUENT EVENTS
On January 7 and January 27, 2000, we issued 4,876,916 aggregate shares of
Series B preferred stock at $5.59 per share for aggregate proceeds of
$27,262,000. We will reflect a deemed dividend of up to $27,762,000 in our first
quarter 2000 financial statements in relation to the Series B preferred stock
financing. See note 12 of our financial statements. We incurred approximately
$1.5 million of associated issuance costs, including 120,000 shares of Series B
preferred stock valued at $5.59 per share. On
19
<PAGE>
January 7, 2000, pursuant to the terms of the collaboration agreement with
Connetics, we also issued to Connetics 89,445 shares of our Series B preferred
stock.
From January 1, 2000 through March 6, 2000, we granted 765,500 shares of
common stock issuable upon the exercise of options at a weighted average
exercise price of $4.21 per share. In connection with these grants, we will
record an additional $8.8 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. Accordingly, at March 6, 2000, the
remaining deferred compensation of approximately $14.1 million will be amortized
as follows: $6.7 million during fiscal 2000, $3.8 million during fiscal 2001,
$2.0 million during fiscal 2002, $1.1 million during fiscal 2003 and
$0.5 million during fiscal 2004. The amortization expense relates to options
awarded to employees and directors. The amortization of deferred stock
compensation has not been separately allocated to all operating expense
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 our management based on an
analysis of significant events which have occurred since our inception. The
weighted average deemed fair value of common stock option grants in calendar
year 1999 was $2.78 per share, and $13.58 and $16.20 per share in January and
February 2000, respectively. 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 of a study 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 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. The fair value of these options was
estimated 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 two
years. The Company recorded stock compensation for these research and
development consulting services of approximately $688,000 in January and
February 2000.
RESULTS OF OPERATIONS
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 $556,401 for the year
ended December 31, 1999. The sales in 1999 represent our portion of ACTIMMUNE
sales that exceed 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 $1,357,436
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,
20
<PAGE>
1999, cost of goods sold totaled $239,802 which included all product cost of
goods sold, royalties and distribution costs associated with our revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased from $1,234,957 for the period from February 25, 1998 (inception) to
December 31, 1998, to a total of $2,969,474 in 1999. The increase resulted
primarily from increased costs for clinical trial study expenses for ACTIMMUNE
in additional diseases. We anticipate that to develop and prove efficacy in each
of the other diseases not yet approved will cost approximately $5-30 million and
take approximately three to seven years.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $892,295 for the period from February 25, 1998 (inception) to
December 31, 1998, to a total of $2,656,130 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
$1,093,750 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 $55,531 for the period from
February 25, 1998 (inception) to December 31, 1998, to a total of $239,778 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 $110,674 for imputed interest
expense on our long-term obligation to Connetics and $75,268 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 with $7,444,720 of private equity financings
and $1,173,723 (net) of contributions from Connetics. At December 31, 1998,
cash, cash equivalents and short-term investments totaled $4,719,831 compared to
$4,214,294 at December 31, 1999. Our cash reserves are held in a variety of
interest-bearing instruments including high-grade corporate bonds, commercial
paper and money market accounts.
Cash used in operations for the period from February 25, 1998 (inception) to
December 31, 1998, was $1,280,185 compared with cash used in operations of
$3,093,540 for the year ended December 31, 1999. A net loss of $6,348,919 for
the year ended December 31, 1999, was partially offset by non-cash charges of
$345,011 for the amortization of deferred compensation, $2,564 for depreciation,
$110,674 for the accretion of obligations payable to Genentech and preferred
stock issued for $1,093,750 for additional product rights from Genentech for
ACTIMMUNE.
Financing activities included the receipt of net proceeds of $6,000,000 as
capital contributed by Connetics in 1998, and $395,600 of expenses Connetics
incurred on our behalf in 1999. In 1999, we received net proceeds of $6,759,662
from the sale of Series A preferred stock to investors, $663,500 from the sale
of common stock, and $22,500 from the exercise of stock options, which enabled
us to return capital to Connetics in the amount of $5,221,877.
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Working capital of $4,181,295 at December 31, 1998 decreased to $1,222,378
at December 31, 1999. The decrease in working capital was due to our use of cash
in operations, higher accounts payable and royalty payables as a result of
product sales and increased corporate expenses offset in part by higher
inventory and accounts receivable balances.
We have deferred payment of the royalties due to Genentech for 1999
(approximately $1.9 million) under a series of interest-bearing promissory notes
that will become due upon the closing date of this offering. The amounts due
under these notes may be converted, at Genentech's option, into shares of our
stock sold in our most recent financing prior to the conversion, at the same
price per share. Genentech has not informed us whether it intends to exercise
the option.
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.
Beginning on January 1, 2002, we are obligated to pay to Connetics a royalty
of .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 .5% of our net U.S.
sales. In addition, we are obligated to pay to Connetics:
- $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 have been recorded at
their net present value of $1,624,343 as long-term obligations payable to
Connetics as of December 31, 1999. We originally planned return of these capital
payments to Connetics on April 27, 1999, but we and Connetics agreed to defer
such payments to provide us with additional working capital. We 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 deferred at a
rate of interest equal to prime plus 2%. Of the additional $1.5 million,
$500,000 has been 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 our stock is contingent upon a subsequent closing of a round of financing, an
initial public offering or the acquisition of InterMune. This $1 million
contingent return of capital has only been reflected in the accompanying pro
forma, December 31, 1999 (unaudited) balance sheet.
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
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product, we are obligated to pay $500,000 to Panorama. In addition, we will
grant to three consultants employed by Panorama stock options for the purchase
of up to an aggregate of 100,000 shares of our common stock that will vest
monthly and be fully vested in January 2003.
We believe our existing cash, cash equivalents and short-term investments,
together with cash flows and the net proceeds of this offering will be
sufficient to fund our operating expenses, debt obligations and capital
requirements through at least the end of 2001. 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.
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.
IMPACT OF THE YEAR 2000
The computer systems and software programs of many companies and
governmental agencies are currently coded to accept or recognize only two digit
entries in the date code field. These systems may recognize a date using "00" as
the year 1900 rather than the year 2000. As a result, these computer systems
and/or software programs may need to be upgraded to comply with such year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
STATE OF READINESS. We have made an assessment of the year 2000 readiness
of our information technology systems. We believe that substantially all of our
applications, databases and infrastructure are year 2000 compliant. We are
currently assessing our non-information technology systems and will seek
assurances of year 2000 compliance from providers of these systems. Until such
testing is complete and these vendors and providers have replied to our
requests, we will not be able to completely evaluate whether our information
technology systems or non-information technology systems will need to be revised
or replaced.
We have not identified any internally used capital equipment or software
that will require an additional material expenditure for year 2000 compliance
upgrades.
RISKS. We are not currently aware of any year 2000 compliance problems
relating to our information technology or non-information technology systems
that would have a material adverse effect on our business. Third-party software,
hardware or services incorporated into our information technology and
non-information technology systems may need to be revised or replaced, all of
which could be time consuming and expensive. Our failure to fix or replace
third-party software, hardware or services on a timely basis could result in
lost revenues, increased operating costs, the loss of customers and other
business interruptions, any of which could have a material adverse effect on our
business. In addition, governmental agencies, utility companies, third-party
service providers and others outside our control may not be year 2000 compliant.
The failure by these entities to be year 2000 compliant could
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result in a systemic failure beyond our control, such as a prolonged
telecommunications or electrical failure, which could have a material adverse
effect on our business.
CONTINGENCY PLAN. In the event that year 2000-related problems materialize,
we maintain relationships with several suppliers of services and products to
mitigate the risks associated with using suppliers which are not year 2000
compliant.
UPDATE SINCE JANUARY 1, 2000. Since January 1, 2000, we have not incurred
any costs or operational interruptions resulting from year 2000 compliance
problems.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
changes the previous accounting definition of derivative, which focused on
freestanding contracts such as options and forwards, including futures and
swaps, expanding it to include embedded derivatives and many commodity
contracts. Under the statement, every derivative is recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivatives fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. We do not anticipate
that the adoption of SFAS No. 133 will have a material impact on our financial
position or results of operations.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve our
capital until it is required to fund operations while at the same time
maximizing the income we receive from our investments without significantly
increasing risk. To minimize this risk, we maintain a portfolio of cash
equivalents and short-term investments in a variety of securities, including
commercial paper, money market funds and corporate debt securities. The average
duration of all our investments in 1999 was less than six months. Due to the
short term nature of these investments, a 10% movement in market interest rates
would not have a material impact on the total fair value of our portfolio as of
December 31, 1999.
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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 congenital
disorders. We have the exclusive license rights in the United States 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; 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 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 at least 50,000
persons in the United States. During the first half of 2000, we plan to initiate
an accelerated clinical trial intended to provide sufficient data for approval,
known as a Phase II/III pivotal clinical trial, to test dosing and efficacy of
ACTIMMUNE for the treatment of this condition. We are also commencing a clinical
trial intended to provide sufficient data for approval, known as a Phase III
pivotal clinical trial, of ACTIMMUNE for the treatment of multidrug-resistant
tuberculosis. We are currently conducting a clinical trial to determine
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 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, in the
second half of 2000. We believe that the risks and time required to obtain FDA
approval for ACTIMMUNE to treat new diseases may be reduced because ACTIMMUNE
has proven to be safe for patients since its approval in 1990 for the treatment
of chronic granulomatous disease and through its approval in February 2000 for
osteopetrosis.
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) and systemic fungal diseases ($500 million) are serious and
difficult to treat diseases that we believe represent a combined maximum market
opportunity for ACTIMMUNE of approximately $3.5 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 II/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 and idiopathic pulmonary fibrosis. 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 osteopetrosis. Both Connetics and Genentech maintain significant
ownership positions in InterMune.
STRATEGY
We plan to pursue a growth strategy through the following:
GROW PRODUCT REVENUE. We assumed commercial operations for ACTIMMUNE in
January 1999. In 1999, we were able to increase the sales of ACTIMMUNE by
approximately 41% in the United States, compared to 1998. We accomplished this
increase in sales through a product price increase and by increasing awareness
of ACTIMMUNE through direct mailings and trade shows targeted at the
academic-centered physician community. We believe increased physician awareness
resulted in increased usage of the product for chronic granulomatous disease and
other diseases.
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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 ACTIMMUNE 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 will enable us to obtain
accelerated, or fast track, approval for ACTIMMUNE for these diseases.
ENHANCE PHYSICIAN AWARENESS AND EDUCATION. We have initiated a program to
further heighten physician awareness of ACTIMMUNE through a group of at least 12
medical science liaisons as well as through peer-reviewed journal advertisements
for ACTIMMUNE and our recently launched ACTIMMUNE.com website. Although
ACTIMMUNE is currently only approved for chronic granulomatous disease and
osteopetrosis, we believe that some physicians may prescribe ACTIMMUNE to treat
patients with idiopathic pulmonary fibrosis, as 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. To the extent
allowed by law, we intend to disseminate these peer-reviewed articles to our
physician customers for the purpose of off-label education.
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 increasing consolidation in the pharmaceutical and
biotechnology industries and continuing changes in the health care system will
provide us with significant opportunities to in-license or acquire additional
products and programs from pharmaceutical companies and research and academic
institutions.
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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>
PRODUCT/PROGRAM DISEASE STATUS MARKETING RIGHTS
<S> <C> <C> <C>
ACTIMMUNE Chronic granulomatous Marketed United States
disease
ACTIMMUNE Osteopetrosis Marketed United States
ACTIMMUNE Idiopathic pulmonary Phase II/III clinical United States
fibrosis trial planned for first
half 2000
ACTIMMUNE MYCOBACTERIAL INFECTIONS
- Multidrug-resistant Phase III clinical trial United States
tuberculosis planned for first half and Japan
2000
- Atypical mycobacterial Phase II clinical trial United States
infections planned for second half
2000
ACTIMMUNE SYSTEMIC FUNGAL
INFECTIONS
- Cryptococcal Phase II clinical trial United States
meningitis ongoing
ACTIMMUNE Cystic fibrosis Phase II clinical trial United States
planned for second half
2000
Pseudomonas aeruginosa Pseudomonas aeruginosa Preclinical studies Worldwide
program infection
Staphylococcus aureus Staphylococcus aureus Preclinical studies Worldwide
program infection
</TABLE>
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
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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
osteopetrosis and granted ACTIMMUNE orphan drug status for the treatment of
osteopetrosis. Osteopetrosis is a life-threatening, congenital disorder in which
an overgrowth of bony structures leads to blindness, deafness and increased
susceptibility to infection. 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 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 pulmonary fibrosis is approximately
three to five years from the time of diagnosis. There are at least 50,000
patients in the United States with idiopathic pulmonary fibrosis. We plan to
commence a Phase II/III pivotal clinical trial for this disease in the first
half of 2000.
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 are 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
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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 the
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 II/III PIVOTAL CLINICAL TRIAL. We are continuing the clinical
development of ACTIMMUNE in idiopathic pulmonary fibrosis by initiating a Phase
II/III pivotal clinical trial during the first half of 2000. Our clinical trial
will enroll patients with documented idiopathic pulmonary fibrosis who have not
responded to previous treatment with corticosteroids and who have evidence of
deteriorating lung function. We anticipate that our trial will compare two
different doses, 100 micrograms and 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. There are at least 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
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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 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 and
Japan.
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. We plan to
initiate a Phase III clinical trial of ACTIMMUNE for the treatment of
multidrug-resistant tuberculosis in the first half of 2000.
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 in the second half of 2000.
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 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.
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
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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 I/II clinical
trial of ACTIMMUNE in patients with cystic fibrosis in the second half of 2000.
Cystic fibrosis affects an estimated 23,000 persons in the United States. We
believe that cystic fibrosis represents an 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 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
CONNETICS CORPORATION (ACTIMMUNE)
In August 1998, we entered into an Exclusive Sublicense Agreement with
Connetics 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 Amended and Restated
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Exclusive Sublicense Agreement with Connetics in April 1999 in order to broaden
the scope of rights granted to us. The agreement terminates on the later of
May 5, 2018 and the date that the last of the patents licensed under the
agreement expires.
Our sublicensed 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 and pulmonary fibrosis, 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 tuberculosis.
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. Connetics must satisfy
specified obligations under the agreement with Genentech to maintain its license
from Genentech. We are obligated under the agreement to develop and
commercialize ACTIMMUNE for a number of diseases.
Beginning on January 1, 2002, we are obligated to pay to Connetics a royalty
of .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 .5% of our net U.S.
sales. In addition, we are obligated to pay to Connetics aggregate payments of
$1,500,000 in connection with various levels of net U.S. sales. Depending on the
level of net U.S. sales, we are obligated to pay cash and/or to furnish to
Connetics promissory notes that have an interest rate of the prime rate plus two
percentage points.
We have deferred payment of the royalties due to Genentech for 1999
(approximately $1.9 million) under a series of interest-bearing promissory notes
that will become due upon the closing date of this offering. The amounts due
under these notes may be converted, at Genentech's option, into shares of our
stock sold in our most recent financing prior to the conversion at the same
price per share.
Until April 2004, Connetics has an option under our 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.
In connection with the execution of the Amended and Restated Exclusive
Sublicense Agreement, we also entered into a Transition Agreement with
Connetics. Under the Transition Agreement, Connetics books the net sales of
ACTIMMUNE, up to a baseline amount through December 2001, less associated cost
of goods sold and marketing expenses. We book all net sales in excess of that
baseline. This agreement also provides for economic incentives to transition the
manufacturing of ACTIMMUNE from Genentech to a third party.
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 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. 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
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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. In
addition we will grant to three consultants employed by Panorama stock options
for the purchase of up to an aggregate of 100,000 shares of our common stock
that will vest monthly and be fully vested in January 2003.
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 that complies with the
FDA's regulations. Genentech currently manufactures and formulates bulk active
ingredient and fills and finishes ACTIMMUNE destined for commercial supply. We
have contracted with CORD Logistics for the commercial distribution of ACTIMMUNE
in the United States. We are negotiating with a third party to perform the
packaging and distribution of ACTIMMUNE for our clinical trials.
Boehringer Ingelheim manufactures and formulates bulk active ingredient and
fills and finishes ACTIMMUNE destined for clinical supply. Boehringer Ingelheim
is currently pursuing qualification by the FDA to manufacture ACTIMMUNE for our
commercial supply. We believe that the FDA will approve Boehringer Ingelheim as
a manufacturer of commercial supply of ACTIMMUNE by mid-2001.
We recently entered into a supply agreement with Boehringer Ingelheim to
manufacture both clinical and commercial supply of ACTIMMUNE. The agreement
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 and Japan to make,
use and sell interferon gamma-1b, ACTIMMUNE, in particular fields in connection
with our Amended and Restated Exclusive Sublicense Agreement with Connetics.
This sublicense agreement covers 15 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;
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- 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.
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/II 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 osteopetrosis. There is no currently available effective therapy for
the treatment of idiopathic pulmonary fibrosis. 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 osteopetrosis. Our marketing efforts
currently 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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We have contracted the services of 12 medical science liaisons who will
educate physicians and increase their awareness of ACTIMMUNE. We also plan to
sponsor speaker programs, medical symposia and continuing medical education
programs regarding ACTIMMUNE.
FDA 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.
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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 criteria are not satisfied
or may require additional clinical data. 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 have a material adverse
effect on 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
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off-label use. Companies cannot actively promote FDA-approved drugs for
off-label uses, but a recent court decision now allows them to disseminate to
physicians articles published in peer-reviewed journals, like THE NEW ENGLAND
JOURNAL OF MEDICINE, that discuss off-label uses of approved products. To the
extent allowed by law, we intend to disseminate peer-reviewed articles on
ACTIMMUNE to our physician customers.
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 which 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, 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 which 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 March 6, 2000, we had 23 full-time employees. Of the full-time
employees, 14 were engaged in research and development and 9 were engaged in
sales, general and administrative positions. In addition, we have contracted
with consultants, including the 12 full-time medical science liaisons, that we
estimate are the equivalent of 20 additional full-time employees. We believe our
relations with our employees are good.
FACILITIES
Our facilities consist of approximately 7,000 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 our current facilities are
adequate for our needs for the foreseeable future and that, should it be needed,
suitable additional space will be 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:
<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
Business Development
Stephen N. Rosenfield..................... 50 Senior Vice President of Legal Affairs and
General Counsel
Peter Van Vlasselaer, Ph.D................ 41 Senior Vice President of Technical
Operations
David Cory, R.Ph.......................... 36 Vice President of Sales and Marketing
Christine Czarniecki, Ph.D................ 49 Vice President of Regulatory Affairs
J. Woodruff Emlen, M.D.................... 53 Vice President of Scientific Affairs
Edgar Engleman, M.D....................... 54 Director
James I. Healy, M.D., Ph.D................ 35 Director
John L. Higgins........................... 29 Director
Wayne Hockmeyer, Ph.D..................... 55 Director
Jonathan S. Leff.......................... 31 Director
Nicholas J. Simon......................... 45 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. From March 1991 to September 1995,
Dr. Harkonen served as Vice President of Medical and Regulatory Affairs at
Univax Biologics. 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 Business Development since November 1999. From July 1999 to
October 1999, Mr. Lynch served as the Director of Business Development at
ePhysician, Inc. From August 1997 to July 1999, Mr. Lynch served as Director of
Strategic Planning at Elan Corporation, plc. 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
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<PAGE>
Vice President of Development at Dendreon Corporation. Dr. Van Vlasselaer holds
a Ph.D. from the University of Leuven in Belgium and was an immunology fellow at
Stanford 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. Mr. Cory holds a
degree in Pharmacy from the University of Cincinnati.
CHRISTINE 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. 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. 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. 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.
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
Visible Genetics, Inc. and VitalCom, Inc., both of which are publicly held, 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 is currently serving as Vice President of Business and Corporate
Development. Mr. Simon serves on the board of directors of several private
companies. Mr. Simon holds an M.B.A. from Loyola College.
WAYNE HOCKMEYER, PH.D. Dr. Hockmeyer has served as a member of our board of
directors since February 2000. Dr. Hockmeyer founded MedImmune, Inc. in April
1988, has served as its chief
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<PAGE>
executive officer since April 1988 and as chairman of its board of directors
since May 1993. Dr. Hockmeyer holds a Ph.D. from the University of Florida.
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 our preferred 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. Upon the closing of the
offering, our board of directors will be 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. Engelman, 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 after the initial classification, 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 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, consisting currently of Messrs.
Higgins and Simon and Dr. Engelman, was recently formed in connection with this
offering. The audit committee will review our internal accounting procedures and
consult with and review the services provided by our independent auditors.
COMPENSATION COMMITTEE. Our compensation committee, consisting currently of
Messrs. Leff and Simon and Dr. Harkonen, was recently formed in connection with
this offering. The compensation committee will review and recommend to our board
of directors the compensation and benefits of all our officers and establish and
review general policies relating to compensation and benefits of our employees.
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<PAGE>
COMPENSATION OF DIRECTORS
We do not provide cash compensation to members of our board of directors for
serving on our board of directors or for attendance at committee meetings.
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 Messrs. Engleman, Healy and Higgins, three of our non-employee
directors, received option grants to purchase 30,000 shares of common stock at
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, each of
Messrs. Leff and Powell, two of our non-employee directors, received option
grants to purchase 30,000 shares of common stock at exercise prices of $4.50 per
share. Under each of these grants, the option shares vest over a three-year
period in monthly installments. In July 1999, Messrs. 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,
Mr. 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, which will become effective upon the
closing of this offering, will provide for ongoing option grants to our
non-employee directors. See "Management--Stock Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Neither 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, our Chairman, Chief Executive Officer and President. The employment
agreement provides for an annual salary of $225,000 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 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 agreement, including
circumstances involving a change in control, he will be entitled to receive his
salary for an additional six months and will vest for an additional 28% of his
common stock.
In October 1999, we entered into an employment offer letter with Mr. Lynch,
our Chief Financial Officer and Vice President of Business Development. 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 or if there is a
significant change in his responsibilities following a change of control, he
will be entitled to receive salary and benefits for an additional six months and
will continue to vest for an 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 will continue to
vest for an 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
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<PAGE>
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 will continue to vest for an 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 and General Counsel.
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 or if there is a significant change in his responsibilities
following a change of control, he will be entitled to receive salary and
benefits for an additional six months and his stock options will continue to
vest for an additional six-month period.
We have entered into change of control agreements with Dr. Harkonen,
Mr. Lynch, Mr. Rosenfield, Dr. Van Vlasselaer, Mr. Cory, Dr. Czarniecki and
Dr. Emlen that provide for accelerated vesting of each officer's unvested stocks
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 and Mr. Rosenfield 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 $100,000 on an annualized basis. All option grants were made under our
1999 equity incentive plan.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION ------------
------------ SECURITIES ALL OTHER
SALARY UNDERLYING COMPENSATION($)
NAME AND PRINCIPAL POSITION ($) OPTIONS (1)
- --------------------------- ------------ ------------ ---------------
<S> <C> <C> <C>
W. Scott Harkonen, M.D............................... $212,534 -- $10,749
Chief Executive Officer, President and Chairman of
the Board of Directors
Timothy P. Lynch..................................... $ 26,667 180,000 $10,024
Chief Financial Officer and Vice President of
Business Development
Peter Van Vlasselaer, Ph.D........................... $ 21,240 160,000 $10,042
Senior Vice President of Technical Operations
J. Woodruff Emlen, M.D............................... $155,294 90,000 $ 5,439
Vice President of Scientific Affairs
Nzeera Virani-Ketter, M.D.(2)........................ $ 60,000 120,000 $ 186
Vice President of Clinical Research
</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.
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<PAGE>
OPTION GRANTS
The following table sets forth summary information regarding the option
grants made to our Chief Executive Officer and each of our other executive
officers whose salary and bonus was in excess of $100,000 on an annualized basis
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 deemed fair
value of the common stock on the date of grant. For our employees and officers,
20% of the option grant generally vests on the one-year anniversary of
employment, and the remainder vest in a series of equal monthly installments
beginning on the one-year anniversary of employment and continuing over the next
four years of service. However, 15,000 of Mr. Lynch's shares will vest upon the
closing of this offering. 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
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE 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 $2,869,094 $4,568,553
15,000 1.28% 0.125 11/16/09 260,827 415,323
Peter Van Vlasselaer, Ph.D........... 160,000 13.68% 0.125 11/16/09 3,251,274 5,177,110
J. Woodruff Emlen, M.D............... 70,000 5.98% 0.125 7/29/09 1,422,432 2,264,986
20,000 1.71% 0.125 11/16/09 406,409 627,139
Nzeera Virani-Ketter, M.D............ 120,000 10.26% 0.125 11/16/09 2,438,455 3,882,832
</TABLE>
AGGREGATED OPTION EXERCISES IN 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. The
repurchase option generally lapses over a five-year period with 20% lapsing
after the first year and 1.667% lapsing monthly thereafter. In the event that 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
fair market value of the common stock on the date of exercise, 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
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS
DECEMBER 31, 1999 AT DECEMBER 31, 1999(2)
SHARES ACQUIRED ---------------------- ---------------------------
NAME ON EXERCISE VALUE REALIZED(1) VESTED UNVESTED EXERCISABLE UNEXERCISABLE
- ---- --------------- ----------------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
W. Scott Harkonen, M.D........ -- -- -- -- -- --
Timothy P. Lynch.............. 180,000 $3,577,500 -- 180,000 $3,577,500 --
Peter Van Vlasselaer, Ph.D.... 0 0 -- 160,000 3,180,000 --
J. Woodruff Emlen, M.D........ 0 0 16,333 73,667 1,788,750 --
Nzeera Virani-Ketter, M.D..... 0 0 -- 120,000 2,385,000 --
</TABLE>
- ------------------------
(1) Based on the initial public offering price of $20.00 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 initial public offering price of $20.00 per share and
the exercise price for those shares, 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 the effective date of this offering.
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 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.
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<PAGE>
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.
OPTIONS ISSUED. As the 2000 plan was not effective until the effective date
of this offering, we have not granted any stock awards 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 the
effective date of this offering, stock awards are no longer granted under the
1999 plan. Stock awards granted under the 1999 plan have substantially the same
terms as will
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<PAGE>
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 March 6, 2000,
we had issued 765,000 shares upon the exercise of options under the 1999 plan
and options to purchase 1,170,500 shares at a weighted average exercise price of
$2.73 per share were outstanding. As of March 6, 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 the effective date of
this offering.
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.
The first offering began on the effective date of this offering, and the
shares will be registered on a Form S-8 registration statement soon after the
effective date of this offering. The fair market value of the shares on the
first date of this offering will be the price per share at which our shares are
first sold to the public as specified in this prospectus. 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.
48
<PAGE>
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 the effective date of
this offering. As of the date hereof, no shares of common stock have been
purchased under the purchase plan.
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;
- 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 later of the closing of this
offering or 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.
49
<PAGE>
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
- 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 the effective date
of this offering. 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.
50
<PAGE>
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 intend to enter 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.
51
<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.
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK
-----------------------------------
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.............................. 180,000 -- -- 4,472
Peter Van Vlassalaer.......................... 160,000 -- -- --
J. Woodruff Emlen............................. 110,000 -- -- 4,472
Nzeera Virani-Ketter(1)....................... 120,000 -- -- 894
Nicholas J. Simon............................. -- -- -- 4,472
John L. Higgins............................... -- -- -- 4,472
James I. Healy................................ -- -- -- 4,472
Edgar Engleman................................ -- -- -- 4,472
5% STOCKHOLDERS
Genentech, Inc.(2)............................ -- 875,000 -- 178,891
Connetics Corporation(3)...................... -- 960,000 -- 89,445
Entities affiliated with Sanderling
Ventures(4)................................. 600,000 -- 2,400,000 313,060
Entities affiliated with BioAsia Investments,
LLC(5)...................................... 312,500 -- 1,200,000 201,253
Veron International, Ltd...................... -- -- 800,000 67,084
Entities affiliated with E.M. Warburg, Pincus
& Co. LLC(6)................................ -- -- -- 3,130,590
Entities affiliated with Sofinnova Ventures... -- -- 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 1/00 4/99 4/99 1/00
</TABLE>
- ------------------------
(1) Nzeera Virani-Ketter resigned her employment with us effective as of
March 10, 2000.
(2) Nicholas J. Simon, one of our directors, is a vice president of
Genentech, Inc.
(3) John L. Higgins, one of our directors, is the chief financial officer of
Connetics Corporation.
(4) James I. Healy, one of our directors, is a former partner of Sanderling
Ventures.
(5) Edgar Engleman, one of our directors, is a managing member of BioAsia
Investments, LLC.
(6) 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 and the preferred
stockholders described above have entered into an agreement, under which these
and other preferred stockholders will have registration rights with respect to
their shares of common stock following this offering. Upon the closing of this
offering, all shares of our outstanding Series A-1, Series A-2, and Series B
preferred stock will be automatically converted into common stock on a one for
one basis. See "Description of Capital Stock--Registration Rights" for a further
description of the terms of this agreement.
AGREEMENTS WITH CONNETICS CORPORATION. We entered into the following
agreements with Connetics in April 1999: an 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,
and Transition Agreement, dated April 27, 1999.
Under the Amended and Restated Exclusive Sublicense Agreement, we obtained a
sublicense to the exclusive rights granted to Connetics by Genentech relating to
interferon gamma-1b. For a summary of the terms of this agreement, please see
"Business--License Agreements."
52
<PAGE>
Pursuant to the Collaboration Agreement, we made cash payments to Connetics
of approximately $500,000, committed to pay Connetics an additional $500,000 in
2001, committed to issue shares of Series B preferred stock to Connetics, which
shares have been issued, and committed to issue to Connetics shares of Series C
preferred stock, or in the event of our initial public offering or sale of us
prior to the issuance of Series C preferred stock to either pay Connetics
$1,000,000 cash or issue additional shares of Series B preferred stock. Under
the Transition Agreement, Connetics books 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 will
fully revert to us. We further pay to Connetics gross margins on sales of
ACTIMMUNE for chronic granulomatous disease below the baseline units until
December 31, 2001.
Under the Amended and Restated Service Agreement, Connetics has provided to
us for a fee information services, payroll, facilities, human resources,
accounting, employee benefits, and administration services. As of the date of
this prospectus, we have discontinued most services under the Amended and
Restated Service Agreement.
SUPPLY AGREEMENT WITH GENENTECH, INC. 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. Under
some circumstances in which we are unable to conclude an agreement with a third
party, Genentech may be required to supply ACTIMMUNE until May 5, 2003 or
longer. However, we recently entered into a supply agreement with Boehringer
Ingelheim for the supply of ACTIMMUNE, and upon their receipt of a license from
the FDA for the manufacture of ACTIMMUNE, the Genentech Supply Agreement would
terminate. See "Business--Strategy."
We have deferred payment of the royalties due to Genentech for 1999
(approximately $1.9 million) under a series of interest-bearing promissory notes
that will become due upon the closing date of this offering. The amounts due
under these notes may be converted, at Genentech's option, into shares of our
stock sold in our most recent financing prior to the conversion at the same
price per share.
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. 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 Business Development; 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 and General Counsel. See
"Management--Employment Agreements."
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.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
- --------------------------------------------------------------------------------
The following table sets forth certain information with respect to the
beneficial ownership of our outstanding common stock as of January 31, 2000, and
as adjusted to reflect the sale of our common stock by this prospectus, by:
- our Chief Executive Officer and each of our four other most highly
compensated executive officers;
- each director;
- all directors and executive officers as a group; and
- each stockholder who is known by us to own beneficially 5% or more of our
common stock.
Percentage of ownership in the following table is calculated based on
15,397,194 shares of common stock outstanding as of January 31, 2000 and
21,647,194 shares of common stock outstanding after completion of this offering.
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 January 31, 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.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF SHARES BENEFICIALLY OWNED AS OF JANUARY 31, 2000
---------------------------------------------------------------------------------
PERCENT OF TOTAL
SHARES ISSUABLE OUTSTANDING SHARES
OUTSTANDING SHARES SUBJECT TO UNDER OPTIONS BENEFICIALLY OWNED
SHARES OF A RIGHT OF EXERCISABLE ------------------------
COMMON REPURCHASE AS OF WITHIN 60 DAYS OF BEFORE THIS AFTER THIS
NAME AND ADDRESS OF BENEFICIAL OWNER STOCK(1) JANUARY 31, 2000(2) JANUARY 31, 2000 OFFERING OFFERING
- ------------------------------------ ----------- ------------------- ------------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
W. Scott Harkonen, M.D.............. 245,972 448,500 -- 4.51% 3.21%
Timothy P. Lynch.................... 19,472 165,000 -- 1.20 *
Peter Van Vlassalaer, Ph.D.......... -- 160,000 -- 1.04 *
J. Woodruff Emlen, M.D.............. 24,805 69,667 20,000 * *
Stephen N. Rosenfield(3)............ -- -- 140,000 * *
David Cory, R.Ph.(3)................ -- -- 100,000 * *
Christine Czarniecki, Ph.D.......... -- 105,000 -- * *
James I. Healy, M.D., Ph.D.(4)...... 3,317,532 -- 110,000 22.05 15.75
Edgar Engleman M.D.(5).............. 1,715,169 -- 110,000 11.72 8.39
Jonathan S. Leff(6)................. 3,130,590 -- 40,000 20.49 14.62
John L. Higgins(7).................. 1,053,917 -- 40,000 7.03 5.04
Nicholas J. Simon(8)................ 4,472 -- 40,000 * *
Wayne Hockmeyer, Ph.D(9)............ -- -- 40,000 * *
Entities affiliated with Warburg,
Pincus Equity Partners,
L.P.(10).......................... 3,130,590 -- -- 20.33 14.46
Entities affiliated with Sanderling
Ventures(11)...................... 3,313,060 -- -- 21.52 15.30
Entities affiliated with BioAsia
Investments, LLC(12).............. 1,713,753 -- -- 11.13 7.92
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF SHARES BENEFICIALLY OWNED AS OF JANUARY 31, 2000
---------------------------------------------------------------------------------
PERCENT OF TOTAL
SHARES ISSUABLE OUTSTANDING SHARES
OUTSTANDING SHARES SUBJECT TO UNDER OPTIONS BENEFICIALLY OWNED
SHARES OF A RIGHT OF EXERCISABLE ------------------------
COMMON REPURCHASE AS OF WITHIN 60 DAYS OF BEFORE THIS AFTER THIS
NAME AND ADDRESS OF BENEFICIAL OWNER STOCK(1) JANUARY 31, 2000(2) JANUARY 31, 2000 OFFERING OFFERING
- ------------------------------------ ----------- ------------------- ------------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Entities affiliated with Sofinnova
Ventures(13)...................... 1,383,363 -- -- 8.98 6.39
Genentech, Inc.(14)................. 1,053,891 -- -- 6.84 4.87
Connetics Corporation(15)........... 1,049,445 -- -- 6.82 4.85
Veron International Ltd.(16)........ 867,084 -- -- 5.63 4.01
All directors and executive officers
as a group (13 persons)(17)....... 12,817,087 948,167 590,000 89.78 64.55
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Excludes shares of common stock subject to a right of repurchase within
60 days of January 31, 2000 and reflects preferred stock on an as converted
basis.
(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) Became an employee of InterMune after January 31, 2000.
(4) 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 IV 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. Until March 2000, Dr. Healy was a partner of Sanderling Ventures.
Sanderling Ventures is a general partner of Sanderling Venture Partners IV,
L.P., Sanderling IV Biomedical, L.P., Sanderling IV Limited Partnership,
L.P., Sanderling IV Venture Management, Sanderling IV Biomedical
Co-Investment Fund, L.P., Sanderling [Feri Trust] Venture Partners IV,
L.P., Sanderling IV Limited, L.P. and Sanderling IV Co-Investment Fund,
L.P. Dr. Healy disclaims beneficial ownership of these shares except to the
extent of his proportionate partnership interest in these shares.
(5) 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.
(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
55
<PAGE>
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 1,049,445 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.
(8) Although Mr. Simon is a Vice President of Genentech, Inc., he does not have
voting or investment power with respect to the shares owned by Genentech,
Inc.
(9) Became a director of InterMune after January 31, 2000.
(10) 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. Each of the Warburg
Pincus entities is located at 466 Lexington Avenue, New York, NY 10017.
(11) 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 IV 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.
(12) 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.
BioAsia Investments, LLC is located at 575 High St., Palo Alto, CA 94301.
(13) 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.
(14) Genentech, Inc. is located at 1 DNA Way, South San Francisco, CA 94080.
(15) Connetics Corporation is located at 3400 West Bayshore Road, Palo Alto, CA
94303.
(16) Veron International, Ltd. is located at ChinaChem Golden Plaza, Top Floor,
77 Mody Road, Tsimshatsui East, Kowloon, Hong Kong. Joseph W. K. Leung
manages Veron International, Ltd.
(17) Total number of shares includes 12,511,186 shares of common stock held by
entities affiliated with directors and executive officers. See
footnotes 4 through 8 above.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
- --------------------------------------------------------------------------------
Upon completion of this offering, our authorized capital stock will consist
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 we have
included as exhibits to the registration statement of which this prospectus
forms a part.
COMMON STOCK
As of December 31, 1999, there were 9,725,833 shares of common stock and
preferred stock outstanding, held of record by 16 stockholders. These amounts
assume the conversion of all outstanding shares of preferred stock into common
stock, which is to occur upon the closing of this offering. In addition, as of
December 31, 1999, there were 990,000 shares of common stock subject to
outstanding options. In January 2000, we sold 4,966,361 shares of our Series B
preferred stock. Upon completion of this offering, there will be
20,942,194 shares of common stock outstanding, assuming no exercise of
outstanding stock options after December 31, 1999.
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, and the shares of common stock that we will issue upon
completion of this offering will be 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 after the completion of this
offering.
REGISTRATION RIGHTS
The holders of 13,656,361 shares of the common stock that will be
outstanding after this offering are entitled to require us for a period of five
years following this offering to register the sales of their shares under the
Securities Act of 1933, under the terms of an agreement between us and the
holders of these securities. Subject to limitations specified in the agreement,
these registration rights include the following:
- two demand registration rights 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;
57
<PAGE>
- an unlimited number of piggyback registration rights 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
- an unlimited number of rights to require us to register 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 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.
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<PAGE>
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Our amended and restated certificate of incorporation and bylaws, to be
effective upon the closing of this offering, divide our board into three classes
as nearly equal in size as possible, 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 will provide that any action required or permitted to be taken by our
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 will 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.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
- --------------------------------------------------------------------------------
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could reduce prevailing market prices. Furthermore, since no shares will
be available for sale shortly after this offering because of contractual and
legal restrictions on resale as described below. Sales of substantial amounts of
our common stock in the public market after any restrictions on sale lapse could
adversely affect the prevailing market price of the common stock and impair our
ability to raise equity capital in the future.
Upon completion of the offering, we will have 20,942,194 outstanding shares
of common stock, assuming no exercise of the over-allotment option and no
exercises of outstanding options after December 31, 1999. Of these shares, all
of the shares sold in the public offering will be freely tradable without
restriction or further registration under the Securities Act, unless these
shares are purchased by affiliates. The remaining 14,692,194 shares of common
stock held by existing stockholders are restricted securities. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration described below under Rules 144,
144(k) or 701 promulgated under the Securities Act.
As a result of contractual restrictions described below and the provisions
of Rules 144, 144(k) and 701, the restricted shares will be available for sale
in the public market as follows:
- unless held by affiliates, the 6,250,000 shares sold in the public
offering will be freely tradable upon completion of the offering;
- 8,436,113 shares will be eligible for sale upon the expiration of the
lock-up agreements, described below, beginning 180 days after the date of
this prospectus; and
- 273,250 shares will be eligible for sale upon the exercise of vested
options 180 days after the date of this prospectus.
LOCK-UP AGREEMENTS
All of our directors, officers, employees and other stockholders, who
together hold all of our securities, have entered into lock-up agreements in
connection with this offering. These lock-up agreements generally provide that
these holders will not offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of our common stock or any securities exercisable
for or convertible into our common stock owned by them for a period of 180 days
after the date of this prospectus without the prior written consent of Warburg
Dillon Read LLC. Notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements
may not be sold until these agreements expire or are waived by the
representatives of the underwriters of this offering.
RULE 144
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding,
which will equal approximately 209,422 shares immediately after this
offering; and
- the average weekly trading volume of our common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice and the availability of current public information about us.
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<PAGE>
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, may sell these
shares without complying with the manner of sale, public information, volume
limitation or notice requirements of Rule 144.
RULE 701
Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares pursuant to a written compensatory plan or
contract to resell such shares in reliance upon Rule 144, but without compliance
with certain restrictions. Rule 701 provides that affiliates may sell their
Rule 701 shares under Rule 144 90 days after effectiveness without complying
with the holding period requirement and that non-affiliates may sell such shares
in reliance on Rule 144 90 days after effectiveness without complying with the
holding period, public information, volume limitation or notice requirements of
Rule 144.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 13,656,361 shares of our
common stock, or their transferees, will be entitled to rights with respect to
the registration of their shares under the Securities Act. Registration of their
shares under the Securities Act would result in these shares becoming freely
tradeable without restriction under the Securities Act, except for shares
purchased by affiliates, immediately upon the effectiveness of such
registration.
STOCK OPTIONS
We intend to file a registration statement under the Securities Act after
the effective date of this offering to register shares to be issued pursuant to
our employee and director benefit plans. As a result, any options or rights
exercised under the 1999 equity incentive plan, the 2000 equity incentive plan,
the 2000 employee stock purchase plan and the 2000 non-employee directors' stock
option plan will also be freely tradable in the public market. However, shares
held by affiliates will still be subject to the volume limitation, manner of
sale, notice and public information requirements of Rule 144, unless otherwise
resalable under Rule 701. As of March 6, 2000, we had granted options to
purchase 1,170,500 shares of common stock that had not been exercised, of which
options to purchase 273,250 shares were both exercisable and not subject to a
right of repurchase in our favor. In addition, as of that date we had reserved
64,500 shares for possible future issuance under our 1999 equity incentive plan.
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<PAGE>
UNDERWRITING
- --------------------------------------------------------------------------------
We have entered into an underwriting agreement with the underwriters named
below. Warburg Dillon Read LLC, Chase Securities Inc., and Prudential Securities
Incorporated are acting as representatives of the underwriters.
The underwriting agreement will provide for the purchase of a specific
number of shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specific number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter will severally agree to purchase
the number of shares of common stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Warburg Dillon Read LLC..................................... 2,250,000
Chase Securities Inc........................................ 1,500,000
Prudential Securities Incorporated.......................... 1,250,000
Bear, Stearns & Co. Inc..................................... 165,000
CIBC Oppenheimer Corp....................................... 165,000
Fleetboston Robertson Stephens Inc.......................... 165,000
Lehman Brothers Inc......................................... 165,000
SG Cowen Securities Corporation............................. 165,000
Pacific Growth Equities, Inc................................ 165,000
Adams, Harkness & Hill, Inc................................. 65,000
Legg Mason Wood Walker, Incorporated........................ 65,000
U.S. Bancorp Piper Jaffray Inc.............................. 65,000
Suntrust Equitable Securities Corporation................... 65,000
---------
Total................................................... 6,250,000
=========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus, other than
those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised us that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to certain securities dealers at such price less a concession
of $0.84 per share. The underwriters may also allow to dealers, and such dealers
may reallow, a concession not in excess of $0.10 per share to certain other
dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at various
times.
We have granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of 937,500 additional shares of
our common stock to cover over-allotments. If the underwriters exercise all or
part of this option, they will purchase shares covered by the option at the
public offering price that appears on the cover page of this prospectus, less
the underwriting discount. If this option is exercised in full, the underwriters
will purchase 7,187,500 shares from us, the total price to the public will be
$143,750,000, and the total proceeds to us will be $133,687,500. The
underwriters have severally agreed that, to the extent the over-allotment option
is exercised, each of the underwriters will purchase a number of additional
shares proportionate to its initial amount reflected in the above table.
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<PAGE>
The following table provides information regarding the amount of the
discount to be paid to the underwriters by us:
<TABLE>
<CAPTION>
PAID BY US
---------------------------------------------
NO EXERCISE OF FULL EXERCISE OF
OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------------------- ---------------------
<S> <C> <C>
Per Share.............................. $ 1.40 $ 1.40
Total.................................. $8,750,000 $10,062,500
</TABLE>
We estimate that the total expenses of this offering, excluding the
underwriter discount, will be approximately $1,100,000.
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act.
We and our directors, executive officers, and all of the holders of our
common stock and securities convertible into or exercisable or exchangeable for
common stock issued prior to this offering, have agreed pursuant to certain
"lock-up" agreements with the underwriters that we and they will not offer,
sell, contract to sell, pledge, grant any option to sell, or otherwise dispose
of, directly or indirectly, any shares of common stock or securities convertible
into or exercisable or exchangeable for common stock for a period of 180 days
after the date of this prospectus without the prior written consent of Warburg
Dillon Read LLC. Warburg Dillon Read LLC, in its sole discretion, may release
the shares subject to the lock-up agreements in whole or in part at any time
with or without notice. However, Warburg Dillon Read LLC has no current plan to
do so.
At our request, the underwriters have reserved for offer and sale at the
initial public offering price up to 275,000 shares of our common stock for our
officers, directors, employees, clients, friends and related persons who express
an interest in purchasing these shares. The number of shares of our common stock
available for sale to the general public will be reduced to the extent these
persons purchase these reserved shares. The underwriters will offer any shares
not so purchased by these persons to the general public on the same basis as the
other shares in this initial public offering.
Warburg Dillon Read LLC and Chase Securities intend to distribute and
deliver this Prospectus only by hand or by mail and intend to use only printed
prospectuses. Prudential Securities Incorporated facilitates the marketing of
new issues online through its PrudentialSecurities.com division. Clients of
Prudential Advisor(SM) may view offering terms and this prospectus online and
place orders through their financial advisors.
Prior to this offering, there has been no public market for our common
stock. Consequently, the offering price for our common stock was determined by
negotiations between us and the underwriters and is not necessarily be related
to our asset value, net worth or other established criteria of value. The
factors considered in these negotiations, in addition to prevailing market
conditions, included the history of and prospects for the industry in which we
compete, an assessment of our management, our prospects, our capital structure
and certain other factors as were deemed relevant.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of shares is
completed. However, the underwriters may engage in the following activities in
accordance with the rules:
- STABILIZING TRANSACTIONS--The representatives may make bids for or
purchases of the shares for the purpose of pegging, fixing or maintaining
the price of the shares, so long as stabilizing bids do not exceed a
specified maximum.
- OVER-ALLOTMENTS AND SYNDICATE COVERING TRANSACTIONS--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with this offering, the representatives may engage in
63
<PAGE>
syndicate covering transactions by purchasing shares in the open market.
The representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
- PENALTY BIDS--If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of these transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither us nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If these transactions are commenced, they may be discontinued without notice at
any time.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
In January 2000, we issued an aggregate of 4,966,361 shares of our Series B
preferred stock, including the shares issued to Chase Securities at a per share
price of $5.59. Chase Securities acted as the placement agent for this private
placement for which it received a customary cash fee for its services and
120,000 shares of Series B preferred stock.
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.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston,
Massachusetts.
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
64
<PAGE>
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.
As a result of this offering, we will become 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.
65
<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............. F-3
Statements of operations 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..................... F-4
Statements of 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..................... F-5
Statement of changes in redeemable convertible preferred
stock and stockholders' equity (deficit) for the period
from February 25, 1998 (inception) to December 31, 1999... 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, the year ended December 31,
1999, and for the period from February 25, 1998 (inception) to 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 last
paragraph
in note 6 to the financial
statements regarding
deferred compensation and the
paragraphs in
note 12 to the financial statements
regarding
stock option grants and stock plans
as to which
the date is February 29, 2000
F-2
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31,
DECEMBER 31, DECEMBER 31, 1999
1998 1999 (UNAUDITED)
------------ ------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $2,314,781 $ 3,772,110
Short-term investments, available for sale......................... 2,405,050 442,184
Accounts receivable, net........................................... -- 409,392
Inventories........................................................ -- 831,145
Notes receivable from officer...................................... -- 103,750
Other current assets and prepaid expenses.......................... -- 18,696
---------- -------------
Total current assets................................................. 4,719,831 5,577,277
Office equipment, net.............................................. -- 27,901
Restricted cash balance............................................ -- 250,000
---------- -------------
Total assets......................................................... $4,719,831 $ 5,855,178
========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses.............................. $ 120,626 $ 1,809,028
Accrued payroll.................................................... 70,073 93,652
Payable to Connetics............................................... 347,837 538,434
Royalty payable to Genentech....................................... -- 1,913,785
---------- -------------
Total current liabilities............................................ 538,536 4,354,899
Long-term obligations payable to Connetics........................... -- 1,624,343
Redeemable convertible preferred stock............................... -- 7,416,427 $ --
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, no par value:
Authorized shares--14,870,000 at December 31, 1999
Issued and outstanding shares--11,200,000 at December 31, 1998
and 1,835,000 at December 31, 1999; no shares pro forma........ 10,253,000 4,506,804 --
Common stock, no par value;
Authorized shares--30,000,000 at December 31, 1999
Issued and outstanding shares--none at December 31, 1998 and
1,890,833 at December 31, 1999; 9,725,833 shares pro forma..... -- 5,659,164 16,582,395
Deferred compensation related to stock options..................... -- (5,285,860) (5,285,860)
Accumulated other comprehensive income............................. 16 41 41
Deficit accumulated during the development stage................... (6,071,721) (12,420,640) (12,420,640)
---------- ------------- -------------
Total stockholders' equity (deficit)................................. 4,181,295 (7,540,491) $ (1,124,064)
---------- ------------- =============
Total liabilities and stockholders' equity (deficit)................. $4,719,831 $ 5,855,178
========== =============
</TABLE>
See accompanying notes.
F-3
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM FOR THE
FEBRUARY 25, PERIOD FROM
1998 FEBRUARY 25,
(INCEPTION) 1998
TO YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 1999
------------- ------------- --------------
<S> <C> <C> <C>
Product sales, net................................................. $ -- $556,401 $556,401
Costs and expenses:
Cost of goods sold, primarily to Genentech....................... -- 239,802 239,802
Research and development......................................... 1,234,957 2,969,474 4,204,431
General and administrative (includes $362,108 in 1998 and
$1,189,920 in 1999 to Connetics)............................... 892,295 2,656,130 3,548,425
Acquired pre-FDA approval rights (sublicense rights contributed
by Connetics in 1998 and stock issued to Genentech for
additional rights in 1999)..................................... 4,000,000 1,093,750 5,093,750
----------- ------------- --------------
Total costs and expenses........................................... 6,127,252 6,959,156 13,086,408
Loss from operations............................................... (6,127,252) (6,402,755) (12,530,007)
Other income (expense):
Interest income.................................................. 55,531 239,778 295,309
Interest expense (includes $110,674 of accretion of long-term
obligations to Connetics and $75,268 of interest on royalty
payable to Genentech).......................................... -- (185,942) (185,942)
----------- ------------- --------------
Net loss........................................................... $(6,071,721) (6,348,919) (12,420,640)
===========
Preferred stock accretion.......................................... (656,765) (656,765)
============= ==============
Net loss applicable to common stockholders......................... $ (7,005,684) $ (13,077,405)
============= ==============
Historical basic and diluted net loss per share.................... $ (9.12)
=============
Weighted average shares outstanding, basic and diluted............. 768,333
=============
Pro forma basic and diluted net loss per share..................... $ (0.90)
=============
Pro forma basic and diluted weighted average shares outstanding.... 7,770,000
=============
</TABLE>
See accompanying notes.
F-4
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM FROM
FEBRUARY 25, FEBRUARY 25,
1998 (INCEPTION) YEAR ENDED 1998 (INCEPTION)
TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1998 1999 1999
---------------- -------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................................... $(6,071,721) $(6,348,919) $(12,420,640)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation....................... -- 345,011 345,011
Accretion of long-term obligations payable to Parent
Connetics................................................. -- 110,674 110,674
Stock issued for acquired pre-FDA approval rights........... 4,000,000 1,093,750 5,093,750
Forgiveness of related party obligation..................... 253,000 -- 253,000
Depreciation................................................ -- 2,564 2,564
Changes in operating assets and liabilities:
Accounts receivable....................................... -- (409,392) (409,392)
Inventories............................................... -- (831,145) (831,145)
Notes receivable from officer............................. -- (103,750) (103,750)
Restricted cash........................................... -- (250,000) (250,000)
Other assets.............................................. -- (18,696) (18,696)
Accounts payable and accrued expenses..................... 120,626 1,688,402 1,809,028
Accrued payroll........................................... 70,073 23,579 93,652
Payable to Connetics...................................... 347,837 (309,403) 38,434
Royalty payable to Genentech.............................. -- 1,913,785 1,913,785
-------------- -------------- --------------
Net cash used in operating activities......................... (1,280,185) (3,093,540) (4,373,725)
INVESTING ACTIVITIES
Purchase of office equipment................................ -- (30,465) (30,465)
Purchase of marketable securities........................... (11,408,960) (24,197,543) (35,606,503)
Maturities of marketable securities......................... 9,003,926 26,160,434 35,164,360
-------------- -------------- --------------
Net cash (used) provided in investing activities.............. (2,405,034) 1,932,426 (472,608)
FINANCING ACTIVITIES
Contributed capital for preferred stock..................... 6,000,000 395,600 6,395,600
Return of capital to Parent (Connetics)..................... -- (5,221,877) (5,221,877)
Proceeds from redeemable preferred stock.................... -- 6,759,662 6,759,662
Proceeds from issuance of common stock...................... -- 663,350 663,350
Proceeds from exercise of stock options..................... -- 22,500 22,500
Repurchase of restricted stock.............................. -- (792) (792)
-------------- -------------- --------------
Net cash provided by financing activities..................... 6,000,000 2,618,443 8,618,443
-------------- -------------- --------------
Net increase in cash and cash equivalents..................... 2,314,781 1,457,329 3,772,110
Cash and cash equivalents at beginning of period.............. -- 2,314,781 --
-------------- -------------- --------------
Cash and cash equivalents at end of period.................... $2,314,781 $3,772,110 $3,772,110
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Return of capital on obligation to Parent (Connetics)....... -- $(2,013,669) $(2,013,669)
Long-term obligation on return of capital................... -- $1,513,669 $1,513,669
Short-term obligation on return of capital.................. -- $500,000 $500,000
Deferred stock compensation................................. -- $5,630,871 $5,630,871
</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 DECEMBER 31, 1999
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------
REDEEMABLE
CONVERTIBLE CONVERTIBLE COMMON
PREFERRED STOCK PREFERRED STOCK STOCK
---------------------- ------------------------- -----------
SHARES AMOUNT SHARES AMOUNT SHARES
--------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to founders for $0.001 per share on
March 4, 1998............................................. -- $ -- -- $ -- 1,600,000
Repurchase of common stock at $0.001 per share on
August 21, 1998........................................... -- -- -- -- (1,600,000)
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)......................................... -- -- 4,369,453 4,000,000 --
Cash.................................................. -- -- 6,830,547 6,253,000 --
Gain on investments......................................... -- -- -- -- --
Net loss.................................................... -- -- -- -- --
--------- ----------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1998................................ -- -- 11,200,000 10,253,000 --
Issuance of restricted common stock to founders for cash at
$0.01 per share on June 1, 1999........................... -- -- -- -- 815,000
Capital transactions with Parent (Connetics):
Exchange of convertible preferred shares on April 27, 1999
Return of Series A...................................... -- -- (11,200,000) -- --
Issuance of Series A-1 at $1.25 per share............... -- -- 960,000 -- --
Contributed capital from Parent (Connetics) (cash)........ -- -- -- 395,600 --
Return of capital to Parent (Connetics) (cash)............ -- -- -- (4,721,877) --
Return of capital to Parent (Connetics) (cash and/or stock
on April 27, 1999....................................... -- -- -- (2,513,669) --
Issuance of Series A-1 convertible preferred stock for
license rights at $1.25 per share on April 27, 1999....... -- -- 875,000 1,093,750 --
Issuance of Series A-2 redeemable convertible preferred
stock for cash, net of issuance costs of $94,888 at $1.116
per share on April 27, 1999............................... 4,800,000 5,259,662 -- -- --
Issuance of common stock for cash at $0.672 per share on
April 27, 1999............................................ -- -- -- -- 975,000
Issuance of Series A-2 redeemable convertible preferred
stock for cash at $1.25 per share on August 6, 1999....... 800,000 1,000,000 -- -- --
Issuance of Series A-2 redeemable convertible preferred
stock for cash at $1.25 per share in September 1999....... 400,000 500,000 -- -- --
Repurchase of common stock at $0.01 per share on
December 15, 1999......................................... -- -- -- -- (79,167)
Exercise of stock options................................... -- -- -- -- 180,000
Gain on investments......................................... -- -- -- -- --
Deferred compensation....................................... -- -- -- -- --
Amortization of deferred compensation....................... -- -- -- -- --
Preferred stock accretion................................... -- 656,765 -- -- --
Net loss.................................................... -- -- -- -- --
--------- ----------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1999................................ 6,000,000 $ 7,416,427 1,835,000 $ 4,506,804 1,890,833
========= =========== =========== ============ ===========
<CAPTION>
DEFICIT
DEFERRED ACCUMULATED ACCUMULATED
COMPENSATION OTHER DURING THE
RELATED TO COMPREHENSIVE DEVELOPMENT
AMOUNT STOCK OPTIONS INCOME STAGE
---------- ------------- ------------------- -------------
<S> <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)......................................... -- -- -- --
Cash.................................................. -- -- -- --
Gain on investments......................................... -- -- 16 --
Net loss.................................................... -- -- -- (6,071,721)
---------- ----------- --------- -------------
BALANCE AT DECEMBER 31, 1998................................ -- -- 16 (6,071,721)
Issuance of restricted common stock to founders for cash at
$0.01 per share on June 1, 1999........................... 8,150 -- -- --
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)........ -- -- -- --
Return of capital to Parent (Connetics) (cash)............ -- -- -- --
Return of capital to Parent (Connetics) (cash and/or stock
on April 27, 1999....................................... -- -- -- --
Issuance of Series A-1 convertible preferred stock for
license rights at $1.25 per share on April 27, 1999....... -- -- -- --
Issuance of Series A-2 redeemable convertible preferred
stock for cash, net of issuance costs of $94,888 at $1.116
per share on April 27, 1999............................... -- -- -- --
Issuance of common stock for cash at $0.672 per share on
April 27, 1999............................................ 655,200 -- -- --
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......................................... (792) -- -- --
Exercise of stock options................................... 22,500 -- -- --
Gain on investments......................................... -- -- 25 --
Deferred compensation....................................... 5,630,871 (5,630,871) -- --
Amortization of deferred compensation....................... -- 345,011 -- --
Preferred stock accretion................................... (656,765) -- -- --
Net loss.................................................... -- -- -- (6,348,919)
---------- ----------- --------- -------------
BALANCE AT DECEMBER 31, 1999................................ $5,659,164 $(5,285,860) $ 41 $ (12,420,640)
========== =========== ========= =============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
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)......................................... 4,000,000
Cash.................................................. 6,253,000
Gain on investments......................................... 16
Net loss.................................................... (6,071,721)
-----------
BALANCE AT DECEMBER 31, 1998................................ 4,181,295
Issuance of restricted common stock to founders for cash at
$0.01 per share on June 1, 1999........................... 8,150
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)........ 395,600
Return of capital to Parent (Connetics) (cash)............ (4,721,877)
Return of capital to Parent (Connetics) (cash and/or stock
on April 27, 1999....................................... (2,513,669)
Issuance of Series A-1 convertible preferred stock for
license rights at $1.25 per share on April 27, 1999....... 1,093,750
Issuance of Series A-2 redeemable convertible preferred
stock for cash, net of issuance costs of $94,888 at $1.116
per share on April 27, 1999............................... --
Issuance of common stock for cash at $0.672 per share on
April 27, 1999............................................ 655,200
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......................................... (792)
Exercise of stock options................................... 22,500
Gain on investments......................................... 25
Deferred compensation....................................... --
Amortization of deferred compensation....................... 345,011
Preferred stock accretion................................... (656,765)
Net loss.................................................... (6,348,919)
-----------
BALANCE AT DECEMBER 31, 1999................................ $(7,540,491)
===========
</TABLE>
F-6
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
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
sublicense rights in the United States to ACTIMMUNE (interferon gamma-1b
injection) for a range of indications, chronic granulomatous disease,
osteopetrosis, including 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, or clinical trials. The FDA has
approved ACTIMMUNE for the treatment of chronic granulomatous disease, and the
Company currently 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 osteopetrosis.
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.
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.
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
F-7
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION (CONTINUED)
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 $1,093,750 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 the date of these financial statements, 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 $12,420,640.
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.
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
F-8
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
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-9
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 Connectics 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 the Company 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.
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. 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
F-10
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Diluted net
income (loss) per share is computed by dividing the net income (loss) for the
period by the weighted average number of common and common equivalent shares
outstanding during the period. 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.
Earnings per share data for 1998 has not been presented as the Company was a
wholly owned subsidiary during the period.
Under the provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. Founders shares of 735,833 were
issued for nominal consideration but are subject to repurchase by the Company.
Shares for which repurchase rights have lapsed have been included in the per
share calculations.
F-11
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 will
automatically convert upon the closing of the initial public offering
contemplated by this prospectus (using the as-if converted method from the
original date of issuance). For the year ended December 31, 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 calculation of historical and pro forma basic and diluted net loss per
share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
-------------
<S> <C>
Historical:
Net loss..................................................................... $ (7,005,684)
=============
Weighted average shares of common stock outstanding.......................... 1,201,736
Less: weighted average shares of common stock that may be repurchased........ (433,403)
-------------
Weighted average shares of common stock outstanding used in computing basic
and diluted net loss per share............................................. 768,333
=============
Basic and diluted net loss per share......................................... $ (9.12)
=============
Pro forma:
Net loss (before preferred stock accretion).................................. $ (6,348,919)
=============
Weighted average shares used in computing basic and diluted net loss per
share (from above)......................................................... 768,333
Adjustment to reflect the effect of the assumed conversion of preferred stock
to common stock from the date of issuance.................................. 4,790,000
Adjustment to reflect the effect of the stock issued on April 27, 1999 and
the assumed conversion of the related preferred stock to common stock from
the beginning of the period through the date of issuance................... 2,211,667
-------------
Weighted average shares used in computing pro forma basic and diluted net
loss per share............................................................. 7,770,000
=============
Pro forma basic and diluted net loss per share............................... $ (0.90)
=============
</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 period
ended December 31, 1999.
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
F-12
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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 have been recorded at their net present value of $1,624,343 as
long-term obligations payable to 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 deferred at a
rate of interest equal to prime plus 2%. Of the additional $1.5 million,
$500,000 has been 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
F-13
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. COLLABORATION, LICENSE AND SERVICE AGREEMENTS WITH RELATED PARTIES
(CONTINUED)
$1 million obligation payable in cash or InterMune stock is contingent upon a
subsequent closing of a round of financing, an initial public offering or the
acquisition of the Company. This $1 million contingent return of capital has
only been reflected in the accompanying pro forma, December 31, 1999 (unaudited)
balance sheet.
SERVICE AGREEMENT
On October 12, 1998, the Company entered into a five year agreement, as
amended, whereby Connetics will provide to the Company certain information
services, accounting activities, facilities, employee benefit administration and
research and development services. The agreement may be terminated by either
party with 90 days prior written notice. The Company has paid Connetics a total
of $362,108 and $1,189,920 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 3-year
Transition Agreement. This agreement effectively transferred certain ACTIMMUNE
distribution, sales and marketing responsibilities from Connetics to InterMune.
Under the terms of the agreement InterMune will:
- 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 $73,056 and
$347,731 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
agreement. The Company paid to Connetics $1,357,436 under this arrangement
for the year ended December 31, 1999. 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.
ACQUIRED PRE-FDA APPROVAL RIGHTS
InterMune sublicenses its development and marketing rights for ACTIMMUNE
from Connetics. Connetics obtained these rights for ACTIMMUNE through its
License Agreement with Genentech in May 1998 as amended in April 1999.
Connetics' associated rights to ACTIMMUNE include uses in chronic granulomatous
disease, osteopetrosis, pulmonary fibrosis, infectious diseases, and cystic
fibrosis, (see Transition Agreement). Connetics sublicensed the rights to all of
these disease indications, except
F-14
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. COLLABORATION, LICENSE AND SERVICE AGREEMENTS WITH RELATED PARTIES
(CONTINUED)
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
CGD. 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 has valued its sublicensed rights 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
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 patients, high costs of manufacturing due to small quantities, a royalty
payable to Genentech and significant costs to market the product. In addition,
InterMune does not capture revenues associated with chronic granulomatous
disease for the first three years of the sublicense, which has further adverse
impact on the discounted cash flow analysis of the projected revenues for
chronic granulomatous disease as it relates to InterMune specifically. 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) were
not likely to exceed the annual sales threshold due to the small U.S. market
size of 400 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 December 31, 1999, short-term investments consisted of the following:
<TABLE>
<CAPTION>
AMORTIZED MARKET UNREALIZED
COST VALUE GAIN
---------- ---------- -------------
<S> <C> <C> <C>
Obligations of U.S. government agencies.................. $ -- $ -- $ --
Corporate debt securities................................ 442,143 442,184 41
---------- ---------- ---------
Total short-term investments............................. $ 442,143 $ 442,184 $ 41
========== ========== =========
</TABLE>
F-15
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SHORT--TERM INVESTMENTS AVAILABLE FOR SALE (CONTINUED)
At December 31, 1998, short-term investments consisted of the following:
<TABLE>
<CAPTION>
AMORTIZED MARKET UNREALIZED
COST VALUE GAIN
------------ ------------ -------------
<S> <C> <C> <C>
Obligations of U.S. government agencies............... $ -- $ -- $ --
Corporate debt securities............................. 2,405,034 2,405,050 16
------------ ------------ ---------
Total short-term investments.......................... $ 2,405,034 $ 2,405,050 $ 16
============ ============ =========
</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, totaled $16 and $41, respectively. 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,
totaled $400 and $910, 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,
1998 1999
------------ ------------
<S> <C> <C>
Computer equipment............................................... $ -- $ 5,657
Office furniture and fixtures.................................... -- 24,808
---------- ----------
-- 30,465
---------- ----------
Less accumulated depreciation.................................... -- (2,564)
---------- ----------
$ -- $ 27,901
========== ==========
</TABLE>
Total depreciation expense amounted to $2,564 for the year ended
December 31, 1999.
F-16
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 as follows:
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
NUMBER OF ----------------------------------------
SHARES CUMULATIVE
-------------------------- AGGREGATE UNDECLARED
ISSUED AND LIQUIDATION CARRYING PREFERRED
DESIGNATED OUTSTANDING PREFERENCE 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
Convertible preferred stock:
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>
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 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.
F-17
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
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.
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 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.
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 Stock Option/Stock Issuance Plan,
employees 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 with the company, 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.
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
F-18
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
repurchase which lapses over periods specified by the board of directors,
generally five years from the date of grant. At December 31, 1999 the number of
shares issuable under the 1999 Plan was 2,000,000.
The stock option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
---------- -----------
<S> <C> <C>
Balance at February 25, 1998........................................... -- --
---------- ---------
Granted.............................................................. -- --
Cancelled............................................................ -- --
Exercised............................................................ -- --
---------- ---------
Balance at December 31, 1998........................................... -- --
---------- ---------
Granted.............................................................. 1,170,000 $ 0.125
Cancelled............................................................ -- --
Exercised............................................................ (180,000) $ 0.125
---------- ---------
Balance at December 31, 1999........................................... 990,000 $ 0.125
========== =========
</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
$0.01 per share from one of its founders pursuant to a stock repurchase
agreement.
The following table summarizes information about options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OF SHARES LIFE PRICE OF SHARES PRICE
- ----------- ---------- ----------- ----------- ---------- -----------
<C> <C> <S> <C> <C> <C>
0$.125..... 990,000 9.5 years $ 0.125 990,000 $ 0.125
</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.
COMMON STOCK
InterMune's Articles of Incorporation provide for the issuance of up to
30,000,000 shares of common stock. The holder of each share of common stock
shall have one right to one vote.
F-19
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
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.
In connection with the grant of options to employees from January 1 through
February 29, 2000, the Company will record 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 of a study 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.
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
F-20
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
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.
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.............................. $ 900,000 $ 3,000,000
Research and development credits.............................. -- 100,000
In-process research........................................... 1,500,000 1,800,000
------------- -------------
Total deferred tax assets....................................... 2,400,000 4,900,000
------------- -------------
Valuation allowance........................................... (2,400,000) (4,900,000)
------------- -------------
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 $18,609 in 1999.
The following is a schedule by year of future minimum lease payments at
December 31, 1999:
<TABLE>
<CAPTION>
OPERATING
YEAR LEASES
- ------------------------------------------------------------------------------------ ------------
<S> <C>
2000................................................................................ $ 223,988
2001................................................................................ 232,108
2002................................................................................ 240,229
2003................................................................................ 248,349
2004................................................................................ 234,477
------------
$ 1,179,151
============
</TABLE>
F-21
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS (CONTINUED)
CONSULTING AGREEMENTS
Beginning in January 2000 the Company has entered into consulting agreements
with a number of individuals for scientific advisory services. Each individual
receives a certain number of nonqualified 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.
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 with Connetics, InterMune is obligated
to pay royalties on ACTIMMUNE sales to Genentech beginning January 15, 1999.
Under the terms of the Genentech License, the accrued royalties are payable 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 may, at their option,
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 $1,913,785 are
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.
10. SPONSORED RESEARCH AND LICENSE AGREEMENTS
LICENSE AGREEMENT WITH MCW RESEARCH FOUNDATION
Under an agreement with MCW Research Foundation, Inc. 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.
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-22
<PAGE>
INTERMUNE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS
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
$1.5 million of issuance costs, including 120,000 shares of Series B redeemable
convertible preferred stock valued at $5.59 per share.
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-1 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.
At the dates of issuance of Series B redeemable convertible preferred stock
in January 2000, the Company 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 its common stock. Subsequent to the commencement of the Company's initial
public offering process, the Company re-evaluated the deemed fair market value
of its common stock as of January 2000 and determined it to be $12.60 to $14.40
per share. Accordingly, the entire proceeds of $27,762,000 is deemed to be the
equivalent of a redeemable preferred stock "dividend". The Company will reflect
that beneficial conversion feature as a deemed dividend on its redeemable
convertible preferred stock in its first quarter 2000 financial statements.
PROPOSED PUBLIC OFFERING OF COMMON STOCK AND PRO FORMA DECEMBER 31, 1999
STOCKHOLDERS' EQUITY (DEFICIT)
In January 2000, the Board of Directors authorized the Company to proceed
with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, each share of outstanding convertible
preferred stock will automatically convert into one share of common stock and
the Company's $1 million contingent payable to Connetics will be due (see
note 3). The effects of the conversion of preferred stock and the payment to
Connectics of the $1 million are reflected in the unaudited pro forma balance
sheet at December 31, 1999. The Company plans to reincorporate in Delaware prior
to the closing of the initial public offering.
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 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 under this
agreement with respect to Boehringer Ingelheim's establishment of comparability
between its product and Genentech's.
STOCK OPTION GRANTS
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)
12. SUBSEQUENT EVENTS (CONTINUED)
STOCK PLANS
The Board of Directors adopted the 2000 Equity Incentive Plan in
January 2000. A total of 2,000,000 shares of common stock have been reserved for
issuance under the 2000 Equity Incentive Plan.
The Board of Directors adopted the 2000 Employee Stock Purchase Plan in
January 2000. A total of 200,000 shares of common stock have currently been
authorized for issuance under the 2000 Employee Stock Purchase Plan.
The Board of Directors adopted the 2000 Non-Employee Directors' Stock Option
Plan in January 2000. A total of 180,000 shares of common stock have been
reserved for issuance under the 2000 Non-Employee Directors' Stock Option Plan.
F-24
<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................... 3
Risk Factors......................... 7
Forward-Looking Statements........... 15
Use of Proceeds...................... 15
Dividend Policy...................... 15
Dilution............................. 16
Capitalization....................... 17
Selected Financial Data.............. 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
Business............................. 25
Management........................... 39
Related Party Transactions........... 52
Principal Stockholders............... 54
Description of Capital Stock......... 57
Shares Eligible for Future Sale...... 60
Underwriting......................... 62
Legal Matters........................ 64
Experts.............................. 64
Where You Can Find More Information.. 64
Index to Financial Statements........ F-1
</TABLE>
UNTIL APRIL 17, 2000, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
PROSPECTUS
6,250,000 Shares
[LOGO]
Common Stock
Warburg Dillon Read LLC
Chase H&Q
Prudential Vector Healthcare
a unit of Prudential Securities
