10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

ANNUAL REPORT

PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2006
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission file number 0-29801

INTERMUNE, INC.

(Exact name of registrant as specified in its charter)

Delaware	94-3296648
(State or other jurisdiction of incorporation or organization)	(IRS Employer identification No.)

3280 Bayshore Boulevard

Brisbane, CA 94005

(Address of principal executive offices, including Zip Code)

(415) 466-2200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Exchange on Which Registered
Common Stock, $0.001 par value	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.  Yes o     No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

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

As of June 30, 2006, the aggregate market value (based upon the closing sales price of such stock as reported on the NASDAQ Global Market on such date) of the voting and non-voting stock held by non-affiliates of the registrant was $235,908,101. Excludes an aggregate of 19,412,920 shares of the registrant’s common stock held by officers and directors and by each person known by the registrant to own 5% or more of the registrant’s outstanding common stock as of June 30, 2006. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant. As of February 28, 2007, the number of outstanding shares of the registrant’s common stock was 34,322,474 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2007 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K are incorporated by reference in Part III, Items 10-14 of this Form 10-K.

INTERMUNE, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

TABLE OF CONTENTS

PART I
	ITEM 1.	BUSINESS	1
	ITEM 1A.	RISK FACTORS	22
	ITEM 1B.	UNRESOLVED STAFF COMMENTS	41
	ITEM 2.	PROPERTIES	41
	ITEM 3.	LEGAL PROCEEDINGS	41
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	42
PART II
	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	42
	ITEM 6.	SELECTED FINANCIAL DATA	44
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	45
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	58
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	60
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES	95
	ITEM 9A.	CONTROLS AND PROCEDURES	95
	ITEM 9B.	OTHER INFORMATION	97
PART III
	ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	97
	ITEM 11.	EXECUTIVE COMPENSATION	97
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	97
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE	98
	ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	98
PART IV
	ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	98
SIGNATURES			105
EXHIBIT 10.109
EXHIBIT 10.110
EXHIBIT 10.111
EXHIBIT 10.112
EXHIBIT 10.113
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

PART I

ITEM 1.  BUSINESS

Forward Looking Statements

This Annual Report on Form 10-K (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve substantial risks and uncertainty. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “could,” “should” and “continue” or similar words. These forward-looking statements may also use different phrases.

We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include, among other things, statements which address our strategy and operating performance and events or developments that we expect or anticipate will occur in the future, including, but not limited to, statements in the discussions about:

•  product and product candidate development;

•  governmental regulation and approval;

•  sufficiency of our cash resources;

•  future revenue, including those from product sales and collaborations, and future expenses;

•  our research and development expenses and other expenses; and

•  our operational and legal risks.

You should also consider carefully the statements under “Item 1A. Risk Factors” below, which address additional factors that could cause our results to differ from those set forth in the forward-looking statements. Any forward-looking statements are qualified in their entirety by reference to the factors discussed in this Report, including those discussed in this Report under “Item 1A. Risk Factors” below. Because of the factors referred to above, as well as the factors discussed in this Report under “Item 1A. Risk Factors” below, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statement. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. When used in the Report, unless otherwise indicated, “InterMune,” “we,” “our” and “us” refers to InterMune, Inc.

Overview

We are a biotech company focused on developing and commercializing innovative therapies in pulmonology and hepatology. Pulmonology is the field of medicine concerned with the diagnosis and treatment of lung conditions. Hepatology is the field of medicine concerned with the diagnosis and treatment of disorders of the liver. We were incorporated in California in 1998 and reincorporated in Delaware in 2000 upon becoming a public company. During the past several years, we have reorganized our business by curtailing new investment in non-core areas and focusing our development and commercial efforts in pulmonology and hepatology. During 2005, we divested the Amphotec^® (amphotericin B cholesteryl sulfate complex for injection) product as well as the oritavancin compound. Until December 2005, our revenue base was provided primarily from the sales of two products, Actimmune^® (interferon gamma-1b) and Infergen^® (consensus interferon alfacon-1). As part of our efforts to refocus our corporate strategy, we completed the sale of the Infergen^® product, including related intellectual property rights and inventory, to a wholly-owned subsidiary of Valeant Pharmaceuticals International

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(“Valeant”) in December 2005, for approximately $120.0 million in cash, of which $6.5 million was attributed to the purchase of finished product inventory. As part of this transaction, we received a $2.1 million promissory note from Valeant due and paid to us in 2007 and may also receive up to approximately $20.0 million in clinical related contingent milestone payments beginning in 2007. Concurrent with the above transaction, we made the decision to significantly reduce our investment in field-based idiopathic pulmonary fibrosis (“IPF”) disease awareness activities, which, when combined with the sale of our Infergen^® assets, led to a significant headcount reduction of approximately 160 full time equivalent employees and resulting termination costs of approximately $9.2 million. As a result of these decisions made during the latter part of 2005, we have had the following key development programs in place throughout 2006: Actimmune^® for IPF (which, effective March 2007, has been discontinued), pirfenidone for IPF, the chronic hepatitis C virus (“HCV”) protease inhibitor program and a new target in hepatology. In October 2006, we entered into an Exclusive License and Collaboration Agreement (the “Collaboration Agreement”) with Hoffmann-LaRoche Inc. and F. Hoffmann-LaRoche Ltd. (collectively, “Roche”) to develop and commercialize products from our HCV protease inhibitor program, including our lead candidate compound ITMN-191. In October 2006, we also reached a comprehensive settlement with the government concerning promotional activities for Actimmune^® by former employees during a period that ended in June 2003. We recorded a $36.9 million charge during 2006 to reflect the final terms of the civil settlement agreement. The settlement resolves all outstanding government investigations of InterMune without criminal sanctions. We agreed to pay a total of $36.9 million, plus 5% interest on the then outstanding principal balance, over a period of five years. As part of the settlement, we also entered into corporate integrity and deferred prosecution agreements with the government. We have sustained losses in every year since inception and, as of December 31, 2006, we had an accumulated deficit of $568.1 million.

Our total revenue, loss from continuing operations and net loss for each of the years ended, and our total assets as of, December 31, 2006, 2005, and 2004 are summarized in the following table:

	2006			2005			2004
	(In thousands)
Total revenue*	$	90,784		$	110,496		$	128,680
Loss from continuing operations		(105,962	)		(57,648	)		(45,043	)
Net loss		(107,206	)		(5,235	)		(59,478	)
Total assets		257,583			266,242			266,011

* Total revenue for each of the years ended 2005 and 2004 have been adjusted to reflect the reclassification of Infergen^® revenue into discontinued operations.

Approved Product

Our sole approved product is Actimmune^®, approved for the treatment of patients with severe, malignant osteopetrosis and chronic granulomatous disease (“CGD”). During 2005, our three approved products were Actimmune^®, Infergen^®, approved for the treatment of patients with compensated liver disease who have chronic HCV infections, and Amphotec^®, approved for the treatment of invasive aspergillosis. In May 2005, we sold the Amphotec^® product to Three Rivers Pharmaceuticals, LLC (“Three Rivers”). In December 2005, we sold the Infergen^® product to Valeant. For the years ended December 31, 2006, 2005 and 2004, Actimmune^® accounted for substantially all of our product revenue and substantially all of that revenue was derived from physicians’ prescriptions for the off-label use of Actimmune^® in the treatment of IPF.

Product Development

Drug development in the United States is a process that includes several steps required by the United States Food and Drug Administration (“FDA”). The process begins with the submission of an Investigational New Drug Application (“IND”) with the FDA, which if accepted by the FDA, allows for the opportunity for clinical study of the potential new medicine. Clinical development typically involves three phases of clinical trials prior to approval: Phase I, II and III. Within the pharmaceutical industry, clinical development takes approximately seven years of a drug’s total development time. The FDA may require, or companies may pursue, additional clinical trials, known as Phase IV clinical trials, after a product is approved. The results of Phase IV clinical trials can confirm the

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effectiveness of a drug and can provide important safety information to supplement the FDA’s voluntary adverse drug reaction reporting system. The most significant costs associated with clinical development are Phase III clinical trials, as they tend to be the longest and largest studies conducted during the drug development process. It is possible for a drug that appears promising in a Phase II clinical trial to fail in a more rigorous Phase III clinical trial.

In responding to a New Drug Application (“NDA”), a Biologic License Application, (“BLA”), or an NDA or BLA supplement, the FDA may grant marketing approval (i.e., a license), request additional information or refuse to approve the application if it determines that the application does not provide an adequate basis for approval.

We have a late-stage development pipeline in the pulmonology area and an early-stage development pipeline in the hepatology area.

•  Pulmonology

In pulmonology, we are developing a single therapy for the treatment of IPF. IPF is a fatal disease characterized by progressive scarring, or fibrosis, of the lungs, which leads to the deterioration and destruction of lung function. There is no FDA approved therapy for IPF. Although conclusive data does not exist, we estimate that approximately 83,000 people suffer from IPF in the United States. We are developing one clinically advanced compound for the treatment of IPF, pirfenidone.

We are developing pirfenidone for the treatment of IPF. In 2005 we finalized the design of a Phase III clinical program for pirfenidone (otherwise known as the “CAPACITY” program) after receiving input from the FDA and the European Medicines Agency (“EMEA”). This program is designed to enroll approximately 580 patients with mild to moderate forms of IPF in two separate, concurrent multi-national Phase III trials. The primary endpoint of these trials is lung function, as measured by change in forced vital capacity (“FVC”), which is believed to be an important measure of disease progression. Phase II studies of pirfenidone suggest that pirfenidone may be effective in preventing a decline in lung function and disease progression. On April 27, 2006 we announced that we had initiated the CAPACITY program by enrolling the first patient in the program and have continued to make progress throughout 2006 towards our goal of enrolling approximately 580 patients. In March 2007, we announced our intent to refine and expand the CAPACITY program to include an increase in the number of patients as well as treatment duration.

We initiated a second Phase III clinical trial of Actimmune^® for the treatment of patients with mild to moderate IPF (otherwise known as the “INSPIRE” trial) in December 2003. Effective March 2007, we discontinued the Phase III INSPIRE trial based upon the recommendation of the study’s independent data monitoring committee (DMC). In a planned interim analysis that included a total of 115 deaths, the DMC found the overall survival result crossed a predefined stopping boundary for lack of benefit of Actimmune^® relative to placebo. Among the 826 randomized patients, there was not a statistically significant difference between treatment groups in overall mortality (14.5% in the Actimmune group as compared to 12.7% in the placebo group). Based on a preliminary review of the interim safety data, the adverse events associated with Actimmune^® therapy appeared generally consistent with prior clinical experience, including constitutional symptoms, neutropenia and possibly pneumonia. As a result of the disappointing INSPIRE trial results, we revised our estimates of inventory requirements as of December 31, 2006. Accordingly, we recorded a charge of $4.5 million related to the prepayment of inventory that we were expecting to receive in 2007 and 2008. While we believe other Actimmune^® related assets are recoverable for at least their $9.4 million net carrying value, if sales decline below our revised estimates, we may incur asset impairment charges, including inventory writedowns and impairment of acquired product rights, as well as product returns. Further, we may incur termination fees related to our supplier and clinical research organization contracts.

•  Hepatology

In hepatology, we are working to provide expanded treatment options for patients suffering from HCV infections. We are focusing our hepatology program on the development of small molecules for the treatment of HCV, the first of which is our protease inhibitor program which we believe may have a broad application in the overall HCV patient population.

In September 2002, we entered into a drug discovery collaboration agreement with Array BioPharma, Inc. (“Array”) to discover novel small molecule protease inhibitors for the treatment of hepatitis C. In late 2004, we

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amended the Array agreement to provide for the acquisition of certain intellectual property rights from Array. In April 2005, we initiated a second research collaboration with Array with respect to a new hepatology target.

Results from scientific studies presented at the Digestive Disease Week medical conference in May 2005 have identified protease inhibitors as a promising therapeutic class. In 2005, we presented several abstracts demonstrating high potency, favorable pharmacokinetics, including uptake into the liver, and encouraging tolerability for our two lead oral HCV protease inhibitor compounds. In the third quarter of 2005, we chose “ITMN 191” (formerly known as ITMN B) as our lead compound and have advanced this compound through toxicology and other clinical trial authorization-enabling studies. We submitted a Clinical Trial Authorisation (“CTA”) with the French Medicinal and Biological Products Evaluation Directorate for this lead compound during the third quarter of 2006. In addition, we are pursuing research related to other small molecules for follow-on compounds to ITMN 191 as well as second-generation protease inhibitors. Under the Collaboration Agreement with Roche, we will collaborate to develop and commercialize products from our HCV protease inhibitor program, including our lead candidate compound ITMN-191, which entered Phase 1a clinical trials late in 2006, and novel second-generation HCV protease inhibitors.

•  Ovarian Cancer

We also were evaluating Actimmune^® in patients with ovarian cancer in a Phase III trial (otherwise known as the “GRACES” trial). On February 2, 2006, we announced our decision to discontinue the GRACES trial evaluating the safety and efficacy of Actimmune^® in combination with standard of care chemotherapy in patients with advanced ovarian cancer. After reviewing the results of an analysis of progression free survival time and an interim analysis of overall survival time, an independent Data Safety Monitoring Board recommended the discontinuation of the ongoing post-treatment follow-up of patients in the study. This recommendation was based on a shorter overall survival time in patients who received Actimmune^® plus standard of care chemotherapy compared to patients who received standard of care chemotherapy alone.

•  Other Assets

Our oritavancin and Amphotec^® assets did not fit within our core focus areas of pulmonology and hepatology. Therefore, we divested these non-core assets during 2005.

Product Development Status

The following chart shows the status of our product development programs as of December 31, 2006:

	Preclinical		Phase I		Phase II	Phase III
Pulmonology
Actimmune® — Idiopathic pulmonary fibrosis (INSPIRE)*							X
Pirfenidone — Idiopathic pulmonary fibrosis (CAPACITY)							X
Pirfenidone Analog		X
Next generation gamma interferon		X
Hepatology
Protease Inhibitor program — ITMN-191				X
Next generation protease inhibitor		X
Second Target in hepatology		X

* Effective March 2007, this development program has been discontinued.

Our Strategy

We intend to use our current capital resources and any potential revenue provided by sales of Actimmune^® to fund the development of our advanced-stage pulmonology pipeline and our research and development-stage hepatology pipeline.

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Our strategy for achieving these objectives include:

Focusing our Development Efforts in the Areas of Pulmonology and Hepatology.  Historically, we have pursued development opportunities in the areas of pulmonology, hepatology, infectious disease and oncology. During 2003 and 2004, we narrowed our focus to development and commercial efforts in pulmonology and hepatology in order to more effectively compete, manage our resources and sustain our business. During 2005, we further narrowed our focus to three core development programs: Actimmune^® in IPF (which, effective March 2007, has been discontinued), pirfenidone in IPF and our protease inhibitors in hepatology.

Investing in Preclinical and Applied Research.  We have a preclinical and applied research group which focuses its research in pulmonology and hepatology. The hepatology research program includes our protease inhibitor program for the treatment of hepatitis C as well as a second small molecule program in hepatology. This group seeks to characterize mechanisms of action and biological, toxicology and pharmacology profiles of our product development candidates. Further, we expect that this group will explore expanded indications and additional formulations to enable us to continue the development of our marketed and late-stage products.

Obtaining FDA Approval for our Compounds in Pulmonology and Hepatology.  We are developing pirfenidone and our protease inhibitors for diseases for which preclinical studies and clinical trials have shown evidence that they may be potentially effective treatments. We believe that pirfenidone may have potential as a treatment for IPF. We also believe that our protease inhibitors may have potential to treat patients with HCV infections.

Establishing Appropriate Alliances.  We believe that we have significant opportunities to achieve additional revenue and to offset expenses by establishing appropriate development or commercial alliances in pulmonology and hepatology. Such alliances may help us accelerate our development efforts, offset our expenses and mitigate our risks. We have entered into a Collaboration Agreement with Roche to develop and commercialize products from our HCV protease inhibitor program, including our lead candidate compound ITMN-191

Evaluating Appropriate Product Acquisition Candidates.  We continue to evaluate appropriate product acquisition candidates that we believe could complement our existing pulmonology and hepatology portfolios.

Approved Product

Our sole approved product is Actimmune^® which is approved by the FDA only for the treatment of two rare congenital disorders: CGD and severe, malignant osteopetrosis. Actimmune^® is also approved for these indications by the health authorities in numerous other countries.

Chronic granulomatous disease.  CGD is a life-threatening congenital disorder that causes patients, mainly children, to be vulnerable to severe, recurrent bacterial and fungal infections. This results in frequent and prolonged hospitalizations and commonly results in death. In 1990, Actimmune^® was approved by the FDA for reducing the frequency and the severity of serious infections associated with CGD, and is the only FDA approved drug for this disease.

Severe, malignant osteopetrosis.  Severe, malignant osteopetrosis is a life-threatening, congenital disorder that primarily affects children. This disease results in increased susceptibility to infection and an overgrowth of bony structures that may lead to blindness and/or deafness. In 2000, Actimmune^® was approved by the FDA for delaying time to disease progression in patients with severe, malignant osteopetrosis, and is the only FDA approved drug for this disease.

We have the exclusive rights to develop and commercialize Actimmune^® for a broad range of diseases in the United States, Canada and Japan. We are collaborating with BI, which is developing and commercializing interferon gamma-1b in Europe and the rest of the world under the trade name Imukin^®. See “License and Other Agreements.” Substantially all of our revenue from sales of Actimmune^® have been derived from off-label uses of Actimmune^® rather than the treatment of osteopetrosis or CGD.

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Development Programs

Pulmonology

We are developing pirfenidone for the treatment of IPF.

Idiopathic Pulmonary Fibrosis.

IPF is a disease characterized by progressive scarring, or fibrosis, of the lungs, which leads to their deterioration and destruction. The cause of IPF is unknown. The prognosis is poor for patients with IPF, which occurs primarily in persons 40 to 70 years old. Based on the published literature, median survival time from diagnosis is two to five years in patients with IPF, and most patients die from the complications associated with IPF. Although conclusive data does not exist, we estimate that approximately 83,000 people suffer from IPF in the United States, approximately one-half of whom have mild to moderate disease severity. There is no FDA approved therapy available for the treatment of IPF.

Actimmune^® for Idiopathic Pulmonary Fibrosis.  We were developing Actimmune^® for the treatment of IPF. We reported data from our first Phase III clinical trial of Actimmune^® for the treatment of IPF (GIPF-001) in August 2002. Although this trial failed to meet its primary and secondary endpoints, it provided us with information regarding the disease, appropriate clinical endpoints and the treatment effect of Actimmune^® on patients. Based on analysis of this data, we initiated a second Phase III clinical trial of Actimmune^® for the treatment of IPF (GIPF-007, or the “INSPIRE” trial) in December 2003. Effective March 2007, we have discontinued the Phase III INSPIRE trial based upon the recommendation of the study’s independent DMC.

Pirfenidone for Idiopathic Pulmonary Fibrosis and HPS.

Pirfenidone, which may have activity in multiple fibrotic indications, is currently in clinical development for the treatment of IPF and for pulmonary fibrosis associated with Hermansky-Pudlak Syndrome (“HPS”), a fatal, fibrotic lung disease caused by genetic factors for which there is no FDA approved therapy. Pirfenidone is an orally active, small molecule drug that appears to inhibit collagen synthesis, down-regulate production of multiple cytokines and block fibroblast proliferation and stimulation in response to cytokines. In May 2003, we concluded a 55-patient, proof-of-concept Phase II clinical trial of pirfenidone in IPF. We stopped this trial early to expedite the collection of preliminary safety and efficacy data and our assessment of whether these data support pirfenidone as a product candidate with potential benefits to IPF patients.

In 2004, we completed the data analysis and preclinical work necessary to design and conduct a pirfenidone registration program for IPF. In May 2005, the American Journal of Respiratory and Critical Care Medicine (AJRCCM) published results from a double-blind, randomized, placebo-controlled Phase II trial evaluating pirfenidone for the treatment of patients with IPF. This 107 patient study with a planned 12 month treatment period was conducted in Japan by Shionogi & Co., LTD (“Shionogi”) and was terminated after only nine months based on the recommendation of an independent Data Safety Monitoring Board following an interim analysis. This analysis suggested favorable effects of pirfenidone on acute exacerbations and other efficacy parameters. In December 2006, Shionogi reported positive results of their Phase III clinical trial of patients with IPF who were treated with pirfenidone. This clinical trial was conducted in Japan. We maintain data sharing agreements with Shionogi which may assist us with our Phase III program.

During 2005, we finalized the design of the Phase III program for pirfenidone in IPF after receiving input from the FDA and the EMEA. This program is designed to enroll a total of approximately 580 patients with mild to moderate forms of IPF in two separate, concurrent multi-national Phase III trials. The primary endpoint of these trials is lung function as measured by change in forced vital capacity (“FVC”), which is believed to be an important measure of disease progression. Phase II studies of pirfenidone suggest that pirfenidone may be effective in preventing a decline in lung function and disease progression. On April 27, 2006, we announced that we had initiated the CAPACITY program by enrolling the first patient in the program and have continued to make progress throughout 2006 towards our goal of enrolling approximately 580 patients. In March 2007, we announced our intent to refine and expand the CAPACITY program to include an increase in the number of patients as well as treatment duration.

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In 2004, the FDA and the EMEA granted pirfenidone orphan drug designation for the treatment of IPF. 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. This designation provides seven years of market exclusivity in the United States upon the FDA’s first approval of the product for the orphan designation provided that the sponsor complies with certain FDA specified conditions. EMEA orphan drug designation provides for ten years of market exclusivity in the European Union.

We are also supporting the development of pirfenidone for HPS by providing free pirfenidone drug product to the National Institute of Health (“NIH”) for its continuing Phase III clinical work on HPS.

Next-Generation Interferon Gamma

We have a license and collaboration agreement with Maxygen Holdings Ltd., a wholly owned subsidiary of Maxygen, Inc. (“Maxygen”), to develop and commercialize novel, next-generation interferon gamma products that have enhanced pharmacokinetics and a potential for less frequent dosing regimens than Actimmune^®. If preclinical data provide compelling proof of concept for a longer-acting interferon gamma compound, our plan would be to take forward into clinical development selected protein-modified interferon gamma product candidates created by Maxygen that meet these criteria. See “License and Other Agreements.”

Hepatology

Our second area of focus is developing therapeutics in the area of hepatology. Our development efforts in hepatology are currently directed at expanding treatment options for patients suffering from HCV infections. Prior to the end of 2005, we were focusing our hepatology efforts on the PEG non-responder population. We have now decided to focus our investments on small molecules, the first of which is our protease inhibitor program which we believe could have a broad application in the overall HCV patient population.

Protease Inhibitor Program

Results from scientific studies have identified protease inhibitors as a promising therapeutic class. In 2005, we presented several abstracts demonstrating high potency, favorable pharmacokinetics, including uptake into the liver, and encouraging tolerability for our two lead oral HCV protease inhibitor compounds. In the third quarter of 2005, we chose ITMN 191 as our lead compound and have advanced this compound through toxicology and other clinical trial authorization-enabling studies. We submitted a Clinical Trial Authorisation (“CTA”) with the French Medicinal and Biological Products Evaluation Directorate for this lead compound during the third quarter of 2006. In addition, we are pursuing research related to other small molecules for follow-on compounds to ITMN 191 as well as second-generation protease inhibitors. Under the Collaboration Agreement with Roche, we will collaborate to develop and commercialize products from our HCV protease inhibitor program, including our lead candidate compound ITMN-191, which entered Phase Ia clinical trials late in 2006, and novel second-generation HCV protease inhibitors.

In September 2002, we entered into a drug discovery collaboration agreement with Array to discover novel small molecule protease inhibitors for the treatment of hepatitis C. In late 2004, we amended the Array agreement to provide for the acquisition of certain intellectual property rights from Array. In April 2005, we initiated a second research collaboration with Array with respect to a new hepatology target.

PEG-Alfacon-1 for Chronic Hepatitis C Virus Infections

To further expand the limited treatments for HCV infections, we have derived a pegylated form of Infergen^®, PEG-Alfacon-1, which was being designed to offer patients an alternative therapy with less frequent dosing than non-pegylated interferons, including Infergen^®. In late 2003, we completed a Phase I clinical trial to evaluate PEG-Alfacon-1 as a potential treatment for chronic HCV infections. We presented the data from our Phase I clinical trial at a medical conference in 2005. Due to limited interest by potential partners, long development timelines and high costs, we have discontinued development of PEG-Alfacon-1 effective June 2006.

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Other Assets

The oritavancin and Amphotec^® assets did not fit within our core focus areas of pulmonology and hepatology. Therefore, we divested these assets during 2005. We also discontinued our Phase III clinical trial of Actimmune^® for the treatment of ovarian cancer.

Divesture of Oritavancin

Oritavancin is a semi-synthetic glycopeptide antibiotic in development for the treatment of a broad range of infections caused by gram-positive bacteria, including those resistant to other glycopeptides. Oritavancin has demonstrated the ability to kill most strains of gram-positive bacteria, while other glycopeptides and many other agents merely suppress them. Oritavancin may be effective in the treatment of a range of infections caused by gram-positive bacteria.

In two Phase III clinical trials with oritavancin for the treatment of complicated skin and skin-structure infections (“CSSSIs”), oritavancin achieved the primary efficacy endpoint and demonstrated that oritavancin was as effective as the comparator regimen of vancomycin followed by cephalexin, which is a commonly used regimen. However, the FDA requested an additional clinical safety study be completed prior to the submission of a New Drug Application, or NDA, for oritavancin for the treatment of CSSSIs. In December 2005, we sold our worldwide rights to oritavancin to Targanta Therapeutics (“Targanta”). The terms of the agreement included upfront and potential clinical related milestone payments of up to $9.0 million. We also received a convertible promissory note that, assuming certain clinical milestones were achieved, could have been valued at up to $25.0 million in principal amount from Targanta, which note was initially secured by the oritavancin assets. Upon the achievement by Targanta of certain corporate objectives, the notes were designed to convert into capital stock of Targanta, subject to certain limitations in the amount of voting stock that we may hold. Effective February 2007, these objectives have been met by Targanta and, upon conversion of the promissory note, we now hold approximately 1.7 million shares of Targanta Series C preferred stock. In connection with this 2005 transaction, Eli Lilly & Company (“Eli Lilly”)waived its right to collect a $10.0 million milestone payment which had previously been accrued by us. We also received a seat on the Targanta board of directors.

Divesture of Amphotec^®

Amphotec^® is an FDA approved lipid-form of amphotericin B indicated for the treatment of invasive aspergillosis in patients where renal impairment or unacceptable toxicity precludes the use of amphotericin B deoxycholate in effective doses, and in patients with invasive aspergillosis where prior amphotericin B deoxycholate has failed. Systemic fungal infections that do not respond to initial treatment with standard antifungal treatment regimens are typically treated with amphotericin B, the active ingredient in Amphotec^®. This product is approved in the United States under the name Amphotec^® and in more than 40 other countries under the name Amphocil^®. In 2004, we announced our intent to divest Amphotec^® and in May 2005, we sold Amphotec^® to Three Rivers for cash consideration. In accordance with our agreement with Three Rivers, we may receive contingent payments based on Three Rivers meeting future specified sales targets of Amphotec^®. During the fourth quarter of 2006, the first of these sales targets was met and we received $0.5 million from Three Rivers in the first quarter of 2007.

Discontinuation of Actimmune^® Trial for Ovarian Cancer.

We were conducting the GRACES trial, which was an 847-patient Phase III clinical trial of Actimmune^® in combination with carboplatin and paclitaxel for the first-line treatment of ovarian cancer in women who have undergone surgical resection. On February 2, 2006, we announced our decision to discontinue the GRACES trial evaluating the safety and efficacy of Actimmune^® in combination with standard of care chemotherapy in patients with advanced ovarian cancer. After reviewing the results of an analysis of progression free survival time and an interim analysis of overall survival time, an independent Data Safety Monitoring Board recommended the discontinuation of the ongoing post-treatment follow-up of patients in the study. This recommendation was based on a shorter overall survival time in patients who received Actimmune^® plus standard of care chemotherapy compared to patients who received standard of care chemotherapy alone. As a result, we do not intend to conduct further development of Actimmune^® for the treatment of ovarian cancer.

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License and Other Agreements

Roche License and Collaboration Agreement (Protease Inhibitors)

In October 2006, we entered into an Exclusive License and Collaboration Agreement (the “Collaboration Agreement”) with Roche. Under the Collaboration Agreement, InterMune and Roche will collaborate to develop and commercialize products from our HCV protease inhibitor program. The Collaboration Agreement includes InterMune’s lead candidate compound ITMN-191, which entered Phase 1a clinical trials late in 2006. The companies also agreed to collaborate on a research program to identify, develop and commercialize novel second-generation HCV protease inhibitors.

Under the terms of the Collaboration Agreement, InterMune agreed to conduct Phase I studies for ITMN-191, and thereafter Roche will lead clinical development and commercialization. Upon closing, InterMune received a non-refundable upfront payment of $60.0 million from Roche. In addition, assuming successful development and commercialization of ITMN-191 in the United States and other countries, InterMune could potentially receive up to $470.0 million in milestone payments. Roche agreed to fund 67% of the global development costs of ITMN-191 and, if the product is approved for commercialization by the U.S. Food and Drug Administration, the companies will co-commercialize the product in the United States and share profits on a 50-50 basis. InterMune will receive royalties on any sales of the product outside of the United States. InterMune has the right to opt-out of either co-development and/or co-commercialization of ITMN-191 in exchange for higher royalties on ex-United States sales and royalties instead of profit sharing in the United States, as applicable. The economic terms for ITMN-191 could also apply to additional compounds that InterMune and Roche develop under the Collaboration Agreement.

Genentech, Inc. License Agreement (Actimmune^®)

In 1998, we obtained a license from Genentech, Inc. (“Genentech”) for patents relating to Actimmune^®. The license from Genentech terminates on the later of May 5, 2018 or the date that the last of the patents licensed under the agreement expires. Our licensed Actimmune^® rights include exclusive and non-exclusive licenses. The exclusive licenses include the right to develop and commercialize Actimmune^® in the United States and Canada for the treatment and prevention of all human diseases and conditions, including infectious diseases, pulmonary fibrosis and cancer, but excluding arthritis and cardiac and cardiovascular diseases and conditions. The non-exclusive licenses include the right to make or have made Actimmune^® for clinical and commercial purposes within our field of use in the United States and Canada. In Japan, we have the exclusive license rights to commercialize Actimmune^® for the treatment and prevention of all infectious diseases caused by fungal, bacterial or viral agents, including in patients with CGD or osteopetrosis. We also have the opportunity, under specified conditions, to obtain further rights to Actimmune^® in Japan and other countries. In addition, we received an exclusive sublicense under certain of Genentech’s patents outside the United States, Canada and Japan under the BI agreement discussed below. Under the Genentech license, we pay Genentech royalties on the revenue from sales of Actimmune^®, and are required to make one-time payments to Genentech upon the occurrence of specified milestone events, which include the submission of a BLA with the FDA for approval to market Actimmune^® for the treatment of particular categories of diseases, the receipt of FDA approval to market Actimmune^® for the treatment of particular categories of diseases and the achievement of certain annual revenue targets for Actimmune^®. We had made royalty payments of approximately $67.2 million in the aggregate, but no milestone payments, under this agreement through December 31, 2006. If all of the milestones under this agreement are achieved, we would be required to make further milestone payments of $3.2 million. We must satisfy specified diligence obligations under the agreement with Genentech to maintain our license from Genentech. Our rights to certain therapeutic uses for Actimmune^® under this agreement could revert to Genentech if we do not meet our diligence obligations or otherwise commit a material breach of the agreement.

Boehringer Ingelheim International GmbH (Imukin^®)

In 2001, we formed a collaboration with BI to clinically develop and seek regulatory approval for interferon gamma-1b, the active ingredient in Actimmune^®, in certain diseases, and to commercialize a liquid formulation of interferon gamma-1b under one or more of BI’s trade names, including Imukin^®, in Europe and other major markets of the world (other than the United States, Canada and Japan). Under the agreement, the parties will seek to develop

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and obtain regulatory approval for the use of Imukin^® in the treatment of a variety of diseases, including IPF, ovarian cancer, CGD and osteopetrosis. The agreement provides that we will fund and manage clinical and regulatory development of interferon gamma-1b for these diseases in the countries covered by the agreement. BI will pay us royalties on sales of the product when it meets a specified minimum sales level. BI has an option to exclusively promote Imukin^® in all of the major market countries covered by the agreement, and we may opt to promote the product in those countries and for those new diseases for which BI does not do so. If we opt to promote the product in those countries or for those new diseases for which BI does not, we will pay royalties to BI on sales of the product in those countries and/or for those new diseases. We had neither paid nor received any royalties under this agreement through December 31, 2006, and there are no milestone payments under this agreement. The agreement will expire, on a country-by-country basis, upon expiration of the parties’ royalty obligations in each country covered by the agreement. Such royalty obligations generally expire fifteen years after regulatory approval of Imukin^® for certain specified indications in the relevant country. If no such regulatory approvals are granted in a particular country, the royalty obligations in such country will expire in 2016. Prior to such expiration, either party can terminate the agreement for the uncured material breach of the other party or for the insolvency of the other party. In addition, we have the right to terminate the agreement with respect to certain countries at any time subsequent to regulatory approval for IPF.

Connetics Corporation (acquired by Stiefel Laboratories, Inc.) (Actimmune^®)

Through an assignment and option agreement with Connetics, we paid Connetics $5.7 million to acquire rights to Actimmune^® and are obligated to pay to Connetics a royalty of 0.25% of our net United States sales for Actimmune^® until our net United States sales cumulatively surpass $1.0 billion. Above $1.0 billion, we are obligated to pay a royalty of 0.5% of our net United States sales of Actimmune^®. Through a separate purchase agreement, we paid Connetics $0.4 million to acquire rights related to scleroderma and are obligated to pay Connetics a royalty of 4.0% on our net revenue from sales of Actimmune^® for the treatment of scleroderma. We had made royalty payments of approximately $1.5 million in the aggregate through December 31, 2006. There are no milestone payments pursuant to this agreement.

Amgen Inc. (Infergen^®, PEG-Alfacon-1 and Interferon Gamma)

In 2001, we entered into a licensing and commercialization agreement with Amgen through which we obtained an exclusive license in the United States and Canada to Infergen^® and the rights to an early stage program to develop a pegylated form of Infergen^® PEG-Alfacon-1. Infergen^® is currently approved in both the United States and Canada to treat chronic HCV infections. Under the agreement, we had the exclusive right to market Infergen^® and clinically develop it for other indications in the United States and Canada. In December 2004, we amended our licensing and commercialization agreement with Amgen to remove certain non-competition restrictions on Amgen with respect to alpha interferons in exchange for a specified reduction in the royalties payable by us to Amgen on Infergen^® sales should Amgen engage in certain competitive activities as well as Amgen’s consent to transfer the manufacturing of Infergen^® to a new supplier. (See section entitled “Manufacturing” below). We initially paid Amgen $29.0 million for up-front license and other fees and milestones with respect to our license, and had been obligated to pay royalties on sales of Infergen^®. In March 2003, we commenced a Phase I clinical trial for PEG-Alfacon-1, which required us to make a $1.5 million milestone payment to Amgen pursuant to the terms of the agreement. We had made royalty and milestone payments of approximately $40.0 million under this agreement in the aggregate through December 31, 2005. These rights and obligations with respect to Infergen^® under the agreement have been assumed by Valeant as part of our sale of the Infergen^® product to Valeant in December 2005. We have discontinued development of PEG-Alfacon-1.

Marnac, Inc./KDL GmbH (Pirfenidone)

In 2002, we licensed from Marnac, Inc. (“Marnac”) and its co-licensor, KDL GmbH (“KDL”), their worldwide rights, excluding Japan, Korea and Taiwan, to develop and commercialize pirfenidone for all fibrotic diseases, including renal, liver and pulmonary fibrosis. Under the agreement terms, we received an exclusive license from Marnac and KDL in exchange for an up-front cash payment of $18.8 million and future milestone and royalty payments. Future milestone payments will be based on the progress of clinical development of pirfenidone. We had

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made no royalty or milestone payments under this agreement through December 31, 2006. If all of the milestones under this agreement are achieved, we would be required to make milestone payments of $14.5 million. Our rights to the licensed products under the agreement could revert to Marnac if we do not meet our diligence obligations or otherwise commit a material breach of the agreement. The agreement is scheduled to expire upon the later of the expiration of the primary patent licensed under the agreement; or on a disease-by-disease and country-by-country basis (as determined by reference to the indications for which pirfenidone is approved in such country) on the later of (i) the expiration of market exclusivity in such country (if any) resulting from the grant of orphan drug designation to pirfenidone for the treatment of a human fibrotic disease; and (ii) the expiration of the last valid and enforceable claim in a issued licensed patent claiming the use of pirfenidone to treat such disease in such country. Following expiration of the agreement, we will retain a fully paid-up, royalty-free, perpetual, irrevocable, sublicenseable license to the patents, know-how, and other intellectual property rights licensed under the Agreement. We may terminate the agreement after giving the requisite notice to Marnac. In the event Marnac or KDL terminate the agreement, we have the right to seek specific performance of the agreement.

Novartis Corporation (formerly Chiron Corporation) (Small Molecule Therapeutics)

In 2004, we entered into a license agreement with Novartis Corporation (“Novartis”) which granted us the right to discover, develop and commercialize small molecule therapeutic agents against certain HCV targets that are covered by patents owned by Novartis. In consideration for this license, we paid Novartis a nonrefundable fee of approximately $0.4 million in 2004 and are required to make milestone payments based on the clinical progress of ITMN-191. In 2006, we expensed $0.5 million upon initiation of the Phase Ia clinical trials for ITMN-191. Assuming that all of the remaining milestones under this agreement are achieved, we will be required to make milestone payments of $4.5 million. In addition, Novartis is entitled to receive royalties on future product sales.

Array BioPharma Inc. (Small Molecule Therapeutics)

In 2002, we entered into a drug discovery collaboration agreement to create small molecule therapeutics targeting hepatitis with Array. We fund drug discovery research conducted by Array based on the number of Array scientists working on the research phase of the agreement and we are responsible for all development and commercialization. Array will be entitled to receive milestone payments based on the selection and progress of clinical drug candidates, as well as low single-digit royalties on net sales of products derived from the collaborative efforts. The original term of this agreement expired in September 2004 and has since been extended to June 2007, subject to certain conditions. In addition, in December 2004, the agreement was amended to provide a mechanism for us to purchase certain intellectual property rights arising from the collaboration. In April 2005, we initiated a second research collaboration with Array with respect to a new hepatology target. This research collaboration extends through March 2007.

Assuming that all of the remaining milestones under these agreements are achieved, we will be required to make milestone payments of $8.5 million. Total research and development expenses related to this agreement were $10.2 million, $7.5 million and $5.7 million for the years ended December 31, 2006, 2005 and 2004, respectively. Included in the $10.2 million in 2006 is a $0.5 million milestone payment for the initiation of the Phase Ia clinical trial for ITMN-191. Included in the $5.7 million in 2004 is a non-refundable fee of $2.5 million paid in connection with securing the right to purchase Array’s ownership interest in certain collaboration patents.

Shearwater Corporation (PEG-Alfacon-1)

In June 2002, we entered into a development, license and manufacturing agreement with Shearwater Corporation (“Shearwater”), a wholly-owned subsidiary of Nektar Therapeutics, to access Shearwater’s pegylation technology in order to develop a pegylated version of Infergen^®. Under the terms of the agreement, we received a co-exclusive license with Maxygen from Shearwater in exchange for an up-front payment of $500,000 and future milestone and royalty payments. We terminated this agreement in June 2006 and had paid $250,000 in milestone payments, but no royalty payments, under this agreement in the aggregate through the date of termination.

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Maxygen Holdings Ltd. (Next-Generation Interferon Gamma)

We have a license and collaboration agreement with Maxygen to develop and commercialize novel, next-generation interferon gamma products that have enhanced pharmacokinetics and a potential for less frequent dosing regimens than Actimmune^®. If preclinical data provide compelling proof of concept for a longer-acting interferon gamma compound, our plan would be to take forward into clinical development selected protein-modified interferon gamma product candidates created by Maxygen that meet these criteria. We have funded Maxygen’s optimization and development of these next-generation interferon gamma products and retain exclusive worldwide commercialization rights for all human therapeutic indications. Our diligence obligations include a minimum level of clinical development expenditures for an initial period of time, as well as the general obligation to use commercially reasonable efforts to clinically develop, seek regulatory approval for and commercialize a product in specified major market countries. The agreement terms include up-front license fees and full research funding, as well as development and commercialization milestone payments, which are payable based on the progress of our clinical development program for next-generation interferon gamma products and the achievement of certain sales targets with respect to such products. In addition, Maxygen will receive royalties on product sales. We had made payments of approximately $9.7 million under this agreement in the aggregate through December 31, 2006. We paid Maxygen a total of $87,000 and $106,000 for the years ended December 31, 2006 and 2004, respectively. We did not make any payments in 2005. If all of the milestones under this agreement are achieved, we would be required to make additional milestone payments of $43.0 million.

In countries in which patents covering next-generation interferon gamma products have issued or will issue to either us or Maxygen, our royalty obligations will generally expire upon the expiration of all such patents. In other countries, our royalty obligations will continue for a specified period following the first commercial sale of a next-generation interferon gamma product in such country. Our agreement with Maxygen will expire upon the expiration of all royalty obligations under the agreement. Prior to expiration of the agreement, either party can terminate the agreement for the insolvency of the other party, and in the event of a material breach of the agreement by a party, the other party has the right to pursue a remedy through arbitration. If we commit a material breach of the agreement, the remedy selected by the arbitrator may include termination of the licenses granted to us by Maxygen under the agreement. In addition, if we do not meet certain diligence obligations, Maxygen may have the right to terminate the agreement, as well as to obtain royalty-bearing licenses from us that would allow it to continue the development and commercialization of next-generation interferon gamma products.

Eli Lilly & Company (Oritavancin)

In 2001, we entered into an asset purchase and license agreement with Eli Lilly pursuant to which we acquired worldwide rights to oritavancin. We assigned this agreement to Targanta in December 2005 in connection with Targanta’s purchase of the oritavancin compound.

ALZA Corporation (Amphotec^®)

In 2001, we entered into a product acquisition agreement with ALZA Corporation, now a subsidiary of Johnson & Johnson, in which we acquired the rights to Amphotec^®. We had made royalty payments of approximately $1.3 million, but no milestone payments, under this agreement in the aggregate through December 31, 2005. We assigned this agreement to Three Rivers in May 2005 in connection with Three Rivers’ purchase of the Amphotec^® product.

Manufacturing

We contract with qualified third-party manufacturers to produce our products and product candidates. 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.

Boehringer Ingelheim Austria GmbH (Actimmune^®)

In 2000, we entered into a supply agreement with BI for the clinical and commercial supply of Actimmune^®. The agreement with BI generally provides for the exclusive supply by BI and exclusive purchase by us of

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Actimmune^®. We are required to purchase a minimum amount of Actimmune^® per year, and BI is required to supply Actimmune^® to us, subject to certain limits. On July 26, 2005, we amended the supply agreement with BI pursuant to which BI agreed to waive certain of InterMune’s minimum purchase commitments for Actimmune^® for 2005 and to reduce certain other minimum Actimmune^® purchase requirements for 2006. In December 2006, we further amended the agreement pursuant to which BI has agreed to reduce our per vial price for purchases of Actimmune^® in 2007 and 2008 in consideration for a prepayment in 2006 of approximately 3.4 million euros (approximately $4.5 million). As of December 31, 2006, we were obligated to make aggregate minimum purchases of Actimmune^® from BI in the years 2007 through 2012 of $91.6 million. With regard to certain minimum purchase requirements in 2007 and thereafter, BI has granted us the option of either taking delivery of Actimmune^® or paying for the difference between the amount of product actually purchased and the minimum purchase requirement. If BI is not able to supply all of our requirements for Actimmune^®, we may choose an additional manufacturer. However, we are not entitled to seek such a secondary source until BI has informed us of its unwillingness or inability to meet our requirements. BI may have the right to terminate the agreement if we materially breach the minimum yearly purchase obligation for Actimmune^® that is specified in the agreement. In the event that we decide that our minimum yearly purchase obligation under the agreement exceeds our annual requirements for Actimmune^®, the agreement provides a mechanism by which we can decrease on a going-forward basis such purchase obligation, in exchange for appropriate adjustments to the financial terms of the agreement, to be negotiated by the parties at time of such adjustments. The agreement will expire on December 31, 2012. However, in the event that we were to proceed with a supplemental BLA for Actimmune^®, we have the option to extend the initial term of the agreement up to December 31, 2021. The agreement continues to automatically renew for successive four-year periods, unless one party provides the other with a written notice of its election not to renew the agreement. In addition, we have the right to terminate the agreement immediately in the event that health authorities prevent use in clinical trials or the marketing of Actimmune^®. Given the fact that the Phase III INSPIRE trial was unsuccessful and discontinued in March 2007, in addition to the mechanism set forth in the agreement which allows us to decrease our minimum yearly purchase obligations on a going-forward basis (with adjustments to the financial terms to be negotiated by the parties), we are currently reviewing other aspects of the contracts that we believe are relevant to our future purchase commitments, including our ability to cancel previously provided forecasts and eliminate our purchase obligations. In addition, the December 2006 prepayment has been charged to cost of goods sold in our 2006 results of operations.

Amgen Inc. (Infergen^®)

As part of our 2001 license agreement with Amgen under which we licensed Infergen^®, we entered into a manufacturing and supply arrangement under which Amgen was obligated to manufacture and supply our requirements of Infergen^® for our sales in the United States and Canada. We assigned this agreement to Valeant in December 2005 in connection with Valeant’s purchase of the Infergen^® product.

Boehringer Ingelheim Austria GmbH (Infergen^®)

On November 3, 2005, we entered into an agreement with BI for the future clinical and commercial supply of Infergen^®. The agreement generally obligated BI to supply exclusively to us, and for us to purchase exclusively from BI, bulk Infergen^® as well as the finished forms of Infergen^® that are currently marketed. Amgen will remain the manufacturer for Infergen^® until the transfer of the manufacturing process from Amgen to BI is completed and until BI is approved by the FDA as a manufacturer of Infergen^®. Prior to and upon execution of the agreement, we made payments to BI of approximately $16.8 million. We assigned this agreement and all future rights and obligations thereunder to Valeant as part of the sale of the Infergen^® product to Valeant in December 2005.

Cardinal Health PTS, Inc. (oritavancin and pirfenidone)

In 2003, we entered into an agreement with Cardinal Health PTS, Inc. (“Cardinal Health”) to supply us with oritavancin drug product. We assigned this agreement to Targanta in December 2005 in connection with Targanta’s purchase of the oritavancin compound. Cardinal Health also formulates and encapsulates the active pharmaceutical ingredient (“API”) in the manufacturing process for pirfenidone.

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ACIC Fine Chemical, Inc. and Signa C.V. (pirfenidone)

On May 13, 2004 we entered into a purchase agreement with ACIC Fine Chemicals Inc. (“ACIC”) to supply us with a finite amount of API for manufacturing of pirfenidone. Under a separate agreement with Signa C.V. (“Signa”), ACIC sub-contracts the actual manufacturing of this finite amount of API for pirfenidone to Signa. We acquire the API for pirfenidone from ACIC on a purchase order basis under the agreement. We are not obligated to purchase any minimum amount of product under this agreement.

Abbott Laboratories, Inc. (oritavancin)

In 2001, we entered into an agreement with Abbott Laboratories, Inc. (“Abbott”) to provide the bulk manufacturing of oritavancin active pharmaceutical ingredient (oritavancin API). We assigned this agreement to Targanta in December 2005 in connection with Targanta’s purchase of the oritavancin compound.

Ben Venue Laboratories Supply Agreement (Amphotec^®)

We assumed a manufacturing and supply agreement with Ben Venue Laboratories, Inc. (“Ben Venue”) dated as of January 1, 1993 for the manufacture of Amphotec^®. We assigned this agreement to Three Rivers in May 2005 in connection with Three Rivers’ purchase of the Amphotec^® product.

Patents and Proprietary Rights

Based on our own internal research efforts, we have filed numerous patents relating to the use of interferons to treat a variety of diseases in the areas of pulmonology, hepatology and oncology. In addition, we have filed for patents on a number of small molecules in hepatology and pulmonology.

Actimmune

We have acquired an exclusive license under certain Genentech patents to develop, use and sell interferon gamma-1b, the active ingredient in Actimmune^®, in particular fields in the United States, Canada and Japan under our license agreement with Genentech. This license agreement covers more than 12 United States patents and related foreign patents and/or patent applications filed in Japan and Canada. Certain of the United States patents covering DNA vectors and host cells relating to interferon gamma-1b have expired in 2005 and in 2006 without material impact to our business. In addition, a United States patent relating to the composition of interferon gamma-1b expires in 2014. Other material United States patents expire between 2009 and 2013. Under the Genentech license, we pay Genentech royalties on the sales of Actimmune^®, and are required to make one-time payments to Genentech upon the occurrence of specified milestone events, which include the submission of a BLA with the FDA for approval to market Actimmune^® for the treatment of particular categories of diseases, the receipt of FDA approval to market Actimmune^® for the treatment of particular categories of diseases and the achievement of certain annual revenue targets for Actimmune^®. Two United States composition-of-matter patents acquired from Amgen covering interferon-gamma analogs, including interferon gamma-1b, expire in 2022.

Pirfenidone

We have acquired an exclusive license under certain Marnac/KDL patents and patent applications relating to the manufacture, use and sale of pirfenidone for antifibrotic use worldwide, excluding Japan, Korea and Taiwan. The Marnac/KDL patent in the United States will expire in 2011. When this patent expires in 2011, we will not be able to use this patent to block others from marketing pirfenidone for the treatment of fibrotic disorders in the United States. Under the terms of this license, we are required to pay Marnac and KDL milestone payments based on the progress of clinical development of pirfenidone, as well as royalties on future sales. The pirfenidone composition-of-matter patent has expired and Marnac has the right to license this compound for non-fibrotic diseases. For a description of certain intellectual property issues relating to this license, please see “Item 1A. Risk Factors-Over time, we will lose our ability to rely on the intellectual property we currently own to prevent competing products, which may impair our ability to generate revenue” below.

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Protease Inhibitors

In late 2004, we purchased from Array certain co-ownership rights in patents relating to our protease inhibitor program such that we hold exclusive ownership rights in the patent applications covering the products arising out of our collaboration with Array.

Other Intellectual Property

We hold additional intellectual property in our core therapeutic areas. For example, we have filed numerous patent applications relating to the use of interferons and small molecules for the treatment of various diseases in the areas of pulmonology, HCV and oncology. To date, none of these patent applications have issued.

Competition

Actimmune^® for CGD and Severe Malignant Osteopetrosis

Actimmune^® is the only FDA approved therapy for CGD and severe, malignant osteopetrosis and we are not aware of any competitive products available or in development for these indications. However, in general, our products and product candidates face competition from other currently available or development-stage therapies.

Pirfenidone for IPF

There is no FDA approved therapy available for the treatment of IPF. We believe that the primary competition for pirfenidone, if approved by the FDA for the treatment of IPF, will initially consist of products that are approved for other indications and for which clinical development for IPF is contemplated or underway, such as Enbrel^®, Gleevec^® and Tracleer^®. In 2005, Phase II clinical trials for both Tracleer^® and Enbrel^® failed to reach their primary endpoints.

Protease Inhibitor for HCV

In the field of hepatology there are multiple drug candidates in development for hepatitis C, including immunomodulators, synthetic interferons, ribavirin analogs, protease inhibitors, polymerase inhibitors, viral budding inhibitors, monoclonal antibodies and RNAi knockdown techniques. In the field of HCV protease inhibitors, several other companies have protease inhibitor drugs in development, including Schering-Plough Corporation, Gilead Sciences, Merck & Co., Pfizer, Inc., GlaxoSmithKline, and Vertex Pharmaceuticals Incorporated. Many of these companies have substantially greater financial, technical and human resources than we do, have a significant lead in terms of timing of clinical development, and are more experienced in the development of new drugs than we are.

Commercial Operations, Product Distribution and Medical Affairs

Reorganization of Commercial Operations

In connection with the divestiture of Infergen^®, we also made significant reductions in our commercial operations in late 2005, including a significant reduction in our field-based IPF disease awareness activities. We plan to rebuild a commercial presence in the future if and when Phase III data from the research and development pipeline warrant that investment. We continue to have a strategic marketing group that will continue to support the supply and reimbursement of Actimmune^® for its labeled indications, CGD and severe, malignant osteopetrosis. This group is also responsible for strategic planning in preparation for the potential launch of pirfenidone for the treatment of IPF.

Product Distribution

In the United States, Actimmune^® is sold primarily to distributors and specialty pharmacies who distribute directly to patients. During the year ended December 31, 2006, the primary specialty pharmacies and distributors for Actimmune^® were CuraScript, Inc. (formerly Priority Healthcare, Inc.), Caremark, Inc. and Merck Medco, which accounted for 57%, 22% and 11%, respectively, of our total net product sales.

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Co-Promotion

On March 26, 2004, we entered into an agreement with Baxter Healthcare Corporation (“Baxter”) under which we co-promoted Baxter’s product Aralast^® in the United States for the treatment of patients with hereditary emphysema. Under this agreement, we were compensated by Baxter based upon a percentage of Aralast sales. We were required to make a certain minimum number of visits to physicians’ offices on an annual basis to discuss Aralast, and among those visits a certain minimum number were required to be to offices of pulmonologists. We terminated this agreement with Baxter in December 2005 in connection with the decision to significantly reduce our field-based IPF disease awareness activities.

Medical Affairs

We have a Medical Affairs Department that maintains current, scientific-based information about pulmonology and hepatology for the benefit of heath care providers, patients and caregivers, as well as our employees. Our Medical Science Liaisons are responsible for maintaining relationships with physicians who are regional and national thought leaders, supporting clinical trial awareness and enrollment and supporting investigator sponsored trials. Other functions of our Medical Affairs Department are medical education, medical information, publications and administration.

Sales by Geographic Region

Our total revenue by region for the years ended December 31, was as follows (in thousands):

	2006		2005		2004
United States	$	90,185	$	110,017	$	126,288
Rest of the world		599		479		2,392
Totals*	$	90,784	$	110,496	$	128,680

* Total revenue for each of the years ended 2005 and 2004 have been adjusted to reflect the reclassification of Infergen^® revenue into discontinued operations.

Governmental Regulation and Product Approval

The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products. We believe that our products will be regulated as biologics or drugs by the FDA.

The EMEA, or European Medicines Agency, is a centralized body of the European Union whose main responsibility is the protection and promotion of public health through the evaluation and supervision of medicines for human use. The EMEA coordinates the evaluation and supervision of medicinal products throughout the 25 European Union member states in a network of 42 national competent authorities.

The process required by the FDA before our potential products, or previously approved products to be marketed for the treatment of new diseases in the United States generally involves the following:

•  preclinical laboratory and animal tests;

•  submission of an IND, 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 BLA, a new NDA, or a BLA or NDA supplement.

The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any new approvals for our products will be granted on a timely basis, if at all.

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Prior to commencing a clinical trial in the U.S., we must submit an IND 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 application. 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 such a clinical trial. Further, an independent institutional review board (“IRB”) for each medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences.

For purposes of NDA or BLA approval, human clinical trials in the United States 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:  Studies are conducted 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, optimal dosage and dosage frequency. These Phase II clinical trials may be divided into early Phase II clinical trials, which are referred to as Phase IIa clinical trials, during which pilot studies are performed to determine initial activity and late Phase II clinical trials, which are referred to as Phase IIb clinical trials, that generally consist of controlled trials often involving several hundred patients in traditional drug development programs.

•  Phase III:  When Phase II clinical trials demonstrate that a dosage range of the product is effective and has an acceptable safety profile, Phase III clinical trials are undertaken to further evaluate dosage, to provide statistically and clinically significant evidence of clinical efficacy and to further test for safety in an expanded patient population at multiple clinical study sites. It is possible for a drug that appears promising in a Phase II clinical trial to fail in a more rigorous and reliable Phase III clinical trial. For example, after Actimmune^® had shown promising results for the treatment of IPF in an investigator sponsored Phase II clinical trial, our initial Phase III study of Actimmune^® for the treatment of IPF failed to show significant effect on the primary endpoint of progression-free survival or on secondary endpoints of lung function and quality of life.

In the case of products for severe or life-threatening diseases such as IPF, 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 clinical trials, and thus these trials are frequently referred to as Phase I/II clinical trials.

We may not successfully complete Phase I, Phase II or Phase III clinical trial testing of our product candidates within any specific time period, if at all. Furthermore, the FDA or an IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

The FDA may require, or companies may pursue, additional clinical trials after a product is approved. These are called Phase IV studies. The results of Phase IV studies can confirm the effectiveness of a drug and can provide important safety information to augment the FDA’s adverse drug reaction reporting system.

The results of product development, preclinical studies and clinical trials are submitted to the FDA as part of a BLA or NDA, or as part of a BLA or NDA supplement for approval as a treatment for a new disease if the product is already approved for a disease. The FDA may deny approval of a BLA, NDA or BLA or NDA supplement if the applicable regulatory criteria are not satisfied, or it may require additional clinical data. Even if such data are submitted, the FDA may ultimately decide that the BLA, NDA or BLA or NDA 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 that 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.

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A company seeking approval of an abbreviated new drug application (“ANDA”), for the use of an approved drug that is subject to another company’s patent may have to certify to that patent and notify the owner of the NDA and patent for such drug that it is seeking approval. If the patent owner or licensee files a patent infringement lawsuit, FDA approval of the ANDA for which certification is made may be deferred pending the outcome of the lawsuit.

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 completed portions of a BLA or NDA for a product granted fast track and/or accelerated review status before the entire application is complete, thus potentially beginning the review process at an earlier time. We have obtained fast track designation from the FDA for Actimmune^® in the treatment of IPF. We cannot guarantee that this fast track designation will affect the time of review, or that the FDA will approve the BLA. Fast track products are subject to the same types of post-approval requirements as other products.

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 of approved products for new diseases for a considerable period of time and impose costly procedures upon our activities. We cannot be certain that the FDA or any other regulatory agency will grant approvals for our product candidates or for use of our approved products for new diseases on a timely basis, if at all. Success in early stage clinical trials does not ensure 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, patient subgroups 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, initial regulatory approval for any of our product candidates, or additional regulatory approvals for new indications of our approved products, would harm our business. In addition, we cannot predict what adverse governmental regulations may arise from future United States or foreign governmental action.

Any products we manufacture or distribute pursuant to FDA approvals are subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with these products. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and other government 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 legally available drugs for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. For example, we are aware that physicians are prescribing Actimmune^® for the treatment of IPF, although we do not promote Actimmune^® for the treatment of IPF, and the FDA has not approved the use of Actimmune^® for the treatment of this disease. Substantially all of our Actimmune^® revenue is derived from physicians’ prescriptions for off-label use for IPF. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturer’s communications on the subject of off-label use. Companies cannot promote FDA approved drugs for off-label uses. A company may engage in truthful, non-misleading, and non-promotional speech concerning its products. We may also educate physicians about a particular disease state and how that disease is properly diagnosed so that patients who qualify for the clinical trial might be identified. We also may survey physicians who are lawfully prescribing our products for off-label uses to monitor patients’ experiences, particularly as to whether safety issues have arisen. We may also, pursuant to FDA policies, respond to unsolicited requests from health care professionals and engage in appropriate scientific exchange of information about unapproved uses. We have engaged in these lawful activities in the past and continue to engage in some of them today. We have polices and procedures in place to regulate the lawful promotion of our marketed products within their labeled indications. Employees are trained to follow these policies and procedures

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and must certify that they will abide by them. The FDA actively enforces regulations prohibiting promotion of off-label uses and the promotion of products for which marketing approval has not been obtained. While we believe we are currently in compliance with the FDA’s regulations relating to off-label promotion, the regulations are subject to varying interpretations which continue to evolve. Failure to comply with these requirements in the past or with respect to future activities can result in regulatory enforcement action by the FDA and other governmental bodies, which would have an adverse effect on our revenue, business and financial prospects. On November 9, 2004 we received a subpoena from the U.S. Department of Justice requiring us to provide the Department of Justice with certain information relating to Actimmune^®, including information regarding the promotion and marketing of Actimmune^®. On October 25, 2006 we reached a comprehensive settlement with the government to resolve all claims without criminal sanctions relating to promotional activities for Actimmune^® for IPF by former InterMune employees during a period ending in June 2003. For a more complete description of this matter see “Item 3. Legal Proceedings” below.

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 approval of new diseases for our existing products. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad.

Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting an NDA or BLA for that orphan indication. After the FDA grants orphan drug designation, the generic identity of the drug 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 is the first to subsequently receive FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusivity for seven years in the United States, (i.e., the FDA may not approve any other applications to market the same drug for the same disease for seven years, except in very limited circumstances). Orphan drug designation exclusivity lasts for 10 years in the European Union. We have filed and intend to file for orphan drug designation for those diseases we target that meet the criteria for orphan drug exclusivity. For example, Actimmune^® has orphan drug exclusivity for severe, malignant osteopetrosis. Actimmune^® and pirfenidone have been granted orphan drug designation for the treatment of IPF by the FDA and EMEA. Although obtaining FDA and EMEA approval to market a product with orphan drug exclusivity can be advantageous, there can be no assurance that we will be able to maintain this designation for Actimmune^® or pirfenidone, nor can there be any assurance that we will be granted orphan drug designation for additional diseases or that orphan drug exclusivity will provide us with a material commercial advantage.

Research and Development

We established an in-house applied research group in 2002 to conduct applied research. We also currently contract preclinical research to qualified third-party research organizations such as academic institutions or private contract labs. Our research and development expenses were $103.8 million, $82.7 million and $75.7 million for the years ended December 31, 2006, 2005 and 2004. Research and development expenses for each year presented have been adjusted to reflect the reclassification of Infergen^® related activities into discontinued operations.

Facilities

All of our facilities and long-lived assets are located in the United States. Our facilities currently consist of 55,898 square feet of office space located at our headquarters at 3280 Bayshore Boulevard, Brisbane, California. In December 2000, we entered into a ten-year lease for this facility. In January 2005, we entered into an operating lease agreement to sublease an additional 12,988 square feet of office space which consists of 11,444 square feet of usable area and 1,544 square feet of common area located at the second floor of 3240 Bayshore Boulevard, Brisbane, CA 94005. In connection with the divestiture of Infergen^® and the reduction in our field-based IPF disease awareness activities, we no longer required the use of this space and have terminated this sublease effective April 2006. In May 2006, we entered into an amendment to our existing lease to expand our existing office space by approximately 15,000 square feet. The lease expires concurrently with our existing facility lease in March 2011. We

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believe that our facilities are adequate for our current needs, and that suitable additional or substitute space will be available in the future to replace our existing facility, if necessary, or accommodate expansion of our operations.

Employees

As of February 28, 2007, we had 195 full-time employees. Of the full-time employees, 128 were engaged in research and development and 67 were engaged in general and administrative positions. In connection with the sale of the Infergen^® product to Valeant and the significant reduction in our field-based IPF disease awareness activities in 2005, we eliminated approximately 160 employee positions. As a result of our decision to discontinue the INSPIRE trial, we expect to reorganize the Company. On March 20, 2007, we announced reductions in staff of up to approximately 50%, which will occur during the next several quarters of 2007. We believe that our relations with our employees are good.

Available Information

We file electronically with the United States Securities and Exchange Commission (“SEC”) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We make available on our website at http://www.intermune.com, free of charge, copies of these reports as soon as reasonably practicable after filing these reports with, or furnishing them to, the SEC. You can also request copies of such documents by contacting our Investor Relations department at (415) 466-2242 or by sending an e-mail to ir@intermune.com.

Executive Officers of the Registrant

The following table provides information regarding our executive officers and key employees as of February 28, 2007:

Name	Age		Title
Daniel G. Welch		49	Chief Executive Officer and President
Marianne T. Armstrong, Ph.D.		52	Chief Medical Affairs and Regulatory Officer
Lawrence M. Blatt, Ph.D.		45	Chief Scientific Officer
Williamson Z. Bradford, M.D., Ph.D.		45	Vice President, Clinical Science
John C. Hodgman		52	Senior Vice President of Finance and Chief Financial Officer
Thomas R. Kassberg		46	Senior Vice President, Corporate Development and Commercial Operations
Steven B. Porter, M.D., Ph.D.		50	Chief Medical Officer
Cynthia Y. Robinson Ph.D.		48	Senior Vice President, Development Operations
Howard A. Simon, Esq., SPHR		48	Senior Vice President, Human Resources and Corporate Services and Associate General Counsel
Robin J. Steele, Esq.		51	Senior Vice President of Legal Affairs, General Counsel and Corporate Secretary

Daniel G. Welch. Mr. Welch has served as our Chief Executive Officer and President and a member of our board of directors since September 2003. From March 2003 to September 2003, Mr. Welch served as a consultant to Warburg Pincus LLC, a global equity investor. From August 2002 to January 2003, Mr. Welch served as chairman and chief executive officer of Triangle Pharmaceuticals, Inc., a pharmaceutical company. From October 2000 to June 2002, Mr. Welch served as president of the pharmaceutical division of Elan Corporation, PLC, a pharmaceutical company. From September 1987 to August 2000, Mr. Welch served in various senior management roles at Sanofi-Synthelabo and its predecessor companies Sanofi and Sterling Winthrop, including vice president of worldwide marketing. From November 1980 to September 1987, Mr. Welch was with American Critical Care, a division of American Hospital Supply. Mr. Welch holds a B.S. from the University of Miami and an MBA from the University of North Carolina.

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Marianne T. Armstrong, Ph.D. Dr. Armstrong has served as our Chief Medical Affairs and Regulatory Officer since January 2006. From January 2004 to January 2006, Dr. Armstrong served as our Senior Vice President, Regulatory/Medical Affairs and Drug Safety. From April 2002 to January 2004, Dr. Armstrong served as our Senior Vice President of Global Regulatory Operations and Corporate Compliance. From December 1999 to April 2002, Dr. Armstrong served as senior director of clinical development/regulatory affairs at Genentech, Inc, a pharmaceutical company. From July 1998 to November 1999, Dr. Armstrong served as senior director of clinical development at PathoGenesis Corporation, a pharmaceutical company. From May 1995 to July 1998, Dr. Armstrong served as department head of clinical affairs for Amgen Inc., a pharmaceutical company. From January 1981 to April 1995, Dr. Armstrong held management positions in clinical development at Alcon Laboratories, Solvay Pharmaceuticals and Parke-Davis/Warner Lambert, each a pharmaceutical company, and was a regional sales representative at American McGaw, a division of American Hospital Supply. Dr. Armstrong holds a Ph.D. and M.S. from Florida State University.

Lawrence M. Blatt, Ph.D. Dr. Blatt has served as our Chief Scientific Officer since January 2006. Dr. Blatt served as our Senior Vice President of Preclinical and Applied Research from January 2004 to January 2006. From May 2002 to January 2004, Dr. Blatt served as our Vice President of Biopharmacology Research. From January 1998 to May 2002, Dr. Blatt served as vice president, research, at Ribozyme Pharmaceuticals., a pharmaceutical company. From August 1996 to January 1998, Dr. Blatt served as vice president, product development, at National Genetics Institute. From May 1984 to August 1996, Dr. Blatt was employed at Amgen Inc., a pharmaceutical company, most recently as product development team leader, interferons. Dr. Blatt holds a Ph.D. in Public Health Administration from the University of La Verne.

Williamson Z. Bradford, M.D., Ph.D. Dr. Bradford has served as our Vice President of Clinical Science since January 2004. From July 2001 to January 2004, Dr. Bradford held several positions including most recently Vice President, Clinical Research, responsible for our pulmonary development efforts. From 1999-2001, Dr. Bradford served as Director, Clinical Science at IntraBiotics Pharmaceuticals, Inc., a pharmaceutical company and from 1998-1999, Dr. Bradford served as Clinical Scientist at Genentech, Inc., a pharmaceutical company. Prior to 1998, Dr. Bradford held various academic and clinical positions including Assistant Professor of Medicine at the University of California, San Francisco (UCSF). Dr. Bradford holds an M.D. from the University of North Carolina at Chapel Hill, School of Medicine, a Ph.D. from the University of California, Berkeley, School of Public Health, and was trained in internal medicine and infectious diseases at UCSF. He is board-certified in infectious diseases and serves as an Assistant Clinical Professor of Medicine in the Division of Infectious Diseases at UCSF.

John C. Hodgman. Mr. Hodgman has served as our Senior Vice President of Finance and Chief Financial Officer since August 2006. Prior to joining InterMune, Mr. Hodgman served as President and Chief Executive Officer of Aerogen, Inc. from June 2005 to October 2005 until its acquisition by Nektar. From August 1998 to December 2005, he served as Chairman, President and Chief Executive Officer of Cygnus, Inc. Mr. Hodgman also served as Vice President of Finance, Chief Financial Officer of Cygnus from August 1994 to August 1998 in addition to serving as President of Cygnus’ Diagnostic Division. He currently serves on the Board of Directors of two public companies, Immersion Corporation and AVI BioPharma, Inc. Mr. Hodgman holds a B.S. from Brigham Young University and an M.B.A. from the University of Utah.

Thomas R. Kassberg. Mr. Kassberg has served as our Senior Vice President, Corporate Development and Commercial Operations since January 2006. From August 2004 to January 2006, Mr. Kassberg served as our Senior Vice President, Business Development. From December 2000 to July 2004, Mr. Kassberg served as founder and Vice President of Business and Corporate Development of Plexxikon, Inc. From 1996 to 1999, Mr. Kassberg worked as Senior Director, Business Development at SUGEN, Inc., and later as Senior Director, Corporate Licensing for Pharmacia, Inc. following the acquisition of SUGEN by Pharmacia in August 1999 until December 2000. Mr. Kassberg began his career at Bristol-Meyers-Squibb Company, a pharmaceutical company, where he served in various commercial functions, including strategic planning, financial analysis, business development and managed care sales. Mr. Kassberg holds a Masters in Management degree from Northwestern University.

Steven B. Porter, M.D., Ph.D. Dr. Porter has served as our Chief Medical Officer since January 2006. Dr. Porter served as our Senior Vice President of Clinical Affairs from January 2004 to January 2006. From July 2001 to January 2004, Dr. Porter served as our Vice President of Clinical Research. From 1999 to June 2001, Dr. Porter was

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employed at IntraBiotics Pharmaceuticals, Inc., a pharmaceutical company, most recently as Senior Director, Clinical Science and Clinical Affairs. From 1997 to 1999, Dr. Porter served as Senior Director, Clinical Affairs at Shaman Pharmaceuticals, Inc., a pharmaceutical company and from 1996 to 1997, Dr. Porter served as Associate Director, Clinical Research at Bayer Corporation. Dr. Porter received his M.D., and Ph.D. from Vanderbilt University School of Medicine. He completed his residency in internal medicine at the University of California, San Francisco and his fellowship in infectious diseases at the University of California, San Francisco and Stanford University. He is currently an Assistant Clinical Professor of Medicine in the Division of Infectious Diseases at the University of California, San Francisco.

Cynthia Y. Robinson, Ph.D. Dr. Robinson has served as our Senior Vice President of Development Operations since January 2006. Dr. Robinson served as our Senior Vice President, Therapeutic Area Teams from November 2004 to January 2006. From 1996 to 2004, Dr. Robinson held various positions at Elan Pharmaceuticals, Inc., a pharmaceutical company, serving most recently as Vice President, Project Management. From 1989 to 1996, Dr. Robinson was a scientist with Athena Neurosciences, Inc., a pharmaceutical company. From 1980 to 1982, Dr. Robinson was a Product Control Chemist with Texaco, Inc. Dr. Robinson holds a B.S. in Chemistry from the University of Alabama, Tuscaloosa, and a Ph.D. in Organic Chemistry from the University of Alabama, Birmingham.

Howard A. Simon, Esq, SPHR. Mr. Simon has served as our Senior Vice President, Human Resources and Corporate Services and Associate General Counsel since May 2004. Mr. Simon joined us from ABD Insurance and Financial Services, a financial services firm, where he was Senior Vice President, Human Resources & Associate Counsel from June 2003 to March 2004. Prior to ABD, Mr. Simon was the principal in HR & Employment Law Solutions, a consulting firm specializing in the biotechnology industry from February 2002 to June 2003. He served as Vice President, Human Resources at Maxygen, Inc. from 1999 to 2001. He holds an undergraduate degree from UC Berkeley, a law degree from the Boalt Hall School of Law (UC Berkeley), and a Master’s Degree from the Graduate Theological Union of Berkeley. Mr. Simon also is a certificated Senior Human Resources Professional.

Robin J. Steele, Esq. Ms. Steele has served as our Senior Vice President, General Counsel and Corporate Secretary since late May 2004. From 1998 to April 2003, Ms. Steele worked with Elan Pharmaceuticals, Inc., a global pharmaceutical company headquartered in Dublin, Ireland, most recently as Vice President, Commercial and Legal Affairs in San Diego. Prior to joining Elan, Ms. Steele was in private practice and served as outside counsel to a variety of life science and technology based companies in the Bay Area. She currently serves on the Board of Directors of Targanta Therapeutics. Ms. Steele holds a B.A. in Biology from University of Colorado, Boulder, a J.D. from Hastings College of the Law, University of California, San Francisco, and a L.L.M. in Taxation from New York University School of Law.

ITEM 1A.  RISK FACTORS

An investment in our common stock is risky. Stockholders and potential purchasers of shares of our stock should carefully consider the following risk factors, which hereby update those risks contained in the “Risk Factors” section of our Quarterly Report on Form 10-Q that was filed with the SEC on November 7, 2006, in addition to other information and risk factors in this Report. We are identifying these risk factors as important factors that could cause our actual results to differ materially from those contained in any written or oral forward-looking statements made by or on behalf of InterMune. We are relying upon the safe harbor for all forward-looking statements in this Report, and any such statements made by or on behalf of InterMune are qualified by reference to the following cautionary statements, as well as to those set forth elsewhere in this Report.

Risks Related to the Development of Our Products and Product Candidates

We may not succeed in our development efforts or in growing product revenue.

We commenced operations in 1998 and have incurred significant losses to date. Our revenue has been limited primarily to sales of Actimmune^® derived from physicians’ prescriptions for the off-label use of Actimmune^® in the treatment of IPF. Although we are developing pirfenidone for the treatment of IPF, pirfenidone will not be marketed for any diseases before 2010, if at all.

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We may fail to develop our products on schedule, or at all, for the reasons stated in “Risks Related to the Development of Our Products and Product Candidates”. If this were to occur, our costs would increase and our ability to generate revenue could be impaired. In addition, we may need to raise capital in amounts greater than we anticipate in order to continue our development activities as planned. If additional capital is not available, we may be forced to curtail our development activities or cease operations.

Clinical development is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of our clinical trials.

To gain approval to market a product for treatment of a specific disease, we must provide the FDA and foreign regulatory authorities with clinical data that demonstrate the safety and statistically significant efficacy of that product for the treatment of the disease. Clinical development is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of our clinical trials. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful. For example, we have decided to end our development of Actimmune^® for patients with IPF as a result of our decision to discontinue the INSPIRE trial on the recommendation of the study’s independent data monitoring committee. As a result, we do not intend to conduct further development of Actimmune^® for the treatment of IPF. In addition, we reported that our exploratory Phase II clinical trial evaluating Actimmune^® for the potential treatment of advanced liver fibrosis caused by HCV in patients who have failed standard antiviral therapy failed to meet its primary endpoint. As a result, we do not intend to conduct further development of Actimmune^® for the treatment of liver fibrosis.

We do not know whether our planned clinical trials will begin on time, or at all, or will be completed on schedule, or at all.

The commencement or completion of any of our clinical trials may be delayed or halted for numerous reasons, including, but not limited to, the following:

•  the FDA or other regulatory authorities do not approve a clinical trial protocol or place a clinical trial on clinical hold;

•  patients do not enroll in clinical trials at the rate we expect;

•  patients experience adverse side effects;

•  patients withdraw or die during a clinical trial for a variety of reasons, including adverse events associated with the advanced stage of their disease and medical problems that may or may not be related to our products or product candidates;

•  the interim results of the clinical trial are inconclusive or negative;

•  our trial design, although approved, is inadequate to demonstrate safety and/or efficacy;

•  third-party clinical investigators do not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol and good clinical practices, or other third-party organizations do not perform data collection and analysis in a timely or accurate manner;

•  our contract laboratories fail to follow good laboratory practices; or

•  sufficient quantities of the trial drug are not available.

Our development costs will increase if we have material delays in our clinical trials or if we need to perform more or larger clinical trials than planned. For example, our development costs related to Actimmune^® as a potential treatment for IPF increased due to our need to conduct an additional Phase III clinical trial, as our first Phase III clinical trial of Actimmune^® for the potential treatment of IPF failed to show a significant effect on the primary endpoint of progression-free survival or on secondary endpoints of lung function and quality of life. If there are any significant delays for any of our other current or planned clinical trials, our financial results and the commercial

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prospects for our products and product candidates will be harmed, and our prospects for profitability will be impaired.

Preclinical development is a long, expensive and uncertain process, and we may terminate one or more of our current preclinical development programs.

We may determine that certain preclinical product candidates or programs do not have sufficient potential to warrant the allocation of resources toward them. Accordingly, we may elect to terminate our programs for and, in certain cases, our licenses to, such product candidates or programs. If we terminate a preclinical program in which we have invested significant resources, we will have expended resources on a program that will not provide a full return on our investment and missed the opportunity to have allocated those resources to potentially more productive uses.

We currently depend upon one collaboration partner, Roche, for support in the development and commercialization of our HCV product candidates. If our collaboration agreement with Roche terminates, our business and, in particular, the development and commercialization of our HCV product candidates would be significantly harmed.

On October 16, 2006, we entered into the Collaboration Agreement with Roche. Under the Collaboration Agreement, we will collaborate with Roche to develop and commercialize products from our HCV protease inhibitor program. The Collaboration Agreement includes our lead candidate compound ITMN-191, which is currently expected to enter clinical trials before the end of 2006. We will also collaborate with Roche on a research program to identify, develop and commercialize novel second-generation HCV protease inhibitors. Assuming we continue to successfully develop and commercialize these product candidates, under the terms of the Collaboration Agreement, we are entitled to receive reimbursement and sharing of expenses incurred in connection with the development of these product candidates and additional milestone payments from Roche. In addition, if any of the product candidates we have licensed to Roche are approved for commercialization, we anticipate receiving proceeds in connection with the sales of such products. After April 30, 2007, Roche may terminate the Collaboration Agreement in its entirety, in any country, subject to certain limitations for major countries, or with respect to any product or product candidate licensed under the Collaboration Agreement for any reason on six months’ written notice. If the Collaboration Agreement is terminated in whole or in part and we are unable to enter into similar arrangements with other collaborators, our business could be materially adversely affected.

If Roche fails to perform its obligations under the Collaboration Agreement, we may not be able to successfully commercialize our product candidates licensed to Roche and the development and commercialization of our product candidates could be delayed, curtailed or terminated.

Under the Collaboration Agreement, if marketing authorization is obtained, we will co-promote or co-market with Roche our lead candidate compound ITMN-191, and/or any other product candidates licensed to Roche, as applicable, in the United States and Roche will market and sell ITMN-191 and/or any other product candidates licensed to Roche, throughout the rest of the world. Roche will also be responsible for the manufacturing of the global commercial supply for ITMN-191 and/or any other product candidates licensed to Roche. As a result, we will depend upon the success of the efforts of Roche to manufacture, market and sell ITMN-191, and/or any other product candidates if approved. However, we have little to no control over the resources that Roche may devote to such manufacturing and commercialization efforts and, if Roche does not devote sufficient time and resources to such efforts, we may not realize the commercial benefits that we anticipate, and our results of operations may be adversely affected.

If we materially breach the representations and warranties we made to Roche under the Collaboration Agreement or any of our other contractual obligations, Roche has the right to seek indemnification from us for damages it suffers as a result of such breach. These amounts could be substantial.

We have agreed to indemnify Roche and its affiliates against losses suffered as a result of our material breach of representations and warranties and our other obligations in the Collaboration Agreement. If one or more of our representations and warranties were not true at the time we made them to Roche, we would be in breach of the

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Collaboration Agreement. In the event of a breach by us, Roche has the right to seek indemnification from us for damages suffered by Roche as a result of such breach. The amounts for which we could become liable to Roche may be substantial.

Roche has the right under certain circumstances to market and sell products that compete with our product candidates that we have licensed to Roche, and any competition by Roche could have a material adverse effect on our business.

Roche has agreed that, except as set forth in the Collaboration Agreement, it will not develop or commercialize certain specific competitive products during the exclusivity period, which extends only until October 2011 at the latest. However if neither ITMN-191 nor any other product candidate is in clinical development, Roche may develop or commercialize such certain specific competitive products; provided if they do, we will have the right to terminate the Collaboration Agreement. Accordingly, Roche may under certain circumstances develop or commercialize competitive products. Roche has significantly greater financial, technical and human resources than we have and they are better equipped to discover, develop, manufacture and commercialize products. In addition, Roche has more extensive experience in preclinical studies and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products. In the event that Roche competes with us, our business could be materially and adversely affected.

Risks Related to Government Regulation and Approval of our Products and Product Candidates

If we fail to comply or have in the past failed to comply with FDA or other government regulations prohibiting the promotion of off-label uses and the promotion of products for which marketing approval has not been obtained, it could result in regulatory enforcement action by the FDA or other governmental authorities, including a substantial fine, either of which could harm our business.

Physicians may prescribe commercially available drugs for uses that are not described in the product’s labeling and that differ from those uses tested by us and approved by the FDA. Such off-label uses are common across medical specialties. For example, even though the FDA has not approved the use of Actimmune^® for the treatment of IPF, we are aware that physicians are, and have in the past, prescribing Actimmune^® for the treatment of IPF. Substantially all of our Actimmune^® revenue is derived from physicians’ prescriptions for off-label use for IPF. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA and other governmental agencies do, however, restrict manufacturers’ communications on the subject of off-label use. Companies may not promote FDA approved drugs for off-label uses. Accordingly, we may not promote Actimmune^® for the treatment of IPF. The FDA and other governmental authorities actively enforce regulations prohibiting promotion of off-label uses and the promotion of products for which marketing approval has not been obtained. The federal government has levied large civil and criminal fines against manufacturers for alleged improper promotion, including us in October 2006, and the FDA has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which certain promotional conduct is changed or curtailed. We are aware of at least one instance in which the Office of the Inspector General of the FDA has sought and secured criminal penalties and a corporate integrity agreement against a pharmaceutical manufacturer requiring that company to pay substantial fines and to monitor certain promotional activities to ensure compliance with FDA regulations. We engage in medical education activities that are subject to scrutiny under the FDA’s regulations relating to off-label promotion. While we believe we are currently in compliance with these regulations, the regulations are subject to varying interpretations, which are evolving.

If the FDA or any other governmental agency initiates an enforcement action against us and it is determined that we violated prohibitions relating to off-label promotion in connection with past or future activities, we could be subject to civil and/or criminal fines and sanctions such as those noted above in this risk factor, any of which would have an adverse effect on our revenue, business and financial prospects.

In addition, some of the agreements pursuant to which we license our products, including our license agreement relating to Actimmune^®, contain provisions requiring us to comply with applicable laws and regulations, including the FDA’s restriction on the promotion of FDA approved drugs for off-label uses. As a result, if it were determined that we violated the FDA’s rules relating to off-label promotion in connection with our marketing of

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Actimmune^®, we may be in material breach of our license agreement for Actimmune^®. If we failed to cure a material breach of this license agreement, we could lose our rights to certain therapeutic uses for Actimmune^® under the agreement.

If the FDA imposes significant restrictions or requirements related to our products for any disease, or withdraws its approval of any of our products for any disease for which it has been approved, our revenue would decline.

The FDA and foreign regulatory authorities may impose significant restrictions on the use or marketing of our products or impose additional requirements for post-approval studies. Later discovery of previously unknown problems with any of our products or their manufacture may result in further restrictions, including withdrawal of the product from the market. In this regard, the FDA has conducted routine inspections of our manufacturing contractors, and some were issued a standard “notice of observations.” While we believe that all of these observations are being appropriately corrected, failure to correct any deficiency could result in manufacturing delays. Our existing approvals for diseases, and any new approval for any other disease that we target, if granted, could be withdrawn for failure to comply with regulatory requirements or to meet our post-approval commitments. For example, we have ongoing Phase IV post-marketing commitments to the FDA relating to Actimmune^® for the treatment of osteopetrosis. Our failure to adequately address these ongoing Phase IV commitments could result in a regulatory action or restriction, such as withdrawal of the relevant product’s approval by the FDA. If approval for a disease is withdrawn, we could no longer market the affected product for that disease. In addition, governmental authorities could seize our inventory of such product, or force us to recall any product already in the market, if we fail to comply with FDA or other governmental regulations.

For a description of restrictions relating to the off-label promotion of our products, please see the risk factor titled, “If we fail to comply or have in the past failed to comply with FDA or other government regulations prohibiting the promotion of off-label uses and the promotion of products for which marketing approval has not been obtained, it could result in regulatory enforcement action by the FDA or other governmental authorities, including a substantial fine, either of which could harm our business.” above.

If our clinical trials fail to demonstrate to the FDA and foreign regulatory authorities that any of our products or product candidates are safe and effective for the treatment of particular diseases, the FDA and foreign regulatory authorities may require us to conduct additional clinical trials or may not grant us marketing approval for such products or product candidates for those diseases.

Our failure to adequately demonstrate the safety and effectiveness of any of our products or product candidates for the treatment of particular diseases will delay or prevent our receipt of the FDA’s and foreign regulatory authorities’ approval and, ultimately, may prevent commercialization of our products and product candidates for those diseases. The FDA and foreign regulatory authorities have substantial discretion in deciding whether, based on the benefits and risks in a particular disease, any of our products or product candidates should be granted approval for the treatment of that particular disease. Even if we believe that a clinical trial has demonstrated the safety and statistically significant efficacy of any of our products or product candidates for the treatment of a disease, the results may not be satisfactory to the FDA or foreign regulatory authorities. Preclinical and clinical data can be interpreted by the FDA and foreign regulatory authorities in different ways, which could delay, limit or prevent regulatory approval. If regulatory delays are significant or regulatory approval is limited or denied altogether, our financial results and the commercial prospects for those of our products or product candidates involved will be harmed, and our prospects for profitability will be impaired.

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 healthcare through various means may adversely affect our ability to successfully commercialize our products. For example, in most foreign markets, the pricing and/or 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 controls. For example, federal legislation was enacted on December 8, 2003 that provides a

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new Medicare prescription drug benefit which began in 2006 and which mandates other reforms. Although we cannot predict the full effects on our business of the implementation of this program, it is possible that the new Medicare benefit, which will be managed by private health insurers, pharmacy benefit managers and other managed care organizations, will result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduce the prices charged for prescription drugs. In addition, increasing emphasis on managed care in the United States will continue to put pressure on the pricing of pharmaceutical products. These new and any future cost-control initiatives could decrease the price that we would receive for Actimmune^® or any other products that we may develop in the future, which would reduce our revenue and potential profitability.

Our failure or alleged failure to comply with anti-kickback and false claims laws could result in civil and/or criminal sanctions and/or harm our business.

We are subject to various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false claims laws. Subject to certain exceptions, the anti-kickback laws make it illegal for a prescription drug manufacturer to knowingly and willfully solicit, offer, receive or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. The federal government has published regulations that identify “safe harbors” or exemptions for certain payment arrangements that do not violate the anti-kickback statutes. Due to the breadth of the statutory provisions and the absence of guidance in the form of regulations or court decisions addressing some of our practices, it is possible that our practices might be challenged under anti-kickback or similar laws. False claims laws prohibit anyone from knowingly presenting, or causing to be presented, for payment to third party payors (including Medicare and Medicaid) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed or claims for medically unnecessary items or services. Our activities relating to the reporting of wholesaler or estimated retail prices for our products, the reporting of Medicaid rebate information and other information affecting federal and state and third-party payment for our products, and the sale and marketing of our products, could become subject to scrutiny under these laws.

In addition, pharmaceutical companies have been prosecuted under the False Claims Act in connection with their “off-label” promotion of drugs. For information regarding allegations with respect to “off-label” promotion by us, please see the risk factor titled “If we fail to comply or have in the past failed to comply with FDA or other government regulations prohibiting the promotion of off-label uses and the promotion of products for which marketing approval has not been obtained, it could result in regulatory enforcement action by the FDA or other governmental authorities, including a substantial fine, either of which could harm our business” above.

If the government were to allege that we were, or convict us of, violating these laws, there could be a material adverse effect on us, including a substantial fine, decline in our stock price, or both. Our activities could be subject to challenge for the reasons discussed above and due to the broad scope of these laws and the increasing attention being given to them by law enforcement authorities.

Risks Related to Manufacturing and Our Dependence on Third Parties

The manufacturing and manufacturing development of our products and product candidates present technological, logistical and regulatory risks, each of which may adversely affect our potential revenue.

The manufacturing and manufacturing development of pharmaceuticals, and, in particular, biologicals, are technologically and logistically complex and heavily regulated by the FDA and other governmental authorities. The manufacturing and manufacturing development of our products and product candidates present many risks, including, but not limited to, the following:

•  It may not be technically feasible to scale up an existing manufacturing process to meet demand or such scale-up may take longer than anticipated; and

•  Failure to comply with strictly enforced good manufacturing practices regulations and similar foreign standards may result in delays in product approval or withdrawal of an approved product from the market. For example, the FDA has conducted routine inspections of our manufacturing contractors, and some were issued a standard “notice of observations.” While we believe that all of these observations are being

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appropriately corrected without further comment or action from the FDA, failure to correct any deficiency could result in manufacturing delays.

Any of these factors could delay clinical trials, regulatory submissions and/or commercialization of our products for particular diseases, interfere with current sales, entail higher costs and result in our being unable to effectively sell our products.

Our manufacturing strategy, which relies on third-party manufacturers, exposes us to additional risks as a result of which we may lose potential revenue.

We do not have the resources, facilities or experience to manufacture any of our products or product candidates ourselves. Completion of our clinical trials and commercialization of our products requires access to, or development of, manufacturing facilities that meet FDA standards to manufacture a sufficient supply of our products. The FDA must approve facilities that manufacture our products for commercial purposes, as well as the manufacturing processes and specifications for the product. We depend on third parties for the manufacture of our product candidates for preclinical and clinical purposes, and we rely on third parties with FDA approved manufacturing facilities for the manufacture of Actimmune^® for commercial purposes. These third parties include BI and Cardinal Health. We have a long-term supply contract with BI for Actimmune^® and an agreement with Cardinal Health for the manufacture of the drug product for pirfenidone. However, if we do not perform our obligations under these agreements, these agreements may be terminated.

Our manufacturing strategy for our products and product candidates presents many risks, including, but not limited to, the following:

•  If market demand for our products is less than our purchase obligations to our manufacturers, we may incur substantial penalties and substantial inventory write-offs.

•  Manufacturers of our products are subject to ongoing periodic inspections by the FDA and other regulatory authorities for compliance with strictly enforced good manufacturing practices regulations and similar foreign standards, and we do not have control over our third-party manufacturers’ compliance with these regulations and standards.

•  When we need to transfer between manufacturers, the FDA and foreign regulatory authorities must approve the new manufacturers’ facilities and processes prior to our use or sale of products it manufactures for us. This requires demonstrated compatibility of product, process and testing and compliance inspections. Delays in transferring manufacturing technology between third parties could delay clinical trials, regulatory submissions and commercialization of our product candidates.

•  Our manufacturers might not be able or refuse to fulfill our commercial needs, which would require us to seek new manufacturing arrangements and may result in substantial delays in meeting market demand.

•  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 our products.

•  Our product costs may increase if our manufacturers pass their increasing costs of manufacture on to us.

•  If third-party manufacturers do not successfully carry out their contractual duties or meet expected deadlines, we will not be able to obtain or maintain regulatory approvals for our products and product candidates and will not be able to successfully commercialize our products and product candidates. In such event, we may not be able to locate any necessary acceptable replacement manufacturers or enter into favorable agreements with such replacement manufacturers in a timely manner, if at all.

•  If our agreement with a third-party manufacturer expires, we may not be able to renegotiate a new agreement with that manufacturer on favorable terms, if at all. If we cannot successfully complete such renegotiation, we may not be able to locate any necessary acceptable replacement manufacturers or enter into favorable agreements with such replacement manufacturers in a timely manner, if at all.

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Any of these factors could delay clinical trials, regulatory submissions or commercialization of our products for particular diseases, interfere with current sales, entail higher costs and result in our being unable to effectively sell our products.

We rely on third parties to conduct clinical trials for our products and product candidates, and those third parties may not perform satisfactorily.

If our third-party contractors do not successfully carry out their contractual duties or meet expected deadlines, we may be delayed in or prevented from obtaining regulatory approvals for our products and product candidates, and may not be able to successfully commercialize our products and product candidates for targeted diseases. We do not have the ability to independently conduct clinical trials for all of our products and product candidates, and we rely on third parties such as contract research organizations, medical institutions and clinical investigators to perform this function. Our ability to monitor and audit the performance of these third parties is limited. If these third parties do not perform satisfactorily, our clinical trials may be extended or delayed, resulting in potentially substantial cost increases to us and other adverse impacts on our product development efforts. We may not be able to locate any necessary acceptable replacements or enter into favorable agreements with them, if at all.

Risks Related to the Commercialization of Our Products and Product Candidates

We rely on one customer for approximately 60% of our total revenue. If this customer does not continue to sell Actimmune^® at its current levels, our business will be harmed.

During the fiscal year ended December 31, 2006, CuraScript, Inc. (formerly Priority Healthcare, Inc.) accounted for approximately 57% of our total product sales and 45% of our outstanding receivables. If this customer or any other customer that sells a significant portion of Actimmune^® were to experience financial difficulties, or otherwise became unable or unwilling to sell Actimmune^®, our business would be harmed. Additionally, any reduction, delay or loss of orders from our key customers could harm our revenue in any period or harm our business generally.

If the specialty pharmacies and distributors that we rely upon to sell our products fail to perform, our business may be adversely affected.

Our success depends on the continued customer support efforts of our network of specialty pharmacies and distributors. A specialty pharmacy is a pharmacy that specializes in the dispensing of injectable or infused medications for complex or chronic conditions, which often require a high level of patient education and ongoing management. The use of specialty pharmacies and distributors involves certain risks, including, but not limited to, risks that these specialty pharmacies and distributors will:

•  not provide us with accurate or timely information regarding their inventories, the number of patients who are using Actimmune^® or Actimmune^® complaints;

•  not effectively sell or support Actimmune^®;

•  reduce their efforts or discontinue to sell or support Actimmune^®;

•  not devote the resources necessary to sell Actimmune^® in the volumes and within the time frames that we expect;

•  be unable to satisfy financial obligations to us or others; or

•  cease operations.

Any such failure may result in decreased product sales and lower product revenue, which would harm our business.

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Even if regulatory authorities approve our products or product candidates for the treatment of the diseases we are targeting, our products may not be marketed or commercially successful.

Our products and product candidates are expensive, and we anticipate that the annual cost for treatment for each of the diseases for which we are seeking approval will be significant. These costs will vary for different diseases based on the dosage and method of administration. Accordingly, we may decide not to market any of our products or product candidates for an approved disease because we believe that it may not be commercially successful. Market acceptance of and demand for our products and product candidates will depend on many factors, including, but not limited to:

•  cost of treatment;

•  pricing and availability of alternative products;

•  ability to obtain third-party coverage or reimbursement for our products or product candidates to treat a particular disease;

•  perceived efficacy relative to other available therapies;

•  shifts in the medical community to new treatment paradigms or standards of care;

•  relative convenience and ease of administration; and

•  prevalence and severity of adverse side effects associated with treatment.

If third-party payors do not provide coverage or reimburse patients for our products, our revenue and prospects for profitability will suffer.

Our ability to commercialize our products or product candidates for particular diseases is highly dependent on the extent to which coverage and reimbursement for our products is available from:

•  private health insurers, including managed care organizations;

•  governmental payors, such as Medicaid, the U.S. Public Health Service Agency or the Veterans’ Administration; and

•  other third-party payors.

Significant uncertainty exists as to the coverage and reimbursement status of pharmaceutical products, particularly with respect to products that are prescribed by physicians for off-label use. If governmental and other third-party payors do not provide adequate coverage and reimbursement levels for our products, market acceptance of our products will be reduced, and our sales will suffer. Many third-party payors provide coverage or reimbursement only for FDA approved indications. If any large or many third-party payors decide to deny reimbursement for Actimmune^® used to treat IPF, sales of Actimmune^® would decline, and our revenue would suffer.

Often, third-party payors make the decision to reimburse an off-label prescription based on whether that product has a compendia listing. A drug compendia is produced by a compendia body, such as the United States Pharmacopoeia Drug Information, that lists approved indications that a product has received from the FDA. The compendia bodies also evaluate all of the clinical evidence to determine whether an off-label use of a product should be listed in the compendia as medically appropriate. A compendia listing of an off-label use is a requirement of third-party payors, such as Medicare and private payors, to cover that use. Applications for a compendia listing are often based upon the publication of certain data in peer reviewed journals whose publication is often outside the applicant’s control. If we are unable to achieve acceptance by a compendia body for Actimmune^® for the treatment of IPF, additional third-party payors may decide to deny reimbursement for Actimmune^® for the treatment of IPF, and fewer physicians may prescribe Actimmune^® for such treatment. If either of these were to occur, sales of Actimmune^® would decline and our revenue would suffer.

Some third-party payors have denied coverage for Actimmune^® for the treatment of IPF for a variety of reasons, including the cost of Actimmune^®, the fact that IPF is not an FDA approved indication for Actimmune^® or

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a third-party payor’s assessment that a particular patient’s case of IPF has advanced to a stage at which treatment with Actimmune^® would not have a significant effect. We believe that approximately 60-70% of the patients who seek coverage for Actimmune^® for the treatment of IPF from private third-party payors are able to obtain coverage. While coverage trends have not changed significantly in the last few years, major health plans could further restrict coverage or adopt a policy of no coverage since we have discontinued the INSPIRE trial and have no further development plans for Actimmune^® for the treatment of IPF.

Medicare generally does not provide coverage for drugs, like Actimmune^®, that are administered by injection in the home. However, in connection with the Medicare Prescription Drug Improvement and Modernization Act of 2003, Medicare has recently discussed the possibility of refusing to provide coverage for products for a specific indication unless the product has been approved by the FDA for that indication. If Medicare were to make a formal decision not to cover the off-label use of products, it may have a negative impact on the willingness of private third-party payors to provide coverage for the off-label use of products such as Actimmune^®.

Our supply agreement with BI may restrict our ability to establish alternative sources of Actimmune^® in a timely manner or at an acceptable cost, which may cause us to be unable to meet demand for Actimmune^® and to lose potential revenue.

Our supply agreement with BI provides that BI is our exclusive source of supply for Actimmune^®, except under certain circumstances. For example, BI is currently our exclusive manufacturer for Actimmune^®. Under our agreement with BI, we cannot seek a secondary source to manufacture Actimmune^® until BI has indicated to us its inability or unwillingness to meet our requirements. If we are delayed in establishing a secondary supply source for Actimmune^®, or cannot do so at an acceptable cost, we may suffer a shortage of commercial supply of Actimmune^® or a higher cost of product, either of which would have a material and adverse effect on our revenue, business and financial prospects.

The activities of competitive drug companies, or others, may limit our products’ revenue potential or render them obsolete.

Our commercial opportunities will be reduced or eliminated if our competitors develop or market products that, compared to our products or product candidates:

•  are more effective;

•  have fewer or less severe adverse side effects;

•  are better tolerated;

•  have better patient compliance;

•  receive better reimbursement terms;

•  are more accepted by physicians;

•  are more adaptable to various modes of dosing;

•  have better distribution channels;

•  are easier to administer; or

•  are less expensive.

Even if we are successful in developing effective drugs, our products may not compete effectively with our competitors’ current or future products. Our competitors include larger, more established, fully integrated pharmaceutical companies and biotechnology companies that have substantially greater capital resources, existing competitive products, larger research and development staffs and facilities, greater experience in drug development and in obtaining regulatory approvals and greater marketing capabilities than we do. For more information, see “Item 1. Business-Competition.”

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Risks Related to Our Intellectual Property Rights

We may not be able to obtain, maintain and protect certain proprietary rights necessary for the development and commercialization of our products or product candidates.

Our commercial success will depend in part on obtaining and maintaining patent protection on our products and product candidates and successfully defending these patents against third-party challenges. Our ability to commercialize our products will also depend in part on the patent positions of third parties, including those of our competitors. 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 with certainty the scope and breadth of patent claims that may be afforded to other companies’ patents. We could incur substantial costs in litigation if we are required to defend against patent suits brought by third parties, or if we initiate suits to protect our patent rights.

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

•  we were the first to make the inventions covered by each of our pending patent applications;

•  we were the first to file patent applications for these inventions;

•  others will not independently develop similar or alternative technologies or duplicate any of our technologies;

•  any of our pending patent applications will result in issued patents;

•  any of our issued patents or those of our licensors will be valid and enforceable;

•  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 a material adverse effect on our business.

Others have filed and in the future may file patent applications covering uses and formulations of interferon gamma-1b, a pegylated version of this product, and other products in our development program. If a third party has been or is in the future issued a patent that blocked our ability to commercialize any of our products, alone or in combination, for any or all of the diseases that we are targeting, we would be prevented from commercializing that product or combination of products for that disease or diseases unless we obtained a license from the patent holder. We may not be able to obtain such a license to a blocking patent on commercially reasonable terms, if at all. If we cannot obtain, maintain and protect the necessary proprietary rights for the development and commercialization of our products or product candidates, our business and financial prospects will be impaired.

If we breach our license agreements, we may lose our ability to develop and sell our products.

We license certain patents and trade secrets relating to Actimmune^® from Genentech and relating to pirfenidone from Marnac and KDL. If we breach any of our agreements with Genentech or with Marnac and KDL, any of these licensors may be able to terminate the respective license, and we would have no further rights to utilize the licensed patents or trade secrets to develop and market the corresponding products, which could adversely affect our revenue and financial prospects.

Since the pirfenidone molecule is in the public domain and the patent we licensed from Marnac is limited to specific methods of use of pirfenidone, we may be subject to competition from third party products with the same active pharmaceutical ingredients as our product candidate.

Composition of matter patent protection for pirfenidone molecule has expired in the United States and elsewhere. Marnac and others have obtained patents in the United States and elsewhere relating to methods of use of pirfenidone for the treatment of certain diseases. We have licensed from Marnac and KDL rights to patents related to the use of pirfenidone for the treatment of fibrotic disorders, including the use of pirfenidone for the treatment of IPF. Marnac has retained rights under other U.S. and foreign patents for the use of pirfenidone to treat diseases other

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than fibrotic disorders. It is possible that Marnac will license these patent rights to third parties to develop, market, sell and distribute pirfenidone for these indications in the United States and elsewhere. It is also possible that a third party may develop pirfenidone for the treatment of certain diseases that are not covered by patents held by Marnac or those we licensed from Marnac. If Marnac or others were to license their method of use patents for non anti-fibrotic indications to a third party, or if a third party were to develop pirfenidone for a use that is not covered by any patents and such third parties successfully developed pirfenidone for non-fibrotic indications, we could face competition from third party products with the same active pharmaceutical ingredient as our product candidate. If a third party were to obtain FDA approval for the use of pirfenidone for an indication before we did, such third party would be first to market and could establish the price for pirfenidone. This could adversely impact our ability to implement our pricing strategy for the product and may limit our ability to maximize the commercial potential of pirfenidone. The presence of a lower priced competitive product with the same active pharmaceutical ingredients as our product could lead to use of the competitive product for our anti-fibrotic indications. This could lead to pricing pressure for pirfenidone, which would adversely affect our ability to generate revenue from the sale of pirfenidone for anti-fibrotic indications.

Over time, we will lose our ability to rely upon the intellectual property we currently own to prevent competing products, which may impair our ability to generate revenue.

We have licensed certain patents relating to interferon gamma-1b, the active ingredient in Actimmune^®, from Genentech. A U.S. patent relating to the composition of interferon gamma-1b expires in 2014. Other material U.S. patents relating to interferon gamma-1b expire between 2009 and 2013. We also previously purchased certain patents relating to interferon gamma analogs from Amgen in 2002 including two U.S. patents that issued August 30, 2005 which will expire on August 30, 2022. When these various patents expire, we will be unable to use these patents to try to block others from marketing interferon gamma-1b in the United States.

We have licensed from Marnac and KDL rights to patents related to the use of pirfenidone for the treatment of fibrotic disorders, including the use of pirfenidone for the treatment of IPF. Among these patents is U.S. Patent No. 5,310,562. After this U.S. patent expires in 2011, we will not be able to use this patent to block others from marketing pirfenidone for fibrotic disorders, including IPF. We may be able to extend our U.S. exclusivity for IPF if we gain FDA approval for IPF under orphan drug designation, which we may not be able to do. The pirfenidone molecule itself has no composition of matter patent protection in the United States or elsewhere. Therefore, we have no ability to prevent others from commercializing pirfenidone for (i) uses covered by the other patents held by Marnac and third parties, or (ii) other uses in the public domain for which there is no patent protection. We are primarily relying on exclusivity granted from orphan drug designation in IPF to protect pirfenidone from competitors in this indication. The exclusivity period in the United States begins on first NDA approval for this product in IPF and ends seven years thereafter. In addition, a third party could develop pirfenidone for another non-fibrotic disease that also qualifies for orphan drug designation and could be granted seven years exclusivity in that indication. Additionally, in the European Union we have been granted orphan drug designation for pirfenidone for the treatment of IPF by the EMEA, which provides for ten years of market exclusivity in the European Union following first marketing approval in the European Union. We cannot provide any assurance that we will be able to maintain this orphan drug designation.

Once our patents expire, we will be subject to competition from third parties who will be able to use the intellectual property covered by these patents, which could impair our ability to generate revenue.

Litigation or third-party claims of intellectual property infringement could require us to spend substantial time and money and could adversely affect our ability to develop and commercialize products.

Our commercial success depends in part on our ability and the ability of our collaborators to avoid infringing patents and proprietary rights of third parties. As noted in the immediately preceding risk factor, third parties may accuse us or our collaborators of employing their proprietary technology in our products, or in the materials or processes used to research or develop our products, without authorization. Any legal action against our collaborators or us claiming damages and/or seeking to stop our commercial activities relating to the affected products, materials 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 utilize the affected materials or processes or to manufacture

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or market the affected products. We cannot predict whether we, or our collaborators, would prevail in any of these actions or whether any license required under any of these patents would be made available on commercially reasonable terms, if at all. If we are unable to obtain such a license, we, or our collaborators, may be unable to continue to utilize the affected materials or processes or manufacture or market the affected products or we may be obligated by a court to pay substantial royalties and/or other damages to the patent holder. Even if we are able to obtain such a license, the terms of such a license could substantially reduce the commercial value of the affected product or products and impair our prospects for profitability. Accordingly, we cannot predict whether or to what extent the commercial value of the affected product or products or our prospects for profitability may be harmed as a result of any of the liabilities discussed above. Furthermore, infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate and can divert management’s attention from our core business.

If the owners of the intellectual property we license fail to maintain the intellectual property, we may lose our rights to develop our products or product candidates.

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. For example, if Genentech fails to maintain the intellectual property licensed to us, we may lose our rights to develop and market certain therapeutic uses for Actimmune^® and may be forced to incur substantial additional costs to maintain or protect the intellectual property or to compel Genentech to do so.

If our employees, consultants and vendors do not comply with their confidentiality agreements or our trade secrets otherwise become known, our ability to generate revenue and profits may be impaired.

We rely on trade secrets to protect technology where it is possible that patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. We protect these rights mainly through confidentiality agreements with our corporate partners, employees, consultants and vendors. These agreements generally provide that all confidential information developed or made known to an individual or company during the course of their relationship with us will be kept confidential and will not be used or disclosed to third parties except in specified circumstances. In the case of employees and consultants, our agreements generally provide that all inventions made by the individual while engaged by us will be our exclusive property. We cannot be certain that these parties will comply with these confidentiality agreements, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by our competitors. If our trade secrets become known, we may lose a competitive advantage and our ability to generate revenue may therefore be impaired.

By working with corporate partners, research collaborators and scientific advisors, we are subject to disputes over intellectual property, and our ability to obtain patent protection or protect proprietary information may be impaired.

Under some of our research and development agreements, inventions discovered in certain cases become jointly owned by our corporate partner and us and in other cases become the exclusive property of one of us. It can be difficult to determine who owns a particular invention, and disputes could arise regarding those inventions. These disputes could be costly and could divert management’s attention from our business. Our research collaborators and scientific advisors have some rights to publish our data and proprietary information in which we have rights. Such publications may impair our ability to obtain patent protection or protect our proprietary information, which could impair our ability to generate revenue.

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Risks Related to Our Financial Results and Other Risks Related to Our Business

If physicians do not prescribe Actimmune^® or prescribe it less often for the treatment of IPF, our revenue will decline.

Physicians may choose not to prescribe Actimmune^® or provide fewer patient referrals for Actimmune^® for the treatment of IPF because:

•  Actimmune^® is not, nor do we expect it to be approved by the FDA for the treatment of IPF, and we therefore are unable to market or promote Actimmune^® for the treatment of IPF;

•  in our initial and Phase III INSPIRE clinical trials, Actimmune^® failed to meet the primary and secondary endpoints;

•  physicians prefer to enroll their patients in another trial for the treatment of IPF, including our Phase III pirfenidone trials;

•  Actimmune^® does not have a drug compendia listing, often a criterion used by third-party payors to decide whether or not to reimburse off-label prescriptions;

•  physicians’ patients are unable to receive or lose reimbursement from a third-party reimbursement organization;

•  physicians are not confident that Actimmune^® has a clinically significant treatment effect for IPF;

•  a competitor’s product shows a clinically significant treatment effect for IPF; or

Net sales of Actimmune^® for the year ended December 31, 2006 were $90.3 million, compared to $107.6 million for the year ended December 31, 2005, a decline of 16%. If physicians do not prescribe Actimmune^® for the treatment of IPF for the above reasons or any other reasons, our Actimmune^® revenue will continue to decline.

If we fail to obtain the capital necessary to fund our operations, we will be unable to successfully execute our business plan.

We believe our existing cash, cash equivalents and available-for-sale securities, together with anticipated cash flows from our operations, will be sufficient to fund our operating expenses, debt obligations and capital requirements under our current business plan through at least the end of 2008. However, our current plans and assumptions may change, and our capital requirements may increase in future periods. 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 successfully 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 incurred net losses since inception, and our accumulated deficit was approximately $568.1 million at December 31, 2006. We expect to incur substantial additional net losses prior to achieving profitability, if ever. 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 our products may be marketed, and this expansion will require significant expenditures. To date, we have generated revenue primarily through the sale of Actimmune^®. However, Actimmune^® sales have decreased in recent periods and we expect this trend to continue into the future. We have not generated operating profits to date from our products. If the time required for us to achieve profitability is longer than we anticipate, we may not be able to continue our business.

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Failure to accurately forecast our revenue could result in additional charges for excess inventories or non-cancelable purchase obligations.

We base many of our operating decisions on anticipated revenue trends and competitive market conditions, which are difficult to predict. Based on projected revenue trends, we acquired inventories and entered into non-cancelable purchase obligations in order to meet anticipated increases in demand for our products. However, more recent projected revenue trends resulted in us recording charges of $9.1 million during 2005 for excess inventories from previous years’ contractual purchases. If revenue levels experienced in future quarters are substantially below our expectations, especially revenue from sales of Actimmune^®, we could be required to record additional charges for excess inventories and/or non-cancelable purchase obligations. For additional information relating to difficulties we have experienced forecasting revenue, see the risk factor titled, “We may fail to meet our publicly announced revenue and/or expense projections and/or other financial guidance, which would cause our stock to decline in value” below.

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 product liability costs 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. While we believe that our clinical trial and product liability insurance currently provides adequate protection to 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.

Our use of hazardous materials, chemicals, viruses and radioactive compounds exposes us to potential liabilities.

Our research and development activities involve the controlled use and disposal of hazardous materials, chemicals, infectious disease agents and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident, we could be held liable for significant damages or fines, which may not be covered by or may exceed our insurance coverage.

If we fail to fulfill our obligations under the Deferred Prosecution Agreement with the U.S. Department of Justice or the Corporate Integrity Agreement with the Office of Inspector General of the United States Department of Health and Human Services it could have a material adverse effect on our business.

On October 26, 2006, we announced that we entered into a Deferred Prosecution Agreement with the United States Attorney’s Office for the Northern District of California and a Corporate Integrity Agreement with the Office of the Inspector General of the United States Department of Health and Human Services. Under the terms of the Deferred Prosecution Agreement, the United States Attorney’s Office for the Northern District of California filed an Information charging InterMune with one count of off-label promotion of Actimmune^® for use with IPF, but has agreed to defer prosecution of such charge during the two year term of the Deferred Prosecution Agreement. The U.S. Attorney will seek dismissal of the Information after the two year period if we comply with the provisions of the Deferred Prosecution Agreement. Under the terms of the Corporate Integrity Agreement, the Office of the Inspector General of the United States Department of Health and Human Services has agreed to waive any potential exclusion against us from participation in federal health care programs provided that we comply with the terms of the Corporate Integrity Agreement for a period of five years. If we do not satisfy our obligations under the Deferred Prosecution Agreement, the U.S. Attorney can proceed with the prosecution against us for actions involving the off-label promotion of Actimmune^® for use with IPF, as set forth in the Information, and may consider additional actions against us, which could have significant adverse effects on our operations and financial results. If we do not satisfy our obligations under the Corporate Integrity Agreement, the Office of the Inspector General of the United States Department of Health and Human Services could potentially exclude us from participation in federal health care programs, which could have significant adverse effects on our operations and financial results.

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Insurance coverage is increasingly difficult to obtain or maintain.

While we currently maintain clinical trial and product liability insurance, directors’ and officers’ liability insurance, general liability insurance, property insurance and warehouse and transit insurance, first- and third-party insurance is increasingly more costly and narrower in scope, and we may be required to assume more risk in the future. If we are subject to third-party claims or suffer a loss or damage in excess of our insurance coverage, we may be required to share that risk in excess of our insurance limits. Furthermore, any first- or third-party claims made on our insurance policies may impact our future ability to obtain or maintain insurance coverage at reasonable costs, if at all.

Budget or cash constraints may force us to delay our efforts to develop certain products in favor of developing others, which may prevent us from meeting our stated timetables and commercializing those products as quickly as possible.

Because we are an emerging company with limited resources, and because research and development is an expensive process, we must regularly assess the most efficient allocation of our research and development resources. Accordingly, we may choose to delay our research and development efforts for a promising product candidate to allocate those resources to another program, which could cause us to fall behind our initial timetables for development. As a result, we may not be able to fully realize the value of some of our product candidates in a timely manner, since they will be delayed in reaching the market, or may not reach the market at all.

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 had 195 full-time employees as of February 28, 2007, 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 Daniel G. Welch, our Chief Executive Officer and President, as well as the other principal members of our management. None of our employees, including members of our management team, has a long-term employment contract, and any of our employees can leave at any time. 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 academic collaborations if we 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.

Risks Related to our Common Stock

We may fail to meet our publicly announced revenue and/or expense projections and/or other financial guidance, which would cause our stock to decline in value.

There are a number of reasons why we might fail to meet our revenue and/or expense projections and/or other financial guidance, including, but not limited to, the following:

•  if only a subset of or no affected patients respond to therapy with any of our products or product candidates;

•  the actual dose or efficacy of the product for a particular condition may be different than currently anticipated;

•  negative publicity about the results of our clinical studies, such as the recent failure of INSPIRE to meet it’s primary endpoint and our resulting decision to discontinue the trial, or those of others with similar or related products may reduce demand for our products and product candidates;

•  the treatment regimen may be different in duration than currently anticipated;

•  treatment may be sporadic;

•  we may not be able to sell a product at the price we expect;

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•  we may not be able to accurately calculate the number of patients using the product;

•  we may not be able to supply enough product to meet demand;

•  there may be current and future competitive products that have greater acceptance in the market than our products do;

•  we may decide to divest a product;

•  our development activities may proceed faster than planned;

•  we may decide to change our marketing and educational programs;

•  clinical trial participation may reduce product sales; or

•  physicians’ prescriptions or patient referrals for Actimmune^® may decline.

If we fail to meet our revenue and/or expense projections and/or other financial guidance for any reason, our stock could decline in value.

Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm attesting to and reporting on these assessments. If we fail to maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC. If we cannot in the future favorably assess, or our independent registered public accounting firm is unable to provide an unqualified attestation report on our assessment of, the effectiveness of our internal control over financial reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could have a material adverse effect on our stock price.

Our stock price may be volatile, and an investment in our stock could decline in value.

The trading price of our common stock has been and is likely to continue to be extremely volatile. During the twelve-month period ended December 31, 2006, the closing price of our common stock on the NASDAQ Global Market ranged from $14.20 to $30.75. Our stock price could be subject to wide fluctuations in response to a variety of factors, including, but not limited to all the factors discussed in this “Risk Factors” section.

In addition, the stock market in general, and the NASDAQ Global Market and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of actual operating performance. Periods of volatility in the market price of a company’s securities frequently results in securities class action and shareholder derivative litigation against that company. This type of litigation can result in substantial costs and a diversion of management’s attention and resources.

If our officers, directors and certain stockholders choose to act together, they may be able to significantly influence our management and operations, acting in their own best interests and not necessarily those of other stockholders.

At December 31, 2006, our directors, executive officers and greater than 5% stockholders and their affiliates beneficially owned approximately 60% of our issued and outstanding common stock. Accordingly, they collectively may have the ability to significantly influence the election of all of our directors and to significantly influence the outcome of corporate actions requiring stockholder approval, such as mergers or a financing in which we sell more than 20% of our voting stock at a discount to market price. They may exercise this ability in a manner that

38

advances their own best interests and not necessarily those of other stockholders. This concentration of ownership could also depress our stock price.

Substantial sales of shares may negatively 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 or conversion of our outstanding convertible notes the market price of our common stock may decline. In addition, the existence of our outstanding convertible notes may encourage short selling by market participants. 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.

We have filed registration statements covering the approximately 9,271,426 shares of common stock that are either issuable upon the exercise of outstanding options or reserved for future issuance pursuant to our stock plans as of December 31, 2006. We have also filed a shelf registration statement covering the resale of our 0.25% convertible senior notes due in 2011 and the 7,858,811 shares of common stock issuable upon conversion of those notes.

On October 29, 2004, we entered into an Amended and Restated Standstill Agreement with Warburg Pincus Equity Partners, L.P. and certain of its affiliates (“Warburg Pincus”) that permits Warburg Pincus to acquire up to 25% of our outstanding common stock in the open market. Under this agreement, Warburg Pincus may acquire up to 25% of our outstanding common stock and we have granted Warburg Pincus certain registration rights with respect to its holdings. The restriction on Warburg Pincus’ acquisition of additional shares of our common stock expires on October 29, 2007. In exchange for allowing Warburg Pincus to increase its ownership stake, Warburg Pincus has granted the independent members of our board of directors the right to vote the shares of InterMune common stock owned by Warburg Pincus in excess of 19.9%. In addition, Warburg Pincus has agreed to certain limitations on the manner in which it may dispose of its ownership interest in InterMune. In connection with this transaction, we also amended our stockholder Rights Plan to allow Warburg Pincus to acquire up to 25% of our outstanding common stock. Jonathan S. Leff, a member of our board of directors, is a managing director of Warburg Pincus LLC and a partner of Warburg Pincus & Co., which are affiliates of Warburg Pincus Equity Partners, L.P. In December 2006, we filed a shelf registration statement covering the sale of 7,357,349 shares held by Warburg Pincus and up to $175.0 million from any combination of debt securities, preferred stock, common stock or warrants that may be sold by us.

We have implemented anti-takeover provisions, which could discourage, prevent or delay a takeover, even if the acquisition would be beneficial to our stockholders, or frustrate or prevent any attempts by our stockholders to replace or remove our current management or Board of Directors.

The existence of our stockholder Rights Plan and 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. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. 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 up to 5,000,000 shares 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.

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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.

Risks Related to our Outstanding Notes

Our indebtedness and debt service obligations may adversely affect our cash flow.

As of December 31, 2006, our annual debt service obligation on the $170.0 million in aggregate principal amount of our 0.25% convertible senior notes due March 1, 2011 was $0.4 million. We intend to fulfill our current debt service obligations, including repayment of the principal, both from cash generated by our operations and from our existing cash and investments. If we are unable to generate sufficient cash to meet these obligations and need to use existing cash or liquidate investments in order to fund our current debt service obligations, including repayment of the principal, we may have to delay or curtail research and development programs.

We may add additional lease lines to finance capital expenditures and may obtain additional long-term debt and lines of credit. If we issue other debt securities in the future, our debt service obligations will increase further.

Our indebtedness could have significant additional negative consequences, including, but not limited to:

•  requiring the dedication of a substantial portion of our expected cash flow from operations to service our indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including capital expenditures;

•  increasing our vulnerability to general adverse economic and industry conditions;

•  limiting our ability to obtain additional financing;

•  limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and

•  placing us at a possible competitive disadvantage to less leveraged competitors and competitors that have better access to capital resources.

We may not have the ability to raise the funds necessary to finance any required redemptions of our outstanding convertible notes, which might constitute a default by us.

If a designated event, such as the termination of trading of our common stock on the NASDAQ Global Market or a specified change of control transaction, occurs prior to maturity, we may be required to redeem all or part of our 0.25% convertible senior notes due 2011. We may not have enough funds to pay the redemption price for all tendered notes. Although the indenture governing the 0.25% convertible senior notes due 2011 allows us in certain circumstances to pay the applicable redemption prices in shares of our common stock, if a designated event were to occur, we may not have sufficient funds to pay the redemption prices for all the notes tendered.

We have not established a sinking fund for payment of our outstanding notes, nor do we anticipate doing so. In addition, any future credit agreements or other agreements relating to our indebtedness may contain provisions prohibiting redemption of our outstanding notes under certain circumstances, or expressly prohibit our redemption of our outstanding notes upon a designated event or may provide that a designated event constitutes an event of default under that agreement. If a designated event occurs at a time when we are prohibited from purchasing or redeeming our outstanding notes, we could seek the consent of our lenders to redeem our outstanding notes or attempt to refinance this debt. If we do not obtain consent, we would not be permitted to purchase or redeem our outstanding notes. Our failure to redeem tendered notes would constitute an event of default under the indenture for the notes, which might constitute a default under the terms of our other indebtedness.

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ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2.   PROPERTIES

Our facilities currently consist of approximately 55,898 square feet of office space located at our headquarters at 3280 Bayshore Boulevard, Brisbane, California. In December 2000, we entered into a ten-year lease for this building. On January 13, 2005, we entered into an operating lease agreement to sublease an additional 12,988 square feet of office space which consists of 11,444 square feet of usable area and 1,544 square feet of common area located at the second floor of 3240 Bayshore Boulevard, Brisbane, CA 94005. In connection with the divestiture of Infergen^® and the reduction in our field-based IPF disease awareness activities, we no longer require the use of this space and have terminated this sublease effective April 2006. In May 2006, we entered into an amendment to our existing lease to expand our existing office and laboratory space by approximately 15,000 square feet on the first floor of 3260 Bayshore Boulevard, Brisbane, CA 94005. The lease expires concurrently with our existing facility lease in March 2011. We believe that our facilities are adequate for our current needs, and that suitable additional or substitute space will be available in the future to replace our existing facility, if necessary, or accommodate expansion of our operations.

ITEM 3.   LEGAL PROCEEDINGS

On November 9, 2004, we received a subpoena from the U.S. Department of Justice requiring us to provide the Department of Justice with certain information relating to Actimmune^®, including information regarding the promotion and marketing of Actimmune^®. On October 25, 2006 we reached a comprehensive settlement with the government to resolve all claims without criminal sanctions relating to promotional activities for Actimmune^® for IPF by our former employees during a period ending in June 2003. As part of this comprehensive settlement, we entered into a Civil Settlement Agreement with the United States Department of Justice and the United States Attorney’s Office for the Northern District of California. In addition, we entered into a Deferred Prosecution Agreement with the United States Attorney’s Office for the Northern District of California and a Corporate Integrity Agreement with the Office of the Inspector General of the United States Department of Health and Human Services.

Under the terms of the Civil Settlement Agreement, we agreed to pay $36.9 million plus 5% interest on the then outstanding principal balance to the government over a period of five years, an amount to be shared between the Federal and participating State governments as per the agreement and the Medicaid Program. We recorded a $36.9 million charge during 2006 to reflect the final terms of the Civil Settlement Agreement. We paid $4.1 million of the first installment payment of $5.0 million during the fourth quarter of 2006 and are required to make additional payments on the remaining settlement amount over the next five years in annual installments. The Civil Settlement Agreement contains a provision for the acceleration of certain of the $36.9 million in scheduled payments if we receive over $150.0 million from partnering, license fees and milestone payments (excluding any research and development contributions), external debt and equity financing during the term of the Civil Settlement Agreement, subject to a cap on any acceleration of payment of $10.0 million in any one year.

Under the terms of the Deferred Prosecution Agreement, the United States Attorney’s Office for the Northern District of California will file an Information charging us with one count of off-label promotion of Actimmune^® for use with IPF, but will defer prosecution of such charge during the two year term of the Deferred Prosecution Agreement. The U.S. Attorney will seek dismissal of the Information after the two year period if we comply with the provisions of the Deferred Prosecution Agreement. The Deferred Prosecution Agreement became effective December 2006 when it was approved by the United States District Court for the Northern District of California.

Under the terms of the Corporate Integrity Agreement, the Office of the Inspector General of the United States Department of Health and Human Services agrees to waive any potential exclusion of us from participation in federal health care programs provided that we comply with the terms of the Corporate Integrity Agreement for a period of five years. As part of the agreement, we agreed to retain an independent review organization to conduct periodic reviews of our promotional processes and policies as well as reviews of certain medical affairs group records.

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ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Since the initial public offering of our common stock, $0.001 par value, on March 24, 2000, our common stock has traded on the NASDAQ Global Market under the symbol “ITMN.”

The following table sets forth the high and low closing sales prices of our common stock, as reported on the NASDAQ Global Market for the fiscal periods indicated:

Fiscal Year:	High		Low
2006
First Quarter	$	20.61	$	17.62
Second Quarter		18.35		14.20
Third Quarter		17.68		14.83
Fourth Quarter		30.75		16.25
2005
First Quarter	$	13.51	$	9.99
Second Quarter		13.22		10.15
Third Quarter		18.14		13.16
Fourth Quarter		17.23		13.22

As of February 28, 2007, we had 88 stockholders of record. In addition, we believe that a significant number of beneficial owners of our common stock hold their shares in street name.

Dividend Policy

We have never declared or paid any dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance our operations and do not anticipate paying any cash dividends on our capital stock in the foreseeable future.

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Performance Graph

We show below the cumulative total return to our stockholders during the period from December 31, 2001 through December 31, 2006 in comparison to the cumulative return on the NASDAQ Composite and the AMEX Biotechnology Index during that same period. The results assume that $100 was invested on December 31, 2001.

	Years Ending December 31,
	Base period
	December
Company/Index	2001		2002		2003		2004		2005		2006
InterMune, Inc.		100	$	51.79	$	47.02	$	26.92	$	34.10	$	62.42
NASDAQ Composite		100		69.13		103.36		112.49		114.88		126.22
AMEX Biotechnology Index		100		58.26		84.42		93.74		117.28		129.91

The information under “Performance Graph” is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any filing of InterMune, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this 10-K and irrespective of any general incorporation language in those filings.

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ITEM 6.  SELECTED FINANCIAL DATA

The selected consolidated financial data that appears below and on the following page has been derived from our audited consolidated financial statements. This historical data should be read in conjunction with our Consolidated Financial Statements and the related Notes to Consolidated Financial Statements contained in this Report, and with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Report. The selected consolidated statement of operations data for each of the three years ended December 31, 2006, 2005 and 2004, respectively, and the selected consolidated balance sheet data as of December 31, 2006 and 2005, respectively, are derived from the audited consolidated financial statements included elsewhere in this Report. The selected consolidated statement of operations data for the years ended December 31, 2003 and 2002, respectively, and the selected consolidated balance sheet data as of December 31, 2004, 2003 and 2002, respectively, are derived from audited financial statements not included in this Report.

In December 2005, we sold our Infergen^® product, including related intellectual property rights and inventory, to Valeant. The operating results of our Infergen^® activities, which include allocations of research and development and selling, general and administrative expenses, have been reclassified as discontinued operations for all periods presented.

	Year Ended December 31,
	2006			2005			2004			2003			2002
	(In thousands, except per share data)
Statement of Operations Data:
Revenue, net:
Actimmune	$	90,317		$	107,633		$	124,980		$	141,402		$	105,802
Other products		—			2,863			3,700			3,460			3,232
Collaboration revenue		467			—			—			—			—
Total revenue, net		90,784			110,496			128,680			144,862			109,034
Costs and expenses:
Cost of goods sold		24,108			33,842			33,139			33,233			23,396
Amortization and impairment of acquired product rights(1)		500			1,180			743			5,998			1,233
Research and development		103,849			82,736			75,683			118,771			128,326
Selling, general and administrative		40,372			58,854			55,132			56,167			54,233
Provision for government settlement		36,944			—			—			—			—
Acquired research and development and milestone (credits) payments(2)		—			(10,000	)		—			12,150			33,750
Restructuring charges		—			5,549			—			—			—
Total costs and expenses		205,773			172,161			164,697			226,319			240,938
Loss from operations		(114,989	)		(61,665	)		(36,017	)		(81,457	)		(131,904	)
Interest income		9,512			3,965			3,490			4,024			7,375
Interest and other income (expense)		(485	)		52			(12,516	)		(10,037	)		(9,803	)
Loss from continuing operations		(105,962	)		(57,648	)		(45,043	)		(87,470	)		(134,332	)
Discontinued operations:
Loss from discontinued operations		(1,244	)		(32,925	)		(14,435	)		(9,531	)		(9,977	)
Gain on sale of discontinued operations (net of transaction costs)		—			85,338			—			—			—
Net income (loss) from discontinued operations		(1,244	)		52,413			(14,435	)		(9,531	)		(9,977	)
Net loss	$	(107,206	)	$	(5,235	)	$	(59,478	)	$	(97,001	)	$	(144,309	)
Basic and diluted net loss per share:
Continuing operations	$	(3.18	)	$	(1.79	)	$	(1.42	)	$	(2.76	)	$	(4.39	)
Discontinued operations	$	(0.04	)	$	1.63		$	(0.45	)	$	(0.30	)	$	(0.33	)
Net loss per share	$	(3.22	)	$	(0.16	)	$	(1.87	)	$	(3.06	)	$	(4.72	)
Shares used in computing basic and diluted net loss per share		33,277			32,220			31,760			31,665			30,589

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	As of December 31,
	2006			2005			2004			2003			2002
	(In thousands)
Balance sheet data:
Cash, cash equivalents and available-for-sale securities	$	214,549		$	215,525		$	183,025		$	216,107		$	316,411
Working capital		201,924			185,295			185,133			201,855			285,633
Total assets		257,583			263,452			266,011			288,501			384,881
Long-term obligations		170,000			170,000			170,000			149,500			149,500
Accumulated deficit		(568,087	)		(460,881	)		(455,646	)		(396,168	)		(299,167	)
Total stockholders’ equity (deficit)		(39,797	)		31,767			32,791			87,744			182,718

(1)

The amortization and impairment of acquired product rights also included charges of $0.6 million and $4.8 million for the impairment of Amphotec® product rights recognized during 2005 and 2003, respectively.

(2)

These charges represent acquired research and development and milestone payments for projects that were in development, had not reached technical feasibility and had no foreseeable alternative future uses at the time of acquisition or when the milestone became payable. The 2005 balance reflects the reversal of the milestone liability in connection with the divestiture of oritavancin. Please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” and Note 5 of the Notes to Consolidated Financial Statements.

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

For additional overview information relating to our business, including Actimmune^®, co-promotion and our product development programs, please see the discussion in “Item 1. Business — Overview,” which is incorporated herein by reference.

Significant License/Acquisition Agreements

We are highly dependent on technology we license or acquire from third parties. Actimmune^®, which is currently our sole marketed product, is subject to a license agreement with Genentech, Inc. The majority of our clinical development pipeline is also based on technology that we have licensed from third parties. Details of these agreements can be found elsewhere in this Report under “Item 1. Business — License and Other Agreements,” Notes 6 and 7 of the Notes to Consolidated Financial Statements, and under the heading “Results of Operations” below.

We will be required to make contingent milestone payments in accordance with all of our license and acquisition agreements in the aggregate amount of $75.6 million if all of the milestones defined in each of the agreements are achieved. These milestones include development, regulatory approval, commercialization and sales milestones.

Our Need for Additional Capital

We commenced operations in 1998 and have incurred significant losses to date. Our revenue has been limited primarily to sales of Actimmune^® derived from physicians’ prescriptions for the off-label use of Actimmune^® in the treatment of IPF. We expect to continue to incur net losses over the next several years as we continue the development of our advanced-stage pulmonology pipeline and our research-stage hepatology pipeline, apply for regulatory approvals and grow our operations. Although we believe that our existing cash, cash equivalents and available-for-sale securities, together with anticipated cash flows from our operations, will be sufficient to fund our operating expenses, settlement with the government, debt obligations and capital requirements under our current business plan through at least the end of 2008, we believe that we will continue to require substantial additional funding to complete the research and development activities currently contemplated and to commercialize our product candidates. As a result, we may require additional funds and may attempt to raise additional funds through

45

equity or debt financings, collaborative arrangements with corporate partners or from other sources. If additional capital is not available, we may be forced to curtail our development activities or cease operations.

Discontinuation of Actimmune^® Trial for IPF

Effective March 5, 2007, we made the decision to discontinue the Phase 3 INSPIRE clinical trial evaluating Actimmune^® in patients with IPF based upon the recommendation of the study’s independent data monitoring committee. As a result of the disappointing INSPIRE trial results, we revised our estimates of inventory requirements as of December 31, 2006. Accordingly, we recorded a charge of $4.5 million related to the prepayment of inventory that we were expecting to receive in 2007 and 2008. While we believe other Actimmune^® related assets are recoverable for at least their $9.4 million net carrying value, if sales decline below our revised estimates, we may incur additional asset impairment charges, including inventory writedowns and impairment of acquired product rights, as well as product returns.

The following table reflects the asset balances as of December 31, 2006 which may be impacted (in thousands):

	2006
Finished goods inventory	$	8,188
Acquired product rights, net		1,167
Total	$	9,355

We also expect to incur approximately $3.5 million in restructuring charges, primarily consisting of severance related expenses to implement our announced plan to reduce the workforce by approximately 50%. We expect to record these charges during 2007. In addition, we may incur termination fees related to our supplier and clinical research organization contracts. Any or all of these remaining charges could be material, individually or collectively.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. These estimates are the basis for our judgments about the carrying values of assets and liabilities, which in turn may impact our reported revenue and expenses. We have discussed the development, selection and disclosure of these estimates with the Audit Committee of our board of directors. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur periodically, could materially change the financial statements. We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Stock-based Compensation

Beginning January 1, 2006, we account for stock-based compensation in accordance with Statement of Financial Accounting Standards, or SFAS No. 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. In order to estimate the value of share-based awards, we use the Black-Scholes model, which requires the use of certain subjective assumptions. The most significant assumptions are our estimates of the expected volatility and the expected term of the award. In addition, judgment is

46

also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from any of these estimates, stock-based compensation expense and our results of operations could be materially impacted.

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. SFAS 123(R)supersedes the Company’s previous accounting under APB 25. The Company’s Consolidated Financial Statements as of and for the year ended December 31, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R) for the year ended December 31, 2006 was $16.5 million, which consisted of stock-based compensation expense related to employee stock options, restricted stock and the 2000 Employee Stock Purchase Plan (the “ESPP”). Stock-based compensation expense of $3.0 million for the year ended December 31, 2005 was related to restricted stock which we had been recognizing under previous accounting standards and option acceleration costs related to our divestiture of Infergen^® and concurrent restructuring. There was no stock-based compensation expense related to the ESPP recognized during the year ended December 31, 2005.

If all of the remaining restricted stock awards that were granted in 2003, 2004 and 2006 became vested, we would recognize approximately $2.8 million in compensation expense over a weighted average remaining period of 1.2 years. If all of the remaining nonvested and outstanding stock option awards that have been granted became vested, we would recognize approximately $17.8 million in compensation expense over a weighted average remaining period of 1.5 years. However, no compensation expense will be recognized for any stock awards that do not vest.

Revenue Recognition and Revenue Reserves

Revenue on product sales is recognized when persuasive evidence of an arrangement exists, the price is fixed, and final delivery has occurred and there is a reasonable assurance of collectibility of the amounts receivable from the customer. Therefore, revenue is generally recognized upon delivery when title passes to a credit-worthy customer. Reserves are recorded at the time revenue is recognized for estimated returns, rebates, chargebacks and cash discounts, if applicable. We sell to a limited number of customers, mainly specialty pharmacies and distributors. We obtain written purchase authorizations from our customers for a specified amount of product at a specified price. We are obligated to accept returns from customers if the pharmaceuticals they purchased have reached the expiration date. We have demonstrated the ability to make reasonable and reliable estimates of product returns based on historical experience. Due to the nature of our business model and based on historical experience, these estimates are not highly subjective. We review all sales transactions for potential rebates, chargebacks and discounts each month and monitor product ordering cycles and actual returns, product expiration dates and wholesale inventory levels to estimate potential product return rates. We believe that our reserves are adequate. For each of the periods presented below, we have not made any shipments as a result of incentives and/or in excess of our customers’ ordinary course of business inventory levels. Specialty wholesalers maintain low inventory levels and manage their inventory levels to optimize patient-based need (demand) and do not overstock Actimmune^®.

The tables below present the amounts reported as revenue reserves for the periods indicated (in thousands, except percentages):

	Years Ended December 31,
Reductions to Revenue	2006		2005		2004
Cash discounts	$	1,887	$	2,280	$	2,663
Product returns		—		428		254
Chargebacks		1,106		1,258		4,290
Medicaid rebates		2,032		3,474		3,971
Total	$	5,025	$	7,440	$	11,178

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	Years Ended December 31,
	2006			2005			2004
Gross product revenue	$	95,342		$	117,936		$	139,858
Revenue reserve as a % of gross product revenue:
Cash discounts		2.0	%		1.9	%		1.9	%
Product returns		—			0.4	%		0.2	%
Chargebacks		1.2	%		1.1	%		3.1	%
Medicaid rebates		2.1	%		2.9	%		2.8	%
Total		5.3	%		6.3	%		8.0	%

In 2006, chargebacks were approximately 1.2% of gross revenue, but could reasonably fall within a range of 1.0% to 4.0% in any given year depending on the customer base. If chargebacks had increased to 4.0% during 2006, this would have reduced our reported revenue by approximately $2.7 million. In 2006, Medicaid rebates were approximately 2.1% of gross revenue, but could reasonably fall within a range of 2.0% to 3.0% in any given year. If Medicaid rebates had increased to 3.0% during 2006, this would have decreased our reported revenue by approximately $0.8 million. The ranges selected above are based on a review of historical trends and we believe they are reasonably likely to continue to be relevant in future periods. As a percentage of gross revenue, chargebacks have declined from 3.1% in 2004 to 1.1% in 2005 and to 1.2% in 2006. The decline for the two most recent years compared to 2004 is due to a decline in the number of government customers we sell to through our wholesalers. The decrease in Medicaid rebates from 2.8% in 2004 and 2.9% in 2005 to 2.1% in 2006 is due to the decreasing number of patients, as a percentage of the total patient population treated with Actimmune^®, that are covered through state Medicaid programs.

The source of information that we monitor in assisting us with computing chargebacks is from the Federal Supply Schedule, Veterans Administration and Public Health System pricing documents. These documents establish the maximum price allowable for the sale of our product to a government customer. The chargeback amount per unit is computed as the difference between our sales price to the wholesaler and the selling price from the wholesaler to a government customer. Chargebacks are processed directly by the wholesalers and are deducted from payments to us.

The source of information that we monitor in assisting us with computing Medicaid rebates is from each of the 50 states. Medicaid rebates are billed directly to us from each state. Billings from each of the states, which are based on end user reports submitted by pharmacies to the state agencies, are typically received within 45 days after the end of each calendar quarter. We use historical billing and payment trends made to the states to assist us in determining an estimated Medicaid rebate amount each period.

Clinical Trial Accruals

We accrue costs for clinical trial activities performed by contract research organizations based upon the estimated amount of work completed on each study. These estimates may or may not match the actual services performed by the organizations as determined by patient enrollment levels and related activities. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence with contract research organizations and review of contractual terms. However, if we have incomplete or inaccurate information, we may underestimate activity levels associated with various studies at a given point in time. In this event, we could record significant research and development expenses in future periods when the actual activity level becomes known. All such costs are charged to research and development expenses as incurred. To date, we have not experienced changes in estimates that have led to material research and development expense adjustments being recorded in future periods.

Inventory Reserves and Non-Cancelable Purchase Obligations for Inventory

Our inventories are stated at the lower of cost or market value and our inventory costs are determined by the first-in first-out method. We enter into non-cancelable purchase obligations to purchase our inventory based upon

48

sales forecasts to enable us to mitigate some of the risk associated with the long lead times required to manufacture our products. At December 31, 2006, our minimum purchase obligations totaled $91.6 million and are committed through the year 2012. Of these commitments, we have $15.9 million and $14.5 million of outstanding fixed purchase order commitments that become due and payable in 2007 and 2008, respectively. Given the fact that the Phase III INSPIRE trial was unsuccessful and discontinued in March 2007, in addition to the mechanism set forth in the agreement which allows us to decrease our minimum yearly purchase obligations on a going-forward basis (with adjustments to the financial terms to be negotiated by the parties) we are currently reviewing other aspects of the contracts that we believe are relevant to our future purchase commitments, including our ability to cancel previously provided forecasts and eliminate our purchase obligations.

We write off the cost of inventory and reserve for future minimum purchase commitments that we consider to be in excess of forecasted future demand. We define excess inventory as inventory that will expire before it can be sold, based on future sales forecasts. In making these assessments, we are required to make judgments as to the future demand for current or committed inventory purchase levels. We are also required to monitor the expiration dates of our products, since our products can no longer be used after their respective expiration dates. In 2004, in an effort to best manage the procurement and distribution of levels of Actimmune^®, we successfully completed the necessary testing to extend the expiration period of Actimmune^® from 30 months to a total of 36 months. As part of our excess inventory assessment for all of our products, we also estimate the expiration dates of our products to be manufactured in the future.

Projected revenue trends resulted in us recording charges during 2005 and 2004 for excess inventories and non-cancelable purchase obligations. If Actimmune^® revenue levels experienced in future periods are substantially below our current expectations, we could be required to record additional charges for excess inventories and/or non-cancelable purchase obligations. For the year ended December 31, 2005, we recorded a charge of $9.1 million, or $0.28 per share, to cost of goods sold for excess inventory. Please refer to the statements under “Item 1A. Risk Factors” in this Report to gain a better understanding of the possible reasons why actual results could differ from our estimates.

Results of Operations

The following discussion of our results of operations for each of the comparative periods excludes Infergen^® revenues and related expenses. These amounts are reflected in discontinued operations as a result of the sale of the Infergen^® product to Valeant in December 2005.

Comparison of years ended December 31, 2006 and 2005

Revenue

For the year ended December 31, 2006, we recorded total net revenue of $90.8 million, compared to $110.5 million for the same period in 2005, a decrease of 18%. Net sales of Actimmune^® for 2006 were $90.3 million, compared to $107.6 million for 2005, a decline of 16%. For the year ended December 31, 2006 Actimmune^® accounted for all of our product revenue and approximately 97% of our total product revenue in 2005. Substantially all of these sales were derived from physicians’ prescriptions for the off-label use of Actimmune^® in the treatment of IPF. Net revenue in 2006 includes approximately $0.5 million of collaboration revenue, which represents amortization of the $60.0 million upfront payment received from Roche during the fourth quarter of 2006.

Actimmune^® sales declined during the year ended December 31, 2006 compared to the corresponding period in 2005 due to a decrease in the underlying demand for Actimmune^®. We believe that rate of patient referrals by physicians and the average duration of therapy are among the key uncertainties that affect demand for Actimmune^® and our Actimmune^® revenue and total product revenue. The patient referral rate reflects the number of new patients who are prescribed Actimmune^® and who call the call center that coordinates with all of our specialty distributors, although these patients may elect not to have those prescriptions filled. We believe that the following factors are among those that may affect the patient referral rate for Actimmune^®: physician screening of patients who are likely to pursue treatment with Actimmune^®; physician or patient interest and the publication of the results of our initial Phase III IPF clinical trial, as well as the disappointing results of the INSPIRE trial.

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Cost of Goods Sold

Cost of goods sold included product manufacturing costs, royalties and distribution costs associated with our revenue and inventory reserves. Cost of goods sold for the year ended December 31, 2006 was $24.1 million, or approximately 27% of total product revenue, compared to $33.8 million, or approximately 31% of total product revenue, in the corresponding period of 2005. The decrease in cost of goods sold primarily reflects the decline in Actimmune^® revenue and a charge of $9.1 million in 2005 taken for excess inventory from previous years’ contractual purchases. Included in 2006 cost of goods sold is a charge of approximately $4.5 million recorded in connection with the disappointing Phase III INSPIRE trial results announced in March 2007. Excluding the $4.5 million and $9.1 million charges for excess inventory and purchase commitments in 2006 and 2005, respectively, cost of goods sold was approximately 22% of product revenue for each of the years ended December 31, 2006 and 2005.

Exchange rate fluctuations on inventory purchases may affect cost of goods sold on Actimmune^® inventory purchased from BI. In the past, we have utilized forward exchange contracts to partially offset the effect of exchange rate fluctuations, but we did not enter into any new contracts in 2005 or 2006.

Amortization and Impairment of Acquired Product Rights

We recorded amortization and impairment of acquired product rights for the years ended December 31, 2006 and 2005 of $0.5 million and $1.2 million, respectively. The acquired product rights were related to the acquisition of Amphotec^® and interferon gamma-1b patents. In March 2005, we recorded an impairment charge of $0.6 million. This impairment charge was based on our impairment review of the Amphotec^® product rights, which took into account that sales levels were lower than expected and that Amphotec^® was not aligned with our new strategic focus in pulmonology and hepatology. In May 2005, we divested the Amphotec^® product line, including all related assets, to Three Rivers for cash consideration.

Research and Development Expenses

Research and development (“R&D”) expenses were $103.8 million and $82.7 million for the years ended December 31, 2006 and 2005, respectively, representing an increase of $21.1 million or 26%. The increase in R&D expense in 2006 was related to increased investment in the company’s two Phase 3 clinical development programs in IPF, the manufacturing, preclinical and clinical activities for ITMN-191 prior to entering into the collaboration agreement with Roche and an increased investment in pulmonology and hepatology research. R&D expense also includes $8.1 million of stock-based compensation expense in 2006, reflecting the adoption of SFAS 123(R).

The following table lists our current product development programs and the research and development expenses recognized in connection with each program during the indicated periods. The category titled “Programs — Non-specific” is comprised of facilities and personnel costs that are not allocated to a specific development program or discontinued programs and $8.1 million of stock-based compensation in 2006. Our management reviews each of these program categories in evaluating our business. For a discussion of the risks and uncertainties associated with developing our products, as well as the risks and uncertainties associated with potential commercialization of our product candidates, see the specific sections under “Item 1A. Risk Factors” above.

	Year Ended December 31,
Development Program	2006		2005		2004
	(In thousands)
Pulmonology	$	50,065	$	34,779	$	19,589
Hepatology		30,035		17,820		15,253
Oncology		1,561		14,156		18,307
Programs — Non-specific		22,188		15,981		22,534
Total	$	103,849	$	82,736	$	75,683

The largest component of our total operating expenses is our ongoing investments in research and development and, in particular, the clinical development of our product pipeline. The process of conducting the clinical research

50

necessary to obtain FDA approval is costly and time consuming. Current FDA requirements for a new human drug to be marketed in the United States include:

•  the successful conclusion of preclinical laboratory and animal tests, if appropriate, to gain preliminary information on the product’s safety;

•  the submission of an IND with the FDA to conduct human clinical trials for drugs;

•  the successful completion of adequate and well-controlled human clinical investigations to establish the safety and efficacy of the product for its recommended use; and

•  the submission by a company and acceptance and approval by the FDA of an NDA or BLA for a drug product to allow commercial distribution of the drug.

In light of the factors mentioned above, we consider the active management and development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each candidate and clinical program may be impacted by a variety of factors, including, among others, the quality of the candidate, the validity of the target and disease indication, early clinical data, investment in the program, competition, manufacturing capability and commercial viability. Due to these factors, it is difficult to give accurate guidance on the anticipated proportion of our research and development investments or the future cash inflows from these programs.

Selling, General and Administrative Expenses

Selling general and administrative (“SG&A”) expenses were $40.4 million and $58.9 million for the years ended December 31, 2006 and 2005, respectively, representing a decrease of $18.5 million, or 31%. SG&A expense also includes $8.4 million of stock-based compensation expense in 2006, reflecting the adoption of SFAS 123(R). The decreased spending for the year ended December 31, 2006 compared to the same period in 2005 was largely the result of the reductions in field-based IPF disease awareness activities and a decrease in the number of personnel in the home office, as announced in November 2005.

Acquired Research and Development and Milestone (Credits) Payments

There were no charges for acquired research and development and milestone payments in the years ended December 31, 2006 and 2005. Included in our charges prior to 2004 was $10.0 million for a milestone payable to Eli Lilly for oritavancin. We initially expensed this amount as acquired research and development as oritavancin at the time was in clinical development, had not reached technical feasibility and had no foreseeable alternative future uses. In connection with the divestiture of oritavancin to Targanta in December 2005, we received a waiver from Eli Lilly for making this payment and thus reversed the accrued liability for this milestone in 2005.

Provision for Government Settlement

On November 9, 2004, we received a subpoena from the U.S. Department of Justice requiring us to provide the Department of Justice with certain information relating to Actimmune^®, including information regarding the promotion and marketing of Actimmune^®. On October 25, 2006, we reached a comprehensive settlement with the government concerning promotional activities for Actimmune^® by former employees during a period that ended in June 2003. A $36.9 million charge was recorded during 2006 to reflect the final terms of the civil settlement agreement. The settlement resolves without criminal sanctions, all outstanding government investigations of InterMune. We agreed to pay a total of $36.9 million, plus 5% interest on the then outstanding principal balance, over a period of five years. As part of the settlement, InterMune also entered into corporate integrity and deferred prosecution agreements with the government.

Restructuring Charges

In the fourth quarter of 2005, our board of directors approved a restructuring plan recommended by our Chief Executive Officer and senior management that was designed to help streamline our operations and reduce our operating expenses in 2006. The plan, which consisted of a significant reduction in our investment in field-based IPF disease awareness activities, was implemented concurrently with the divestiture of Infergen^® in December

51

2005. These combined actions led to a significant headcount reduction of approximately 160 employees and resulting termination costs of approximately $9.2 million. Restructuring charges comprised approximately $5.5 million of this amount which were recorded as a separate component of operating expenses in the statement of operations, with the remainder allocated to discontinued operations. See “Loss from Discontinued Operations” discussion below. The majority of the 160 employees left InterMune at the end of the fourth quarter of 2005 and the remainder during the first quarter of 2006.

The $5.5 million restructuring charge was comprised of approximately $4.7 million for cash severance and related benefits and approximately $0.8 million for non-cash stock compensation, consisting of an allocation of option acceleration costs for approximately 400,000 shares of our common stock. We paid substantially all of the $4.7 million severance and related benefits during the first quarter of 2006. No further restructuring charges were incurred in 2006. Given our decision to discontinue the INSPIRE trial effective March 2007, we expect to incur approximately $3.5 million in restructuring charges during the first several quarters of 2007, primarily consisting of severance related expenses to implement our announced plan to reduce the workforce by approximately 50%.

Interest Income

Interest income increased to $9.5 million for the year ended December 31, 2006 compared to $4.0 million for the year ended December 31, 2005. The increase in interest income in the year ended December 31, 2006 reflects a higher average balance on our invested cash and securities throughout 2006 compared to 2005 and an increase in average interest rates.

Interest Expense

Interest expense increased to $1.5 million for the year ended December 31, 2006 compared to $1.3 million for the year ended December 31, 2005. The increase in interest expense in the year ended December 31, 2006 reflects interest incurred on our government settlement liability. Both 2006 and 2005 include interest on our $170.0 million principal amount 0.25% convertible senior notes, issued in February 2004.

Other Income (Expense)

Other income (expense) decreased to income of $1.1 million in the year ended December 31, 2005 compared to income of $1.3 million in 2005. Other income in both 2006 and 2005 includes $1.0 million cash payments received from Targanta in connection with the divestiture of oritavancin.

Loss from Discontinued Operations

The loss from discontinued operations reflects the divestiture of our Infergen^® product line to Valeant which was completed in December 2005. The loss from discontinued operations of $1.2 million in the year ended December 31, 2006 compares to a loss of $32.9 million in the year ended December 31, 2005. Discontinued operations in 2006 consist primarily of transition related services, including product returns, which were substantially completed at the end of 2006. The components of the loss from discontinued operations for 2005 included net revenue of Infergen^®, the related cost of goods sold and amortization of acquired product rights, as well as certain allocated research and development and selling general and administrative expenses specific to Infergen^®. The loss in 2005 also included employee termination costs of approximately $3.7 million. See Note 3 of Notes to Consolidated Financial Statements.

Gain on Sale of Discontinued Operations

The gain on sale of discontinued operations in 2005 was comprised of the $120.0 million in cash proceeds and a $2.1 million note received from Valeant in connection with the sale of Infergen^®, offset by the net book value of the assets sold and direct transaction costs. These assets included intellectual property rights, payments to a contract manufacturer, and inventory with a net book value of approximately $36.5 million at the time of the transaction. In addition, we incurred approximately $0.3 million of direct transaction costs related to the sale of Infergen^®.

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Provision for Income Taxes

Due to our continuing operating losses and the uncertainty of our recognizing the potential future benefits from these losses, we recorded no provision or benefit for income taxes for the years ended December 31, 2006 and 2005. As of December 31, 2006, we had federal net operating loss carryforwards of approximately $464.4 million. The net operating loss carryforwards will expire at various dates beginning in 2018 through 2026 if not utilized. We also have federal research and development tax credits of approximately $15.8 million that will expire in the years 2018 through 2026. In addition, we had net operating loss carryforwards for state income tax purposes of approximately $102.2 million that expire in the years 2012 through 2016 and state research and development tax credits of approximately $9.1 million that do not expire. Utilization of the net operating losses may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.

Comparison of years ended December 31, 2005 and 2004

Revenue

For the year ended December 31, 2005, InterMune recorded total net revenue of $110.5 million, compared to $128.7 million for the same period in 2004, a decrease of 14%. Net sales of Actimmune^® for 2005 were $107.6 million, compared to $125.0 million for 2004, a decline of 14%. For each of the years ended December 31, 2005 and 2004, Actimmune^® accounted for approximately 97% of our total net revenue and substantially all of these sales were derived from physicians’ prescriptions for the off-label use of Actimmune^® in the treatment of IPF.

Cost of Goods Sold

Cost of goods sold included product manufacturing costs, royalties and distribution costs associated with our revenue and inventory reserves. Cost of goods sold for the year ended December 31, 2005 was $33.8 million, or approximately 31% of total net revenue, compared to $33.1 million, or approximately 26% of total net revenue, in the corresponding period of 2004. The increase in cost of goods sold primarily reflects a charge of $9.1 million taken for excess inventory from previous years’ contractual purchases compared to a $4.7 million charge taken in 2004 for the same reason. Excluding these charges for excess inventory, cost of goods sold was approximately 22% of total revenue for each of the years ended December 31, 2005 and 2004.

Exchange rate fluctuations on inventory purchases may affect cost of goods sold on Actimmune^® inventory purchased from BI. We have utilized forward exchange contracts to partially offset the effect of exchange rate fluctuations in the past, but we did not enter into any new contracts in 2005.

Amortization and Impairment of Acquired Product Rights

We recorded amortization and impairment of acquired product rights for the years ended December 31, 2005 and 2004 of $1.2 million and $0.7 million, respectively. The acquired product rights were related to the acquisition of Amphotec^® and interferon gamma-1b patents. In March 2005, we recorded an impairment charge of $0.6 million. This impairment charge was based on our impairment review of the Amphotec^® product rights, which took into account that sales levels were lower than expected and that Amphotec^® was not aligned with our new strategic focus in pulmonology and hepatology. In May 2005, we divested the Amphotec^® product line, including all related assets, to Three Rivers for cash consideration.

Research and Development Expenses

Research and development expenses were $82.7 million and $75.7 million for the years ended December 31, 2005 and 2004, respectively, representing an increase of $7.1 million or 9%. The increase in 2005 reflects a greater level of spending to support our Phase III IPF clinical trials and our HCV protease inhibitor program.

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Selling, General and Administrative Expenses

Selling general and administrative expenses were $58.9 million and $55.1 million for the years ended December 31, 2005 and 2004, respectively, representing an increase of $3.7 million, or 7%. The increased spending for the year ended December 31, 2005 compared to the same period in 2004 was primarily due to $5.6 million in expenses related to litigation, legal settlements and ongoing legal matters.

Acquired Research and Development and Milestone (Credits) Payments

There were no charges for acquired research and development and milestone payments in the years ended December 31, 2005 and 2004. Included in our charges prior to 2004 was $10.0 million for a milestone payable to Eli Lilly for oritavancin. We initially expensed this amount as acquired research and development as oritavancin at the time was in clinical development, had not reached technical feasibility and had no foreseeable alternative future uses. In connection with the divestiture of oritavancin to Targanta in December 2005, we received a waiver from Eli Lilly for making this payment and thus reversed the accrued liability for this milestone.

Restructuring Charges

In the fourth quarter of 2005, our board of directors approved a restructuring plan recommended by our Chief Executive Officer and senior management that was designed to help streamline our operations and reduce our operating expenses in 2006. The plan, which consisted of a significant reduction in our investment in field-based IPF disease awareness activities, was implemented concurrently with the divestiture of Infergen^® in December 2005. These combined actions led to a significant headcount reduction of approximately 160 employees and resulting termination costs of approximately $9.2 million. Restructuring charges comprised approximately $5.5 million of this amount which were recorded as a separate component of operating expenses in the statement of operations, with the remainder allocated to discontinued operations. See “Loss from Discontinued Operations” discussion below. The majority of the 160 employees left InterMune at the end of the fourth quarter of 2005 and the remainder during the first quarter of 2006.

The $5.5 million restructuring charge was comprised of approximately $4.7 million for cash severance and related benefits and approximately $0.8 million for non-cash stock compensation, consisting of an allocation of option acceleration costs for approximately 400,000 shares of our common stock.

Interest Income

Interest income increased to $4.0 million for the year ended December 31, 2005 compared to $3.5 million for the year ended December 31, 2004. The increase in interest income in the year ended December 31, 2005 reflects the increase in interest rates that we received on our invested cash and securities, partially offset by our declining cash and short-term investment balances up to our receipt of $120.0 million in proceeds from the sale of Infergen^® in December 2005.

Interest Expense

Interest expense decreased to $1.3 million for the year ended December 31, 2005 compared to $5.1 million for the year ended December 31, 2004. The decrease in interest expense in the year ended December 31, 2005 reflects the 2004 repurchase of all of our $149.5 million 5.75% convertible subordinated notes, and the impact of the lower interest rate on our $170.0 million principal amount 0.25% convertible senior notes, issued in February 2004. At the time of repurchase of the 5.75% convertible subordinated notes, we paid accrued interest charges of $3.2 million.

Other Income (Expense)

Other income (expense) improved to income of $1.3 million in the year ended December 31, 2005 compared to an expense of $7.4 million in 2004. Other income in 2005 included a $1.0 million cash payment received from Targanta in connection with the divestiture of oritavancin. Other expense of $7.4 million for the year ended December 31, 2004 included a charge of $5.0 million for the repurchase of all our outstanding $149.5 million principal amount 5.75% convertible subordinated notes, and the accelerated amortization of $2.1 million of the

54

deferred issuance costs associated with these notes. Also included in other expense for the year ended December 31, 2004 was a $0.3 million foreign currency exchange loss on our unhedged foreign currency payables for inventory and clinical material purchases from BI at year-end.

Loss from Discontinued Operations

The loss from discontinued operations reflects the divestiture of our Infergen^® product line to Valeant which was completed in December 2005. The loss from discontinued operations of $32.9 million in the year ended December 31, 2005 compares to a loss of $14.4 million in the year ended December 31, 2004. The components of the loss from discontinued operations for each of the years included net revenue of Infergen^®, the related cost of goods sold and amortization of acquired product rights, as well as certain allocated research and development and selling general and administrative expenses specific to Infergen^®. The increased loss in 2005 compared to 2004 was the result of a greater level of sales and marketing expenses to support Infergen^®, including the 31-representative sales force hired in the fourth quarter of 2004, and the full year impact of the Phase III trial of once-daily treatment with Infergen^® in combination with ribavirin therapy for hepatitis C PEG nonresponder patients. These increased expenses were offset by the gross margin on higher levels of Infergen^® revenue (see Note 3 of Notes to Consolidated Financial Statements). The loss in 2005 also included employee termination costs of approximately $3.7 million.

Gain on Sale of Discontinued Operations

The gain on sale of discontinued operations in 2005 was comprised of the $120.0 million in cash proceeds and a $2.1 million note received from Valeant in connection with the sale of Infergen^®, offset by the net book value of the assets sold and direct transaction costs. These assets included intellectual property rights, payments to a contract manufacturer, and inventory with a net book value of approximately $36.5 million at the time of the transaction. In addition, we incurred approximately $0.3 million of direct transaction costs related to the sale of Infergen^®.

Provision for Income Taxes

Due to our continuing operating losses and the uncertainty of our recognizing the potential future benefits from these losses, we recorded no provision or benefit for income taxes for the years ended December 31, 2005 and 2004.

Liquidity and Capital Resources

At December 31, 2006, we had cash, cash equivalents and available-for-sale securities of $214.5 million compared to $215.5 million at December 31, 2005. The slight decrease was the result of operating losses, partially offset by the $60.0 million upfront milestone we received from Roche under the collaboration agreement and $19.7 million in proceeds from the issuance of our common stock under our employee stock plans.

The primary objective of our investment activities is to preserve principal while at the same time maximize yields without significantly increasing risk. To achieve this objective, we invest our excess cash in debt instruments of the U.S. federal and state governments and their agencies and high-quality corporate issuers, and, by policy, restrict our exposure by imposing concentration limits and credit worthiness requirements for all corporate issuers.

Operating Activities

Cash used in operating activities was $16.3 million during the year ended December 31, 2006, comprised primarily of a net loss of $107.2 million and a significant decrease in accounts payable and accrued compensation of approximately $24.1 million. This use of cash is net of the $59.5 million deferred revenue balance as a result of the upfront milestone received from Roche under the collaboration agreement, the provision for government settlement, stock-based compensation expense of $16.5 million and a decrease in accounts receivable of $4.4 million. The decrease in accounts payable and accrued compensation was the result of approximately $4.5 million in severance payments made in connection with the headcount reduction at the end of 2005 as a result of our decision to concurrently sell our Infergen^® assets and reduce our investment in field-based IPF disease awareness activities. In addition, we reduced the days outstanding in our trade payables, thus reducing our accounts payable balance by approximately $16.1 million. The decrease in accounts receivable is primarily due to the decline in Actimmune^®

55

sales and the elimination of Infergen^® sales. Details concerning the loss from operations can be found above in this Report under the heading “Results of Operations.”

Investing Activities

Investing activities used $81.4 million in cash flows during the year ended December 31, 2006, primarily due to investment purchases of $130.4 million made after the receipt of $120.0 million from the divestiture of Infergen^® late in December 2005. We also had maturities and sales of available-for-sale securities totaling $53.5 million, which partially offset the purchases during the year.

Financing Activities

Cash provided by financing activities of $19.7 million for the year ended December 31, 2006 was due to the proceeds from the issuance of our common stock under our employee stock plans.

We do not have any “special purpose” entities that are unconsolidated in our financial statements. We have no commercial commitments with related parties. We have no loans with related parties, except for executive loans to Dr. Marianne Armstrong, our Chief Medical Affairs and Regulatory Officer in the amount of $0.1 million (due April 2007), and Dr. Lawrence Blatt, our Chief Scientific Officer, in the amount of $0.1 million (due May 2007). Both of these loans were in place prior to the enactment of the Sarbanes-Oxley Act in 2002.

We believe that we will continue to require substantial additional funding to complete the research and development activities currently contemplated and to commercialize our product candidates. We believe that our existing cash, cash equivalents and available-for-sale securities, together with anticipated cash flows from our operations, will be sufficient to fund our operating expenses, settlement with the government, debt obligations and capital requirements under our current business plan through at least the end of 2008. However, this forward-looking statement involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed under “Item 1A. Risk Factors.” This forward-looking statement is also based upon our current plans and assumptions, which may change, and our capital requirements, which may increase in future periods. Our future capital requirements will depend on many factors, including, but not limited to:

•  sales of Actimmune^® or any of our product candidates in development that receive commercial approval;

•  our ability to partner our programs or products;

•  the progress of our research and development efforts;

•  the scope and results of preclinical studies and clinical trials;

•  the costs, timing and outcome of regulatory reviews;

•  determinations as to the commercial potential of our product candidates in development;

•  the pace of expansion of administrative expenses;

•  the status of competitive products and competitive barriers to entry;

•  the establishment and maintenance of manufacturing capacity through third-party manufacturing agreements;

•  the pace of expansion of our sales and marketing capabilities, in preparation for product launches;

•  the establishment of collaborative relationships with other companies;

•  the payments of annual interest on our long-term debt;

•  the payments related to the Civil Settlement Agreement with the government;

•  the timing and size of the payments we may receive from Roche pursuant to the Collaboration Agreement; and

•  whether we must repay the principal in connection with our convertible debt obligations.

56

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 such fund raising activities at this time. 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.

Contractual Obligations

Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude contingent liabilities, such as milestone payments, for which we cannot reasonably predict future payments. The following chart represents our contractual obligations as of December 31, 2006, aggregated by type (in millions):

Contractual Obligations	Total		2007		2008-2009		2010-2011		After 2011
Long-term debt obligations(1)	$	172.2	$	0.4	$	0.9	$	170.9	$	—
Government settlement		38.4		5.9		13.5		19.0		—
Operating leases		20.0		4.4		9.3		6.3		—
Non-cancelable purchase obligations — Inventory(4)		91.6		15.9		29.8		30.6		15.3
Non-cancelable purchase obligations — Other(2)		13.8		12.3		1.3		0.2		—
Research and development commitments(3)		35.4		14.0		21.4		—		—
Total contractual cash obligations	$	371.4	$	52.9	$	76.2	$	227.0	$	15.3

(1)	These amounts include accrued interest and the principal amount of the 0.25% convertible senior notes due 2011.
(2)	These amounts consist of clinical, process development and marketing related obligations.
(3)	These amounts consist of clinical related obligations and are cancelable upon discontinuation of the trial.
(4)	See Note 15 to the Consolidated Financial Statements for a discussion regarding the commitment.

The operating leases for our facilities require letters of credit secured by a restricted cash balance with our bank. The amount of each letter of credit approximates six to twelve months of operating rent payable to the landlord of each facility.

The majority of our non-cancelable purchase obligations for inventory are denominated in foreign currencies, principally the purchase of Actimmune^® inventory, which is denominated in Euros. We assumed an average foreign currency exchange rate of euros to U.S. dollars of 1.20 over the length of the agreement.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. We are currently evaluating the impact of SFAS 157, but do not expect the adoption of SFAS 157 to have a material impact on our consolidated financial position, results of operations or cash flows.

In July 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006 and as a

57

result, is effective for InterMune in the first quarter of fiscal 2007. We are currently evaluating the effect that the adoption of FIN 48 will have on our consolidated results of operations and financial position.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments” which amends Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities” and Statement of Financial Accounting Standards No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a re-measurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. We will adopt SFAS 155 in the first quarter of fiscal 2007. We do not expect the adoption of SFAS 155 to have a material impact on our consolidated financial position, results of operations or cash flows.

In September 2006, the SEC issued SAB No. 108 “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements”, which provides interpretive guidance on how registrants should quantify financial statement misstatements. Under SAB 108 registrants are required to consider both a “rollover” method which focuses primarily on the income statement impact of misstatements and the “iron curtain” method which focuses primarily on the balance sheet impact of misstatements. The transition provisions of SAB 108 permit a registrant to adjust retained earnings for the cumulative effect of immaterial errors relating to prior years. We will adopt SAB 108 in the first quarter of fiscal 2007.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The securities in our investment portfolio are not leveraged, are classified as available-for-sale and are, due to their short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that a change in market rates would have a significant negative impact on the value of our investment portfolio.

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest our excess cash in debt instruments of the U.S. federal and state governments and its agencies and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates we maintain investments of shorter effective maturities.

The table below presents the principal amounts and weighted-average interest rates by year of maturity for our investment portfolio as of December 31, 2006 by effective maturity (in millions, except percentages):

																	Fair Value at
											2011 and						December 31,
	2007			2008			2009		2010		Beyond			Total			2006
Assets:
Available-for-sale securities	$	172.2		$	29.0		$	—	$	—	$	—		$	201.2		$	202.1
Average interest rate		5.2	%		5.3	%		—		—		—			5.2	%		—
Liabilities:
0.25% convertible senior notes due 2011		—			—			—		—	$	170.0		$	170.0		$	249.1
Average interest rate		—			—			—		—		0.25	%		0.25	%		—

58

The table below presents the principal amounts and weighted-average interest rates by year of maturity for our investment portfolio as of December 31, 2005 by effective maturity (in millions, except percentages):

																		Fair Value at
												2010 and						December 31,
	2006			2007			2008		2009			Beyond			Total			2005
Assets:
Available-for-sale securities	$	78.2		$	1.0			—	$	6.7		$	—		$	85.9		$	86.1
Average interest rate		4.0	%		2.2	%		—		2.8	%		—			4.0	%		—
Liabilities:
0.25% convertible senior notes due 2011		—			—			—		—		$	170.0		$	170.0		$	151.1
Average interest rate		—			—			—		—			0.25	%		0.25	%		—

Foreign Currency Market Risk

We have obligations denominated in euros for the purchase of Actimmune^® inventory. In 2004, we used foreign currency forward contracts to partially mitigate this exposure, but did not enter into any new foreign currency forward contracts in 2005 or 2006. We regularly evaluate the cost-benefit of entering into such arrangements, and presently have no foreign currency hedge agreements outstanding.

59

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm	61
Consolidated Balance Sheets	62
Consolidated Statements of Operations	63
Consolidated Statements of Stockholders’ Equity (Deficit)	64
Consolidated Statements of Cash Flows	65
Notes to Consolidated Financial Statements	66

60

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

InterMune, Inc.

We have audited the accompanying consolidated balance sheets of InterMune, Inc. (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 consolidated financial position of InterMune, Inc. at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, in 2006 InterMune, Inc. changed its method of accounting for stock-based compensation in accordance with guidance provided in Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of InterMune, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2007, expressed an unqualified opinion thereon.

/s/  ERNST & YOUNG LLP

Palo Alto, California

March 12, 2007

61

INTERMUNE, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,
	2006			2005
	(In thousands, except
	per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	109,386		$	187,335
Available-for-sale securities		105,163			28,190
Accounts receivable, net of allowances of $164 in 2006 and $1,444 in 2005		11,799			16,223
Inventories		8,188			12,437
Prepaid expenses and other current assets		7,691			3,942
Total current assets		242,227			248,127
Property and equipment, net		9,210			7,274
Acquired product rights, net		1,167			1,667
Other assets (includes restricted cash of $1,425)		4,979			9,174
Total assets	$	257,583		$	266,242
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	10,572		$	26,655
Accrued compensation		6,181			14,188
Other accrued liabilities		23,550			21,989
Total current liabilities		40,303			62,832
Deferred rent		1,804			1,643
Deferred collaboration revenue		56,732			—
Liability under government settlement		28,541			—
Convertible notes		170,000			170,000
Commitments and contingencies (Note 15)
Stockholders’ equity (deficit):
Convertible preferred stock, $0.001 par value; 5,000 shares authorized, no shares issued and outstanding at December 31, 2006 and 2005, respectively		—			—
Common stock, $0.001 par value, 70,000 shares authorized; 34,264 and 32,589 shares issued and outstanding at December 31, 2006 and 2005, respectively		34			33
Additional paid-in capital		528,116			493,953
Deferred stock compensation		—			(2,092	)
Accumulated other comprehensive income		140			754
Accumulated deficit		(568,087	)		(460,881	)
Total stockholders’ equity (deficit)		(39,797	)		31,767
Total liabilities and stockholders’ equity (deficit)	$	257,583		$	266,242

See Accompanying Notes to Consolidated Financial Statements

62

INTERMUNE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2006			2005			2004
	(In thousands, except per share amounts)
Revenue, net
Actimmune	$	90,317		$	107,633		$	124,980
Other products		—			2,863			3,700
Collaboration revenue		467			—			—
Total revenue, net		90,784			110,496			128,680
Costs and expenses:
Cost of goods sold		24,108			33,842			33,139
Amortization and impairment of acquired product rights		500			1,180			743
Research and development		103,849			82,736			75,683
Selling, general and administrative		40,372			58,854			55,132
Acquired research and development and milestone credits		—			(10,000	)		—
Restructuring charges		—			5,549			—
Provision for government settlement		36,944			—			—
Total costs and expenses		205,773			172,161			164,697
Loss from operations		(114,989	)		(61,665	)		(36,017	)
Other income (expense):
Interest income		9,512			3,965			3,490
Interest expense		(1,542	)		(1,261	)		(5,065	)
Other income (expense)		1,057			1,313			(7,451	)
Loss from continuing operations		(105,962	)		(57,648	)		(45,043	)
Discontinued operations:
Loss from discontinued operations		(1,244	)		(32,925	)		(14,435	)
Gain on sale of discontinued operations (net of transaction costs)		—			85,338			—
Income (loss) from discontinued operations		(1,244	)		52,413			(14,435	)
Net loss	$	(107,206	)	$	(5,235	)	$	(59,478	)
Basic and diluted net loss per share
Continuing operations	$	(3.18	)	$	(1.79	)	$	(1.42	)
Discontinued operations	$	(0.04	)	$	1.63		$	(0.45	)
	$	(3.22	)	$	(0.16	)	$	(1.87	)
Shares used in computing basic and diluted net loss per share		33,277			32,220			31,760

See Accompanying Notes to Consolidated Financial Statements

63

INTERMUNE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

												Accumulated
						Additional						Other						Total
	Common Stock					Paid-In			Deferred Stock			Comprehensive			Accumulated			Stockholders’
	Shares			Amount		Capital			Compensation			Income			Deficit			Equity (Deficit)
	(In thousands)
Balances at December 31, 2003		31,845		$	32	$	483,697		$	(217	)	$	400		$	(396,168	)	$	87,744
Net unrealized loss on available-for-sale securities		—			—		—			—			(638	)		—			(638	)
Net realized gain on foreign exchange contract		—			—		—			—			1,824			—			1,824
Net loss		—			—		—			—			—			(59,478	)		(59,478	)
Comprehensive loss																			(58,292	)
Exercise of stock options		109			—		879			—			—			—			879
Stock issued under employee stock purchase plan		97			—		1,161			—			—			—			1,161
Stock compensation related to the modification of unvested stock options		—			—		110			—			—			—			110
Stock compensation related to options granted to consultants for services		—			—		45			—			—			—			45
Issuance of restricted stock to employees		532			1		8,129			(8,067	)		—			—			63
Reversal of deferred stock compensation due to employee terminations		—			—		(1,358	)		1,193			—			—			(165	)
Amortization of deferred stock compensation, net of reversals		—			—		—			1,246			—			—			1,246
Balances at December 31, 2004		32,583		$	33	$	492,663		$	(5,845	)	$	1,586		$	(455,646	)	$	32,791
Net unrealized gain on available-for-sale securities		—			—		—			—			173			—			173
Net realized gain on foreign exchange contract		—			—		—			—			(1,005	)		—			(1,005	)
Net loss		—			—		—			—			—			(5,235	)		(5,235	)
Comprehensive loss																			(6,067	)
Exercise of stock options		19			—		236			—			—			—			236
Stock issued under employee stock purchase plan		203			—		1,847			—			—			—			1,847
Stock compensation related to the modification of unvested stock options		—			—		1,301			—			—			—			1,301
Issuance of restricted stock to employees		11			—		175			—			—			—			175
Reversal of deferred stock compensation due to employee terminations		(227	)		—		(2,269	)		2,269			—			—			—
Amortization of deferred stock compensation, net of reversals		—			—		—			1,484			—			—			1,484
Balances at December 31, 2005		32,589		$	33	$	493,953		$	(2,092	)	$	754		$	(460,881	)	$	31,767
Net unrealized loss on available-for-sale securities		—			—		—			—			(7	)		—			(7	)
Net realized gain on foreign exchange contract		—			—		—			—			(607	)		—			(607	)
Net loss		—			—		—			—			—			(107,206	)		(107,206	)
Comprehensive loss																			(107,820	)
Exercise of stock options		1,225			1		18,605			—			—			—			18,606
Stock issued under employee stock purchase plan		117			—		1,128			—			—			—			1,128
Reclassification of deferred compensation upon adoption of SFAS 123(R)		—			—		(2,092	)		2,092			—			—			—
Issuance of restricted stock to employees		333			—		5,960			—			—			—			5,960
Stock compensation related to the modification of stock options		—			—		253			—			—			—			253
Stock compensation related to employee stock benefit plans		—			—		10,309			—			—			—			10,309
Balances at December 31, 2006		34,264		$	34	$	528,116		$	—		$	140		$	(568,087	)	$	(39,797	)

See Accompanying Notes to Consolidated Financial Statements

64

INTERMUNE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Year Ended December 31,
	2006			2005			2004
	(In thousands)
Cash flows used for operating activities:
Net loss	$	(107,206	)	$	(5,235	)	$	(59,478	)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on sale of discontinued operations		—			(85,338	)		—
Restructuring charges		—			5,549			—
Stock-based compensation expense		16,522			2,144			1,298
Acquired research and development and milestone (credits) payments		—			(10,000	)		—
Amortization		1,331			4,555			4,264
Depreciation		2,516			2,860			2,700
Deferred rent		161			130			257
Impairment of intangible asset		—			600			—
Change in unrealized gain on foreign currency cash flow hedge		(607	)		(1,005	)		1,096
Loss on early extinguishment of debt		—			—			7,072
Changes in operating assets and liabilities:
Accounts receivable, net		4,424			(1,335	)		1,172
Inventories		4,249			14,053			(12,928	)
Prepaid expenses		(1,319	)		(291	)		(332	)
Other assets		927			(760	)		32
Accounts payable and accrued compensation		(24,090	)		(1,084	)		10,556
Other accrued liabilities		(5,816	)		4,386			1,150
Liability under government settlement		33,116			—			—
Deferred collaboration revenue		59,534			—			—
Net cash used in operating activities		(16,258	)		(70,771	)		(43,141	)
Cash flows from investing activities:
Purchase of property and equipment		(4,452	)		(2,144	)		(1,340	)
Proceeds from the divestiture of Infergen		—			120,000			—
Purchase of manufacturing technology rights		—			(16,832	)		—
Purchases of available-for-sale securities		(130,434	)		(77,353	)		(139,617	)
Maturities of available-for-sale securities		41,396			103,516			124,287
Sales of available-for-sale securities		12,065			72,903			61,471
Other		—			163			—
Net cash provided by (used in) investing activities		(81,425	)		200,253			44,801
Cash flows from financing activities:
Proceeds from issuance of common stock, net		19,734			2,084			2,040
Proceeds from convertible senior notes, net		—			—			164,221
Repurchase of convertible subordinated notes		—			—			(154,451	)
Repayment of notes receivable from stockholder		—			—			228
Net cash provided by financing activities		19,734			2,084			12,038
Net increase (decrease) in cash and cash equivalents		(77,949	)		131,566			13,698
Cash and cash equivalents at beginning of period		187,335			55,769			42,071
Cash and cash equivalents at end of period	$	109,386		$	187,335		$	55,769
Supplemental disclosure of cash flow information:
Interest paid	$	445		$	425		$	3,903

See Accompanying Notes to Consolidated Financial Statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   ORGANIZATION

Overview

InterMune, Inc. (“InterMune,” “the company,” “we,” “our,” or “us”) is an independent biotechnology company focused on developing and commercializing innovative therapies in pulmonology and hepatology. Our revenue is provided primarily from sales of Actimmune^®. We also have preclinical and advanced stage clinical programs in the pulmonology and hepatology areas. As part of our efforts to refocus our corporate strategy, we completed the sale of our Infergen^® product, including related intellectual property rights and inventory, in December 2005. As a result of this transaction, Infergen^® related activities are reflected as discontinued operations in these financial statements. Effective March 5, 2007 as a result of disappointing trial results, we made the decision to discontinue the Phase 3 INSPIRE clinical trial evaluating Actimmune^® in patients with IPF.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of InterMune and its wholly-owned subsidiaries, InterMune Canada Inc. and InterMune Ltd. (U.K.). All inter-company accounts and transactions have been eliminated. To date, the financial position and results of operations of InterMune Canada Inc. and InterMune Ltd. (U.K.) have been dormant.

Basis of Presentation

Effective 2006, we began reporting provisions for estimated returns, rebates and Medicaid reserves as current liabilities. Previously, these provisions were included as part of our allowance for doubtful accounts and reduced our net accounts receivable. The effect of this change was an increase to both net accounts receivable and other accrued liabilities of approximately $1.7 million and $2.8 million at December 31, 2006 and 2005, respectively.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

We evaluate our estimates and assumptions on an ongoing basis, including those related to reserves for doubtful accounts, returns, charge backs, cash discounts and rebates; excess inventories; inventory purchase commitments; and accrued clinical and preclinical expenses and contingent liabilities. We base our estimates on historical experience and on various other specific assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Cash, Cash Equivalents and Available-For-Sale Securities

Cash and cash equivalents consist of highly liquid investments with original maturities, when purchased, of less than three months. We classify all debt securities as available-for-sale. Cash equivalents and available-for-sale securities are carried at fair value, with unrealized gains and losses, reported as other comprehensive income, a separate component of stockholders’ equity (deficit). We have estimated the fair value amounts by using readily available market information. The cost of securities sold is based on the specific identification method.

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Fair Value of Other Financial Instruments

Other financial instruments, including accounts receivable, accounts payable and accrued liabilities, are carried at historical cost, which we believe approximates fair value because of the short-term maturity of these instruments. The fair value of our convertible senior notes was $249.1 million at December 31, 2006 and $151.1 million at December 31, 2005, which we determined using readily available market information.

Inventory Valuation

Inventories consist principally of finished-good products and are stated at the lower of cost or market value. Cost is determined by the specific identification method.

Because of the long lead times required to manufacture our products, we enter into non-cancelable obligations to purchase our inventory. We evaluate the need to provide reserves for contractually committed future purchases of inventory that may be in excess of forecasted future demand. In making these assessments, we are required to make judgments as to the future demand for current or committed purchases. We are also required to make judgments as to the expiration dates of our products, since our products can no longer be used after their respective expiration dates. As part of our excess inventory assessment for all of our products, we also consider the expiration dates of our products to be manufactured in the future under non-cancelable purchase obligations.

Significant differences between our current estimates and judgments and future commercial and clinical estimated demand for Actimmune^® and the useful life of our inventories may result in significant charges for excess inventory or purchase commitments in the future. These differences could have a material adverse effect on our financial condition and results of operations during the period in which we recognize an inventory reserve. During the years ended December 31, 2005 and 2004, we charged $9.1 million and $4.7 million, respectively, to cost of goods sold for excess inventory and non-cancelable purchase obligations for inventory in excess of forecasted needs.

Concentration of Risks

Cash equivalents and investments are financial instruments that potentially subject us to concentration of risk to the extent recorded on the balance sheet. We have established guidelines for investing excess cash relative to diversification and maturities that we believe maintain safety and liquidity. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest our excess cash in debt instruments of the U.S. federal and state governments and their agencies and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To reduce the exposure due to adverse shifts in interest rates we maintain investments with short effective maturities.

Foreign Currency and Derivative Instruments

From time to time, we use derivatives to manage our market exposure to fluctuations in foreign currencies. We record all derivatives on the balance sheet at fair value. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The gain or loss on the derivative instruments in excess of the cumulative change in the present value of future cash flows of the hedged transaction, if any, is recognized in current earnings during the period of change. We do not use derivative instruments for speculative purposes.

We purchase commercial and clinical products from Boehringer Ingelheim (“BI”) and settle our obligations in a foreign currency. This exposes us to foreign currency exchange rate risk. To protect against currency exchange risks on forecasted foreign currency cash payments for the purchases of Actimmune^® from BI over the next year, we

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have considered instituting a foreign currency cash flow hedging program. In the past, we have hedged portions of our forecasted foreign currency cash payments with forward contracts. When the dollar strengthens significantly against the foreign currencies, the decline in the value of future foreign currency expenses is offset by losses in the value of the option or forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the value of future foreign currency expenses is offset by gains in the value of the forward contracts. In accordance with FAS 133, hedges related to anticipated transactions are designated and documented at the hedge’s inception as cash flow hedges and evaluated for hedge effectiveness at least quarterly.

At December 31, 2006, net gains on derivative instruments expected to be reclassified from accumulated other comprehensive income to earnings ratably with sales of Actimmune^® were $0.2 million. Such amount will be recognized as a reduction of cost of goods sold ratably as the related units of Actimmune^® are sold. At December 31, 2006, there were no outstanding derivative instruments.

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets as follows:

	Useful Lives
Computer and laboratory equipment	3 to 5 years
Office furniture and fixtures	3 to 5 years
Leasehold improvements	Length of lease

Acquired Product Rights

Initial payments for the acquisition of products that, at the time of acquisition, are already marketed or are approved by the FDA for marketing are capitalized and amortized ratably over the estimated life of the products, typically ten years. At the time of acquisition, the product life is estimated based upon the term of the agreement, the patent life of the product and our assessment of future sales and profitability of the product. We assess this estimate regularly during the amortization period and adjust the asset value or useful life when appropriate. Initial payments for the acquisition of products that, at the time of acquisition, are under development or are not approved by the FDA for marketing, have not reached technical feasibility and have no foreseeable alternative uses are expensed as research and development costs. Acquired product rights consist of payments made for the acquisition of rights to interferon gamma (see Note 6). Accumulated amortization of this intangible asset was $2.3 million and $1.8 million at December 31, 2006 and 2005, respectively. Amortization expense for acquired product rights for each of the next three years until fully amortized is as follows: 2007 — $0.5 million; 2008 — $0.5 million; 2009 — $0.2 million.

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” if indicators of impairment exist, we assess 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, we 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.

Revenue Recognition and Revenue Reserves

We recognize revenue generally upon delivery when title passes to a credit-worthy customer and record provisions for estimated returns, rebates, chargebacks and cash discounts against revenue. We are obligated to accept from customers the return of pharmaceuticals that have reached their expiration date. We believe that we are able to make reasonable and reliable estimates of product returns, rebates, chargebacks and cash discounts based on historical experience and other known or anticipated trends and factors. We review all sales transactions for

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potential rebates, chargebacks and discounts each month and believe that our reserves are adequate. We include shipping and handling costs in cost of goods sold.

Our revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration we receive is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Advance payments received in excess of amounts earned are classified as deferred revenue until earned.

Collaboration revenue generally includes upfront license fees and milestone payments. Nonrefundable upfront license fees that require our continuing involvement in the form of research, development, or other commercialization efforts by us are recognized as revenue ratably over the estimated life of the contract. Milestone payments are recognized as revenue when milestones, as defined in the contract, are achieved.

On March 26, 2004, we entered into an agreement with Baxter Healthcare Corporation (“Baxter”) under which we co-promoted Baxter’s product Aralast^® in the United States for the treatment of patients with hereditary emphysema. Under this agreement, we were compensated by Baxter based upon a percentage of Aralast sales. We recognized Aralast co-promotion revenue upon receipt of the co-promotion funds from Baxter. The co-promotion revenue calculation was dependent upon national sales data which lagged one quarter for reporting purposes, therefore estimates were not used. Co-promotion revenue was based on a percentage of Baxter’s sales of Aralast to pulmonologists. We terminated this agreement with Baxter in December 2005 in connection with the decision to significantly reduce our field-based pulmonary disease awareness activities.

Research and Development Expenses

Research and development (“R&D”) expenses include salaries, contractor and consultant fees, external clinical trial expenses performed by contract research organizations (“CRO”), licensing fees and facility and administrative expense allocations. In addition, we fund R&D at research institutions under agreements that are generally cancelable at our option. Research costs typically consist of applied research and preclinical and toxicology work. Pharmaceutical manufacturing development costs consist of product formulation, chemical analysis and the transfer and scale-up of manufacturing at our contract manufacturers. Clinical development costs include the costs of Phase I, II and III clinical trials. These costs, along with the manufacturing scale-up costs, are a significant component of research and development expenses.

We accrue costs for clinical trial activities performed by contract research organizations and other third parties based upon the estimated amount of work completed on each study as provided by the CRO. These estimates may or may not match the actual services performed by the organizations as determined by patient enrollment levels and related activities. We monitor patient enrollment levels and related activities using available information; however, if we underestimate activity levels associated with various studies at a given point in time, we could record significant R&D expenses in future periods when the actual activity level becomes known. We charge all such costs to R&D expenses.

Collaboration agreements with co-funding arrangements resulting in a net receivable or payable of R&D expenses are recognized as the related R&D expenses by both parties are incurred. The agreement resulted in a net receivable of approximately $3.2 million in 2006. See Note 7 below.

Advertising Costs

We expense advertising costs as incurred. Advertising costs were $285,000, $313,000 and $520,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

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Income Taxes

In accordance with SFAS No. 109, “Accounting for Income Taxes,” we determine a deferred tax asset or liability 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. We provide 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. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.

Comprehensive Income (Loss)

SFAS No. 130, “Reporting Comprehensive Income,” requires components of other comprehensive income, including unrealized gains or losses on our available-for-sale securities, to be included in total comprehensive income (loss). Total comprehensive loss for each of the periods presented is disclosed in Note 10 below. Also, other comprehensive income (loss) includes certain changes in stockholders’ equity that are excluded from net income. Specifically, we include in other comprehensive income (loss) changes in the fair value of our available-for-sale investments and derivatives designated as effective cash flow hedges.

Net Loss Per Share

We compute basic net loss per share by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. We deduct shares subject to repurchase by us from the outstanding shares to arrive at the weighted average shares outstanding. We compute diluted net loss per share by dividing the net loss for the period by the weighted average number of common and common equivalent shares outstanding during the period. We exclude potentially dilutive securities, composed of incremental common shares issuable upon the exercise of stock options and common shares issuable on conversion of our convertible notes, from diluted net loss per share because of their anti-dilutive effect.

The securities excluded were as follows (in thousands):

	Year Ended December 31,
	2006		2005		2004
Options		5,390		6,449		4,945
Shares issuable upon conversion of convertible notes		7,859		7,859		7,859

The calculation of basic and diluted net loss per share is as follows (in thousands, except per share data):

	Year Ended December 31,
	2006			2005			2004
Net loss	$	(107,206	)	$	(5,235	)	$	(59,478	)
Basic and diluted net loss per share:
Weighted-average shares of common stock outstanding		33,702			32,577			32,089
Less: weighted-average shares subject to repurchase		(425	)		(357	)		(329	)
Weighted-average shares used in computing basic and diluted net loss per common share		33,277			32,220			31,760
Basic and diluted net loss per share	$	(3.22	)	$	(0.16	)	$	(1.87	)

Stock-Based Compensation

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted

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stock and employee stock purchases related to the Amended and Restated 2000 Employee Stock Purchase Plan (“ESPP”) based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. In accordance with the modified prospective transition method, the Company’s Condensed Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R) for the year ended December 31, 2006 was $16.5 million, which consisted of stock-based compensation expense related to employee stock options, restricted stock and the ESPP. Basic and diluted net loss per share for the year ended December 31, 2006 was $0.32 higher than if we had continued to account for stock-based compensation under APB 25. Stock-based compensation expense of $3.0 million for the year ended December 31, 2005 was related to restricted stock and costs associated with the acceleration of unvested stock options, which the Company had been recognizing under previous accounting standards. There was no stock-based compensation expense related to the ESPP recognized during the year ended December 31, 2005. See Note 13 for additional information.

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statement of Operations. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based compensation expense had been recognized in the Company’s Consolidated Statement of Operations, other than for restricted stock and the acceleration of unvested stock options, because the exercise price of the Company’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in our Condensed Consolidated Statement of Operations for fiscal 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), we changed our method of attributing the value of stock-based compensation to expense from the accelerated multiple- option approach to the straight-line single option method. Compensation expense for all share-based payment awards granted on or prior to December 31, 2005 will continue to be recognized using the accelerated multiple-option approach while compensation expense for all share-based payment awards granted subsequent to December 31, 2005 is recognized using the straight-line single option method. As stock-based compensation expense recognized in the Condensed Consolidated Statement of Operations for fiscal 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, we accounted for forfeitures as they occurred.

Upon adoption of SFAS 123(R), the Company retained its method of valuation for share-based awards granted beginning in fiscal 2006 with the use of the Black-Scholes option-pricing model (“Black-Scholes model”) which was previously used for the Company’s pro forma information required under SFAS 123. For additional

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information, see Note 13. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. We are currently evaluating the impact of SFAS 157, but do not expect the adoption of SFAS 157 to have a material impact on our consolidated financial position, results of operations or cash flows.

In July 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006 and as a result, is effective for InterMune in the first quarter of fiscal 2007. We are currently evaluating the effect that the adoption of FIN 48 will have on our consolidated results of operations and financial position.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments” which amends Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities” and Statement of Financial Accounting Standards No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a re-measurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. We will adopt SFAS 155 in the first quarter of fiscal 2007. We do not expect the adoption of SFAS 155 to have a material impact on our consolidated financial position, results of operations or cash flows.

In September 2006, the SEC issued SAB No. 108 “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements”, which provides interpretive guidance on how registrants should quantify financial statement misstatements. Under SAB 108 registrants are required to consider both a “rollover” method which focuses primarily on the income statement impact of misstatements and the “iron curtain” method which focuses primarily on the balance sheet impact of misstatements. The transition provisions of SAB 108 permit a registrant to adjust retained earnings for the cumulative effect of immaterial errors relating to prior years. We will adopt SAB 108 in the first quarter of fiscal 2007.

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3.   DISCONTINUED OPERATIONS

Product Acquisition Agreement

We entered into a Product Acquisition Agreement (the “Agreement”) with Valeant Pharmaceuticals International (“Valeant”) on November 28, 2005, whereby Valeant agreed to purchase all of the rights to Infergen^® from us. Valeant agreed to acquire certain assets, including intellectual property rights and inventory, as of December 30, 2005 (the “Closing Date”) for approximately $122.1 million, including a fixed payment of approximately $2.1 million in 2007. Of the $122.1 million, $6.5 million is related to the purchase of finished product inventory. The Agreement also states that we are entitled to receive approximately $20.0 million contingent upon Valeant achieving certain clinical related milestones beginning in 2007. The operating results of our Infergen^® activities, which include allocations of research and development and selling, general and administrative expenses, have been reclassified as discontinued operations for all periods presented.

We had acquired rights to Infergen^® in a licensing and commercialization agreement with Amgen in 2001 through which we obtained an exclusive license in the United States and Canada to Infergen^® and the rights to an early stage program to develop a pegylated form of Infergen^® (PEG-Alfacon-1). Infergen^® is currently approved in both the United States and Canada to treat chronic HCV infections. We initially paid Amgen total consideration of $29.0 million for up-front license and other fees and milestones with respect to our license, and had been obligated to pay royalties on sales of Infergen^®. Based upon an independent appraisal, the $5.4 million fair value of the in-process research and development program for PEG-Alfacon-1 was expensed as acquired research and development and milestone payments because at the time of acquisition the PEG-Alfacon-1 program was in clinical development, had not reached technical feasibility and had no foreseeable alternative future uses. The remainder of the purchase price of approximately $23.6 million was allocated to developed technology and recorded as an intangible asset, which was being amortized over ten years. At December 30, 2005, the net book value of this asset was $12.9 million.

Manufacturing Technology Rights

On November 3, 2005, we entered into an agreement with BI for the future clinical and commercial supply of Infergen^®. The agreement generally obligated BI to supply exclusively to us, and for us to purchase exclusively from BI, bulk Infergen^® as well as the finished forms of Infergen^® that are currently marketed. Amgen will remain the manufacturer for Infergen^® until the transfer of the manufacturing process from Amgen to BI is completed and until BI is approved by the FDA as a manufacturer of Infergen^®. Prior to and upon execution of the agreement, we made payments to BI of approximately $16.8 million. We assigned this agreement and all future rights and obligations thereunder to Valeant as part of the sale of the Infergen^® product to Valeant in December 2005.

Purchase Option

Under the terms of our agreement with Valeant for the purchase of Infergen^®, Valeant has the option to acquire our rights to PEG Alfacon-1 at any time prior to the commencement of a Phase III clinical trial for PEG Alfacon-1, provided that we have incurred documented expenses by that time of at least $7.0 million in the development of PEG Alfacon-1. If Valeant chooses to exercise this option, Valeant will be obligated to pay us an amount equal to 150% of our documented expenses directly incurred by us in connection with the development of PEG Alfacon-1. In addition, if we decide to accept an offer from a third party to acquire the rights to PEG Alfacon-1, we are required to deliver written notice to Valeant of such offer and Valeant has the option to acquire the rights to PEG Alfacon-1 on substantially the same terms and conditions as those offered to us by such third party.

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Results of Discontinued Operations

Summary operating results for the discontinued operations are as follows (in thousands):

	Year Ended December 31,
	2006			2005			2004
Infergen revenue, net	$	(1,024	)	$	36,399		$	22,307
Costs and expenses:
Cost of goods sold		81			17,296			7,723
Amortization and impairment of acquired product rights		—			2,360			2,360
Research and development		(531	)		13,652			5,636
Selling, general and administrative		230			36,016			21,023
Total costs and expenses		(220	)		69,324			36,742
Loss from discontinued operations	$	(1,244	)	$	(32,925	)	$	(14,435	)

The loss from discontinued operations in 2005 includes a write-off of $3.2 million for inventory not acquired by Valeant and severance related costs of approximately $3.7 million, including $0.5 million of option acceleration costs for approximately 400,000 shares of our common stock. Discontinued operations in 2006 consist primarily of transition related services, including product returns.

Gain on Sale of Discontinued Operations

The gain on sale of discontinued operations is calculated as follows (in thousands):

Cash proceeds received from sale	$	120,000
Note receivable from Valeant		2,130
		122,130
Less Infergen® assets sold:
Acquired product rights, net		(12,889	)
Manufacturing technology rights		(16,832	)
Inventories		(6,500	)
Property and equipment, net		(271	)
Less direct transaction costs:
Legal, accounting and regulatory		(300	)
Total	$	85,338

4.   RESTRUCTURING CHARGES

In the fourth quarter of 2005, our Board of Directors approved a restructuring plan recommended by our Chief Executive Officer and senior management that was designed to help streamline our operations and reduce our operating expenses in 2006. The plan, which consisted of a significant reduction in our investment in field-based IPF disease awareness activities, was implemented concurrently with the divestiture of Infergen^® in December 2005 (see Note 3). These combined actions led to a significant headcount reduction of approximately 160 employees and resulting termination costs of approximately $9.2 million. Restructuring charges comprised approximately $5.5 million of this amount which were recorded as a separate component of operating expenses in the statement of operations, with the remainder allocated to discontinued operations. The majority of the 160 employees left InterMune at the end of the fourth quarter of 2005 and the remainder during the first quarter of 2006.

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The $5.5 million restructuring charge is comprised of approximately $4.7 million for cash severance and related benefits and approximately $0.8 million for non-cash stock compensation, consisting of an allocation of option acceleration costs for approximately 400,000 shares of our common stock.

The activity in the accrued restructuring balance, included within accrued compensation on the balance sheet, was as follows for 2006 (in thousands):

	Restructuring								Restructuring
	Liabilities at								Liabilities at
	December 31,		Cash			Accrual			December 31,
	2005		Payments			Reversals			2006
Workforce reduction	$	4,733	$	(4,653	)	$	(80	)	$	—

5.  AMPHOTEC^® AND ORITAVANCIN

In 2001, we acquired worldwide rights from ALZA, (now a subsidiary of Johnson & Johnson) to Amphotec^® (sold under the trade name Amphocil^® in certain countries outside the United States). The transaction terms included an up-front product acquisition fee of $9.0 million which was capitalized as acquired product rights and was being amortized over its estimated useful life of ten years. During September 2003, we reduced the remaining carrying value of the intangible asset by recording an impairment charge of $4.8 million. In 2004, we decided to divest Amphotec^®. In March 2005, we recorded an additional impairment charge of $0.6 million. These impairment charges were based on our impairment review of the Amphotec^® product rights, which took into account that sales levels were lower than expected and that Amphotec^® is not aligned with our new strategic focus in pulmonology and hepatology.

In May 2005, we divested the Amphotec^® product line, including all related assets, to Three Rivers for cash consideration. The resulting loss, which was not material, is included in other income in our 2005 results of operations. In accordance with our agreement with Three Rivers, we may receive contingent payments based on Three Rivers meeting future specified sales targets of Amphotec^®. During the fourth quarter of 2006, the first of these sales targets was met and we received $0.5 million from Three Rivers in the first quarter of 2007.

In 2001, we entered into an asset purchase and license agreement with Eli Lilly pursuant to which we acquired worldwide rights to oritavancin. The agreement provided us with exclusive worldwide rights to develop, manufacture and commercialize oritavancin. Pursuant to the agreement, we paid Eli Lilly $50.0 million and would have been obligated to pay Eli Lilly significant milestone payments and royalties on product sales. We expensed the $50.0 million during 2001 since oritavancin was in clinical development, had not reached technical feasibility and had no foreseeable alternative uses. We had made no royalty or milestone payments under this agreement through December 31, 2005. In September 2002, Eli Lilly exercised its option under the agreement to reduce the agreed percentage of royalties on product sales. The exercise of this option required us to pay $15.0 million to Eli Lilly, and we made the payment to Eli Lilly during January 2003. In September 2003, we expensed $10.0 million related to a milestone payment due to Eli Lilly for the completion of the Phase III clinical trials for oritavancin. This amount was recorded as a milestone-based liability at December 31, 2003 as a result of an understanding between Eli Lilly and ourselves.

In December 2005, we sold the oritavancin compound to Targanta Therapeutics (“Targanta”). The terms of the agreement included upfront and clinical related contingent milestone payments of up to $9.0 million. A $1.0 million upfront payment from Targanta has been included in other income in our 2005 statement of operations and an additional $1.0 million payment has been included in other income in our 2006 statement of operations. We also received a convertible promissory note that, assuming certain clinical milestones were achieved, could have been valued at up to $25.0 million in principal amount from Targanta, which note was initially secured by the oritavancin assets. Upon the achievement by Targanta of certain corporate objectives, the notes were designed to convert into capital stock of Targanta, subject to certain limitations in the amount of voting stock that we may hold. Based on Targanta’s early stage of development, significant uncertainty exists regarding the realization of the convertible

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promissory note, and thus we have fully reserved this amount in the accompanying financial statements. Effective February 2007, the corporate objectives have been met by Targanta and, upon conversion of the promissory note, we now hold approximately 1.7 million shares of Targanta Series C preferred stock. InterMune also received a seat on the Targanta Board of Directors. In connection with the Targanta transaction, Eli Lilly waived its right to collect the $10.0 million milestone payment which had previously been accrued. As a result, we reversed this liability in 2005 (reflected as a credit to acquired research and development expenses in the accompanying statement of operations).

6.   ACQUIRED PRODUCT RIGHTS

Marnac, Inc./KDL GmbH (Pirfenidone)

In 2002, we licensed from Marnac and its co-licensor, KDL, their worldwide rights, excluding Japan, Korea and Taiwan, to develop and commercialize pirfenidone for all fibrotic diseases, including renal, liver and pulmonary fibrosis. Under the agreement terms, we received an exclusive license from Marnac and KDL in exchange for an up-front cash payment of $18.8 million and future milestone and royalty payments. We expensed the $18.8 million as acquired research and development and milestone payments in the first quarter of 2002 since pirfenidone was in clinical development, had not reached technical feasibility and had no foreseeable alternative future uses. Future milestone payments will be based on the progress of clinical development of pirfenidone. We had made no royalty or milestone payments under this agreement through December 31, 2006. If all of the milestones under this agreement are achieved, we would be required to make milestone payments of $14.5 million. Our rights to the licensed products under the agreement could revert to Marnac if we do not meet our diligence obligations or otherwise commit a material breach of the agreement. The agreement will expire upon the later of the expiration of the primary patent licensed under the agreement or on a disease-by-disease and country-by-country basis (as determined by reference to the indications for which pirfenidone is approved in such country) on the later of (i) the expiration of market exclusivity in such country (if any) resulting from the grant of orphan drug designation to pirfenidone for the treatment of a human fibrotic disease; and (ii) the expiration of the last valid and enforceable claim in a issued licensed patent claiming the use of pirfenidone to treat such disease in such country. Following expiration of the agreement, we will retain a fully paid-up, royalty-free, perpetual, irrevocable, sublicenseable license to the patents, know-how, and other intellectual property rights licensed under the Agreement. We may terminate the agreement after giving the requisite notice to Marnac. In the event Marnac or KDL terminate the agreement, we have the right to seek specific performance of the agreement.

Amgen Inc. (Interferon Gamma)

In 2002, we acquired certain pending patent applications relating to interferon gamma from Amgen in exchange for $3.5 million, of which $1.5 million was paid in June 2002, and the remaining $2.0 million was paid in January 2003. We are amortizing these product rights to operations over the expected useful product life of Actimmune^®.

Shearwater Corporation (PEG-Alfacon-1)

In June 2002, we entered into a development, license and manufacturing agreement with Shearwater, a wholly owned subsidiary of Nektar Therapeutics, to access Shearwater’s pegylation technology in order to develop a pegylated version of Infergen^®. Under the terms of the agreement, we received a co-exclusive license with Maxygen from Shearwater in exchange for an up-front payment of $500,000 and future milestone and royalty payments. We terminated this agreement in June 2006 and had paid $250,000 in milestone payments, but no royalty payments, under this agreement in the aggregate through the date of termination.

Genentech, Inc. License Agreement (Actimmune^®)

In 1998, we obtained a license under Genentech’s patents relating to Actimmune^®. The license from Genentech terminates on the later of May 5, 2018 or the date that the last of the patents licensed under the

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agreement expires. Our licensed Actimmune^® rights include exclusive and non-exclusive licenses. The exclusive licenses include the right to develop and commercialize Actimmune^® in the United States and Canada for the treatment and prevention of all human diseases and conditions, including infectious diseases, pulmonary fibrosis and cancer, but excluding arthritis and cardiac and cardiovascular diseases and conditions. The non-exclusive licenses include the right to make or have made Actimmune^® for clinical and commercial purposes within our field of use in the United States and Canada. In Japan, we have the exclusive license rights to commercialize Actimmune^® for the treatment and prevention of all infectious diseases caused by fungal, bacterial or viral agents, including in patients with CGD or osteopetrosis. We also have the opportunity, under specified conditions, to obtain further rights to Actimmune^® in Japan and other countries. In addition, we received an exclusive sublicense under certain of Genentech’s patents outside the United States, Canada and Japan under the BI agreement discussed below. Under the Genentech license, we pay Genentech royalties on the revenue from sales of Actimmune^® and are required to make one-time payments to Genentech upon the occurrence of specified milestone events, which include the submission of a filing a BLA with the FDA for approval to market Actimmune^® for the treatment of particular categories of diseases, the receipt of FDA approval to market Actimmune^® for the treatment of particular categories of diseases and the achievement of certain annual revenue targets for Actimmune^®. We had made royalty payments of approximately $67.2 million, but no milestone payments, under this agreement in the aggregate through December 31, 2006. If all of the milestones under this agreement are achieved, we would be required to make milestone payments of $3.2 million. We must satisfy specified diligence obligations under the agreement with Genentech to maintain our license from Genentech. Our rights to certain therapeutic uses for Actimmune^® under this agreement could revert to Genentech if we do not meet our diligence obligations or otherwise commit a material breach of the agreement.

Connetics Corporation (Actimmune^®)

Through an assignment and option agreement with Connetics, we paid Connetics $5.7 million to acquire rights to Actimmune^® and are obligated to pay to Connetics a royalty of 0.25% of our net United States sales for Actimmune^® until our net United States sales cumulatively surpass $1.0 billion. Above $1.0 billion, we are obligated to pay a royalty of 0.5% of our net United States sales of Actimmune^®. Through a separate purchase agreement, we paid Connetics $0.4 million to acquire rights related to scleroderma and are obligated to pay Connetics a royalty of 4.0% on our net revenue from sales of Actimmune^® for the treatment of scleroderma. We had made royalty payments of approximately $1.5 million in the aggregate through December 31, 2006. There are no milestone payments pursuant to this agreement.

7.   SPONSORED RESEARCH, LICENSE AND COLLABORATION AGREEMENTS

Roche (Protease Inhibitors)

In October 2006 we entered into an Exclusive License and Collaboration Agreement (the “Collaboration Agreement”) with Hoffmann-LaRoche Inc. and F.Hoffmann-La Roche Ltd (collectively, “Roche”). Under the Collaboration Agreement, we will collaborate with Roche to develop and commercialize products from our HCV protease inhibitor program. The Collaboration Agreement includes our lead candidate compound ITMN-191, which entered Phase 1a clinical trials late in 2006. We will also collaborate with Roche on a research program to identify, develop and commercialize novel second-generation HCV protease inhibitors.

Under the terms of the Collaboration Agreement, we will conduct Phase I studies for ITMN-191, and thereafter Roche will lead clinical development and commercialization. Upon closing, we received an upfront payment of $60.0 million from Roche. In addition, assuming successful development and commercialization of ITMN-191 in the United States and other countries, we could potentially receive up to $470.0 million in milestone payments, of which $10.0 million has been received in January 2007. Roche will fund 67% of the global development costs of ITMN-191 and, if the product is approved for commercialization by the U.S. Food and Drug Administration, we will co-commercialize the product in the United States and share profits on a 50-50 basis with Roche. We will

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receive royalties on any sales of the product outside of the United States. We have the right to opt-out of either co-development and/or co-commercialization of ITMN-191 in exchange for higher royalties on sales outside of the United States, and royalties instead of profit sharing in the United States. The economic terms for ITMN-191 could also apply to additional compounds that we and Roche develop under the Collaboration Agreement.

Novartis Corporation (formerly Chiron Corporation) (Small Molecule Therapeutics)

In 2004, we entered into a license agreement with Novartis which granted us the right to discover, develop and commercialize small molecule therapeutic agents against certain HCV targets that are covered by patents owned by Novartis. In consideration for this license, we paid Novartis a nonrefundable fee of approximately $0.4 million in 2004 and are required to make milestone payments based on the clinical progress of ITMN-191. In 2006, we expensed $0.5 million upon initiation of the Phase Ia clinical trials for ITMN-191. Assuming that all of the remaining milestones under this agreement are achieved, we will be required to make milestone payments of $4.5 million. In addition, Novartis is entitled to receive royalties on future product sales.

Array BioPharma Inc. (Small Molecule Therapeutics)

In 2002, we entered into a drug discovery collaboration agreement to create small molecule therapeutics targeting hepatitis with Array. We fund drug discovery research conducted by Array based on the number of Array scientists working on the research phase of the agreement and we are responsible for all development and commercialization. Array is entitled to receive milestone payments based on the selection and progress of clinical drug candidates, as well as low single digit royalties on net sales of products derived from the collaborative efforts. The original term of this agreement expired in September 2004 and has since been extended to June 2007, subject to certain conditions. In addition, in December 2004, the agreement was amended to provide a mechanism for us to purchase certain intellectual property rights arising from the collaboration. In April 2005, we initiated a second research collaboration with Array with respect to a new hepatology target. This research collaboration extends through March 2007. Assuming that all of the remaining milestones under these agreements are achieved, we will be required to make milestone payments of $8.5 million. Total research and development expenses related to this agreement were $10.2 million, $7.5 million and $5.7 million for the years ended December 31, 2006, 2005 and 2004, respectively. Included in the $10.2 million in 2006 is a $0.5 million milestone payment for the initiation of the Phase Ia clinical trial for ITMN-191. Included in the $5.7 million in 2004 is a one-time non-refundable fee of $2.5 million paid in connection with securing the right to purchase Array’s ownership interest in certain collaboration patents.

Maxygen Holdings Ltd. (Next-Generation Interferon Gamma)

We have a license and collaboration agreement with Maxygen to develop and commercialize novel, next-generation interferon gamma products that have enhanced pharmacokinetics and a potential for less frequent dosing regimens than Actimmune^®. If preclinical data provide compelling proof of concept for a longer-acting interferon gamma compound, our plan would be to take forward into clinical development selected protein-modified interferon gamma product candidates created by Maxygen that meet these criteria. We have funded Maxygen’s optimization and development of these next-generation interferon gamma products and retain exclusive worldwide commercialization rights for all human therapeutic indications. Our diligence obligations include a minimum level of clinical development expenditures for an initial period of time, as well as the general obligation to use commercially reasonable efforts to clinically develop, seek regulatory approval for and commercialize a product in specified major market countries. The agreement terms include up-front license fees and full research funding, as well as development and commercialization milestone payments, which are payable based on the progress of our clinical development program for next-generation interferon gamma products and the achievement of certain sales targets with respect to such products. In addition, Maxygen will receive royalties on product sales. We paid Maxygen a total of $87,000 and $106,000 for the years ended December 31, 2006 and 2004, respectively. We did not

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make any payments in 2005. If all of the milestones under this agreement are achieved, we would be required to make additional milestone payments of $43.0 million.

In countries in which patents covering next-generation interferon gamma products have issued or will issue to either us or Maxygen, our royalty obligations will generally expire upon the expiration of all such patents. In other countries, our royalty obligations will continue for a specified period following the first commercial sale of a next-generation interferon gamma product in such country. Our agreement with Maxygen will expire upon the expiration of all royalty obligations under the agreement. Prior to expiration of the agreement, either party can terminate the agreement for the insolvency of the other party, and in the event of a material breach of the agreement by a party, the other party has the right to pursue a remedy through arbitration. If we commit a material breach of the agreement, the remedy selected by the arbitrator may include termination of the licenses granted to us by Maxygen under the agreement. In addition, if we do not meet certain diligence obligations, Maxygen may have the right to terminate the agreement, as well as to obtain royalty-bearing licenses from us that would allow it to continue the development and commercialization of next-generation interferon gamma products.

Boehringer Ingelheim International GmbH (Imukin^®)

In 2001, we formed a collaboration with BI to clinically develop and seek regulatory approval for interferon gamma-1b, the active ingredient in Actimmune^®, in certain diseases, and to commercialize a liquid formulation of interferon gamma-1b under one or more of BI’s trade names, including Imukin^®, in Europe and other major markets of the world (other than the United States, Canada and Japan). Under the agreement, the parties will seek to develop and obtain regulatory approval for the use of Imukin^® in the treatment of a variety of diseases, including IPF, ovarian cancer, CGD and osteopetrosis. The agreement provides that we will fund and manage clinical and regulatory development of interferon gamma-1b for these diseases in the countries covered by the agreement. BI will pay us royalties on sales of the product when it meets a specified minimum sales level. BI has an option to exclusively promote Imukin in all of the major market countries covered by the agreement, and we may opt to promote the product in those countries and for those new diseases for which BI does not do so. If we opt to promote the product in those countries or for those new diseases for which BI does not, we will pay royalties to BI on sales of the product in those countries and/or for those new diseases. We had neither paid nor received any royalties under this agreement through December 31, 2006, and there are no milestone payments under this agreement. The agreement will expire, on a country-by-country basis, upon expiration of the parties’ royalty obligations in each country covered by the agreement. Such royalty obligations generally expire fifteen years after regulatory approval of Imukin^® for certain specified indications in the relevant country. If no such regulatory approvals are granted in a particular country, the royalty obligations in such country will expire in 2016. Prior to such expiration, either party can terminate the agreement for the uncured material breach of the other party or for the insolvency of the other party. In addition, we have the right to terminate the agreement with respect to certain countries at any time subsequent to regulatory approval for IPF.

Funding Commitments

Our non-cancelable funding commitments under the above sponsored research, license and collaboration agreements, excluding Roche, total $0.9 million as of December 31, 2006, of which all of it is due during the year ending December 31,2007.

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8.   AVAILABLE-FOR-SALE INVESTMENTS

The following is a summary of our available-for-sale investments as of December 31, 2006 and 2005 (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
December 31, 2006
Obligations of government-sponsored enterprises	$	111,487	$	16	$	(72	)	$	111,431
Corporate debt securities		41,070		5		(5	)		41,070
Auction rate preferred stock and other debt securities		49,607		—		(16	)		49,591
Total	$	202,164	$	21	$	(93	)	$	202,092

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Reported as:
Cash equivalents	$	96,915	$	18	$	(4	)	$	96,929
Available-for-sale securities		105,249		3		(89	)		105,163
Total	$	202,164	$	21	$	(93	)	$	202,092

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
December 31, 2005
Obligations of government-sponsored enterprises	$	46,865	$	6	$	(57	)	$	46,814
Corporate debt securities		30,531		5		(19	)		30,517
Auction rate preferred stock and other debt securities		8,727		—		—			8,727
Total	$	86,123	$	11	$	(76	)	$	86,058

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Reported as:
Cash equivalents	$	57,858	$	11	$	(1	)	$	57,868
Available-for-sale securities		28,265		—		(75	)		28,190
Total	$	86,123	$	11	$	(76	)	$	86,058

The realized gains and losses for the years 2006 and 2005 were not material. Realized gains and losses were calculated based on the specific identification method.

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The following is a summary of the amortized cost and estimated fair value of available-for-sale debt securities at December 31, by contractual maturity (in thousands):

	December 31, 2006
	Amortized
	Cost		Fair Value
Mature in less than one year	$	172,827	$	172,801
Mature in one to three years		29,337		29,291
Mature in over three years		—		—
Total	$	202,164	$	202,092

9.   BALANCE SHEET DETAIL

Inventories consist of the following at December 31 (in thousands):

	2006		2005
Finished goods	$	8,188	$	12,437
Total	$	8,188	$	12,437

For the years ended December 31, 2005 and 2004, we recognized a total of $9.1 million and $4.7 million, respectively, in cost of goods for excess inventory and non-cancelable purchase commitments in excess of forecasted demand. We did not incur any charges for excess inventory and non-cancelable purchase commitments in 2006.

Property and equipment and related accumulated depreciation and amortization is as follows at December 31 (in thousands):

	2006			2005
Computer and laboratory equipment	$	9,444		$	6,125
Office furniture and fixtures		3,693			3,577
Leasehold improvements		9,139			8,122
		22,276			17,824
Less accumulated depreciation and amortization		(13,066	)		(10,550	)
Total	$	9,210		$	7,274

Other accrued liabilities consist of the following at December 31 (in thousands):

	2006		2005
Accrued clinical trial costs	$	7,654	$	8,289
Royalties payable		1,955		7,061
Liability under government settlement — current		4,575		—
Deferred collaboration revenue — current		2,802		—
Medicaid rebates		534		1,424
Provision for returns and rebates		1,174		1,366
Accrued interest		142		142
Accrued research and development		2,733		271
Other accrued liabilities		1,981		3,436
Total other accrued liabilities	$	23,550	$	21,989

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10.   COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). We include in other comprehensive income (loss) changes in the fair value of derivatives designated as effective foreign currency cash flow hedges and unrealized gains and losses on our available-for-sale securities. The activity in other comprehensive income (loss) is as follows (in thousands):

	Year Ended December 31,
	2006			2005			2004
Net loss	$	(107,206	)	$	(5,235	)	$	(59,478	)
Change in unrealized gain/(loss) on available-for-sale securities		(7	)		173			(638	)
Change in realized and unrealized gain on foreign currency hedge		(607	)		(1,005	)		1,824
Comprehensive loss	$	(107,820	)	$	(6,067	)	$	(58,292	)

Accumulated other comprehensive income consists of the following at (in thousands):

	December 31,
	2006			2005
Net unrealized loss on available-for-sale securities	$	(72	)	$	(65	)
Gain on foreign currency hedge		212			819
Accumulated other comprehensive income	$	140		$	754

11.   CONVERTIBLE SUBORDINATED NOTES

In 2004, we completed the repurchase of all of our outstanding $149.5 million principal amount 5.75% convertible subordinated notes and issued $170 million principal amount 0.25% convertible senior notes due in March 2011. We paid a total of $157.6 million related to the repurchase, which included $3.2 million for accrued interest on the convertible subordinated notes and a premium of $5.0 million recognized as a loss on the early extinguishment of debt. We also expensed a non-cash charge of approximately $2.1 million for the acceleration of the amortization of the deferred issuance costs associated with the notes.

12.   CONVERTIBLE SENIOR NOTES

In February 2004, we issued 0.25% convertible senior notes due March 1, 2011 in an aggregate principal amount of $170.0 million (the “Senior Notes”). The Senior Notes are convertible into our common stock at the option of the holder at a conversion price of approximately $21.63 per share, subject to adjustment in certain circumstances. Interest on the Senior Notes is payable semiannually in arrears on March 1 and September 1 of each year. The Senior Notes are unsecured and rank on parity with all of our other existing and future senior unsecured debt and prior to all subordinated indebtedness. In addition, the Senior Notes are effectively subordinated to any existing and future secured debt to the extent of the value of the collateral securing such debt. As of December 31, 2006, we had no secured debt and no senior obligations. Offering expenses of $5.8 million related to the sale of the Senior Notes have been included in other assets and are being amortized to interest expense using the effective interest method over the life of the Senior Notes, which is seven years from the date of issuance. Accumulated amortization at December 31, 2006 is $2.4 million.

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13.   STOCKHOLDERS’ EQUITY

Employee Stock Purchase Plan

To provide employees with an opportunity to purchase our common stock through payroll deductions, our board of directors adopted the 2000 Employee Stock Purchase Plan (the “ESPP”). Under the ESPP, employees, subject to certain restrictions, may purchase shares of common stock at 85% of the fair market value at either the date of eligibility for enrollment or the date of purchase, whichever is less. Purchases are limited to the lesser of 15% of each employee’s eligible annual compensation or $25,000. Through the end of December 2006, we issued a cumulative total of 589,110 shares under the ESPP, including 117,858 issued in 2006, and 1,003,632 shares remained available for future issuance at December 31, 2006.

Restricted Stock Awards

In January 2006 we granted employees restricted stock awards for 404,450 shares of our common stock with a weighted-average fair value of $19.30 per share that vest in January 2008. The vesting may accelerate depending on the Company’s achievement of certain performance criteria over the two-year period, twenty-five percent each for four different milestones. In May 2006, the first of the four milestones was met and in January 2007, the second milestone was met. Grants made in 2004 and 2003 (none were granted in 2005) vest annually over a four-year period, thirty percent in each of the first three years and ten percent in the final year. Restricted stock awards are shares of common stock which are forfeited if the employee leaves the Company prior to vesting. As a result of these 2006 restricted stock awards and awards granted in 2004 and prior, we recognized $6.0 million in compensation expense during the year ended December 31, 2006, compared to $1.7 million and $1.1 million in the years ended December 31, 2005 and 2004, respectively. As all of the restricted stock awards vest through 2008, we will continue to recognize stock based compensation expense related to the grants of these restricted awards. These stock awards offer employees the opportunity to earn shares of our stock over time, rather than options that give the employee the right to purchase stock at a set price. If all of the remaining restricted stock awards that were granted in 2003, 2004 and 2006 vest, we will recognize approximately $2.8 million in compensation expense over a weighted average remaining period of 1.2 years. However, no compensation expense will be recognized for stock awards that do not vest.

A summary of our restricted stock activity during the year ended December 31, 2006 is presented in the following table:

				Weighted-Average
				Grant Date Fair
Restricted Stock Awards	Shares			Value
Nonvested at January 1, 2006		175,651		$	16.02
Granted		424,450			19.43
Vested		(161,959	)		18.08
Forfeited		(92,774	)		17.77
Nonvested at December 31, 2006		345,368		$	18.78

Stock Compensation Plans

In 1999, we adopted the 1999 Equity Incentive Plan (“1999 Plan”). The 1999 Plan provided for the granting of options to purchase common stock and the issuance of shares of common stock, subject to repurchase rights, to directors, employees and consultants. Certain options were immediately exercisable, at the discretion of our board of directors. Shares issued pursuant to the exercise of an unvested option are subject to the right of repurchase which lapses over periods specified by the board of directors, generally four years from the date of grant. In 2000, we terminated all remaining unissued shares under the 1999 Plan amounting to 121,584 shares. Under the 1999 Plan, 46,550 shares have been granted to employees that are subject to repurchase as of December 31, 2006.

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In 2000, our board of directors adopted the 2000 Equity Incentive Plan, which was most recently amended in 2004 and re-named the Amended and Restated 2000 Equity Incentive Plan (“2000 Plan”). In 2000, a total of 2.0 million shares of common stock were initially reserved for issuance under the 2000 Plan. In 2004, an additional 1.0 million shares of common stock were reserved for issuance under the 2000 Plan. The 2000 Plan provides for the granting of options to purchase common stock and the issuance of shares of common stock, subject to repurchase rights, to directors, employees and consultants. Shares issued pursuant to the exercise of an unvested option are subject to our right of repurchase which lapses over periods specified by the board of directors, generally four years from the date of grant. Options not immediately exercisable generally vest up to a maximum of four years. Options granted under the 2000 Plan have a maximum term of 10 years.

In 2000, our board of directors adopted the 2000 Non-Employee Directors’ Stock Option Plan, which was most recently amended in 2004 and re-named the Amended and Restated 2000 Non-Employee Directors’ Stock Option Plan (“Directors’ Plan”). In 2000, a total of 180,000 shares of common stock were initially reserved for issuance under the Directors’ Plan. In 2004, an additional 550,000 shares of common stock were reserved for issuance under the Director’s Plan. The Directors’ Plan provides for the granting of options to purchase common stock and the issuance of shares of common stock, subject to repurchase rights, to directors of InterMune. Shares issued pursuant to the exercise of an unvested option are subject to our right of repurchase which lapses over periods specified by the board of directors, generally one year from the date of grant for annual grants and three years from the date of grant for initial grants made to new directors. Options not immediately exercisable generally vest over four years. Options granted under the Directors’ Plan have a maximum term of 10 years.

The stock option and related activity under all of our stock option plans is summarized as follows:

	Outstanding Options
	Shares						Weighted
	Available for			Number of			Average Exercise
	Grant			Shares			Price per Share
Balance at December 31, 2003		1,311,685			5,727,992		$	27.52
Authorized		1,550,000			—			—
Shares terminated under 1999 plan and not available for future grants		(13,667	)		—			—
Granted		(1,603,077	)		1,603,077		$	13.79
Restricted shares granted		(525,600	)		—			—
Forfeited stock options		2,276,414			(2,276,414	)	$	29.02
Restricted shares forfeited		74,620			—			—
Exercised		—			(109,203	)	$	8.04
Balance at December 31, 2004		3,070,375			4,945,452		$	22.81
Granted		(2,317,724	)		2,317,724		$	12.44
Forfeited stock options		795,980			(795,980	)	$	21.88
Restricted shares forfeited		152,275			—			—
Exercised		—			(18,166	)	$	12.95
Balance at December 31, 2005		1,700,906			6,449,030		$	19.22
Granted		(1,406,716	)		1,406,716		$	16.15
Restricted shares granted		(424,450	)		—			—
Forfeited stock options		1,240,435			(1,240,435	)	$	25.10
Restricted shares forfeited		92,774			—			—
Exercised		—			(1,225,763	)	$	15.18
Balance at December 31, 2006		1,202,949			5,389,548		$	17.99

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At December 31, 2006, the weighted average remaining contractual term for the outstanding options is 7.7 years and the aggregate intrinsic value is approximately $73.1 million on that date. The total intrinsic value of options exercised during the year ended December 31, 2006 was approximately $6.4 million. Intrinsic value for stock options is defined as the difference between the current market value and the exercise price.

The following table summarizes information about options outstanding at December 31, 2006:

Options Outstanding							Options Exercisable
			Weighted		Weighted				Weighted
			Average		Average				Average
	Number of		Remaining		Exercise		Number of		Exercise
Range of Exercise Prices	Shares		Contractual Life		Price		Shares		Price
$ 4.50 - $12.74		1,763,940		8.01	$	11.45		833,423	$	11.09
$12.95 - $16.40		1,355,190		9.09	$	15.09		256,777	$	14.74
$16.42 - $23.16		1,347,815		7.32	$	19.68		876,234	$	19.88
$23.50 - $53.00		922,603		5.39	$	32.27		922,431	$	32.27
		5,389,548		7.66	$	17.99		2,888,865	$	20.85

At December 31, 2006, the weighted average remaining contractual term for options exercisable is 6.7 years and the aggregate intrinsic value for those shares is approximately $33.0 million. If all of the remaining nonvested and outstanding stock option awards that have been granted became vested, we will recognize approximately $17.8 million in compensation expense over a weighted average remaining period of 1.5 years. However, no compensation expense will be recognized for any stock awards that do not vest.

Stockholder Rights Agreement

In July 2001, our board of directors approved the adoption of a stockholder Rights Agreement, which provided for the distribution of one preferred share purchase right (a “Right”) for each outstanding share of our common stock. The dividend was paid on August 3, 2001 to the stockholders of record on that date. Each Right entitles the registered holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share (the “Preferred Shares”), at a price of $390.00 per one one-hundredth of a Preferred Share (the “Purchase Price”), subject to adjustment. The Rights will be exercisable upon the earlier of: (i) the date of a public announcement that a person, entity or group of affiliated or associated persons have acquired beneficial ownership of 20% or more of the outstanding common shares (an “Acquiring Person”), or (ii) ten business days (or such later date as may be determined by action of the board of directors prior to such time as any person or entity becomes an Acquiring Person) following the commencement of, or announcement of an intention to commence, a tender offer or exchange offer the consummation of which would result in any person or entity becoming an Acquiring Person. In October 2004, the Rights Agreement was amended to allow Warburg Pincus Equity Partners, L.P. and certain of its affiliates (“Warburg Pincus”) to acquire ownership of up to 25% of our issued and outstanding common stock in open market purchases without becoming an Acquiring Person. Jonathan S. Leff, a member of our board of directors, is a managing director of Warburg Pincus LLC and a partner of Warburg Pincus & Co., which are affiliates of Warburg Pincus Equity Partners, L.P.

In the event that any person, entity or group of affiliated or associated persons become an Acquiring Person, each holder of a Right will have the right to receive, upon exercise, the number of common shares having a market value of two times the exercise price of the Right. In the event that we are acquired in a merger or other business combination transaction or 50% or more of our consolidated assets or earning power are sold to an Acquiring Person, its associates or affiliates or certain other persons in which such persons have an interest, each holder of a Right will have the right to receive, upon the exercise at the then-current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. At any time after an Acquiring Person becomes an Acquiring Person and prior to the acquisition by such Acquiring Person of 50% or more of the outstanding common shares, our board of

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directors may exchange the Rights (other than Rights owned by such person or group which have become void), in whole or in part, at an exchange ratio of one common share, or one one-hundredth of a Preferred Share, per Right (or, at our election, we may issue cash, debt, stock or a combination thereof in exchange for the Rights), subject to adjustment. The Rights will expire on August 3, 2011, unless we redeem or exchange them.

Reserved Shares

At December 31, 2006, common stock subject to future issuance is as follows:

Common stock issuable upon conversion of convertible senior notes	7,858,811
Outstanding common stock options	5,389,548
Common stock available for grant under stock option plans	1,202,949
Common stock available for grant under the 2000 Employee Stock Purchase Plan	1,003,632
Total	15,454,940

Valuation and Expense Information under SFAS 123(R)

We adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s Consolidated Financial Statements as of and for the year ended December 31, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R) for the year ended December 31, 2006 was $16.5 million, which consisted of stock-based compensation expense related to employee stock options, restricted stock and the ESPP. For the year ended December 31, 2006, approximately $8.1 million has been recorded in research and development (R&D) expense and the remaining $8.4 million has been recorded in selling, general and administrative (SG&A) expense. Approximately $0.3 million has been included in SG&A expense for the year ended December 31, 2006 in connection with the amendment to our Amended and Restated 2000 Non-Employee Directors’ Stock Option Plan, which allows the board of directors to specify in a directors’ stock option agreement a longer or shorter period of time by which a director must exercise the option before the option terminates.

Upon adoption of SFAS 123(R), we retained our method of valuation for share-based awards granted beginning in fiscal 2006 with the use of the Black-Scholes model which was previously used for the Company’s pro forma information required under SFAS 123. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. A description of the assumptions follows:

•  Previously under SFAS 123, we estimated volatility using only our historical share price performance over the expected life of the option. Under SFAS No. 123(R), however, the Company, with the assistance of an outside consulting service, has refined its valuation methodology and estimated expected volatility using a blend of implied volatility based on market-traded options on the Company’s common stock and historical volatility of the Company’s common stock over the contractual life of the options

•  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the option.

•  The expected life of options granted represents the period of time the options are expected to be outstanding. The Company has applied the provisions of SAB 107 to determine the expected term.

•  The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the contractual life of the option.

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We estimated the fair value of each option grant on the date of grant using the Black-Scholes model with the following weighted-average assumptions:

	Year Ended
	December 31,
	2006
Expected stock price volatility		56	%
Risk-free interest rate		5.0	%
Expected term (in years)		6.0
Expected dividend yield		—

The weighted-average fair value per share of options granted during the year ended December 31, 2006 was $9.30.

We estimated the fair value of the employees’ stock purchase rights using the Black-Scholes model with the following weighted-average assumptions:

	Year Ended
	December 31,
	2006
Expected stock price volatility		65	%
Risk-free interest rate		4.1	%
Expected term (in years)		1.8
Expected dividend yield		—

The weighted-average fair value for purchase rights granted under the employee stock purchase plan for the year ended December 31, 2006 was $6.21.

As stock-based compensation expense recognized in the Condensed Consolidated Statement of Operations for fiscal 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Pro Forma Information under SFAS 123 for Periods Prior to January 1, 2006

Had we used the fair value based accounting method for stock-based compensation expense prescribed by SFAS No. 123 for the years ended December 31, 2005 and 2004, our net loss and net loss per share would have increased to the following pro-forma amounts (in thousands, except per share data):

	Year Ended
	December 31,
	2005			2004
Net loss, as reported	$	(5,235	)	$	(59,478	)
Add: Stock-based employee compensation expense, included in reported net loss		2,960			1,081
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(17,003	)		(9,549	)
Pro forma net loss	$	(19,278	)	$	(67,946	)
Net loss per share:
Basic and diluted — as reported	$	(0.16	)	$	(1.87	)
Basic and diluted — pro forma	$	(0.60	)	$	(2.14	)

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Prior to the adoption of SFAS No. 123(R), pro forma disclosures reflected the fair value of each option grant estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	Year Ended
	December 31,
	2005			2004
Expected stock price volatility		72	%		74	%
Risk-free interest rate		4.0	%		3.6	%
Expected term (in years)		6.5			6.0
Expected dividend yield		—			—

The weighted-average fair value per share of options granted was $8.46 in 2005 and $9.21 in 2004.

We estimated the fair value of the employees’ stock purchase rights using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	Year Ended
	December 31,
	2005			2004
Expected stock price volatility		75	%		80	%
Risk-free interest rate		3.0	%		2.5	%
Expected term (in years)		2.0			2.0
Expected dividend yield		—			—

The weighted-average fair value for shares issued under the employee stock purchase plan for the years ended December 31, 2005 and 2004 was $8.38 and $12.76, respectively.

14.   INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amount used for income tax purposes.

Significant components of our deferred tax assets as follows at December 31 (in thousands):

	2006			2005
Deferred tax assets:
Net operating loss carryforwards	$	171,000		$	139,000
Research and development credits		22,000			17,000
Capitalized research and development costs		12,000			12,000
Other, net		47,000			26,000
Total deferred tax assets		252,000			194,000
Valuation allowance		(252,000	)		(194,000	)
Net deferred tax assets	$	—		$	—

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $58.0 million, $8.0 million, and $28.0 million during the years ended December 31, 2006, 2005 and 2004, respectively.

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Deferred tax assets related to carryforwards at December 31, 2006 include approximately $7.6 million associated with stock option activity for which any subsequently recognized tax benefits will be credited directly to stockholders equity.

As of December 31, 2006, we had net operating loss carryforwards for federal income tax purposes of approximately $464.4 million, which expire in the years 2018 through 2026, and federal research and development credits of approximately $15.8 million, which expire in the years 2018 through 2026. In addition, we have net operating loss carryforwards for state income tax purposes of approximately $102.2 million, which expire in the years 2012 through 2016, and state research and development tax credits of approximately $9.1 million, which do not expire.

Utilization of our net operating loss may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss before utilization.

In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”, which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006 and as a result, is effective for InterMune in the first quarter of fiscal 2007. We are currently evaluating the effect that the adoption of FIN 48 will have on our consolidated results of operations and financial position.

15.   COMMITMENTS AND CONTINGENCIES

Leases

We have a non-cancelable lease for facilities, which expires in 2011. Total rent expense was approximately $4.2 million, $4.1 million and $3.7 million for the years ended December 31, 2006, 2005 and 2004, respectively.

The following is a schedule by year of future minimum lease payments of all leases at December 31, 2006 (in thousands):

	Operating
Year	Leases
2007	$	4,374
2008		4,617
2009		4,659
2010		4,803
2011		1,578
Thereafter		—
	$	20,031

The operating lease for our facility requires a letter of credit secured by a restricted cash balance with our bank. The amount of each letter of credit approximates 6-12 months of operating rent payable to the landlord of the facility and is effective until we reach profitability. At December 31, 2006 and 2005, restricted cash under this letter of credit amounted to $1.4 million.

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Purchase Commitments

We have purchase commitments with BI for the manufacture and supply of Actimmune^®. In 2000, we entered into an agreement with BI for the clinical and commercial supply of Actimmune^®. The agreement with BI generally provides for the exclusive supply by BI and exclusive purchase by us of Actimmune^®. We are required to purchase a minimum amount of Actimmune^® per year, and BI is required to supply Actimmune^® to us, subject to certain limits. In July 2005, we amended the supply agreement with BI pursuant to which BI agreed to waive certain of our minimum purchase commitments for Actimmune^® for 2005, and to reduce certain other minimum Actimmune^® purchase requirements for 2006. In December 2006, we further amended the agreement pursuant to which BI has agreed to reduce our per vial price for purchases of Actimmune^® in 2007 and 2008 in consideration for a prepayment in 2006 of approximately 3.4 million euros ($4.5 million at December 31, 2006). At December 31, 2006, our minimum purchase obligations totaled $91.6 million and are committed through the year 2012. Of these commitments, we have $15.9 million and $14.5 million of outstanding fixed purchase order commitments that become due and payable in 2007 and 2008, respectively. With regard to certain minimum purchase requirements for 2007 and thereafter, BI granted us the option of either taking delivery of Actimmune^® or paying for the difference between the amount of product actually purchased and the minimum purchase requirement. Our contractual obligation to BI is denominated in euros. Given the fact that the Phase III INSPIRE trial was unsuccessful and discontinued in March 2007, in addition to the mechanism set forth in the agreement which allows us to decrease our minimum yearly purchase obligations on a going-forward basis (with adjustments to the financial terms to be negotiated by the parties), we are currently reviewing other aspects of the contracts that we believe are relevant to our future minimum purchase commitments, including our ability to cancel previously provided forecasts and eliminate our purchase obligations. In addition, the December 2006 prepayment has been charged to cost of goods sold in our 2006 results of operations as a result of our revised estimates of inventory requirements. See Note 20.

Contingent Payments

We will be required to make contingent milestone payments in accordance with our license, commercialization and collaboration agreements in the aggregate amount of $75.6 million if all of the milestones per the agreements are achieved. These milestones include development, regulatory approval, commercialization and sales milestones.

Department of Justice Settlement

On November 9, 2004, we received a subpoena from the U.S. Department of Justice requiring us to provide the Department of Justice with certain information relating to Actimmune^®, including information regarding the promotion and marketing of Actimmune^®. On October 25, 2006 we reached a comprehensive settlement with the government to resolve all claims without criminal sanctions relating to promotional activities for Actimmune^® for idiopathic pulmonary fibrosis (“IPF”) by our former employees during a period ending in June 2003. As part of this comprehensive settlement, we entered into a Civil Settlement Agreement with the United States Department of Justice and the United States Attorney’s Office for the Northern District of California. In addition, we entered into a Deferred Prosecution Agreement with the United States Attorney’s Office for the Northern District of California and a Corporate Integrity Agreement with the Office of the Inspector General of the United States Department of Health and Human Services.

Under the terms of the Civil Settlement Agreement, we agreed to pay $36.9 million plus 5% interest on the then outstanding principal balance to the government over a period of five years, an amount to be shared between the Federal and participating State governments as per the agreement and the Medicaid Program. We recorded a $36.9 million charge during 2006 to reflect the final terms of the Civil Settlement Agreement. We paid $4.1 million of the first installment payment of $5.0 million during the fourth quarter of 2006 and are required to make additional payments on the remaining settlement amount over the next five years in annual installments. The Civil Settlement Agreement contains a provision for the acceleration of certain of the $36.9 million in scheduled payments if we receive over $150.0 million from partnering, license fees and milestone payments (excluding any research and

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development contributions), external debt and equity financing during the term of the Civil Settlement Agreement, subject to a cap on any acceleration of payment of $10.0 million in any one year.

Under the terms of the Deferred Prosecution Agreement, the United States Attorney’s Office for the Northern District of California will file an Information charging us with one count of off-label promotion of Actimmune^® for use with IPF, but will defer prosecution of such charge during the two year term of the Deferred Prosecution Agreement. The U.S. Attorney will seek dismissal of the Information after the two year period if we comply with the provisions of the Deferred Prosecution Agreement. The Deferred Prosecution Agreement became effective December 2006 when it was approved by the United States District Court for the Northern District of California.

Under the terms of the Corporate Integrity Agreement, the Office of the Inspector General of the United States Department of Health and Human Services agrees to waive any potential exclusion of us from participation in federal health care programs provided that we comply with the terms of the Corporate Integrity Agreement for a period of five years. As part of the agreement, we agreed to retain an independent review organization to conduct annual reviews of our medical affairs group and periodic reviews of our promotional processes and policies as well as reviews of certain medical affairs group records.

The following table reflects the schedule of payments due under the settlement as of December 31, 2006 (in thousands):

Year	Principal		Interest		Total
2007	$	4,309	$	1,597	$	5,906
2008		5,073		1,427		6,500
2009		5,826		1,174		7,000
2010		8,118		882		9,000
2011		9,524		476		10,000
Total	$	32,850	$	5,556	$	38,406

16.   DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

We have determined that, in accordance with SFAS No. 131, we operate in one segment, because operating results are reported only on an aggregate basis to our chief operating decision makers. We currently market Actimmune^® in the United States for the treatment of chronic granulomatous disease and severe, malignant osteopetrosis. Prior to its divestiture in December 2005, we also marketed Infergen^® in the United States and Canada for chronic HCV infections; and prior to its divestiture in May 2005, we also marketed Amphotec^® worldwide for invasive aspergillosis. Total revenue for each year presented has been adjusted to reflect the reclassification of Infergen^® revenue into discontinued operations.

Our net revenue for the years ended December 31, are as follows (in thousands):

	2006		2005		2004
Actimmune®	$	90,317	$	107,633	$	124,980
Other products		—		2,863		3,700
Collaboration revenue		467		—		—
Totals	$	90,784	$	110,496	$	128,680

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Our net revenue by region for the years ended December 31, are as follows (in thousands):

	2006		2005		2004
United States	$	90,185	$	110,017	$	126,288
Rest of world		599		479		2,392
Totals	$	90,784	$	110,496	$	128,680

Our revenue and trade receivables are concentrated with a few customers. We perform credit evaluations on our customers’ financial condition and limit the amount of credit extended. However, we generally do not require collateral on accounts receivable. Concentrations of credit risk, with respect to accounts receivable, exist to the extent of amounts presented in the financial statements. Three customers represented 45%, 27% and 13%, respectively, of total accounts receivable at December 31, 2006, and three customers represented 46%, 12% and 11%, respectively, of total accounts receivable at December 31, 2005. No other customer represented more than 10% of accounts receivable at December 31, 2006 or December 31, 2005.

Revenue from customers representing 10% or more of total sales during the years ended December 31, 2006, 2005 and 2004 were as follows:

Customer	2006			2005			2004
CuraScript, Inc (formerly Priority Healthcare)		57	%		59	%		61	%
Caremark		22	%		21	%		14	%
Merck Medco		11	%		7	%		11	%

17.   RELATED PARTY TRANSACTIONS

On October 29, 2004 we entered into an Amended and Restated Standstill Agreement with Warburg Pincus Equity Partners, L.P. and certain of its affiliates (“Warburg Pincus”) that permits Warburg Pincus to acquire up to 25% of our outstanding common stock in the open market. Under this agreement, Warburg Pincus may acquire up to 25% of our outstanding common stock and we have granted Warburg Pincus certain registration rights with respect to its holdings. In exchange for allowing Warburg Pincus to increase its ownership stake, Warburg Pincus has granted the independent members of our board of directors the right to vote the shares of InterMune common stock owned by Warburg Pincus in excess of 19.9%. In addition, Warburg Pincus has agreed to certain limitations on the manner in which it may dispose of its ownership interest in InterMune. In connection with this transaction, we have also amended our stockholder Rights Plan to allow Warburg Pincus to acquire up to 25% of our outstanding common stock in open market purchases. Jonathan S. Leff, a member of our board of directors, is a managing director of Warburg Pincus LLC and a partner of Warburg Pincus & Co., which are affiliates of Warburg Pincus Equity Partners, L.P. As of December 31, 2006, Warburg Pincus held approximately 21% of our outstanding common stock.

18.   EMPLOYEE SAVINGS PLAN

On May 1, 1999, we adopted a 401(k) defined contribution plan that covers all full time employees, as defined, who fulfill certain length-of-service requirements. Employees may contribute up to the maximum limit imposed by federal tax law. Beginning in 2005, we began matching employee contributions at a rate of 50% of the first $6,000 per employee contributed each year. Our total matching contributions were $0.5 million and $0.8 million in 2006 and 2005, respectively. We did not make any matching contributions under the 401(k) defined contribution plan in 2004.

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19.   GUARANTEES AND INDEMNIFICATIONS

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligations it assumes under that guarantee.

As permitted under Delaware law and in accordance with our Bylaws, we indemnify our officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at our request in such capacity. We terminate the indemnification agreements with our officers and directors upon the termination of their employment, but the termination will not affect claims for indemnification relating to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited; however, our director and officer insurance policy limits our exposure and may enable us to recover a portion of any future amounts paid. Accordingly, we believe the fair value of these indemnification agreements is minimal. Therefore, we have not recorded any liabilities for these agreements as of December 31, 2006.

20.   SUBSEQUENT EVENT

Effective March 5, 2007, we made the decision to discontinue the Phase 3 INSPIRE clinical trial evaluating Actimmune^® in patients with IPF based upon the recommendation of the study’s independent data monitoring committee. As a result of the disappointing INSPIRE trial results, we revised our estimates of inventory requirements as of December 31, 2006. Accordingly, we recorded a charge of $4.5 million related to the prepayment of inventory that we were expecting to receive in 2007 and 2008. While we believe other Actimmune^® related assets are recoverable for at least their $9.4 million net carrying value, if sales decline below our revised estimates, we may incur additional asset impairment charges, including inventory writedowns and impairment of acquired product rights, as well as product returns.

The following table reflects the asset balances as of December 31, 2006 which may be impacted (in thousands):

	2006
Finished goods inventory	$	8,188
Acquired product rights, net		1,167
Total	$	9,355

We also expect to incur approximately $3.5 million in restructuring charges, primarily consisting of severance related expenses to implement our announced plan to reduce the workforce by approximately 50%. We expect to record these charges during 2007. In addition, we may incur termination fees related to our supplier and clinical research organization contracts. Any or all of these remaining charges could be material, individually or collectively.

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InterMune, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

21.   QUARTERLY FINANCIAL DATA (Unaudited)

	First			Second			Third			Fourth			Total
	Quarter			Quarter			Quarter			Quarter			Year
	(In thousands, except per share amounts)
2006
Revenue, net
Actimmune	$	24,356		$	24,111		$	22,496		$	19,354		$	90,317
Collaboration revenue		—			—			—			467			467
Total revenue, net	$	24,356		$	24,111		$	22,496		$	19,821		$	90,784
Cost of goods sold	$	6,248		$	5,013		$	4,421		$	8,426		$	24,108
Provision for settlement		—			30,000			6,944			—			36,944
Loss from operations		(14,283	)		(45,881	)		(30,290	)		(24,535	)		(114,989	)
Loss from continuing operations		(12,532	)		(44,018	)		(28,361	)		(21,051	)		(105,962	)
Income (loss) from discontinued operations		(254	)		38			(623	)		(405	)		(1,244	)
Net income (loss)		(12,786	)		(43,980	)		(28,984	)		(21,456	)		(107,206	)
Basic and diluted net loss per share:
Continuing operations	$	(0.38	)	$	(1.33	)	$	(0.86	)	$	(0.63	)	$	(3.18	)
Discontinued operations		(0.01	)		—			(0.02	)		(0.01	)		(0.04	)
Net loss per share	$	(0.39	)	$	(1.33	)	$	(0.88	)	$	(0.64	)	$	(3.22	)
2005
Revenue, net
Actimmune	$	27,705		$	25,892		$	25,793		$	28,243		$	107,633
Others		642			782			667			772			2,863
Total revenue, net	$	28,347		$	26,674		$	26,460		$	29,015		$	110,496
Cost of goods sold	$	6,585		$	7,535		$	12,487		$	7,235		$	33,842
Restructuring charges		—			—			—			5,549			5,549
Loss from operations		(11,623	)		(15,068	)		(19,770	)		(15,204	)		(61,665	)
Loss from continuing operations		(10,227	)		(14,566	)		(18,741	)		(14,114	)		(57,648	)
Loss from discontinued operations		(7,179	)		(9,162	)		(5,027	)		73,781			52,413
Net income (loss)		(17,406	)		(23,728	)		(23,768	)		59,667			(5,235	)
Basic and diluted net loss per share:
Continuing operations	$	(0.32	)	$	(0.45	)	$	(0.58	)	$	(0.44	)	$	(1.79	)
Discontinued operations		(0.22	)		(0.29	)		(0.16	)		2.28			1.63
Net income (loss) per share	$	(0.54	)	$	(0.74	)	$	(0.74	)	$	1.84		$	(0.16	)

94

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

Not Applicable.

ITEM 9A.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.  We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financial Reporting.  Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on our assessment using those criteria, we concluded that our internal control over financial reporting was effective as of December 31, 2006.

Our independent registered public accounting firm has issued an attestation report on management’s assessment of our internal control over financial reporting which is included below.

95

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

InterMune, Inc.

We have audited management’s assessment, included in “Management’s Report on Internal Control Over Financial Reporting” in Item 9A of this Form 10-K, that InterMune, Inc. maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO criteria”). InterMune Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that InterMune, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, InterMune, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of InterMune, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2006 and our report dated March 12, 2007 expressed an unqualified opinion thereon.

/s/  ERNST & YOUNG LLP

Palo Alto, California

March 12, 2007

96

Changes in Internal Control over Financial Reporting.  There have been no changes to our internal controls over financial reporting during the three months ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls.  Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected.

ITEM 9B.   OTHER INFORMATION.

Not applicable.

PART III

Certain information required by Part III is omitted from this Annual Report on Form 10-K because the registrant expect to file with the U.S. Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A in connection with the solicitation of proxies for our Annual Meeting of Stockholders to be held at 9:00 a.m. on May 15, 2007 (the “Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information included therein is incorporated herein by reference.

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Identification of Directors and Executive Officers

The information required by this Item with respect to Executive Officers may be found under the caption, “Executive Officers of the Registrant” at the end of Item 1 of this Annual Report on Form 10-K. The information required by this Item with respect to Directors, including information with respect to our audit committee financial expert and the identification of our audit committee, is incorporated herein by reference from the information under the caption “Proposal 1 — Election of Directors” contained in the Proxy Statement.

Section 16(a) Beneficial Ownership Reporting Compliance

The information required by this Item with respect to compliance with Section 16(a) of the Exchange Act is incorporated herein by reference from the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Proxy Statement.

Code of Business Conduct and Ethics

The information required by this Item with respect to our code of ethics is incorporated herein by reference from the section captioned “Proposal 1 — Election of Directors — Code of Business Ethics and Conduct” contained in the Proxy Statement.

ITEM 11.   EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference to the information under the sections entitled “Executive Compensation” and “Compensation Committee Interlocks and Insider Participation” contained in the Proxy Statement.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated herein by reference to the information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” contained in the Proxy Statement.

97

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE

The information required by this Item is incorporated herein by reference to the information under the caption “Executive Compensation — Certain Relationships and Related Transactions” contained in the Proxy Statement.

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated herein by reference to the information from the Proxy Statement under the section entitled “Proposal 2 — Ratification of Selection of Independent Registered Public Accounting Firm.”

PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this Annual Report on Form 10-K:

(1) Financial Statements

See Index to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

(2) Financial Statement Schedules

The following financial statement schedule is filed as part of this Annual Report on Form 10-K. All other financial statement schedules have been omitted because they are either not applicable or the required information has been included in the consolidated financial statements or the notes thereto.

98

Schedule II

InterMune, Inc.

Valuation and Qualifying Accounts and Reserves

Years ended December 31, 2006, 2005 and 2004

	Balance at		Charged to
	Beginning of		Revenue or					Balance at
Description	Year		Expense		Utilizations			End of Year
Allowance for cash discounts:
Year ended December 31, 2006	$	337	$	1,887	$	(2,060	)	$	164
Year ended December 31, 2005		526		3,108		(3,297	)		337
Year ended December 31, 2004		358		3,151		(2,983	)		526
Allowance for doubtful accounts:
Year ended December 31, 2006	$	108	$	—	$	(108	)	$	—
Year ended December 31, 2005		94		43		(29	)		108
Year ended December 31, 2004		50		44		—			94

99

(3) Exhibits

Number			Description of Document
	3	.1	Certificate of Incorporation of Registrant.(1)
	3	.2	Certificate of Ownership and Merger, dated April 26, 2001.(10)
	3	.3	Bylaws of Registrant.(1)
	3	.4	Certificate of Amendment of Certificate of Incorporation of Registrant.(16)
	3	.5	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.(24)
	3	.6	Registrant’s Certificate of Designation of Series A Junior Participating Preferred Stock.(8)
	4	.1	Specimen Common Stock Certificate.(1)
	4	.6	Indenture, dated as of February 17, 2004, between Registrant and The Bank of New York.(20)
	4	.7	Registration Rights Agreement, dated as of February 17, 2004, among Registrant, Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Credit Suisse First Boston LLC, Harris Nesbitt Corp. and RBC Capital Markets Corporation.(20)
	10	.1+	Form of Indemnity Agreement.(1)
	10	.2+	1999 Equity Incentive Plan and related documents.(1)
	10	.3+	Stock option grant notice, stock option agreement and notice of exercise for Amended and Restated 2000 Equity Incentive Plan.(2)
	10	.4+	2000 Employee Stock Purchase Plan and related documents.(1)
	10	.5+	Annual stock option grant notice and initial stock option grant notice for Amended and Restated 2000 Non-Employee Directors’ Stock Option Plan.(14)
	10	.6	Amended and Restated Investor Rights Agreement, dated January 7, 2000, between Registrant and certain holders of the common stock.(1)
	10	.7	Rights Agreement, dated July 17, 2001, between Registrant and Mellon Investor Services LLC.(8)
	10	.8	Preliminary Stipulation of Settlement Agreement, dated May 6, 2005.(27)
	10	.19*	Data Transfer, Clinical Trial, and Market Supply Agreement, dated January 27, 2000, between the Registrant and Boehringer Ingelheim.(1)
	10	.20+	Form of Change of Control Provisions for Officers.(3)
	10	.24	Assignment and Option Agreement, dated June 23, 2000, between Registrant and Connetics Corporation.(4)
	10	.25	Consent to Assignment Agreement, dated June 23, 2000, between Registrant, Connetics Corporation and Genentech, Inc.(4)
	10	.27	Notice re: Return of Rights to Gamma Interferon for Treatment of Infectious Diseases in Japan, dated July 25, 2000, between Registrant and Genentech, Inc.(4)
	10	.29	Form of Common Stock Purchase Agreement, dated August 11, 2000, between the Company and Investors.(5)
	10	.31	Lease Agreement, dated December 18, 2000, between Registrant and GAL-BRISBANE, L.P.(6)
	10	.32	First Amendment to Brisbane Technology Park Lease, effective as of December 18, 2000, between Registrant and GAL-BRISBANE, L.P.(6)
	10	.34	Product Acquisition Agreement, dated January 2, 2001, between Registrant and ALZA Corporation.(7)
	10	.35	Development and Marketing Agreement, dated March 23, 2001, between Registrant and Boehringer Ingelheim International GmbH.(7)
	10	.38	Amendment No. 5, dated January 25, 2001, to License Agreement, dated May 5, 1998, between Registrant and Genentech, Inc.(7)
	10	.39*	License and Commercialization Agreement, dated June 15, 2001, between Registrant and Amgen, Inc.(9)
	10	.40	Letter Amendment, dated August 1, 2001, to Development and Marketing Agreement, dated March 23, 2001, between Registrant and Boehringer Ingelheim International GmbH.(10)
	10	.42*	Asset Purchase and License Agreement, dated September 19, 2001, between Registrant and Eli Lilly and Company.(10)

100

Number			Description of Document
	10	.43*	Development and Supply Agreement, dated December 28, 2001, between Registrant and Abbott Laboratories.(11)
	10	.47+	Employment Offer Letter, dated April 5, 2002, between Registrant and Marianne Armstrong, Ph.D.(12)
	10	.48+	Bonus Plan Memorandum, dated April 18, 2002, from Registrant to Marianne Armstrong, Ph.D.(12)
	10	.49+	Secured Promissory Note, dated May 1, 2002, between Registrant and Marianne Armstrong, Ph.D.(12)
	10	.50*	Amendment No. 1, dated April 26, 2002, to the Development and Supply Agreement, dated December 28, 2001, between Registrant and Abbott Laboratories.(12)
	10	.51*	Amendment No. 1, dated April 25, 2002, to the License and Commercialization Agreement, dated June 15, 2001, between Registrant and Amgen Inc.(12)
	10	.52*	First Amendment, dated June 19, 2002, to the Data Transfer, Clinical Trial and Market Supply Agreement, dated January 27, 2000, between Registrant and Boehringer Ingelheim International GmbH.(12)
	10	.53	Letter Amendment, dated May 28, 2002, to Development and Marketing Agreement, dated March 23, 2001, between Registrant and Boehringer Ingelheim International GmbH.(12)
	10	.54	Letter Amendment, dated July 1, 2002, to Development and Marketing Agreement, dated March 23, 2001, between Registrant and Boehringer Ingelheim International GmbH.(12)
	10	.57*	Amendment No. 4, dated January 28, 2003, to Development and Marketing Agreement, dated March 23, 2001, between Registrant and Boehringer Ingelheim International GmbH.(14)
	10	.58+	Employment Offer Letter, dated April 30, 2002, between Registrant and Lawrence M. Blatt, Ph.D.(15)
	10	.59+	Bonus Plan Memorandum, dated May 22, 2002, from Registrant to Lawrence M. Blatt, Ph.D.(15)
	10	.60+	Promissory Note, dated May 22, 2002, between Registrant and Lawrence M. Blatt, Ph.D.(15)
	10	.64*	Amendment No. 2 to Data Transfer, Clinical Trial and Market Supply Agreement, dated January 27, 2000, between Registrant and Boehringer Ingelheim Austria, GmbH.(17)
	10	.65+	Employment Offer Letter, dated September 24, 2003, between Registrant and Daniel G. Welch.(16)
	10	.68*	License Agreement, dated March 29, 2002, among Registrant, Marnac, Inc., KDL, Inc., KDL GmbH, Dr. Solomon Margolin and Dr. Shitotomo Yamauchi.(20)
	10	.69+	Stock Bonus Award Agreement, dated November 5, 2003, between Registrant and William R. Ringo, Jr.(18)
	10	.74	Aralast Promotion Agreement, dated as of March 26, 2004, by and between Registrant and Baxter Healthcare Corporation.(22)
	10	.79	Amended and Restated Standstill Agreement, dated October 29, 2004, among Registrant, Warburg Pincus & Co. and certain affiliates of Warburg Pincus & Co.(26)
	10	.80	Registration Rights Agreement, dated October 29, 2004, among Registrant, Warburg Pincus & Co. and certain affiliates of Warburg Pincus & Co.(26)
	10	.81	Amendment, dated October 29, 2004 to Rights Agreement, dated July 17, 2001, between Registrant and Mellon Investor Services LLC.(26)
	10	.82+	Employment Offer Letter Agreement, dated October 29, 2004 and effective as of November 1, 2004, between Registrant and Cynthia Robinson.(26)
	10	.83+	Employment Offer Letter Agreement, dated June 13, 2001, between Registrant and Williamson Bradford, M.D., Ph.D.(28)
	10	.84+	Employment Offer Letter Agreement, dated May 14, 2004, between Registrant and Thomas Kassberg.(28)
	10	.85+	Employment Offer Letter Agreement, dated June 1, 2001, between Registrant and Steven Porter, M.D., Ph.D. (28)
	10	.86+	Employment Offer Letter Agreement, dated August 9, 2004, between Registrant and Robin Steele. (28)
	10	.87+	Salary Information for Executive Officers. (28)
	10	.88+	Compensation Arrangements with Non-Employee Directors. (28)

101

Number			Description of Document
	10	.89+	Amendment to Offer Letter re Severance Pay and Change in Control, dated August 18, 2004, between Registrant and Marianne Armstrong, Ph.D. (28)
	10	.90+	Amendment to Offer Letter re Severance Pay and Change in Control, dated August 18, 2004, between Registrant and Lawrence M. Blatt, Ph.D. (28)
	10	.91+	Amendment to Offer Letter re Severance Pay and Change in Control, dated July 27, 2004, between Registrant and Williamson Bradford, M.D., Ph.D. (28)
	10	.93+	Amendment to Offer Letter re Severance Pay and Change in Control, dated August 10, 2004, between Registrant and Thomas Kassberg. (28)
	10	.94+	Amendment to Offer Letter re Severance Pay and Change in Control, dated July 26, 2004, between Registrant and Steven Porter, M.D., Ph.D. (28)
	10	.95+	Amendment to Offer Letter re Severance Pay and Change in Control, dated July 27, 2004, between Registrant and Howard A. Simon, Esq. (28)
	10	.96*	Amendment No. 2, dated December 31, 2004, to the License and Commercialization Agreement, dated June 15, 2001, between Registrant and Amgen Inc. (28)
	10	.97*	Amendment No. 3, dated December 31, 2004, to the License and Commercialization Agreement, dated June 15, 2001, between Registrant and Amgen Inc. (28)
	10	.98**	Amendment No. 3, dated July 26, 2005, to Data Transfer, Clinical Trial and Market Supply Agreement, dated January 27, 2000, between Registrant and Boehringer Ingelheim Austria, GmbH.(29)
	10	.99**	Data Transfer, Clinical Trial and Market Supply Agreement, dated November 3, 2005, between Registrant and Boehringer Ingelheim Austria, GmbH.(31)
	10	.100**	Product Acquisition Agreement, dated November 28, 2005, between Registrant and Valeant Pharmaceuticals North America.(30)
	10	.101**	Amendment Number 3, dated December 22, 2005, to Development and Supply Agreement dated December 28, 2001, between Registrant and Abbott Laboratories.(31)
	10	.102**	Amendment Number 4, dated December 22, 2005, to License and Commercialization Agreement, dated June 15, 2001, between Registrant and Amgen Inc.(31)
	10	.103**	Asset Purchase Agreement dated December 23, 2005, between Registrant and Targanta Therapeutics Corporation.(31)
	10	.104**	License Agreement, dated December 23, 2005, between Registrant and Eli Lilly & Company.(31)
	10	.105+	Severance Agreement and General Release, dated January 6, 2006, between Registrant and Roger L. Hawley.(31)
	10	.106**	Amendment No. 6, dated February 27, 2006, to License Agreement dated May 5, 1998, between Registrant and Genentech, Inc.(31)
	10	.107+	Amended and Restated 2000 Equity Incentive Plan.(31)
	10	.108+	Amended and Restated 2000 Non-Employee Directors’ Stock Option Plan.(31)
	10	.109**	Exclusive License and Collaboration Agreement dated October 16, 2006 between Registrant and Hoffmann-La Roche, Inc. and F. Hoffmann-La Roche Ltd. (32)
	10	.110**	Amendment No. 4, dated December 21, 2006, to Data Transfer, Clinical Trial and Market Supply Agreement, dated January 27, 2000, between Registrant and Boehringer Ingelheim Austria, GmbH.(32)
	10	.111	Deferred Prosecution Agreement between Registrant and the United States Attorney’s Office for the Northern District of California (32)
	10	.112	Civil Settlement Agreement between Registrant and the United States Department of Justice and the United States Attorney’s Office for the Northern District of California (32)
	10	.113	Corporate Integrity Agreement between Registrant and the Office of the Inspector General of the United States Department of Health and Human Services (32)
	21	.1	List of Subsidiaries(32)
	23	.1	Consent of Independent Registered Public Accounting Firm(32)
	24	.1	Power of Attorney (included on the signature pages hereto)
	31	.1	Certification required by Rule 13a-14(a) or Rule 15d-14(a)(32)

102

Number			Description of Document
	31	.2	Certification required by Rule 13a-14(a) or Rule 15d-14(a)(32)
	32	.1†	Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350)(32)

*	Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
**	Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
+	Management contract or compensation plan or arrangement.
†	This certification accompanies the Periodic Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
(1)	Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 2, 2000 (No. 333-96029), as amended by Amendment No. 1 filed with the Commission on February 18, 2000, as amended by Amendment No. 2 filed with the Commission on March 6, 2000, as amended by Amendment No. 3 filed with the Commission on March 22, 2000, as amended by Amendment No. 4 filed with the Commission on March 23, 2000 and as amended by Amendment No. 5 filed with the Commission on March 23, 2000.
(2)	Incorporated by reference to pages 16 through 26 of Exhibit 10.3 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 18, 2000 (No. 333-45460).
(3)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
(4)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
(5)	Filed as an exhibit to the Registrant’s Current Report on Form 8-K on August 23, 2000.
(6)	Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000.
(7)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
(8)	Filed as an exhibit to the Registrant’s Current Report on Form 8-K on July 18, 2001.
(9)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
(10)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
(11)	Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
(12)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2002.
(13)	Incorporated by reference to pages following page 10 of Exhibit 10.5 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 18, 2000 (No. 333-45460).
(14)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2003.
(15)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2003.
(16)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2003.
(17)	Filed as an exhibit to the Registrant’s amended Quarterly Report on Form 10-Q/A (Amendment No. 1) filed for the quarter ended September 30, 2003.
(18)	Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003.
(19)	Filed as an exhibit to the Registrant’s amended Annual Report on Form 10-K/A (Amendment No. 1) for the year ended December 31, 2003.

103

(20)	Filed as an exhibit to the Registrant’s amended Annual Report on Form 10-K/A (Amendment No. 2) for the year ended December 31, 2003.
(21)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2004.
(22)	Filed as an exhibit to the Registrant’s amended Quarterly Report on Form 10-Q/A (Amendment No. 1) filed for the quarter ended March 31, 2004.
(23)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2004.
(24)	Filed as an exhibit to the Registrant’s amended Quarterly Report on Form 10-Q/A (Amendment No. 1) filed for the quarter ended June 30, 2004.
(25)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2004.
(26)	Filed as an exhibit to the Registrant’s Current Report on Form 8-K on November 4, 2004.
(27)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2005.
(28)	Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.
(29)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2005.
(30)	Incorporated by reference to Exhibit 2.1 of Form 8-K (File No. 001-11397) filed by Valeant Pharmaceuticals International, the parent company of Valeant Pharmaceuticals North America on January 5, 2006.
(31)	Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005.
(32)	Filed herewith.

(c) Exhibits

See Item 15(a) above.

(d) Financial Statement Schedules

See Item 15(a) above.

104

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

InterMune, Inc.

By:  /s/  JOHN C. HODGMAN

John C. Hodgman

Senior Vice President of Finance Administration

and Chief Financial Officer

Dated: March 26, 2007

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John C. Hodgman and Daniel G. Welch, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution for him, and in his name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this Report below:

Signatures	Title	Date
/s/  William R. Ringo, Jr. William R. Ringo, Jr.	Chairman of the Board of Directors	March 26, 2007
/s/  Daniel G. Welch Daniel G. Welch	President and Chief Executive Officer and Director (Principal Executive Officer)	March 26, 2007
/s/  John C. Hodgman John C. Hodgman	Senior Vice President of Finance Administration and Chief Financial Officer (Principal Financial Officer)	March 26, 2007
/s/  Bruce W. Tomlinson Bruce W. Tomlinson	Vice President, Controller and Principal Accounting Officer	March 26, 2007
/s/  Lars Ekman Lars Ekman	Director	March 26, 2007
/s/  James I. Healy James I. Healy	Director	March 26, 2007

105

Signatures	Title	Date
/s/  David S. Kabakoff David S. Kabakoff	Director	March 26, 2007
/s/  Jonathan S. Leff Jonathan S. Leff	Director	March 26, 2007
/s/  Michael L. Smith Michael L. Smith	Director	March 26, 2007

106

EXHIBIT INDEX

Number			Description of Document
	3	.1	Certificate of Incorporation of Registrant.(1)
	3	.2	Certificate of Ownership and Merger, dated April 26, 2001.(10)
	3	.3	Bylaws of Registrant.(1)
	3	.4	Certificate of Amendment of Certificate of Incorporation of Registrant.(16)
	3	.5	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.(24)
	3	.6	Registrant’s Certificate of Designation of Series A Junior Participating Preferred Stock.(8)
	4	.1	Specimen Common Stock Certificate.(1)
	4	.6	Indenture, dated as of February 17, 2004, between Registrant and The Bank of New York.(20)
	4	.7	Registration Rights Agreement, dated as of February 17, 2004, among Registrant, Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Credit Suisse First Boston LLC, Harris Nesbitt Corp. and RBC Capital Markets Corporation.(20)
	10	.1+	Form of Indemnity Agreement.(1)
	10	.2+	1999 Equity Incentive Plan and related documents.(1)
	10	.3+	Stock option grant notice, stock option agreement and notice of exercise for Amended and Restated 2000 Equity Incentive Plan.(2)
	10	.4+	2000 Employee Stock Purchase Plan and related documents.(1)
	10	.5+	Annual stock option grant notice and initial stock option grant notice for Amended and Restated 2000 Non-Employee Directors’ Stock Option Plan.(14)
	10	.6	Amended and Restated Investor Rights Agreement, dated January 7, 2000, between Registrant and certain holders of the common stock.(1)
	10	.7	Rights Agreement, dated July 17, 2001, between Registrant and Mellon Investor Services LLC.(8)
	10	.8	Preliminary Stipulation of Settlement Agreement, dated May 6, 2005.(27)
	10	.19*	Data Transfer, Clinical Trial, and Market Supply Agreement, dated January 27, 2000, between the Registrant and Boehringer Ingelheim.(1)
	10	.20+	Form of Change of Control Provisions for Officers.(3)
	10	.24	Assignment and Option Agreement, dated June 23, 2000, between Registrant and Connetics Corporation.(4)
	10	.25	Consent to Assignment Agreement, dated June 23, 2000, between Registrant, Connetics Corporation and Genentech, Inc.(4)
	10	.27	Notice re: Return of Rights to Gamma Interferon for Treatment of Infectious Diseases in Japan, dated July 25, 2000, between Registrant and Genentech, Inc.(4)
	10	.29	Form of Common Stock Purchase Agreement, dated August 11, 2000, between the Company and Investors.(5)
	10	.31	Lease Agreement, dated December 18, 2000, between Registrant and GAL-BRISBANE, L.P.(6)
	10	.32	First Amendment to Brisbane Technology Park Lease, effective as of December 18, 2000, between Registrant and GAL-BRISBANE, L.P.(6)
	10	.34	Product Acquisition Agreement, dated January 2, 2001, between Registrant and ALZA Corporation.(7)
	10	.35	Development and Marketing Agreement, dated March 23, 2001, between Registrant and Boehringer Ingelheim International GmbH.(7)
	10	.38	Amendment No. 5, dated January 25, 2001, to License Agreement, dated May 5, 1998, between Registrant and Genentech, Inc.(7)
	10	.39*	License and Commercialization Agreement, dated June 15, 2001, between Registrant and Amgen, Inc.(9)
	10	.40	Letter Amendment, dated August 1, 2001, to Development and Marketing Agreement, dated March 23, 2001, between Registrant and Boehringer Ingelheim International GmbH.(10)
	10	.42*	Asset Purchase and License Agreement, dated September 19, 2001, between Registrant and Eli Lilly and Company.(10)

Number			Description of Document
	10	.43*	Development and Supply Agreement, dated December 28, 2001, between Registrant and Abbott Laboratories.(11)
	10	.47+	Employment Offer Letter, dated April 5, 2002, between Registrant and Marianne Armstrong, Ph.D.(12)
	10	.48+	Bonus Plan Memorandum, dated April 18, 2002, from Registrant to Marianne Armstrong, Ph.D.(12)
	10	.49+	Secured Promissory Note, dated May 1, 2002, between Registrant and Marianne Armstrong, Ph.D.(12)
	10	.50*	Amendment No. 1, dated April 26, 2002, to the Development and Supply Agreement, dated December 28, 2001, between Registrant and Abbott Laboratories.(12)
	10	.51*	Amendment No. 1, dated April 25, 2002, to the License and Commercialization Agreement, dated June 15, 2001, between Registrant and Amgen Inc.(12)
	10	.52*	First Amendment, dated June 19, 2002, to the Data Transfer, Clinical Trial and Market Supply Agreement, dated January 27, 2000, between Registrant and Boehringer Ingelheim International GmbH.(12)
	10	.53	Letter Amendment, dated May 28, 2002, to Development and Marketing Agreement, dated March 23, 2001, between Registrant and Boehringer Ingelheim International GmbH.(12)
	10	.54	Letter Amendment, dated July 1, 2002, to Development and Marketing Agreement, dated March 23, 2001, between Registrant and Boehringer Ingelheim International GmbH.(12)
	10	.57*	Amendment No. 4, dated January 28, 2003, to Development and Marketing Agreement, dated March 23, 2001, between Registrant and Boehringer Ingelheim International GmbH.(14)
	10	.58+	Employment Offer Letter, dated April 30, 2002, between Registrant and Lawrence M. Blatt, Ph.D.(15)
	10	.59+	Bonus Plan Memorandum, dated May 22, 2002, from Registrant to Lawrence M. Blatt, Ph.D.(15)
	10	.60+	Promissory Note, dated May 22, 2002, between Registrant and Lawrence M. Blatt, Ph.D.(15)
	10	.64*	Amendment No. 2 to Data Transfer, Clinical Trial and Market Supply Agreement, dated January 27, 2000, between Registrant and Boehringer Ingelheim Austria, GmbH.(17)
	10	.65+	Employment Offer Letter, dated September 24, 2003, between Registrant and Daniel G. Welch.(16)
	10	.68*	License Agreement, dated March 29, 2002, among Registrant, Marnac, Inc., KDL, Inc., KDL GmbH, Dr. Solomon Margolin and Dr. Shitotomo Yamauchi.(20)
	10	.69+	Stock Bonus Award Agreement, dated November 5, 2003, between Registrant and William R. Ringo, Jr.(18)
	10	.74	Aralast® Promotion Agreement, dated as of March 26, 2004, by and between Registrant and Baxter Healthcare Corporation.(22)
	10	.79	Amended and Restated Standstill Agreement, dated October 29, 2004, among Registrant, Warburg Pincus & Co. and certain affiliates of Warburg Pincus & Co.(26)
	10	.80	Registration Rights Agreement, dated October 29, 2004, among Registrant, Warburg Pincus & Co. and certain affiliates of Warburg Pincus & Co.(26)
	10	.81	Amendment, dated October 29, 2004 to Rights Agreement, dated July 17, 2001, between Registrant and Mellon Investor Services LLC.(26)
	10	.82+	Employment Offer Letter Agreement, dated October 29, 2004 and effective as of November 1, 2004, between Registrant and Cynthia Robinson.(26)
	10	.83+	Employment Offer Letter Agreement, dated June 13, 2001, between Registrant and Williamson Bradford, M.D., Ph.D.(28)
	10	.84+	Employment Offer Letter Agreement, dated May 14, 2004, between Registrant and Thomas Kassberg.(28)
	10	.85+	Employment Offer Letter Agreement, dated June 1, 2001, between Registrant and Steven Porter, M.D., Ph.D. (28)
	10	.86+	Employment Offer Letter Agreement, dated August 9, 2004, between Registrant and Robin Steele. (28)
	10	.87+	Salary Information for Executive Officers. (28)
	10	.88+	Compensation Arrangements with Non-Employee Directors. (28)
	10	.89+	Amendment to Offer Letter re Severance Pay and Change in Control, dated August 18, 2004, between Registrant and Marianne Armstrong, Ph.D. (28)
	10	.90+	Amendment to Offer Letter re Severance Pay and Change in Control, dated August 18, 2004, between Registrant and Lawrence M. Blatt, Ph.D. (28)

Number			Description of Document
	10	.91+	Amendment to Offer Letter re Severance Pay and Change in Control, dated July 27, 2004, between Registrant and Williamson Bradford, M.D., Ph.D. (28)
	10	.93+	Amendment to Offer Letter re Severance Pay and Change in Control, dated August 10, 2004, between Registrant and Thomas Kassberg. (28)
	10	.94+	Amendment to Offer Letter re Severance Pay and Change in Control, dated July 26, 2004, between Registrant and Steven Porter, M.D., Ph.D. (28)
	10	.95+	Amendment to Offer Letter re Severance Pay and Change in Control, dated July 27, 2004, between Registrant and Howard A. Simon, Esq. (28)
	10	.96*	Amendment No. 2, dated December 31, 2004, to the License and Commercialization Agreement, dated June 15, 2001, between Registrant and Amgen Inc. (28)
	10	.97*	Amendment No. 3, dated December 31, 2004, to the License and Commercialization Agreement, dated June 15, 2001, between Registrant and Amgen Inc. (28)
	10	.98**	Amendment No. 3, dated July 26, 2005, to Data Transfer, Clinical Trial and Market Supply Agreement, dated January 27, 2000, between Registrant and Boehringer Ingelheim Austria, GmbH.(29)
	10	.99**	Data Transfer, Clinical Trial and Market Supply Agreement, dated November 3, 2005, between Registrant and Boehringer Ingelheim Austria, GmbH.(31)
	10	.100**	Product Acquisition Agreement, dated November 28, 2005, between Registrant and Valeant Pharmaceuticals North America.(30)
	10	.101**	Amendment Number 3, dated December 22, 2005, to Development and Supply Agreement dated December 28, 2001, between Registrant and Abbott Laboratories.(31)
	10	.102**	Amendment Number 4, dated December 22, 2005, to License and Commercialization Agreement, dated June 15, 2001, between Registrant and Amgen Inc.(31)
	10	.103**	Asset Purchase Agreement dated December 23, 2005, between Registrant and Targanta Therapeutics Corporation.(31)
	10	.104**	License Agreement, dated December 23, 2005, between Registrant and Eli Lilly & Company.(31)
	10	.105+	Severance Agreement and General Release, dated January 6, 2006, between Registrant and Roger L. Hawley.(31)
	10	.106**	Amendment No. 6, dated February 27, 2006, to License Agreement dated May 5, 1998, between Registrant and Genentech, Inc.(31)
	10	.107+	Amended and Restated 2000 Equity Incentive Plan.(31)
	10	.108+	Amended and Restated 2000 Non-Employee Directors’ Stock Option Plan.(31)
	10	.109**	Exclusive License and Collaboration Agreement dated October 16, 2006 between Registrant and Hoffmann-La Roche, Inc. and F. Hoffmann-La Roche Ltd. (32)
	10	.110**	Amendment No. 4, dated December 21, 2006, to Data Transfer, Clinical Trial and Market Supply Agreement, dated January 27, 2000, between Registrant and Boehringer Ingelheim Austria, GmbH.(32)
	10	.111	Deferred Prosecution Agreement between Registrant and the United States Attorney’s Office for the Northern District of California (32)
	10	.112	Civil Settlement Agreement between Registrant and the United States Department of Justice and the United States Attorney’s Office for the Northern District of California (32)
	10	.113	Corporate Integrity Agreement between Registrant and the Office of the Inspector General of the United States Department of Health and Human Services (32)
	21	.1	List of Subsidiaries(32)
	23	.1	Consent of Independent Registered Public Accounting Firm(32)
	24	.1	Power of Attorney (included on the signature pages hereto)
	31	.1	Certification required by Rule 13a-14(a) or Rule 15d-14(a)(32)
	31	.2	Certification required by Rule 13a-14(a) or Rule 15d-14(a)(32)
	32	.1†	Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350)(32)

* Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

**	Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
+	Management contract or compensation plan or arrangement.
†	This certification accompanies the Periodic Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
(1)	Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 2, 2000 (No. 333-96029), as amended by Amendment No. 1 filed with the Commission on February 18, 2000, as amended by Amendment No. 2 filed with the Commission on March 6, 2000, as amended by Amendment No. 3 filed with the Commission on March 22, 2000, as amended by Amendment No. 4 filed with the Commission on March 23, 2000 and as amended by Amendment No. 5 filed with the Commission on March 23, 2000.
(2)	Incorporated by reference to pages 16 through 26 of Exhibit 10.3 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 18, 2000 (No. 333-45460).
(3)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
(4)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
(5)	Filed as an exhibit to the Registrant’s Current Report on Form 8-K on August 23, 2000.
(6)	Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000.
(7)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
(8)	Filed as an exhibit to the Registrant’s Current Report on Form 8-K on July 18, 2001.
(9)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
(10)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
(11)	Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
(12)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2002.
(13)	Incorporated by reference to pages following page 10 of Exhibit 10.5 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 18, 2000 (No. 333-45460).
(14)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2003.
(15)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2003.
(16)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2003.
(17)	Filed as an exhibit to the Registrant’s amended Quarterly Report on Form 10-Q/A (Amendment No. 1) filed for the quarter ended September 30, 2003.
(18)	Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003.
(19)	Filed as an exhibit to the Registrant’s amended Annual Report on Form 10-K/A (Amendment No. 1) for the year ended December 31, 2003.
(20)	Filed as an exhibit to the Registrant’s amended Annual Report on Form 10-K/A (Amendment No. 2) for the year ended December 31, 2003.
(21)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2004.
(22)	Filed as an exhibit to the Registrant’s amended Quarterly Report on Form 10-Q/A (Amendment No. 1) filed for the quarter ended March 31, 2004.
(23)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2004.
(24)	Filed as an exhibit to the Registrant’s amended Quarterly Report on Form 10-Q/A (Amendment No. 1) filed for the quarter ended June 30, 2004.

(25)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2004.
(26)	Filed as an exhibit to the Registrant’s Current Report on Form 8-K on November 4, 2004.
(27)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2005.
(28)	Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.
(29)	Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2005.
(30)	Incorporated by reference to Exhibit 2.1 of Form 8-K (File No. 001-11397) filed by Valeant Pharmaceuticals International, the parent company of Valeant Pharmaceuticals North America on January 5, 2006.
(31)	Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005.
(32)	Filed herewith.

EX-10.109

Exhibit 10.109

EXECUTION COPY

EXCLUSIVE LICENSE AND COLLABORATION AGREEMENT

     This Exclusive License and Collaboration Agreement (this “Agreement”) is executed as of October 16, 2006, (the “Execution Date”) and effective as of the Effective Date and is entered into by and between Hoffmann-La Roche Inc., a New Jersey corporation located at 340 Kingsland Street, Nutley, New Jersey 07110 (“Roche Nutley”), and F.Hoffmann-La Roche Ltd, a Swiss corporation, with its principal office at Grenzacherstrasse 124, CH-4070 Basel, Switzerland (“Roche Basel”; Roche Nutley and Roche Basel are collectively referred to as “Roche”), on the one hand, and InterMune, Inc., a Delaware corporation with its principal place of business at 3280 Bayshore Boulevard, Brisbane, California 94005 (“InterMune”), on the other hand.

RECITALS:

     WHEREAS, InterMune has developed pharmaceutical compounds, including ITMN-191, and is the owner of, or has the right to license to Roche, certain know how and patent rights;

     WHEREAS, InterMune and Roche wish to collaborate in the research, development, manufacturing and commercialization of products, under the terms and conditions set forth below; and

     WHEREAS, InterMune and Roche desire to enter into this Agreement to exclusively and jointly develop, and commercialize ITMN-191 and to exclusively and jointly discover, research, and to the extent commercially reasonable, develop and commercialize at least one other compound in the agreed upon licensed field globally.

     NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, and for good and valuable consideration, the receipt and sufficiency which are hereby acknowledged, Roche and InterMune hereby agree as follows:

ARTICLE 1 — DEFINITIONS

Unless specifically set forth to the contrary in this Agreement, the following terms, whether used in the singular or plural, shall have the respective meanings set forth below.

1.1	“AAA” shall have the meaning ascribed to it in Section 13.6.1 hereof.
1.2	“Act” shall mean, as applicable, the United States Federal Food, Drug, and Cosmetic Act, 21 U.S.C. §§ 301 et seq., and/or the Public Health Service Act, 42 U.S.C. §§ 262 et seq., as such may be amended from time to time.
1.3	“Additional Compound Notice” shall have the meaning ascribed to it in Section 5.3.3 hereof.
1.4	“Additional Third Party Patent Licenses” shall have the meaning ascribed to it in Section 8.3.3 hereof.

[^*] Certain information on this page has been redacted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

1

EXECUTION COPY

1.5	“Adjusted Gross Sales” shall mean the amount of gross sales of a Product invoiced by Roche, its Affiliates and its sub-licensees to independent third parties less deductions of returns and [***] (including [***]), rebates [***], [***]), volume (quantity) discounts, taxes (value added or sales taxes, government mandated exceptional taxes and other taxes directly linked to the [***]).
1.6	“Affiliate” shall mean any corporation or non-corporate business entity which controls, is controlled by, or is under common control with a Party to this Agreement. A corporation or non-corporate business entity shall be regarded as in control of another corporation if it owns or directly or indirectly controls at least fifty percent (50%) of the voting stock of the other corporation or such lesser maximum percentage permitted in those jurisdictions where majority ownership by foreign entities is prohibited, or (a) in the absence of the ownership of at least fifty percent (50%) of the voting stock of a corporation, or (b) in the case of a non-corporate business entity, if it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the corporation or non-corporate business entity, as applicable, whether through the ownership or control of voting securities, by contract or otherwise. Anything to the contrary in this paragraph notwithstanding, Genentech, Inc., a Delaware corporation (“Genentech”), and Chugai Pharmaceutical Co., Ltd., a Japanese corporation (“Chugai”), (each, a “Roche Entity”), shall not be deemed an Affiliate of Roche unless Roche provides written notice to InterMune of its desire to include a particular Roche Entity as an Affiliate of Roche. Notwithstanding such written notice, if any Roche Entity does not agree to be bound by the terms and conditions of this Agreement, then such Roche Entity shall have none of the rights and obligations of an Affiliate of Roche under this Agreement. Notwithstanding the preceding provisions, once an entity ceases to be an Affiliate, then such entity shall, without any further action, cease to have any rights, including license and sublicense rights, under this Agreement that it has by reason of being an Affiliate
1.7	“Agreement” shall have the meaning given such term in the preamble to this document.
1.8	“Anticipated First Commercial Sale” shall mean, with respect to a Product, the date projected by Roche as the expected date of First Commercial Sale of such Product in a country.
1.9	“Antitrust Division” shall have the meaning ascribed to it in Section 9.4.1 hereof.
1.10	“[***] Agreement” shall mean that [***], as amended, by and between InterMune and [***], as the same may be amended from time to time.
1.11	“Calendar Quarter” shall mean the respective periods of three (3) consecutive calendar months ending on March 31, June 30, September 30 and December 31.
1.12	“Calendar Year” shall mean each successive period of twelve (12) months commencing on January 1 and ending on December 31.

[^*] Certain information on this page has been redacted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

2

EXECUTION COPY

1.13	“Change of Control” shall mean with respect to a Party: (1) the sale of all or substantially all of such Party’s assets; (2) a merger, reorganization or consolidation (other than a reorganization which is effected primarily for tax purposes) involving such Party in which the voting securities of such Party outstanding immediately prior thereto cease to represent at least fifty percent (50%) of the combined voting power of the surviving entity immediately after such merger, reorganization or consolidation; or (3) a person or entity, or group of persons or entities, acting in concert (other than a trustee or other fiduciary holding securities under an employee benefit plan) acquire more than fifty percent (50%) of the voting equity securities or management control of such Party.
1.14	“[***] License” shall mean that certain [***] by and between InterMune and [***] dated [***], as the same may be amended from time to time.
1.15	“Chronic Toxicology Study” shall mean any toxicology study in any animal model that is longer than thirteen (13) weeks.
1.16	“Chugai” shall have the meaning ascribed to it in Section 1.6 hereof.
1.17	“Claims” shall have the meaning ascribed to it in Section 11.1 hereof.
1.18	“Clinical Trial” shall mean a Phase I Clinical Trial, Phase II Clinical Trial, Phase III Clinical Trial, and/or Phase IV Clinical Trial.
1.19	“Closing Date” shall mean, as the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”) applies to transactions contemplated hereunder, the date of expiration or termination of all applicable waiting periods under the HSR Act.
1.20	“Co-Commercialization” shall mean the joint Commercialization of a Product by the Parties in the Co-Commercialization Country, and “Co-Commercialize” shall have a corresponding meaning.
1.21	“Co-Commercialization Budget” shall mean, as to a Product, the annual budget(s) included in a Co-Commercialization Plan for the Co-Commercialization Country.
1.22	“Co-Commercialization Country” shall mean the United States of America and its possessions and territories, including Puerto Rico.
1.23	“Co-Commercialization Plan” shall mean, as to a Product in the Co-Commercialization Country, the plan for Co-Commercialization, including the related Co-Commercialization Budget, developed and approved by the Joint Development and Commercialization Committee for each Product in the Co-Commercialization Country.
1.24	“Co-Commercialization Profit Split” shall mean, as to a Product in the Co-Commercialization Country, for a Calendar Quarter, (a) [***] for such Product in the Co-Commercialization Country and for such Calendar Quarter less (b) aggregate [***] (as defined in[***] for such Product and for such Calendar Quarter, with the result of such calculation being multiplied by 0.50.

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1.25	“Co-Funded Development” shall mean the joint Development of a Product by the Parties in the Co-Funded Development Territory, and “Co-Develop” shall have a corresponding meaning.
1.26	“Co-Funded Development Budget” shall mean, upon commencement of the first Phase II Clinical Trial, as to a Product, the annual budget(s) for joint Development activities in the Co-Funded Development Territory included in the Co-Funded Development Plan.
1.27	“Co-Funded Development Plan” shall mean, upon commencement of the first Phase II Clinical Trial, as to a Product, the plan for Co-Funded Development, including the related Co-Funded Development Budget, developed and approved by the Joint Development and Commercialization Committee for each Product in the Co-Funded Development Territory.
1.28	“Co-Funded Development Territory” shall mean Europe and the United States of America and its possessions and territories, including Puerto Rico.
1.29	“Code” shall have the meaning ascribed to it in Section 12.4.3 hereof.
1.30	“Collaboration Compound” shall mean any [***] in the Field (together with its salts and esters), other than ITMN-191, which is Controlled by InterMune as of the Effective Date or during the Research Program Term.
1.31	“Collaboration Compound Opt-In” shall have the meaning ascribed to it in Section 4.3.7(a)(iii) hereof.
1.32	“Combination Product” shall mean either a single pharmaceutical formulation containing as its active ingredients both a Licensed Compound and one or more other therapeutically or prophylactically active ingredients, or a combination therapy comprised of a Product and one or more other therapeutically or prophylactically active products priced and sold in a single package containing such multiple products, in each case, in all dosage forms, formulations, presentations, line extensions, and package configurations. All references to Product in this Agreement shall be deemed to include Combination Product.
1.33	“Combination Toxicology Study” shall mean a study conducted in primates to evaluate the safety of a Licensed Compound or Product in combination with one or more other products approved for or in development for the treatment and/or prevention of [***].
1.34	“Commercialize” or “Commercialization” shall mean any and all activities directed to marketing (including any pre-launch marketing activities (including market research and analysis, and health economics) performed prior to First Commercial Sale), promoting, Detailing, distributing, importing, exporting, commercializing, conducting medical affairs activities, offering for sale, having sold and/or selling a Product, including sampling, and conducting Post-Approval Clinical Trials.

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1.35	“Commercially Reasonable Efforts” shall mean that level, caliber and quality of efforts and resources reasonably and normally used in the research, development and commercialization by biopharmaceutical companies (as to [***]) and by pharmaceutical companies (as to [***]) for a product or compound, which is of similar market potential and at a similar stage in its development or product life, taking into account, without limitation, with respect to the Licensed Compounds and Products, issues of safety, efficacy, product profile and proprietary position of the Licensed Compounds and Products, and other relevant scientific, technical, business, marketing, return on investment and other commercial factors. Without limiting the foregoing, (i) Commercially Reasonable Efforts as it applies to the Development of Licensed Compounds hereunder shall mean adherence to the activities and timelines (to the extent adherence to such activities and timelines are controllable by the Party responsible for performing such activities) set forth in the then most current version of the [***], [***] and/or [***], as applicable, and the respective budgets included therein, subject to delays caused by issues of safety and efficacy and other technical and scientific issues that may arise or by any other factor outside of the reasonable control of the responsible Party; and (ii) Commercially Reasonable Efforts as it applies to the Co-Commercialization of Products hereunder shall mean adherence to the activities and timelines (to the extent adherence to such activities and timelines are controllable by the Party responsible for performing such activities) set forth in the then most current version of the Co-Commercialization Plan (and the related budget included therein). Notwithstanding the foregoing, to the extent that the performance of a Party’s responsibilities hereunder is adversely affected by the other Party’s failure to perform its responsibilities hereunder, such Party shall not be deemed to have failed to use its Commercially Reasonable Efforts in performing such responsibilities.
1.36	“Committees” shall have the meaning ascribed to it in Section 3.1 hereof.
1.37	“Competing Pharma Change of Control” shall have the meaning ascribed to it in Section 13.2.2 hereof.
1.38	“Competing Product” shall mean a compound whose [***] results solely from [***], and which is not owned or Controlled by InterMune.
1.39	“Co-Promote” or “Co-Promotion” shall mean the joint promotion of Products by the Parties (or their respective Affiliates) wherein only one Party sells Product in the given country under the same trademark in the Co-Promotion Country pursuant to the applicable Co-Promotion Plan, following the exercise by InterMune of the Co-Promotion Option under Section 4.9.
1.40	“Co-Promotion Country” shall mean the United States of America and its possessions and territories, including Puerto Rico.
1.41	“Co-Promotion Agreement” shall have the meaning ascribed to it in Section 4.9.1 hereof.

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1.42	“Co-Promotion Exercise Date” shall have the meaning ascribed to it in Section 4.9.3 hereof.
1.43	“Co-Promotion Option” shall have the meaning ascribed to it in Section 4.9.1 hereof.
1.44	“Confidential Information” shall mean all non-public or proprietary information, whether in oral, graphic, electronic or any other form or medium including, but not limited to, any: use process, method, raw materials, compound, formulations, clinical data, test results, formulas, models, flow charts, software in various stages of development, source codes, object codes, research and development procedures, marketing and development plans, price lists, pricing policies, business plans, information relating to customers and/or suppliers’ identities, characteristics and agreements, financial information and projections, employee files, technical reports, specifications, drawings, diagrams, research project, work in process, future development, scientific, engineering, manufacturing, processing information, technique, marketing plan, business plan, financial plan, personnel matters relating to the disclosing party, its present or future products, research, process and technology development programs, sales programs, marketing techniques, suppliers, pricing, customers, employees and investors.
1.45	“Contract Year” shall mean the period beginning on the Effective Date and ending on December 31, 2006, and each succeeding twelve (12) month period thereafter during the Term.
1.46	“Control”, “Controls” or “Controlled by” shall mean, with respect to any item of or right under InterMune Patent Rights, Roche Patent Rights, Joint Patent Rights, InterMune Know-How, Roche Know-How or Joint Know-How, the possession of (whether by ownership or license, other than pursuant to this Agreement) the ability of a Party to grant access to, or a license or sublicense of, such items or right as provided for herein without violating the terms of any agreement or other arrangement with any Third Party existing at the time such Party would be required hereunder to grant the other Party such access or license or sublicense.
1.47	“Cover” or “Covering” shall mean the making, using, selling, offering for sale, importation or exportation of a Licensed Compound or Product would infringe a Valid Claim but for the licenses granted under this Agreement.
1.48	“Deliverables” shall have the meaning ascribed to it in Section 4.3.3(c) hereof.
1.49	“Detail” shall mean a product presentation consistent with approved product labeling in a face-to-face meeting in an individual or group practice setting, including a hospital setting, between a professional sales representative and a Target Prescriber in which one or more key product benefits are presented in a balanced manner. A Detail does not include a reminder or sample drop. “Detailing” shall mean the act of presenting a Detail.

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1.50	“Develop” or “Development” shall mean (a) activities directly and specifically relating to the pre-clinical and clinical drug development of a Product, including test method development and stability testing, assay development, toxicology, formulation, quality assurance/quality control development, technology transfer, statistical analysis, process development, pharmacokinetic studies, Clinical Trials (including research to design Clinical Trials and develop target product profiles), regulatory affairs, drug safety surveillance activities, and required Marketing Authorizations and (b) any other research and development activities with respect to a Product.
1.51	“Development and Commercialization Exclusivity Period” shall have the meaning ascribed to it in Section 6.2.2 hereof.
1.52	“Development Cost Project Account” shall have the meaning ascribed to it in Section 4.3.7(c).
1.53	“Development Expenses” shall have the meaning set forth in Exhibit A.
1.54	“Development Plan” shall have the meaning ascribed to it in Section 4.3.2 hereof.
1.55	“Dispute” shall have the meaning ascribed to it in Section 13.6.1 hereof.
1.56	“Effective Date” shall mean the later of the Execution Date or, if applicable, the Closing Date.
1.57	“Europe” shall mean Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Germany, Greece, Finland, France, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Russia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey and United Kingdom and such other countries which are included in the European Union after the Effective Date.
1.58	“Event Payment” shall have the meaning ascribed to it in Section 8.2 hereof.
1.59	“Excluded Claim” shall have the meaning ascribed to it in Section 13.6.5 hereof.
1.60	“Executive” shall mean for Roche, the CEO of the Roche Pharmaceuticals Division (or such individual’s designee), and, for InterMune, the Chief Executive Officer of InterMune (or such individual’s designee). If either position is vacant or either position does not exist, then the person having the most nearly equivalent position (or such individual’s designee) shall be deemed to be the Executive Officer of the relevant Party.
1.61	“Field” shall mean the treatment and/or prevention of acute or chronic [***] infection in humans by administering a compound whose [***] results solely from [***].
1.62	“Filing” of an NDA shall mean the acceptance by a Regulatory Authority of an NDA for filing.

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1.63	“First Commercial Sale” shall mean, with respect to any Product, the first sale for end use or consumption of such Product (provided that such Product is one which has received Marketing Authorization in the country) in a country, excluding, however, any sale or other distribution for compassionate use or for use in a Clinical Trial, for test marketing or for compassionate or similar use.
1.64	“First Opt-In Notice” shall have the meaning ascribed to it in Section 5.3.5 hereof.
1.65	“First Opt-In Report” shall have the meaning ascribed to it in Section 5.3.5 hereof.
1.66	“Full-Time Equivalent” or “FTE” shall mean the equivalent of a full-time individual’s work time based upon a total of 1,880 hours per year of scientific, technical or managerial work on the Research Program. The portion of an FTE year devoted by an individual to the Research Program shall be determined by dividing: (a) the number of hours during any twelve-month period devoted by such employee to the Research Program by (b) 1,880.
1.67	“FTC” shall have the meaning ascribed to it in Section 9.4.1 hereof.
1.68	“Gap Period Expenses” shall have the meaning ascribed to it in Section 4.3.7 hereof.
1.69	“Genentech” shall have the meaning ascribed to it in Section 1.6 hereof.
1.70	“Generic Product” means a Third Party product that contains the same Licensed Compound as the active pharmaceutical ingredient and that has received Marketing Authorization for use in a particular indication through an expedited regulatory approval process governing approval of generic pharmaceuticals; provided, however, that Generic Products shall not include Products sold by a Party’s sublicensees or distributors pursuant to this Agreement. For the avoidance of doubt, in the United States, such Generic Product would be set forth in the “Orange Book” (i.e., the APPROVED DRUG PRODUCTS WITH THERAPEUTIC EQUIVALENCE EVALUATIONS published by the U.S. Department of Health and Human Services).
1.71	“HCV” shall mean the hepatitis C virus.
1.72	“HSR Act” shall have the meaning ascribed to it in Section 1.19 hereof.
1.73	“IND” shall mean an Investigational New Drug application, Clinical Study Application, Clinical Trial Exemption, or similar application or submission for approval to conduct human clinical investigations filed with or submitted to a Regulatory Authority in the Territory in conformance with the requirements of such Regulatory Authority.
1.74	“Indemnified Party” shall have the meaning ascribed to it in Section 11.5 hereof.
1.75	“Indemnifying Party” shall have the meaning ascribed to it in Section 11.5 hereof.

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1.76	“Initiates”, “Initiated” or “Initiation” shall mean, with respect to a Clinical Trial, the administration of the first dose by Roche or InterMune to the first volunteer or patient in such Clinical Trial, and, with respect to a Combination Toxicology Study or Chronic Toxicology Study, the administration of the first dose by Roche or InterMune to an animal in such study.
1.77	“InterMune” shall have the meaning given such term in the preamble to this Agreement.
1.78	“InterMune Indemnitees” shall have the meaning ascribed to it in Section 11.2 hereof.
1.79	“InterMune Know-How” shall mean all Confidential Information which is Controlled by InterMune during the term of the Agreement and: (i) is used in the course of performing any activity permitted under this Agreement, or (ii) is proposed by InterMune to be so used; or (iii) is conceived or created by InterMune in connection with or at least partially as a result of activities conducted or disclosures made or received in connection with this Agreement; or (iv) is necessary to make, use, sell, offer to sell, export or import Lead Compound, Licensed Compounds or Products, regardless of whether such Confidential Information was previously created for or applied to a different purpose.
1.80	“InterMune Patent Rights” shall mean any and all patents and patent applications, including those listed on Schedule 1.80, in the Field in the Territory which are Controlled by InterMune during the term of this Agreement which Cover any activity permitted under this Agreement, including, but not limited to, the making, using, selling, offering to sell, exporting or importing Lead Compound, Licensed Compounds or Products. For the purposes of this Agreement, “patents and patent applications” shall be deemed to include certificates of invention and applications for certificates of invention, as well as divisions, continuations, continuations-in-part, reissues, renewals, extensions, supplementary protection certificates, and the like of any such patents and patent applications and foreign equivalents thereof.
1.81	“ITMN-191” shall mean that [***] identified within InterMune as “ITMN-191”, together with its salts and esters, which is hereby designated a Licensed Compound.
1.82	“ITMN-191 Transition Plan” shall have the meaning ascribed to it in Section 4.3.3 hereof, including the related ITMN-191 Transition Plan Budget.
1.83	“ITMN-191 Transition Plan Budget” shall mean, as of the Effective Date, as to ITMN-191, the budget(s) for joint Development activities described in the ITMN-191 Transition Plan as further described in Section 4.3.3.
1.84	“Joint Development and Commercialization Committee” or “JDCC” shall mean the joint development and commercialization committee established for any Co-Funded Development and Co-Commercialization efforts hereunder, as more fully described in Section 3.4.

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1.85	“Joint Finance Committee” or “JFC” shall mean the joint finance committee established in connection with the establishing of a Joint Development and Commercialization Committee or Joint Co-Promotion Committee, as more fully described in Sections 3.1 and 3.5.
1.86	“Joint Know-How” shall mean all Confidential Information which is jointly Controlled by both Parties during the term of the Agreement and is used in the course of performing any activity permitted under this Agreement or is reasonably needed to perform any activity permitted under this Agreement.
1.87	“Joint Patent Rights” shall mean any and all patents and patent applications in the Field in the Territory which are invented jointly during the term of this Agreement by employees of both Parties according to the U.S. laws pertaining to joint inventorship. For the purposes of this Agreement, “patents and patent applications” shall be deemed to include certificates of invention and applications for certificates of invention, as well as divisions, continuations, continuations-in-part, reissues, renewals, extensions, supplementary protection certificates, and the like of any such patents and patent applications and foreign equivalents thereof.
1.88	“Joint Research Committee” or “JRC” shall mean the joint research committee established to facilitate the Research Program as more fully described in Sections 3.1 and 3.3.
1.89	“Joint Steering Committee” or “JSC” shall have the meaning ascribed to it in Section 3.2.
1.90	“Key Tables and Listings” or “KTL” shall mean, with respect to a Clinical Trial, those key tables and listings created from raw datasets from a Clinical Trial.
1.91	“Launch Plan/Budget” shall have the meaning ascribed to in Section 4.4.3(a)(i) hereof.
1.92	“Lead Compound” shall mean any Collaboration Compound which meets the requirements set forth in Schedule 1.92 (as the same may be subsequently amended from time to time by the JRC).
1.93	“Licensed Compound” shall mean (a) ITMN-191 and (b) Collaboration Compounds properly included by [***] under [***] as Licensed Compounds; provided however, [***] may substitute a Lead Compound for an existing Licensed Compound as set forth in this Agreement; provided further there shall not be more than [***] at any time during the Term unless [***] shall have exercised its option to expand the number of Licensed Compounds pursuant to [***].
1.94	“Licensed Compound Claim” shall mean a claim in the InterMune Patent Rights or Joint Patent Rights that Covers a Licensed Compound or formulation or composition thereof or a method of making or using the same, that defines the Licensed Compound (including salts, hydrates, enantiomers, or esters thereof) by particularly naming the

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	Licensed Compound or by [***] that is specific to [***] or that is a [***] which [***] explicitly include groups that, if selected, [***]. For purposes of clarity, a claim that sets forth [***] but that has more than [***] is not [***] but a claim dependent thereon reducing the variable substituent groups to no more than [***] is a Licensed Compound Claim to the extent that the structure it defines encompasses the [***] and such dependent claim Covers the [***] or a method of making or using the same.
1.95	“Licensed Compound Payment” shall have the meaning ascribed to it in Section 5.3.3.
1.96	“Loss” shall have the meaning ascribed to it in Section 11.1.
1.97	“[***]” shall mean any cyclic macromolecule in the [***] containing a [***] and optional [***] [***] [***] groups as part of the [***] and supporting the [***] of [***] [***] [***] groups.
1.98	“MAD Study” shall mean the Phase I Clinical Trial [***] originally designed by [***] and subject to modification by the JDCC to evaluate the safety, pharmacokinetics, [***] and [***] of [***] of ITMN-191 in patients with [***].
1.99	“Major European Market” shall mean any one of the following countries: the United Kingdom, France, Germany, Italy, Spain or Europe as an entity (or, for patent purposes, the European Patent Office).
1.100	“Major Market” shall mean each of the United States, Japan and Major European Market.
1.101	“Marketing Authorization” shall mean all approvals necessary from the relevant Regulatory Authority to market and sell a Product in any country (including all applicable pricing and governmental reimbursement approvals to the extent legally required to sell Product in a country).
1.102	“Mechanism of Action” shall have the meaning ascribed to it in Section 6.1.1 hereof.
1.103	“More Advanced Competing Product” shall mean a Competing Product that is in substantially the same or in a more advanced stage of development or commercialization than any Licensed Compound or Product.
1.104	“NDA” shall mean a New Drug Application, Biologics License Application, Worldwide Marketing Application, Marketing Application Authorization, filing pursuant to Section 510(k) of the Act, or similar application or submission for Marketing Authorization of a Product filed with a Regulatory Authority in the Territory to obtain marketing approval to sell commercially a biological, pharmaceutical or diagnostic product in that country or in that group of countries, together with all subsequent submissions, supplements and amendments thereto.
1.105	“Net Sales” shall mean the amount calculated by subtracting from the amount of Adjusted Gross Sales a lump sum deduction of the applicable Sales Related Deductions

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	for the territory in which such Adjusted Gross Sales occurred. For purposes of this Section, “Sales Related Deductions” shall mean (a) [***]percent ([***]%) of Adjusted Gross Sales in [***] or (b) [***] percent ([***]%) of Adjusted Gross Sales in the [***]. The Parties acknowledge that such Sales Related Deductions are in lieu of those sales related deductions which are not accounted for within [***] on a product by product basis ([***]).
	With respect to sales of Combination Products, Net Sales shall be calculated by multiplying the total Net Sales of such Combination Product by the fraction A/A+B where A is the actual invoice price of the Product in the same dosage amount in the applicable country if sold separately and B is the sum of the actual invoice prices of all other active ingredients or products in the same dosage amount in the Combination Product in the applicable country if sold separately during the applicable quarter. If A or B cannot be determined because values for the Product or the other active ingredients sold alone are not available in a particular country then Roche and InterMune will discuss an appropriate allocation for the fair market value of the Product and other active ingredients in the Combination Product to determine Net Sales for such Combination Product. The deductions set forth in Adjusted Gross Sales shall be applied in calculating Net Sales for a Combination Product.
1.106	“Operating Expenses” shall have the meaning set forth in Exhibit A.
1.107	“Operating Expenses Cost Account” shall have the meaning ascribed to it in Section 4.4.3(c) hereof.
1.108	“Opt-In Option” shall have the meaning ascribed to it in Section 5.3.5 hereof.
1.109	“Opt-Out” shall mean (i) failure by InterMune to exercise a Collaboration Compound Opt-In pursuant to Section 4.3.7(a)(iii), (ii) a deemed Opt-Out pursuant to Section 4.4.3(a)(iii), or (iii) exercise by InterMune of its Opt-Out with respect to ITMN-191 pursuant to Section 4.8.
1.110	“Opt-Out Product” shall mean a Product for which an Opt-Out has occurred.
1.111	“Party” shall mean Roche or InterMune, and “Parties” shall mean Roche and InterMune.
1.112	“Passed Compound” shall mean a compound that falls into at least one of the following: (a) [***] for which [***] under this Agreement is [***] during the [***], whether before or after a determination that such [***] is a [***]; (b) [***] synthesized by or on behalf of [***] under this Agreement but never screened during the [***] to determine if such [***] meet the [***] definition; (c) [***] synthesized by or on behalf of [***] during the [***] which are not [***] by definition; (d) Lead Compounds that are not nominated as a [***]; or (e) [***] that are nominated as a [***], but not subsequently selected by [***] as a [***] pursuant to [***]. For purposes of clarification, a [***] cannot be or have been a [***].

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1.113	“Passive Development” shall mean development activities with any [***] that involve one or more of the following types of support from [***] or a [***]: (i) provision by [***] of [***] to a [***] for use in a [***] to study the [***] of such [***] products with such [***] for the [***] or [***] of [***]; (ii) provision by [***] of [***] input and advice to such [***], solely with respect to the appropriate [***] and [***] of such [***] products in such [***] (including assessment of such [***] product related aspects of proposed designs and protocols of such [***]); or (iii) provision by [***] of [***] support to a [***] for use in a [***] to study the [***] of such [***] products with such [***] for the treatment or prevention of [***], provided that the sole purpose of such [***] support by [***] is to enhance the use of such [***] products with such [***] (for example, by enabling regulatory approval of the [***] use of [***] together with such [***]) and not to directly facilitate further development and approval of such [***] independent of such [***] trial with such [***] products.
1.114	“Phase I Clinical Trial” shall mean the first phase of human clinical trials of a drug required by the FDA or other equivalent regulatory authority to gain evidence of safety in enrollees, as described in 21 C.F.R. Part 312, as it may be amended.
1.115	“Phase II Clinical Trial” shall mean the second phase of human clinical trials of a drug required by the FDA or other equivalent regulatory authority to gain evidence of efficacy in the target population, determine optimal dosage, obtain expanded evidence of safety, as described in 21 C.F.R. Part 312, as it may be amended, and such clinical trial contemplates an interim assessment which could be used to decide whether to initiate a Phase III Clinical Trial in the Field.
1.116	“Phase III Clinical Trial” shall mean the third phase of human clinical trials of a drug required by the FDA or other equivalent regulatory authority to gain evidence of efficacy in the target population and obtain expanded evidence of safety, as described in 21 C.F.R. Part 312, as it may be amended.
1.117	“Phase IV Clinical Trial” shall mean either a post-marketing human clinical trial that would satisfy the requirement of 21 C.F.R. 312.85, as it may be amended, and the foreign equivalent thereof, or any Phase I Clinical Trial, Phase II Clinical Trial or Phase III Clinical Trial required as a condition for the maintenance of the Marketing Authorization of a Product by the relevant Regulatory Authority.
1.118	“Post-Approval Clinical Trial” shall mean any clinical trial in an indication, other than a Clinical Trial, to be conducted after receipt of Marketing Authorization for such indication.
1.119	“Potential [***] Development Candidate” or “PRDC” shall mean any Lead Compound that has been nominated by the [***] or [***] for consideration by [***] as a [***].

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1.120	“Prescriber” shall mean a medical or health care professional authorized to prescribe any medication under the laws of the jurisdiction in which such medical or health care professional is practicing, as mutually agreed by the Parties.
1.121	“Product(s)” shall mean any pharmaceutical preparation containing a Licensed Compound for any and all uses in humans, including any Combination Product.
1.122	“PCT” shall mean the Patent Cooperation Treaty.
1.123	“Regulatory Authority” shall mean any applicable government regulatory authority involved in granting approvals for the manufacturing, marketing, reimbursement and/or pricing of a Product in the Territory, including, in the United States, the United States Food and Drug Administration and any successor governmental authority having substantially the same function.
1.124	“Related Party” shall mean a Party, its Affiliates, and their respective sublicensees (which term does not include distributors), as applicable.
1.125	“Research Exclusivity Period” shall have the meaning ascribed to it in Section 6.1.1.
1.126	“Research Plan” shall have the meaning ascribed to it in Section 2.1 hereof.
1.127	“Research Program” shall mean the research activities undertaken by the Parties as set forth in Article 2 and Schedule 2.1.
1.128	“Research Program Term” shall have the meaning ascribed to it in Section 2.4 hereof.
1.129	“Reverted Compound” shall mean (i) a former [***] that has been [***] with another [***] pursuant to Section [***] or is [***] from [***] under Section [***]; provided that such [***] shall not be deemed a Reverted Compound [***] of the [***]; or (ii) any [***] for which [***] under Section [***](d) or Section [***](c) or for which the [***] has been terminated under Section [***].
1.130	“Right of First Negotiation” shall have the meaning ascribed to it in Section 6.3.2 hereof.
1.131	“Right of First Negotiation Exclusivity Period” shall have the meaning ascribed to it in Section 6.3.2 hereof.
1.132	“Right of First Negotiation Notice” shall have the meaning ascribed to it in Section 6.3.2 hereof.
1.133	“Right of First Negotiation Report” shall have the meaning ascribed to it in Section 6.3.2 hereof.
1.134	“Roche” shall have the meaning given such term in the preamble to this Agreement.

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1.135	“Roche Entity” shall have the meaning ascribed to it in Section 1.6 hereof.
1.136	“Roche Indemnitees” shall have the meaning ascribed to it in Section 11.3 hereof.
1.137	“Roche Know-How” shall mean all Confidential Information which is Controlled by Roche during the term of the Agreement and: (i) is used in the course of performing any activity permitted under this Agreement, or (ii) )is proposed by Roche to be so used; (iii) is conceived or created by Roche in connection with or at least partially as a result of activities conducted or disclosures made or received in connection with this Agreement; or (iv) is necessary to make, use, sell, offer to sell, export or import Lead Compound, Licensed Compounds, Products, Passed Compounds or Reverted Compounds, regardless of whether such Confidential Information was previously created for or applied to a different purpose.
1.138	“Roche Patent Rights” shall mean any and all patents and patent applications in the Field in the Territory which are Controlled by Roche during the term of this Agreement which Cover any activity permitted under this Agreement, all to the extent that the subject matter claimed therein is used in the course of performing any activity permitted under this Agreement, including, but not limited to, the making, using, selling, offering to sell, exporting or importing Lead Compound, Licensed Compounds, Products, Passed Compounds or Reverted Compounds. For the purposes of this Agreement, “patents and patent applications” shall be deemed to include certificates of invention and applications for certificates of invention, as well as divisions, continuations, continuations-in-part, reissues, renewals, extensions, supplementary protection certificates, and the like of any such patents and patent applications and foreign equivalents thereof.
1.139	“ROW Territory” shall mean the Territory excluding the Co-Commercialization Country.
1.140	“Royalty Period” shall have the meaning ascribed to it in Section 8.3.1(b) hereof.
1.141	“SAD Trial” shall mean the Phase I Clinical Trial [***] originally designed by [***] and subject to modification by the [***] to evaluate the safety, tolerability and pharmacokinetics of [***] of ITMN-191 in [***] [***].
1.142	“Second Opt-In Notice” shall have the meaning ascribed to it in Section 5.3.6 hereof.
1.143	“Second Opt-In Report” shall have the meaning ascribed to it in Section 5.3.6 hereof.
1.144	“Sensitive Information” shall have the meaning ascribed to it in Section 13.2.2(c) hereof.
1.145	“Substitution Notice” shall have the meaning ascribed to it in Section 5.3.2 hereof.
1.146	“Target Prescriber” shall mean a Prescriber as a member of the target audience to whom a Detail of Product shall be directed.

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1.147	“Territory” shall mean all of the countries in the world, and their territories and possessions.
1.148	“Third Party” shall mean an entity other than Roche, InterMune and their respective Affiliates.
1.149	“Third Party License” shall mean (a) any of the license agreements set forth on Exhibit B and (b) any license agreement entered into by a Party with a Third Party after the Effective Date that the Parties agree in writing is necessary for the Development or Commercialization of one or more Products in the applicable territory under this Agreement.
1.150	“Third Party License Fees” shall mean license fees, royalties and other amounts payable or paid to any Third Party under a Third Party License after the Effective Date.
1.151	“Transition Plan Deliverables” shall have the meaning ascribed to it in Section 4.3.3(c) hereof.
1.152	“Valid Claim” shall mean a claim in any (i) unexpired and issued patent in the InterMune Patent Rights, Joint Patent Rights or Roche Patent Rights that has not been (a) held permanently revoked, unenforceable or invalid by a final unappealable decision of a court or government agency of competent jurisdiction over such claim or (b) admitted to be invalid or unenforceable through disclaimers, consent decrees or otherwise, or (ii) pending patent application in the InterMune Patent Rights, Joint Patent Rights or Roche Patent Rights that has been on file with the applicable patent office for not more than [***]years and for which there has been [***] to advance to issuance of a patent; provided that such time period shall be tolled during any period of opposition, interference or appeal.
1.153	“Valuation” shall have the meaning ascribed to it in Section 6.3.2(b) hereof.
1.154	“Valuation Price” shall have the meaning ascribed to it in 6.3.2(b) hereof.
1.155	Interpretation.

(a)	Whenever any provision of this Agreement uses the term “including” (or “includes”), such term shall be deemed to mean “including without limitation” and “including but not limited to” (or “includes without limitations” and “includes but is not limited to”) regardless of whether the words “without limitation” or “but not limited to” actually follow the term “including” (or “includes”);
(b)	“Herein,” “hereby,” “hereunder,” “hereof” and other equivalent words shall refer to this Agreement in its entirety and not solely to the particular portion of this Agreement in which any such word is used;

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(c)	All definitions set forth herein shall be deemed applicable whether the words defined are used herein in the singular or the plural;
(d)	Wherever used herein, any pronoun or pronouns shall be deemed to include both the singular and plural and to cover all genders;
(e)	The recitals set forth at the start of this Agreement, along with the Attachments to this Agreement, and the terms and conditions incorporated in such recitals and Attachments shall be deemed integral parts of this Agreement and all references in this Agreement to this Agreement shall encompass such recitals and Attachments and the terms and conditions incorporated in such recitals and Attachments; provided, that in the event of any conflict between the terms and conditions of this Agreement and any terms and conditions set forth in the recitals or Attachments, the terms of this Agreement shall control;
(f)	In the event of any conflict between the terms and conditions of this Agreement and any terms and conditions that may be set forth on any order, invoice, verbal agreement or otherwise, the terms and conditions of this Agreement shall govern;
(g)	The Agreement shall be construed as if both Parties drafted it jointly, and shall not be construed against either Party as principal drafter;
(h)	Unless otherwise provided, all references to Sections, Articles and Schedules in this Agreement are to Sections, Articles and Schedules of and to this Agreement;
(i)	Any reference to any federal, national, state, local or foreign statute or law shall be deemed to also refer to all rules and regulations promulgated thereunder, unless the context requires otherwise; and
(j)	Wherever used, the word “shall” and the word “will” are each understood to be imperative or mandatory in nature and are interchangeable with one another.

ARTICLE 2 — RESEARCH PROGRAM; EXCHANGE OF INFORMATION

2.1

Conduct of Research. In furtherance of the Research Program, InterMune and Roche have developed and attached hereto an initial overview of the Research Program, which includes the goals and objectives for the Research Program during the Research Program Term as Schedule 2.1 (“Research Plan”). Within ninety (90) days of the Effective Date, the Parties shall prepare a more detailed Research Plan setting forth the objectives, planned tasks, responsibilities of the Parties, and associated timelines, including, subject to Section 2.3, the allocation of InterMune FTEs and Roche FTEs and other Roche resource commitments, under the Research Program. Schedule 2.1 may be further

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revised and amended by the agreement of the Parties (and not by the JRC decision-making process) during the Research Program Term.

2.1.1	InterMune and Roche shall use [***] to proceed with the work set out in the Research Program.
2.1.2	InterMune and Roche each shall conduct the Research Program in good scientific manner and in compliance with all applicable laws, rules and regulations. Each Party shall notify the other in writing of any material deviations from applicable regulatory or legal requirements with respect to work under this Agreement. Each Party hereby certifies that it has not employed or otherwise used and shall not employ and otherwise use in any capacity the services of any person debarred under United States law, including 21 U.S.C. § 335a, in performing any portion of the Research Program.
2.1.3	If animals are used in the Research Program, each Party shall comply with the Animal Welfare Act or any other applicable local, state, national and international laws and regulations relating to the care and use of laboratory animals. Any animals which are used in the course of the Research Program, or products derived from those animals, such as eggs or milk, shall not be used for food purposes, nor shall these animals be used for commercial breeding purposes.

2.2 Research Program: The more detailed Research Plan setting forth the objectives, planned tasks, responsibilities of the Parties, and associated timelines shall reflect, among other things, the following:

(a)	[***] shall be responsible for evaluating Collaboration Compounds up to and including [***]including performing [***]. Collaboration Compounds that meet the Lead Compound criteria will be presented to the [***] as candidates for advancement;
(b)	If [***] decides to further conduct preclinical evaluation of a Lead Compound presented to the [***], then [***] will be responsible for all such subsequent preclinical evaluation through to nomination of the Lead Compound to [***] status, [***].
(c)	Subject to Section 4.2, the [***] shall nominate Lead Compounds to [***] to evaluate as potential Licensed Compounds;
(d)	For Lead Compounds that are advanced to [***] status, [***] will be responsible for all subsequent Development activities; and
(e)	[***] and [***] shall conduct such other activities as the [***] may determine are appropriate, subject to Section 3.3.3(b).

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2.3 FTE Commitments.

2.3.1 For each twelve (12)-month period in the Research Program Term, [***] and [***] shall commit the appropriate number of FTE’s to carry out their respective obligations under the Research Program. The Parties shall ensure that all FTEs and all other of their personnel, employees, and agents involved in the Research Program comply with the confidentiality provisions of this Agreement. For purposes of this Section 2.3, Roche acknowledges that InterMune FTEs include FTEs contracted by InterMune under the [***] to perform funded research, and that unless InterMune, using Commercially Reasonable Efforts, is able to extend the funded research being performed by [***] FTEs under the [***] or execute an agreement with a Third Party contract research organization to assume such research activities comparable to those being performed by [***] FTEs under the [***], then InterMune’s FTE commitment under this Agreement will expire on June 30, 2007, with respect to FTE efforts provided under the [***]; provided, however, that InterMune shall only be required to use [***] to extend the funded research being performed by [***] FTEs under the [***] or execute an agreement with a Third Party contract research organization to perform such comparable research activities if InterMune determines in its sole discretion that doing so is necessary for InterMune to perform its obligations under the Research Plan.

2.4

Research Program Term. Except as otherwise provided herein, the term of the Research Program shall commence on the Effective Date and continue for a period of [***]years, unless earlier terminated pursuant to Section 12.2 (the “Research Program Term”).

2.5

Permitted Subcontractors. Each Party may perform their respective obligations under the Research Program and the Research Plan through one or more Affiliates or Third Party subcontractors, provided that (a) none of the rights of InterMune hereunder are diminished or otherwise adversely affected as a result of Roche’s use of such Affiliates or subcontractors and (b) the Affiliate or subcontractor undertakes obligations of confidentiality and non-use regarding Confidential Information which are substantially the same as those undertaken by the Parties pursuant to Article 7 hereof, which shall be in writing with respect to subcontractors. Both Parties shall remain at all times fully liable for its respective responsibilities under the Research Program.

ARTICLE 3 – COLLABORATION MANAGEMENT AND COMMITTEES

3.1 General. The Parties agree to establish, for the purposes specified herein, a Joint Steering Committee, a Joint Research Committee, a Joint Development and Commercialization Committee and a Joint Finance Committee (collectively, the JSC, the JRC, the JDCC and the JFC shall be referred to herein as the “Committees”). Notwithstanding anything to the contrary contained herein, the Parties acknowledge and agree that none of the Committees shall have the power to amend, modify or waive any of the terms or conditions of this Agreement and that the Agreement can only be

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amended by mutual agreement of the Parties as set forth in Section 13.7. Each Party shall bear its own costs associated with its participation in each of the Committees.

3.1.1	Meetings. Following its establishment, except as set forth in this Article 3, each Committee shall meet in accordance with a schedule established by mutual written agreement of the Parties, with the location for such meetings alternating between InterMune and Roche facilities (or such other location as may be determined by the Committee). Alternatively, each Committee may meet by means of teleconference, videoconference or other similar communications equipment. Additional representatives or consultants may from time to time, by mutual consent of the Parties, be invited to attend Committee meetings, subject to such representative’s or consultant’s written agreement to comply with confidentiality requirements at least as restrictive as those contained in this Agreement and any additional confidentiality or other requirements as the Committee may reasonably require for attendance.
3.1.2	Voting. Each Committee will take action by unanimous vote with each Party having a single vote, irrespective of the number of representatives a Party has on a Committee. The Parties agree that, in voting on matters as described in this Article 3, it shall be conclusively presumed that each representative voting on behalf of each Party in a Committee has the authority and approval of such member’s respective senior management in casting his or her vote.
3.1.3	Exchange of Information.

(a)	Each Calendar Quarter InterMune and Roche shall provide to the other through their participation in the relevant Committees updates on the work performed under the [***] by or on their behalf, or work performed by or on their behalf in the [***] or [***] of a [***], including, without limitation, [***] of [***] with respect to [***], [***] in the [***] and [***] in the [***].
(b)	Roche and InterMune will, on an ongoing basis through their participation in the relevant Committee(s), identify and notify the other Party of any [***] that constitute Roche or InterMune [***] or Roche or InterMune [***].
(c)	InterMune will, every six (6) months, through its participation in the JRC, share with Roche general, [***] information on InterMune’s [***] program solely for purposes of Roche’s internal planning relating to its Right of First Negotiation set forth in Section 6.3.2.
(d)	With respect to permitted subcontractors under Section 2.5 and permitted sublicensees under Section 4.7, each Party shall keep the other Party informed of [***] and [***] within the appropriate Committee meetings and each Party shall use [***] to add the other

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	Party as a third party beneficiary under such [***] or [***], as applicable, and shall update the other Party on whether it was able to do so.
(e)	The Parties will exchange with one another any [***] by such Parties for purposes of the exchange of information during the Committee meetings.

3.1.4 Minutes. Each Committee chair shall designate a recording secretary to prepare written minutes of each Committee meeting and written records of all Committee decisions, whether made at a Committee meeting or otherwise. Such minutes shall provide a description, in reasonable detail, of the discussions at the meeting and a list of any actions, decisions, or determinations approved by the Committee. The Committee chair will distribute draft minutes to all Committee members within ten (10) business days after each meeting for comments and revisions. Minutes will be finalized no later than twenty (20) business days after the meeting to which the minutes pertain. Finalized minutes will be distributed to the Parties after approval of the drafts by the members of the Committee.

3.2 Joint Steering Committee. The Parties shall promptly following the Effective Date establish a JSC, which shall be comprised of up to three (3) representatives from each Party, none of whom may participate as members of any other Committee. These representatives shall maintain ongoing familiarity with the Development and Commercialization and the strategic direction of the collaborative efforts under this Agreement. In addition, the Alliance Managers shall participate in JSC meetings as members. Each Party may change its representatives to the JSC from time to time in its sole discretion, effective upon notice to the other Party of such change.

3.2.1	Meetings. The JSC shall meet at least two (2) times a year in accordance with a schedule established by mutual written agreement of the Parties or as otherwise required.
3.2.2	Chair. The JSC shall be chaired by a representative of [***]. The JSC chair shall have no voting rights or decision-making authority over that vested in any JSC member. The JSC chair shall have responsibility for calling JSC meetings, circulating agendas and meeting minutes, and performing administrative tasks required to assure the efficient operation of the JSC.
3.2.3	Responsibilities. The JSC shall have the following specific responsibilities:

(a) Facilitate the overall strategic direction of the activities under this Agreement, including Co-Funded Development, Co-Commercialization or Co-Promotion, as the case may be, and [***] input into strategic elements of [***] of ITMN-191, and, if additional

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	[***] are selected as Licensed Compounds pursuant to the terms of this Agreement, such additional Licensed Compounds;
(b)	In such case where the [***] does not exist or has been disbanded under this Agreement, consider and advise on any [***] provided by [***]; provided that [***] shall have ultimate decision-making authority on changes to the [***] and respective budget;
(c)	Discuss presentations on the compounds covered by this Agreement to be made to [***] decision-making [***], which [***] shall be the [***] and [***] in the case of [***] and the [***] and [***] in the case of [***];
(d)	Oversee the [***] of Confidential Information between the Parties related to Development and Commercialization of the Licensed Compounds, including ensuring [***] from [***] on such Development and Commercialization pursuant to Sections 4.3.7 and 4.4.3; and
(e)	Perform such other functions as the Parties may agree in writing or as otherwise assigned by this Agreement.

3.2.4	Decision-Making. The JSC shall decide [***] on those matters referred to for its decision in Sections 3.3, 3.4, and 3.5.2, unless otherwise agreed upon by the Parties in writing.
3.2.5	Existence. The JSC shall exist throughout the term of this Agreement.

3.3 Joint Research Committee. The Research Program shall be conducted under the direction of the JRC, which shall be comprised of two (2) representatives of Roche and two (2) representatives of InterMune. These representatives shall maintain ongoing familiarity with the Research Program. Each Party may change its representatives to the JRC from time to time in its sole discretion, effective upon notice to the other Party of such change.

3.3.1	Chair. The JRC shall be chaired by a JRC representative of [***]. The JRC chair shall have no voting rights or decision-making authority over that vested in any JRC member. The JRC chair shall have responsibility for calling JRC meetings, circulating agendas and meeting minutes, and performing administrative tasks required to assure the efficient operation of the JRC.
3.3.2	Responsibilities. The JRC shall have the following specific responsibilities:

(a)	Confer regarding the status and progress of the Research Program and the Research Program’s results;
(b)	Discuss the overall strategy for the Research Program;

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(c)	Monitor and assess the status and progress of the Research Program and the Research Program’s research results, including without limitation discuss any updates on [***] efforts;
(d)	Oversee the exchange of Confidential Information under the Research Program between the Parties;
(e)	Discuss presentations and publications proposed to be made by a Party with respect to the Research Program and its results; and
(f)	Consider issues of priority in the Research Program.

3.3.3 Decision-Making. The JRC shall exercise its decision-making authority solely regarding the following matters:

(a)	Adjustments to the [***], including determining the general allocation of InterMune and Roche FTEs dedicated to the [***], consistent with the provisions of Article 2, and providing input into the ongoing [***] efforts necessary for the execution of the Research Plan; and
(b)	Determine which [***] are [***].

If the JRC cannot or does not, after good faith efforts, reach agreement on an issue as to which it has decision-making authority, then the disputed matter shall be referred to the JSC. If the JSC cannot or does not, after good faith efforts, reach agreement on an issue referred to it by the JRC, then the issue will be decided by [***], except with respect to (i) deciding which [***] are either advanced for further [***] or are nominated as [***], in which case [***] will decide the matter; and (ii) adjusting either the number of [***] FTEs committed to the [***] or the allocation of such FTEs, which may not be done without [***] prior written consent.

3.3.4 Existence. The JRC shall exist until the expiration of the Research Program Term.

3.4 Joint Development and Commercialization Committee. The Parties shall establish a JDCC to (i) direct and facilitate a [***] and a [***] suitable to produce a global registration package and (ii) beginning no later than twenty-four (24) months prior to the Anticipated First Commercial Sale of a Product and assuming InterMune has not exercised its Opt-Out, consider and discuss strategic options related to Commercialization and facilitate the development of a Co-Commercialization Plan. The JDCC shall be comprised of up to three (3) representatives of Roche and up to three (3) representatives of InterMune. These representatives shall maintain ongoing familiarity with the development program and strategic options related to Commercialization. Each Party may change its representatives to the JDCC from time to time in its sole discretion,

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effective upon notice to the other Party of such change. The Parties shall jointly determine if separate JDCCs are necessary or appropriate for each Product.

3.4.1	Chair. The JDCC shall be chaired by a representative of [***]. The JDCC chair shall have no voting rights or decision-making authority over that vested in any JDCC member. The JDCC chair shall have responsibility for calling JDCC meetings, circulating agendas and drafting meeting minutes, and performing administrative tasks required to assure the efficient operation of the JDCC.
3.4.2	Responsibilities. The JDCC shall have the following specific responsibilities:

(a)	Discuss and oversee all matters relating to [***] of Products, including trial sizes, CRO’s used, patient populations, protocols, and enrollment;
(b)	Review data relevant to the [***];
(c)	Consider and advise on any technical issues that arise in the [***];
(d)	Consider issues of priority in the [***];
(e)	Review and advise on any budgetary and economic matters relating to the [***];
(f)	Oversee the exchange of Confidential Information between the Parties related to [***] of the applicable Product
(g)	Discuss [***] proposed to be made by a Party with respect to the [***] of the applicable Product and the results thereof;
(h)	Discuss accommodations that allow both Parties to be informed of adverse conditions or events relating to the safety of the Licensed Compound and/or Product in the Field;
(i)	Review [***] progress with respect to Passed Compounds during the period in which [***] may exercise rights under Sections 5.3.5 or 5.3.6;
(j)	Review the Co-Commercialization Plan and strategy in order to coordinate [***] and implementation of [***];
(k)	Prepare the [***] to be provided to [***] pursuant to Section 4.4.3; and
(l)	Following the [***] period covered by the [***] prepare and recommend to the JSC the Co-Commercialization Plan and the related Co-Commercialization budget.

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3.4.3

Decision-Making. The JDCC shall decide [***] on (1) the recommendation of the [***], ITMN-191[***] and the related budgets, (2) the tactical implementation of the approved [***] and ITMN-191[***], (3) the recommendation of a [***] and the related [***], (4) the tactical implementation of the approved [***] and, thereafter, the [***], (5) use of [***] and [***] or other personnel if [***] is providing the same or similar, and (6) overall [***]. If the JDCC cannot or does not, after good faith efforts, reach agreement on (1) a recommendation of a [***], ITMN-191[***] and/or the related budgets, (2) the tactical implementation of the approved [***] and ITMN-191[***], (3) a recommendation of a [***] and/or recommendation of the budget to support such [***], (4) the tactical implementation of the approved [***] and, thereafter, the [***] (5) use of [***] and/or [***] or other personnel or (6) overall [***], then the such matter shall be referred to the JSC. If the JSC cannot or does not, after good faith efforts, reach agreement on such issue referred to it by the JDCC, then the Executives of each Party shall promptly meet and endeavor to come to an agreement in a timely manner. If such Executive mediation does not resolve the issue, then [***] shall decide the matter, except when the matter relates to either the [***], the [***] or the [***] in which case the ITMN-191 [***] shall govern.

3.4.4

Existence. The JDCC shall exist throughout the term of Co-Funded Development and Co-Commercialization under this Agreement.

3.5 Joint Finance Committee. The Parties shall establish a JFC which shall operate under the direction of the JSC to provide services to and consult with the JDCC in order to address the financial, budgetary and accounting issues that arise in connection with the ITMN-191 Transition Plan, Co-Funded Development Plans, Co-Commercialization Plans and updates thereto. Additionally, the JFC will lead the reporting and reconciliation processes outlined in Exhibit A. The JFC shall operate by the procedures set forth in this Section 3.6 and in Section 3.1.

3.5.1	Membership. Each Party shall designate up to two (2) employees of such Party or an Affiliate of such Party. Each Party may replace any or all of its representatives at any time upon prior written notice to the other Party. Such representatives will include individuals with expertise and responsibilities in the areas of accounting, cost allocation, budgeting and financial reporting. Each representative may serve on more than one Committee as appropriate in view of the individual’s expertise.
3.5.2	Decision-Making. It is anticipated that the JFC shall not be responsible for [***], but instead shall be a mechanism to address financial, budgetary and accounting issues.
3.5.3	Meetings. The JFC shall meet as frequently as members of the JSC determine is required (but in no event, less frequently than twice every Calendar Year), on such dates and at such times as agreed to by the Parties.

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3.6

Alliance Manager. Each Party shall appoint an Alliance Manager, who shall serve on as a non-voting member of the JSC in addition to their other duties. Each Alliance Manager shall be responsible for supporting the teams and Committees involved in the activities hereunder by providing a preferred channel of communication between the Parties, ensuring monitoring and continuous improvement of the overall performance of the activities hereunder as well as early identification of opportunities and issues and support for resolution of difficulties within the activities hereunder. Each Party shall notify the other Party as soon as practicable upon the changing of the Alliance Manager.

3.7

Timing of Decision-Making Processes. If a Committee is unable to reach agreement on any issue as to which it has decision-making authority as set forth in this Article 3 and such issue is then to be referred to the JSC, such referral to the JSC shall occur within thirty (30) days of the Committee’s initial consideration of any such issue. If the JSC cannot reach consensus on any issue referred to it for resolution or any issue arising from its own deliberations and any such issue is then to be referred to the Executives, such referral shall occur within ten (10) business days of the JSC’s initial consideration of any such issue. The Executives shall have fifteen (15) business days to agree upon the resolution of any such issue.

ARTICLE 4 — DEVELOPMENT AND COMMERCIALIZATION

4.1	Development Generally. From and after the Effective Date, subject to the terms and conditions of this Agreement, including the Opt-Out and the ITMN-191 [***], [***] shall assume primary responsibility for and conduct a Development program for the Development of Products as guided by the Development Plan, except as otherwise provided in the ITMN-191[***]. In each [***], [***], through itself or an Affiliate, shall use [***] to Develop Licensed Compound(s).
4.2	Selection as Licensed Compounds. [***] shall have the exclusive right to determine whether it wishes to (a) substitute any [***] or [***] as [***] of the [***] permitted Licensed Compounds pursuant to Section [***]; (b) [***] any [***] or [***] as an [***] pursuant to Section [***]; or (c) decline to make any [***] a Licensed Compound. Such determination shall be made in writing to the JRC and [***] during the time periods set forth in Section 5.3, setting forth the option selected, within ninety (90) days of its determination under this Section 4.2.
4.3	Development and Regulatory Matters.

4.3.1	Responsibility for Development. [***] shall have responsibility for the Development of Licensed Compounds and Products within the scope of the rights granted to it and [***] hereunder.
4.3.2	Development Plan. Within ninety (90) days following substitution of or addition of a new Licensed Compound, [***] shall, in accordance with its regular business practices, develop a reasonably detailed [***] suitable to produce a [***] (as amended from time to time, the “Development Plan”).

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The Development Plan shall include a Co-Funded Development Plan (as generated and approved by the JDCC) for activities within the Co-Funded Development Territory, at the appropriate time. [***] shall have the right to amend the Development Plan; provided that the Co-Funded Development Plan may only be amended on the approval of the JDCC. [***] shall promptly provide [***] with a copy of the initial Development Plan and any such amended Development Plan. Upon the mutual written agreement of the Parties, [***] may make available FTEs to assist [***] in any Development activities conducted pursuant to this Agreement and [***] shall grant to [***] any licenses necessary for it to conduct such activities. [***] shall use Commercially Reasonable Efforts to proceed with the work under the [***] and each Party shall use Commercially Reasonable Efforts to proceed with the work under the [***] (as such plans may be amended from time to time in accordance with this Agreement).

4.3.3 ITMN-191 Transition Plan: Within ninety (90) of the Effective Date (as to ITMN-191), the Parties shall, in accordance with its regular business practices, develop a reasonably detailed transition plan (as amended from time to time, the “ITMN-191 Transition Plan”) and a draft Development Plan for ITMN-191. The ITMN-191 Transition Plan shall include all activities until the planned Initiation of the first Phase II Clinical Trial for ITMN-191. The Parties shall have the right to amend the ITMN-191 Transition Plan. Subject to the guidelines set forth below in this Section 4.3.3, the Parties shall each use [***] to proceed with the work under the ITMN-191 Transition Plan. In addition to such other responsibilities which the JDCC or JSC may determine are appropriate with respect to ITMN-191 the Parties agree as follows:

(a)	[***] shall use [***] to proceed with the conduct of the [***] and the [***];
(b)	[***] shall transfer all data and manufacturing Confidential Information (including that obtained by [***] from Third Party contract manufacturing organizations) related to ITMN-191 to [***] no later than sixty (60) days after the Effective Date;
(c)	[***] shall use [***] to deliver a [***] kilogram ([***] Kg) lot of cGMP material (the “Transition Plan Deliverables”) of ITMN-191 by December 31, 2006. After such date, [***] shall be responsible for all aspects of manufacturing of ITMN-191;
(d)	If necessary, [***] and [***] shall work together to develop a plan for the transfer of manufacturing of ITMN-191 to Roche or a Third Party designated by [***];
(e)	[***] shall conduct formulation development of ITMN-191;

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(f)	[***] shall transfer to [***] responsibility for regulatory matters (including appropriate regulatory documents, filings (e.g., any existing INDs) and safety data) with respect to ITMN-191 as soon as is appropriate;
(g)	[***] shall be responsible for all Clinical Trials of ITMN-191, excluding the [***] and the [***], including, but not limited to, [***];
(h)	[***], at its discretion, may conduct site monitoring for the [***] and [***];
(i)	[***] shall conduct the appropriate [***] experiments for the [***]. [***] shall be responsible for [***] experiments after completion of the [***]; and
(j)	Prior to the Effective Date, [***] shall initiate necessary activities to permit the delivery of a [***] kilogram ([***] Kg) lot of [***] or [***] suitable for [***] of ITMN-191 by [***] and a delivery of an additional [***] kilogram ([***] Kg) lot of [***] ITMN-191 by [***].

4.3.4	Clinical Studies. Subject to Sections 2.1 and 4.3.3 with respect to ITMN-191, [***] shall have the discretion and authority to make all decisions with respect to all protocols and all other matters relating to Development of the Products, subject to the oversight and approval of Co-Funded Development activities by the JDCC and JSC in the Co-Funded Development Territory.
4.3.5	Marketing Authorizations. [***] shall have the right to obtain Marketing Authorizations for the Products in the Territory. To the extent reasonably practicable and permitted under applicable law, [***] shall notify [***] of any material meeting with any Regulatory Authority for a Product. To the extent permitted under applicable law (and with respect to non-Major Markets, to the extent reasonably practicable), [***] shall give [***] reasonable access to a copy of the NDA (other than the [***] section of the NDA [***]) submitted by [***] to the Regulatory Authority and to a copy of Marketing Authorizations received by [***]. Notwithstanding the foregoing, in the Co-Funded Development Territory, [***] shall, to the extent allowed by applicable law, have a right to attend any scheduled meeting or phone conference with any Regulatory Authority as an observer, and [***] shall [***] a copy of Marketing Authorizations therein.
4.3.6	Adverse Event Reporting. [***] will be responsible for reporting Adverse Events to the appropriate Regulatory Authorities in the Territory through the [***], after which regulatory responsibility shall be transferred to [***] and [***] will thereafter be responsible for reporting such Adverse Events, in both cases, in accordance with the appropriate laws and regulations of the relevant countries.

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4.3.7 Development Expenses Sharing in Co-Funded Development Territory. [***] and [***] shall share Development Expenses incurred in connection with the Co-Funded Development of a Product including the [***] as set forth in this Section 4.3.7 and Exhibit A. With respect to ITMN-191, such expense sharing shall terminate upon the availability of the [***] for the [***]; provided, however that in the event [***] does not exercise its right to Opt-Out set forth in Section 4.8, [***] shall share in the expenses incurred for activities taking place following the date that the [***] for the [***] are available and prior to Initiation of the Phase II Clinical Study (“Gap Period Expenses”) as well as those expenses incurred under the [***] for ITMN-191, subject to this Section 4.3.7. With respect to Collaboration Compounds, subject to Section 4.3.7(a)(iii), [***] shall Develop such compounds at its sole expense.

(a) Payment of Development Expenses.

(i)	All Development Expenses incurred in the Co-Funded Development Territory from and after the Effective Date shall be shared between Roche and InterMune as provided below and in accordance with Exhibit A, so that Roche bears sixty seven percent (67%) of such costs and InterMune bears thirty three percent (33%) of such costs, provided that such costs were part of (i) the ITMN-191[***], (ii) a Co-Funded Development Budget, or (iii) were incurred pursuant to the Co-Funded Development Plans, or were otherwise approved by the JSC.
(ii)	[***] shall be required to share Development Expenses incurred in the ITMN-191[***] in the Co-Funded Development Territory up to a maximum of [***] million U.S. dollars (U.S. [***]. Notwithstanding the foregoing, [***] shall not be required to make any payments in excess of [***]million dollars ($[***]) in the Calendar Year [***] towards the Co-Funded Development Expenses. Any remaining balance owed but unpaid shall be paid during Calendar Year [***] at the earlier of [***]ITMN-191 or (B) [***].
(iii)	At least [***] prior to the anticipated Initiation of a Phase II Clinical Trial for a Licensed Compound, [***] shall provide to [***] a Co-Funded Development Plan, including a Co-Funded Development Budget, for such Licensed Compound. The Co-Funded Development Plan with respect to the Co-Funded Development Territory shall (i) be prepared by [***] in [***] from [***], (ii) be commercially reasonable taking into consideration industry standards, effort of competition, and

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scientific, business and marketing and return on investment issues, and (iii) set forth the proposed activities, allocation of resources between the Parties and the associated Co-Funded Development Expenses and other budgetary and financial matters for the advancement of such Licensed Compound through receipt of Marketing Authorization. [***] shall have a period of [***]days following receipt of such Co-Funded Development Plan (including a reasonably detailed Co-Funded Development Budget) to elect to (i) exercise its Opt-out rights under Section 4.8 with respect to ITMN-191 or (ii) opt-in to [***] with respect to a Collaboration Compound that is a Licensed Compound (the “Collaboration Compound Opt-In”). If InterMune does not Opt-Out with respect to a ITMN-191 as set forth in Section 4.8, or exercises its Collaboration Compound Opt-In right with respect to a Collaboration Compound, then with respect to the relevant Collaboration Compound all [***] or [***] incurred in the [***] from and after Initiation of a Phase II Clinical Trial for such Product shall be [***] as provided below and in accordance with Exhibit A, so that [***] bears [***] percent ([***]%) of such costs and [***] bears [***] percent ([***]%) of such costs, provided however that in the event that such costs are more than [***] percent ([***]%) in total of the initial Co-Funded Development Budget, [***] shall bear the costs associated with any amount over such [***] percent ([***]%) cushion set forth in this Section; and provided, further that costs shall be further subject to calendar year budgets as discussed in Exhibit A. In the event [***] does not exercise its Collaboration Compound Opt-In with respect to a Collaboration Compound, [***], upon [***] reasonable request from time to time, shall provide [***] with updates on [***] Development efforts with respect to such Opt-Out Product.

(iv)

If InterMune does not Opt-Out with respect to ITMN-191 pursuant to Section 4.8 hereof, [***] shall be responsible for [***] percent ([***]%) of the [***] subject to the following payment schedule:

(1)	[***] percent ([***]%) shall be paid on or before [***]; and
(2)	Remaining [***] percent ([***]%) shall be paid on or before [***].

(b) Reconciliation Statement. There shall be a Reconciliation Statement, prepared by the JFC as set forth in Exhibit A, of such costs which are

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	to be shared and which are incurred during a reporting period by each Party, with a payment by one Party to the other, pursuant to Exhibit A, to the extent necessary so that each Party bears its appropriate percentage of such shared Development Expenses.
(c)	Development Cost Accounts. For purposes of Exhibit A, each Party shall charge all Development Expenses so incurred by it or its Affiliates on its books and records to enable the tracking of expenses incurred in connection with each Co-Funded Development Plan and each Co-Funded Development Budget (each, a “Development Cost Project Account”).

4.4 Commercialization.

4.4.1	Marketing Efforts in the Territory. Upon receipt of all Marketing Authorizations, [***] shall have sole responsibility for the promotion, marketing, selling and commercialization of Products in the ROW Territory and Opt-Out Products in the Territory. In the Co-Commercialization Country, [***] shall have primary responsibility for the promotion, marketing, selling and commercialization of Products. In each Major Market, [***], through itself or an Affiliate, shall use Commercially Reasonable Efforts to Commercialize Product(s).
4.4.2	[***] Post-Approval Clinical Trials. To the extent that [***] performs Post-Approval Clinical Trials in the ROW Territory or for Opt-Out Products [***] will bear the cost of all such Post-Approval Clinical Trials.
4.4.3	Co-Commercialization Budget. [***] shall [***] Operating Expenses incurred in connection with the Co-Commercialization of a Product as set forth in this Section 4.4.4 and Exhibit A. Such expense sharing shall terminate upon InterMune’s exercise of the Opt-Out set forth in Section 4.9 or as set forth herein.

(a) Preparation and Agreement on Co-Commercialization Budget.

(i) No later than [***] months prior to the Anticipated First Commercial Sale of a Product, [***] shall (with input from [***] and JDCC) prepare and recommend in good faith to the JSC a [***] Co-Commercialization Plan, including a Co-Commercialization Budget, which plan shall be commercially reasonable taking into consideration industry standards, effort of competition, and scientific, business and marketing and return on investment issues (the “Launch Plan/Budget”). The Launch Plan/Budget, when setting out the roles and responsibilities of each Party thereunder, shall leverage (A) each [***] and (B) each [***] to maximize the success of the

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	Product, taking into account the size, structure and target audience of each [***] and [***] in existence at the time the Parties begin joint promotion of such Product and shall contain the same or substantially the same rights and obligations under Sections (c), (d), (e) and (f) of the co-promotion terms set forth in Schedule 4.9 hereof. It is the intention of the Parties that the [***] sales force shall have the lead activities and that the [***] sales force role shall: (i) not be marginal or incidental in relation to the capabilities of the [***] sales force, and (ii) be consistent with the [***] sales force lead. The Launch Plan/Budget shall be prepared by [***] in good faith and be commercially reasonable and set forth in reasonable detail the [***], [***] between the Parties and the associated [***] and other [***] for the first [***] years following launch of the Product.
(ii)	Following the approval of such Launch Plan/Budget by each Party, such Launch Plan/Budget shall govern the Operating Expenses to be shared in the Co-Commercialization Country for the first [***] years following launch of the Product. Each of the Parties shall be responsible for [***] percent ([***]%) of the Operating Expenses as set forth in Exhibit A; provided, however that in the event, on an aggregate basis, the Operating Expenses incurred for any Calendar Year covered by the Launch Plan/Budget are more than [***] percent ([***]%) [***] than the Operating Expenses approved by the Parties hereunder, [***] shall bear the costs associated with any amounts [***] such [***] percent ([***]%) [***] set forth in this Section 4.4.4(a)(ii).
(iii)	If the JDCC or JSC are unable to reach agreement on the Launch Plan/Budget following the escalation of any such dispute as set forth in Section 3.4.3, or [***] does not approve such Launch Plan/Budget (in its sole discretion) no later than twelve (12) months prior to the Anticipated First Commercial Sale of the Product, InterMune shall be deemed to have exercised an Opt-Out with respect to such Product; provided, however, that, for purposes of clarity, in the event of any dispute by [***] that such Launch Plan/Budget was not prepared by [***] in accordance with Section 4.4.3(a)(i) above, InterMune shall not be deemed to exercise an Opt-Out with respect to such Product unless and until such dispute is resolved in accordance with Section 13.6 hereof and the decision is that [***] did comply with Section 4.4.3(a)(i) when preparing the Launch Plan/Budget; provided, however that [***] shall have the right to proceed with the Development and

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Commercialization of such Product without [***] participation in the JDCC with respect to such Product unless and until such dispute is resolved in favor of [***]. Following such deemed exercise of an Opt-Out: (a) [***] shall thereafter pay to [***] filing and Marketing Authorization milestones for such Product as set forth in note 1 of Section 8.2; (b) [***] shall no longer be eligible to receive a [***]and shall not be responsible for any sharing of [***] associated with such Product; (c) [***] shall pay [***] royalties as set forth in Sections 8.3.1(a)(iii); and (d) such Product shall be an [***].

(b)	Reconciliation Statement. There shall be a Reconciliation Statement, prepared by the JFC as set forth in Exhibit A, of such costs which are to be shared and which are incurred during a reporting period by each Party, with a payment by one Party to the other, pursuant to Exhibit A, to the extent necessary so that each Party bears its appropriate percentage of such shared Operating Expenses.
(c)	Operating Expense Cost Accounts. For purposes of Exhibit A, each Party shall charge all Operating Expenses so incurred by it or its Affiliates on its books and records to enable the tracking of expenses incurred in connection with each Co-Commercialization Plan and each Co-Commercialization Budget (each, a “Operating Expenses Cost Account”).

4.4.4 Co-Commercialization Profit Split in the Co-Commercialization Country. InterMune and Roche shall each receive the Co-Commercialization Profit Split. Such [***] shall [***] upon [***] exercise of the Opt-Out set forth in [***].

4.5	Manufacturing and Supply. Subject to InterMune’s responsibilities under the [***], [***] shall have sole responsibility to manufacture or have manufactured by an Affiliate or a Third Party the Products for use in Clinical Trials and for sale in the Territory.
4.6	Final Decision-Making Authority following Opt-Out. Following the exercise by [***] of the Opt-Out, the resulting Opt-Out Product shall no longer be within the purview of the JDCC (assuming such a Committee exists) and [***] shall have final decision-making authority on all issues relating to the Development, regulatory approval, Commercialization and manufacturing of the applicable Opt-Out Product, subject to its compliance with all other terms of this Agreement, provided that [***] shall have such final decision-making authority at all times with respect to the ROW Territory so long as such decisions do not adversely impact ongoing or planned Co-Funded Development or Co-Commercialization activities.
4.7	Licenses/Sublicenses. Neither Party may license its responsibilities under this Article 4 nor grant sublicenses under the licenses granted under Article 5 without the prior written

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consent of the other Party, such consent not to be unreasonably withheld, except as follows:

4.7.1	Either Party may grant sublicenses under any of its rights to any of its Affiliates for so long as such entity remains an Affiliate;
4.7.2	Either Party may use CROs and other Third Parties which it reasonably believes are competent to perform portions of the Development of the Products to the extent consistent with its normal business practices;
4.7.3	[***] may engage Third Parties to assist in the physical distribution of the Products to the extent consistent with its normal business practices;
4.7.4	[***] may use Third Parties, including contract manufacturers, which it reasonably believes are competent to manufacture, label and package the Products; and
4.7.5	[***] may grant licenses or sublicenses to sell the Products to local distributors in any country in accordance with [***] normal business practices, other than the Co-Commercialization Country,

provided, that in each such case, (i) such Party shall remain liable to the other Party as if it were exercising such rights itself under this Agreement, (ii) the licensee or sublicensee will not be permitted to grant further sublicenses, and (iii) such Party shall use Commercially Reasonable Efforts to ensure that its licensees or sublicensees are obligated to comply with confidentiality, indemnity, reporting, and audit rights comparable to those set forth in this Agreement.

4.8

InterMune’s Opt-Out. With respect to ITMN-191, InterMune shall retain a one-time right to Opt-Out of the Development on the terms and conditions set forth in this Section 4.8. No later than [***] ([***]) days following completion of the [***] and receipt of the Co-Funded Development Plan, InterMune may provide to Roche a written notice of its intent to Opt-Out with respect to ITMN-191, which Opt-Out shall be effective upon such written notice. Following exercise of an Opt-Out, with respect to ITMN-191: (a) ITMN-191 shall no longer be within the purview of the JDCC (assuming such Committee exists); (b) InterMune shall retain its Co-Promotion Option; (c) [***] shall no longer be responsible for [***] sharing as set forth in Section [***] above; (d) [***] shall thereafter pay to [***] filing and [***] [***] for ITMN-191 as set forth in note 1 of Section 8.2; (e) [***] shall no longer be eligible to receive a [***] and shall not be responsible for any sharing of Operating Expenses associated with ITMN-191; and (f) [***] shall pay [***] royalties as set forth in Sections [***].

4.9

InterMune’s Co-Promotion Option. If and only if an Opt-Out has occurred with respect to a Product:

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4.9.1	On an Opt-Out Product-by-Opt-Out Product basis, [***] shall retain a one-time option right to co-promote each Opt-Out Product in the [***] on a fee per Detail basis (each, a “Co-Promotion Option”), subject to the provisions of this Section 4.9 and Schedule 4.9, and conditioned on InterMune and Roche or their respective Affiliates entering into a co-promotion agreement consistent with this Section 4.9 and Schedule 4.9 (“Co-Promotion Agreement”).
4.9.2	[***] shall determine the proposed [***] of each Opt-Out Product in the [***] and shall notify [***] of such proposed launch date at least [***] months in advance of such proposed launch date.
4.9.3	[***] shall notify [***] in writing of its intent to exercise the Co-Promotion Option no less than twelve (12) months prior to the expected launch date of each Opt-Out Product in the Co-Promotion Country (the “Co-Promotion Exercise Date”).
4.9.4	If [***] exercises the Co-Promotion Option in accordance with Section 4.9.3, then [***] shall enter into a Co-Promotion Agreement consistent with the terms and conditions set forth in Schedule 4.9 no later than [***]) months prior to the proposed launch date for the applicable Product.
4.9.5	Unless otherwise explicitly set forth in this Agreement, all Commercialization decisions (including decisions with respect to marketing and promotion) concerning the Opt-Out Product reside solely with [***]. Upon [***] exercising the Co-Promotion Option in accordance with this Section 4.9, the Parties shall coordinate all sales efforts and field activities in the U.S. under the direction of the JDCC (or, if no such Committee exists, the appropriate governance committee established under the Co-Promotion Agreement consistent with Section (h) of Schedule 4.9 where [***] shall have final decision-making authority provided that the Parties agree that such committee shall have no power to amend, modify or waive any of the terms of the Co-Promotion Agreement), and such efforts and activities shall be more fully described in the Co-Promotion Agreement to be entered into by the Parties.
4.9.6	Other than in connection with the assignment to an [***] Affiliate, [***] may not assign, sublicense, delegate or otherwise transfer its Co-Promotion Option to a Third Party.

ARTICLE 5– LICENSES

5.1 Reciprocal Research Licenses.

5.1.1 For the duration of the Research Program Term, InterMune hereby grants to Roche the exclusive (except as to InterMune and its permitted subcontractors as set forth in Section 2.5) license to permit it or them to conduct activities

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under the Research Program license in the Territory, with the right to sublicense to Affiliates and to Permitted Subcontractors, under the InterMune Know-How, InterMune Patent Rights and InterMune’s rights in Joint Know-How and Joint Patent Rights, to conduct the Research Program in accordance with the Research Plan.

5.1.2

For the duration of the Research Program Term, Roche hereby grants to InterMune the exclusive (except as to Roche and its permitted subcontractors to permit it to conduct activities under the Research Program) license in the Territory, with the right to sublicense to Affiliates and to Permitted Subcontractors, under Roche Know-How, Roche Patent Rights and Roche’s rights in Joint Know-How and Joint Patent Rights, to conduct the Research Program in accordance with the Research Plan.

5.1.3

The licenses granted pursuant to this Section 5.1 include the right of each licensee to use its Affiliates in exercising such rights and carrying out its obligations under this Agreement.

5.2 Development and Commercialization License Grants.

5.2.1	Subject to the obligations, conditions, and termination rights set forth herein, InterMune hereby grants to Roche the exclusive (except as to InterMune to permit it conduct its Co-Funded Development and/or Co-Commercialization activities and those activities under the ITMN-191 Transition Plan hereunder) license under the InterMune Know-How and InterMune Patent Rights and under InterMune’s rights in Joint Know-How and Joint Patent Rights to develop, make, have made, use, import, export, offer for sale and sell Licensed Compounds and Products in the Territory. Roche may grant sublicenses under this Section 5.2 in accordance with Section 4.7.
5.2.2	Subject to the obligations, conditions, and termination rights set forth herein, Roche hereby grants to InterMune the exclusive (except as to Roche) license under the Roche Know-How and Roche Patent Rights and under Roche’s rights in Joint Know-How and Joint Patent Rights to develop, make, have made, use, import, export, offer for sale and sell Licensed Compounds and Products only to the extent necessary for InterMune to conduct its Co-Funded Development and/or Co-Commercialization activities and those activities under the ITMN-191 Transition Plan hereunder.
5.2.3	Subject to the obligations, conditions and termination rights set forth herein, Roche, as of the date a Licensed Compound, Product or Passed Compound becomes a Reverted Compound, hereby grants to InterMune an exclusive worldwide royalty-free license to Roche Know-How, Roche Patent Rights and Roche’s interest in the Joint Know-How and Joint Patent Rights to develop, make, have made, use, import, export, offer for sale and sell such Reverted Compound and products containing such Reverted Compound in the Field and

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in the Territory. Such license grant is to Roche Know-How, Roche Patent Rights and Roche’s interest in the Joint Know-How and Joint Patent Rights Controlled by Roche as of the date such Licensed Compound, Product or Passed Compound becomes a Reverted Compound (and not to Roche Know-How, Roche Patent Rights and Roche’s interest in the Joint Know-How and Joint Patent Rights which Roche may acquire Control of after such date).

5.2.4 Subject to the obligations, conditions, and termination rights set forth herein, Roche hereby grants to InterMune a non-exclusive, sublicensable license under the Roche Know-How and Roche Patent Rights and under Roche’s rights in Joint Know-How and Joint Patent Rights to develop, make, have made, use, import, export offer for sale and sell Passed Compounds and products containing such Passed Compounds in the Territory.

5.3 Licensed Compounds.

5.3.1	Number of Licensed Compounds. Subject to Sections 5.3.3, 5.3.4, 5.3.5 and 6.3, there shall be no more than [***] Licensed Compounds at any time during the term of this Agreement.
5.3.2	Substitution of Licensed Compounds. [***] shall have the exclusive right to substitute a [***] that is not a Passed Compound for an existing Licensed Compound at any time through the end of the Research Program Term, for [***] by [***]. Upon [***] determination that it wishes to substitute a [***] for an existing Licensed Compound, it shall provide [***] with written notice of such determination (the “Substitution Notice”), setting forth the Licensed Compound to be excluded from this Agreement and the [***] to be substituted therefore. Effective upon receipt of such Substitution Notice by [***], the “Licensed Compound” definition shall automatically be amended to delete the existing Licensed Compound and substitute the [***], which shall thereafter be subject to the terms and conditions of this Agreement, including the license grant set forth in Section 5.2.
5.3.3	Addition of Licensed Compounds. [***] shall have the exclusive option, at any time through the end of the Research Program Term, to include additional [***] as Licensed Compounds on the terms and conditions set forth in this Section 5.3.3 and this Agreement. No later than the end of the Research Program Term, [***] may provide [***] with written notice of its intent to include a specified [***] as an additional Licensed Compound pursuant to the terms and conditions of this Agreement (the “Additional Compound Notice”). Within [***] ([***]) days of delivery of the Additional Compound Notice by [***], [***] shall pay to [***] an amount equal to [***] Dollars ($U.S. [***]) per additional Licensed Compound (“Licensed Compound Payment”) in excess of [***] ([***]) Licensed Compounds. Upon receipt of such Licensed Compound Payment, the “Licensed Compound” definition shall automatically be amended to include such additional Licensed

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	Compound which shall thereafter be subject to the terms and conditions of this Agreement, including the license grant set forth in Section 5.2.
5.3.4	Passed Compounds. Subject to [***] rights set forth in this Section 5.3, [***] shall have the right to Develop and/or Commercialize any Passed Compound at any time following the Effective Date.
5.3.5	Roche First Opt-In on a Passed Compound. Roche shall have the first right (before any Third Party) to opt-in on the development and commercialization of each Passed Compound which InterMune develops in the Field (the “Opt-In Option”), as set forth in this Section 5.3.5 and Sections 5.3.6 and 5.3.7. Within [***] ([***]) days following delivery by InterMune to Roche of a report setting forth (i) [***] and (ii) the [***] delivery of the report (the “First Opt-In Report”), Roche shall conduct and complete due diligence and provide InterMune with written notice (the “First Opt-In Notice”) of its intent as set forth in (b), (c) or (d) below.

(a)	Roche’s due diligence may include, but is not limited to, the following: (i) a full pre-clinical and manufacturing audit of InterMune, at Roche’s expense, (ii) the right to reasonably request all relevant data, including raw data, obtained to date relating to the Passed Compound, (iii) the right to inspect InterMune’s facilities and, to the extent within the reasonable control of InterMune, the facilities of its clinicians and manufacturers (and InterMune agrees to use its Commercially Reasonable Efforts to ensure that Roche can inspect the facilities of such Third Parties), and (iv) to review a detailed report of the development costs related to the Passed Compound.
(b)	In the event Roche determines to exercise its Opt-In Option with respect to such Passed Compound, Roche shall pay to InterMune within [***] ([***]) days of delivery of the First Opt-In Notice an amount equal to [***] percent ([***]%) of the associated pre-clinical and clinical development expenses incurred by or on behalf of InterMune for such Passed Compound through the date of exercise of the Opt-In Option. Upon receipt of such payment, the Passed Compound shall be added as an additional Licensed Compound and the “Licensed Compound” definition shall automatically be amended to add the Passed Compound as a Licensed Compound, and such Passed Compound shall thereafter be subject to the terms and conditions of this Agreement, including the license grant set forth in Section 5.2 and subject to the payment of any Development Milestones which occur following the delivery of the First Opt-In Notice.
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Compound, Roche shall pay to InterMune an amount equal to [***] Dollars ($U.S. [***]) within [***] ([***] days of delivery of the First Opt-In Notice and the Opt-In Option shall remain in full force and effect through [***] ([***]) days following the delivery of the Second Opt-In Notice (as defined in Section 5.3.6 below).

(d)

In the event Roche determines to relinquish its Opt-In Option with respect to such Passed Compound (including by not making timely payment to InterMune under this Section 5.3.5), such Passed Compound shall automatically be deemed a “[***]” for purposes of this Agreement and InterMune shall be free to continue the research, development, manufacture and commercialization of such Passed Compound in the Field worldwide without any obligation to compensate Roche.

5.3.6 Roche Second Opt-in on a Passed Compound. Within [***] ([***]) days following delivery by InterMune to Roche of a report (i) setting forth the [***] and (ii) the [***] of the report (the “Second Opt-In Report”), and provided Roche has maintained its Opt-In Option under Section 5.3.5(c), Roche shall conduct and complete due diligence and provide InterMune with written notice (the “Second Opt-In Notice”) of its intent as set forth in (b) or (c) below.

(a)

Roche’s due diligence may include, but is not limited to, the following: (i) a full pre-clinical, clinical and manufacturing audit of InterMune, at Roche’s expense, (ii) the right to reasonably request all relevant data, including raw data, obtained to date relating to the Passed Compound, (iii) the right to inspect InterMune’s facilities and, to the extent within the reasonable control of InterMune, the facilities of its clinicians and manufacturers (and InterMune agrees to use its Commercially Reasonable Efforts to ensure that Roche can inspect the facilities of such Third Parties), and (iv) a detailed report of the Development Expenses related to the Passed Compound.

(b)

In the event Roche determines to exercise its Opt-In Option with respect to such Passed Compound, Roche shall pay to InterMune within [***] ([***]) days of delivery of the Second Opt-In Notice an amount equal to [***] percent ([***]%) of the associated pre-clinical and clinical development expenses incurred by or on behalf of InterMune for such Passed Compound through the date of exercise. Upon receipt of such payment, the Passed Compound shall be added as an additional Licensed Compound and the “Licensed Compound” definition shall automatically be amended to add the Passed Compound as a Licensed Compound, and such Passed Compound shall thereafter be subject to the terms and conditions of this Agreement, including the license grant set forth in Section 5.2 and

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subject to the payment of any Development Milestones which occur following the delivery of the Second Opt-In Notice.

(c)

In the event Roche determines to relinquish its Opt-In Option with respect to such Passed Compound (including by not making timely payment to InterMune under this Section 5.3.6), such Passed Compound shall automatically be deemed a “[***]” for purposes of this Agreement and InterMune shall be free to continue the research, development, manufacture and commercialization of such Passed Compound in the Field worldwide without any obligation to compensate Roche, other than the rights of Roche set forth in Section 5.3.7.

5.3.7 Right of Audit of Associated Expenses Incurred by InterMune. Roche shall have the right, at its sole expense, to request, on [***] ([***]) days prior written notice to InterMune, that the nationally recognized, independent accounting firm then-engaged by InterMune perform an audit or interim review of InterMune’s books and records as they relate to the associated pre-clinical and clinical development expenses associated with the first Opt-In Option set forth in Section 5.3.5 and the second Opt-In Option set forth in Section 5.3.6, as applicable. The accounting firm shall be provided access to such books and records at InterMune’s facility(ies) and/or the facilities of its Affiliates or sublicensees where such books and records are normally kept. Upon completion of the audit, the accounting firm shall provide both Parties a written report disclosing whether the pre-clinical and clinical development expenses associated with the first Opt-In Option set forth in Section 5.3.5 and the second Opt-In Option set forth in Section 5.3.6, as applicable are correct or incorrect and the specific details and supporting analysis for any discrepancies.

5.3.8 Delivery of Development Plan. Upon Roche’s exercise of its Opt-In Option with respect to a Passed Compound under Section 5.3.5 or Section 5.3.6, [***] shall present to [***] a Development Plan, as may be amended pursuant to this Agreement.

5.4 No Implied Licenses. Except as specifically set forth in this Agreement, and except for an implied right to use that flows to an end user, neither Party shall acquire any license or other intellectual property interest, by implication or otherwise, in any Roche Patent Rights, Roche Know-How, InterMune Patent Rights, InterMune Know-How, Joint Patent Rights or Joint Know-How, as the case may be, disclosed to it under this Agreement by the other Party or under any other Confidential Information or other patents or patent applications owned or Controlled by the other Party or its Affiliates.

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5.5 Third Party Licenses.

5.5.1	The licenses to Roche of rights obtained by InterMune under the [***] and [***] are limited by the scope of rights obtained by InterMune thereunder, such that InterMune’s license to Roche shall not be more extensive than the rights that InterMune obtains and retains under the terms of such agreements. This Section 5.5.1 does not limit or narrow the representation and warranty provided by InterMune pursuant to Section 9.1.6.
5.5.2	As set forth in Section 9.1.6, InterMune will maintain and keep in full force and effect the [***] and [***] if necessary to perform its material obligations hereunder; provided, however that in the event InterMune requires any action by Roche (or requires Roche to refrain from taking any action) to prevent a breach by InterMune under the [***] or [***], as applicable, InterMune shall notify Roche in writing or such action. After such notification, Roche shall cooperate and work with InterMune in good faith taking into account the consequence if Roche does not take such action or refrain from taking such action, as applicable. In the event Roche chooses not to take such action or refrain from taking such action, as applicable, and Roche’s choice not to do so causes the termination of the [***] or [***], as applicable, then InterMune shall not be deemed in breach of this Section 5.5 or Section 9.1.6 for purposes of this Agreement.
5.5.3	If InterMune receives a notice of breach of the [***] from [***] or a notice of breach of the [***] from [***], which breach does not require any action or inaction by Roche to cure such breach, then InterMune shall promptly inform Roche of the notice and of the plan to cure the breach. If InterMune does not plan to, or can not, cure such breach within the time period allowed, then Roche shall have the right to cure the breach on InterMune’s behalf.
5.5.4	In addition, upon a Collaboration Compound being deemed a Licensed Compound under this Agreement, InterMune shall use Commercially Reasonable Efforts to acquire in accordance with the terms of the [***] all right, title and license to those patents and patent applications that are the subject of the [***] that Cover such Licensed Compound from [***].
5.5.5	Prior to any termination of the [***] or [***] by InterMune, InterMune shall, in accordance with the terms of the [***] or [***], as applicable, use Commercially Reasonable Efforts to obtain all rights (including but not limited to obtaining ownership of patents and patent applications that are subject to the [***]) necessary for the Parties to perform the activities pursuant to this Agreement.

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ARTICLE 6– EXCLUSIVITY

6.1 Research.

6.1.1	Research Exclusivity Period. During the Research Program Term (“Research Exclusivity Period”), except as provided elsewhere in this Agreement, neither Party shall independently or collaboratively with any Third Party engage in the discovery research and/or pre-clinical development of compounds whose mechanism of activity results solely from [***] (“Mechanism of Action”).
6.1.2	After the Research Exclusivity Period. Following the expiration of the Research Exclusivity Period, either Party is free to engage in the discovery research and/or preclinical development of compounds with the same Mechanism of Action, either independently or in collaboration with any Third Parties.
6.1.3	Passed Compounds. Notwithstanding this Article 6, and subject to Roche’s Opt-In Option described in Section 5.3.5, InterMune will be free to research, develop, or commercialize Passed Compounds in the Field or outside the Field. In addition, nothing in this Article 6 shall be construed to restrict in any way InterMune’s right to research, develop or commercialize, on its own or with any Third Party, (i) Reverted Compounds; (ii) Licensed Compounds or Products for which Roche has terminated rights to under Section 12.3; or (iii) Licensed Compounds and Products for purposes of a country in the Territory for which Roche has terminated rights under Section 12.3, whether within or outside the Field.

6.2 Development and Commercialization.

6.2.1	[***]. [***] by [***] is permitted at any time during the term of this Agreement.
6.2.2	Development and Commercialization Exclusivity Period. During the period commencing on the Effective Date and ending on the earlier of (i) [***] ([***]) years following the end of the Research Exclusivity Period and (ii) [***] ([***]) years following the Effective Date (the “Development and Commercialization Exclusivity Period”), except as provided elsewhere in this Agreement, neither Party may independently or collaboratively with any Third Party engage in the clinical development or commercialization of compounds with the same Mechanism of Action.
6.2.3	Exception to Development and Commercialization Exclusivity. In the event that, at any point in time [***] ([***]) months after the Effective Date and during the Development and Commercialization Exclusivity Period, there is no Licensed Compound or Product in clinical Development by the Parties under this Agreement, then [***] may engage in the clinical development of a More Advanced Competing Product or obtain rights to commercialize a More Advanced Competing Product (e.g., rights to market, sell or co-promote a More Advanced Competing Product), whether such rights are obtained by

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way of contract, option or license, [***] shall provide written notice to [***] and the Parties shall meet to permit [***] to present to [***] its plans for the Licensed Compounds and/or Products in light of its clinical development or commercialization of such More Advanced Competing Product. If [***], after reviewing such plans, believes that the clinical development cannot proceed without adversely affecting the goals and the intentions of the Parties under this Agreement, the Executives shall promptly meet. Following the meeting of the Executives, [***] may then, at its sole discretion, terminate the Agreement immediately upon written notice to [***], subject to Section [***] hereof

6.2.4

Expiration of Development and Commercialization Exclusivity Period. Upon the expiration of the Development and Commercialization Exclusivity Period, in the event [***] engages in the clinical development of a More Advanced Competing Product or [***] obtains rights to commercialize a More Advanced Competing Product (e.g., rights to market, sell or co-promote a More Advanced Competing Product), whether such rights are obtained by way of contract, option or license, [***] shall provide written notice to [***] and the Parties shall meet to permit [***] to present to [***] its plans for the Licensed Compounds and/or Products in light of its clinical development or commercialization of such More Advanced Competing Product. If [***], after reviewing such plans, believes that the clinical development cannot proceed without adversely affecting the goals and the intentions of the Parties under this Agreement, the Executives shall promptly meet. Following the meeting of the Executives, [***] may then, at its sole discretion, terminate the Agreement immediately upon written notice to [***], subject to Section [***] hereof.

6.3 InterMune [***] Programs

6.3.1

Retained Rights for [***]. Roche agrees and understands that InterMune has an early stage discovery program in the Field directed at discovering compounds that are [***] [***], and that such [***]-[***] compounds are not part of this Agreement. Consequently, and notwithstanding Sections 6.1 and 6.2 above or anything else in this Agreement, and subject to [***]will be free to engage in the discovery, research, pre-clinical development, clinical development, and/or commercialization either alone of with a Third Party, of any compound in the [***]that is [***] [***].

6.3.2

Right of First Negotiation. At any time between the completion of the IND-enabling GLP toxicology studies and the availability of the Key Listings and Tables from the first Phase I Clinical Trial with multiple ascending dose proof of concept within the Field conducted independently by or on behalf of InterMune for any given [***] compound but no later than [***] from the Effective Date hereof, provided such [***] compound has the properties that would meet the Lead Compound Requirements set forth in Schedule 1.92 and

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that IND-enabling GLP toxicology studies have been completed, InterMune shall provide Roche with written notice and Roche shall have the right of first negotiation to enter into negotiations with InterMune for a separate agreement for the further research, development and/or commercialization of such [***] compound in the Field as described in this Section 6.3.2 (“Right of First Negotiation”). Such notice shall include a reasonable confidentiality agreement for the Parties to execute no later than fifteen (15) business days of such notice to enable Roche to conduct due diligence. Upon execution of such confidentiality agreement, InterMune shall provide Roche all the available and relevant data from the studies for such [***] compound (“Right of First Negotiation Report”). Commencing on the date that Roche receives the Right of First Negotiation Report, Roche shall have the right to conduct initial due diligence related to the [***] compound for a period of up to [***] following delivery by InterMune of the First Right of Negotiation Report. Roche’s due diligence may include, but is not limited to, the following: (i) a full pre-clinical or clinical (as applicable) and manufacturing audit of InterMune, at Roche’s expense, (ii) the right to reasonably request all relevant data, including raw data, obtained to date relating to the [***] Compound, and (iii) the right to inspect InterMune’s facilities and, to the extent within the reasonable control of InterMune, the facilities of its clinicians and manufacturers (and InterMune agrees to use its [***] to ensure that Roche can inspect the facilities of such Third Parties). In the event Roche determines to exercise its Right of First Negotiation, upon conclusion of its initial due diligence, Roche shall provide written notice of its intent to InterMune (“Right of First Negotiation Notice”) and the Parties shall negotiate in good faith using Commercially Reasonable Efforts to enter into an amendment to this Agreement, subject to subsections (a), (b) and (c) below, for a period of [***] following the date of receipt of the Right of First Negotiation Notice (the “Right of First Negotiation Exclusivity Period”).

(a) The Parties agree that such amendment shall provide that such [***] compound will be added to this Agreement as a “Licensed Compound” to be governed under this Agreement, including, but not limited to, being subject to the payments provisions set forth in Sections [***] (inclusive); provided, however that Section [***] shall not apply. In addition, such amendment will provide for a separate and additional [***] payment in return for rights to such [***] compound and the development plan therefor, including the associated budget (which development plan will constitute the “Development Plan” for such [***] Compound once it becomes a “Licensed Compound” for purposes of this Agreement), which [***] payment and development plan will be negotiated by the Parties in good faith using Commercially Reasonable Efforts taking into consideration most recent comparable transactions involving compounds or products in substantially the same stage of development and competitive space,

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	industry standards and scientific, business and marketing and return on investment issues.
(b)	If the Parties cannot agree on the amount of the [***] payment upon the expiration of the Right of First Negotiation Exclusivity Period, within thirty (30) days thereafter, the Parties shall engage a mutually agreeable independent investment banking firm of national reputation to decide on the amount of the [***] payment (“Valuation Price”) and each Party shall submit to such investment banking firm an appraisal prepared by such Party as to its assessment of the fair market value of the collaboration (each such appraisal, a “Valuation”). In the event of a Party’s failure to submit its Valuation by the end of the aforementioned thirty (30) day time period, the Valuation Price will be equal to the Valuation submitted by the other Party. If both Parties submit Valuations within the thirty (30) day time period, within ten (10) days thereafter, the investment banking firm will select one of the Valuations which will then be the Valuation Price. The investment banking firm when making its selection shall take into account the value of the patent rights, know-how and other assets, the potential market and return on investment for the [***] compound(s), and the most recent comparable transactions involving compounds or products in substantially the same stage of development (including the transactions covered by this Agreement) and competitive space. In addition, the investment banking firm when making its selection shall take into account any additional value InterMune may have contributed towards the development of the [***] compound between the date Roche receives the Right of First Negotiation Report from InterMune and the time the Valuation Price is finally resolved in accordance with the procedure set forth above. The Parties shall equally share in the cost of the engagement of such investment banking firm.
(c)	If the Parties cannot agree on the appropriateness of the development plan for such [***] compound, the dispute will be resolved pursuant to Section 13.6; provided, however, that the arbitrators shall only have the power and authority to arbitrate the matter of the appropriateness of the development plan (taking into consideration the most recent comparable transactions involving compounds or products in substantially the same stage of development (including the transactions covered by this Agreement), industry standards and scientific, business and marketing and return on investment issues).

ARTICLE 7 — CONFIDENTIALITY AND PUBLICATION

7.1 Nondisclosure Obligation. All Confidential Information disclosed by one Party to the other Party hereunder shall be maintained in confidence by the receiving Party and shall

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not be disclosed to any Third Party, except to an Affiliate, or used for any purpose except as set forth in this Agreement without the prior written consent of the disclosing Party, except to the extent that such Confidential Information:

7.1.1	is known by the receiving Party or its Affiliates at the time of its receipt, and not through a prior disclosure by the disclosing Party, as documented by the receiving Party’s or its Affiliates’ records;
7.1.2	is properly in the public domain by use and/or publication before its receipt from the disclosing Party, or thereafter enters the public domain through no fault of the receiving Party or its Affiliates;
7.1.3	is subsequently disclosed to the receiving Party or its Affiliates by a Third Party who may lawfully do so and is not under an obligation of confidentiality to the disclosing Party; and
7.1.4	is developed by the receiving Party or its Affiliates independently of Confidential Information received from the disclosing Party, as documented by the receiving Party’s or its Affiliates’ records.

7.2 Permitted Disclosure of Information. Notwithstanding anything to the contrary contained in Section 7.1, a Party receiving Confidential Information of the other Party may disclose such information to the extent that such Confidential Information:

7.2.1	is disclosed to governmental or other regulatory agencies in order to obtain patents or to gain or maintain approval to conduct clinical trials or Marketing Authorizations for a Product, but such disclosure may be only to the extent reasonably necessary to obtain patents or authorizations and reasonable steps are taken to assure confidential treatment of such information;
7.2.2	is disclosed in prosecuting or defending litigation pursuant to a protective order;
7.2.3	is deemed necessary by either Party to be disclosed to Affiliates, agents, consultants, and/or other Third Parties to the extent reasonably necessary for the research, development, manufacturing and/or commercialization of the Product (or for such entities to determine their interest in performing such activities) in accordance with this Agreement on the condition that such disclosures may only be to the extent reasonably necessary for such activities and any Affiliates, agents, consultants and/or Third Parties agree to be bound by confidentiality and non-use obligations that substantially are no less stringent than those confidentiality and non-use provisions contained in this Agreement; or
7.2.4	is required to be disclosed by law or court order; provided that notice is promptly delivered to the other Party in order to provide an opportunity to

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challenge or limit the disclosure obligation; and provided further the Party required to disclose cooperates with the other Party in limiting disclosure to the extent so required. Confidential Information that is disclosed by judicial or administrative process shall remain otherwise subject to the confidentiality and non-use provisions of Sections 7.1 and 7.2 and the Party disclosing Confidential Information pursuant to law or court order shall take all steps reasonably necessary, including obtaining an order of confidentiality, to ensure the continued confidential treatment of such Confidential Information.

	Any combination of features or disclosures as set forth in Sections 7.1 and 7.2 shall not be deemed to fall within the foregoing exclusions merely because individual features are published or available to the general public or in the rightful possession of the receiving Party unless the combination itself and principle of operation are published or available to the general public or in the rightful possession of the receiving Party.
7.3	Disclosures In Connection with Financing. Each Party shall have the further right to disclose the material financial terms of this Agreement under confidentiality obligations no less protective than those set forth in this Agreement, to any bona fide potential acquiror, merger partner or potential providers of financing and their advisors (which shall be in writing if disclosed to any such potential acquiror or merger partner); provided, a Party may not disclose Confidential Information to Third Parties engaged in research, development or commercialization activities which may be competitive with the other Party’s activities without prior written consent of the Party whose information is being disclosed.
7.4	Disclosures Required by Applicable Law. Nothing in this Agreement shall impair either Party’s compliance with any requirements of: (i) governmental agencies to the extent required or desirable to secure government approval for the development, manufacture or sale of Products in the Territory; (ii) the U.S. Securities and Exchange Commission or the national securities exchange or other stock market on which such Party’s securities are trades; (iii) or any other applicable law. In connection with any filing by either Party of a copy of this Agreement with the U.S. Securities and Exchange Commission (or the national securities exchange or other stock market on which such Party’s securities are traded), the filing Party shall endeavor to obtain confidential treatment of economic and trade secret information. Reasonably in advance of any filing under this Section (whether or not this Agreement is included in the filing), the filing Party shall provide to the other Party a copy of the proposed filing and the Parties shall work cooperatively in good faith, taking into consideration the other Party’s suggestions, regarding the information for which the filing Party will seek to obtain confidential treatment. However, in the event of any disagreements that cannot be amicably resolved, the Party which is making the filing shall, together with input from their own legal counsel, have the ultimate authority to make the filing in the fashion in which it feels the filing must be made.
7.5	Press Releases. The Parties will issue the initial press releases attached hereto as Exhibit C on or after the Effective Date. Roche shall issue press releases in accordance with its

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	internal policy that typically does not issue a second press release until proof of concept has been achieved for a particular Licensed Compound. Roche shall provide InterMune with a copy of any draft press release related to the activities contemplated by this Agreement at least two (2) weeks prior to its intended publication for InterMune’s review. InterMune may provide Roche with suggested modifications to the draft press release and Roche shall consider InterMune’s suggestions in good faith in issuing its press release. InterMune shall only issue press releases related to activities contemplated by this Agreement that have either been approved by Roche or are required to be issued by InterMune as a matter of law. In all circumstances, InterMune shall provide Roche with a draft press release at least two (2) weeks prior to its intended publication for Roche’s review. During such period, Roche shall (i) approve the draft press release and permit InterMune to issue the press release, (ii) contact InterMune to discuss reasonable modifications to the draft press release, or (iii) contact InterMune to disapprove the draft press release. If Roche asks for modifications, then InterMune shall either make the modification or work with Roche to arrive at a press release that Roche approves.
7.6	Publication. Roche and InterMune each acknowledge the other Party’s interest in publishing the results of its research and/or development in order to obtain recognition within the scientific community and to advance the state of scientific knowledge. Each Party also recognizes the mutual interest in obtaining valid patent protection and in protecting business interests and trade secret information. Consequently, except for disclosures permitted pursuant to Sections 7.1 through 7.5, inclusive, either Party, its employees or consultants wishing to make a publication disclosing any Roche Know-How, InterMune Know-How, Joint Know-How, InterMune Patent Rights, Roche Patent Rights, or Joint Patent Rights shall deliver to the other Party a copy of the proposed written publication in substantially the final form at least thirty (30) days prior to submission for publication and a copy of the proposed outline of an oral disclosure or presentation at least thirty (30) days prior to presentation. The reviewing Party shall have the right to: (a) propose modifications to the publication for reasonable patent, trade secret or business reasons; or (b) request a reasonable delay in publication or presentation in order to protect Roche Know-How, InterMune Know-How, Joint Know-How, InterMune Patent Rights, Roche Patent Rights, and/or Joint Patent Rights as the case may be, and patentable Confidential Information. If the reviewing Party requests modifications to the publication or presentation, the publishing Party shall edit such publication to prevent disclosure of trade secret or proprietary business Confidential Information prior to submission of the publication or presentation. If the reviewing Party requests a delay to file a patent application, then the publishing Party shall not publish any information related to the patent application prior to the filing of the application, which filing shall occur within a reasonable time from the request.
7.7	Publicity/Use of Names. Except as expressly set forth in this Agreement, no disclosure of the existence, or the terms, including the financial terms, of this Agreement may be made by either Party, and no Party shall use the name, trademark, trade name or logo of the other Party, its Affiliates or their respective employees in any publicity, promotion, news release or disclosure relating to this Agreement or its subject matter, without the prior express written permission of the other Party, except as may be required by law.

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7.8 Clinical Trial Registry. Roche, in accordance with its internal policies and procedures, shall have the right to publish all studies, clinical trials and results thereof related to the Licensed Compounds on the clinical trial registries which are maintained by or on behalf of Roche. InterMune shall not publish any studies, clinical trials or results thereof related to the Licensed Compounds on its clinical trial registry, provided however, that Roche’s clinical trial registry can be accessed via a link from InterMune’s clinical trial registry.

ARTICLE 8 – UPFRONT FEE, EVENT PAYMENTS, ROYALTIES AND
REPORTS

8.1 Upfront Fee and Deliverables Payment. In consideration for the licenses granted herein under the InterMune Patent Rights and InterMune Know-How, for the Development work performed on ITMN-191 by InterMune and other related [***]s or on behalf of InterMune by Third Parties prior to the Effective Date and for InterMune’s agreeing to the terms and conditions of this Agreement, Roche shall pay to InterMune a non-refundable amount equal to Sixty Million U.S. Dollars ($U.S. 60,000,000) within [***] business days of the Effective Date and Roche’s receipt of invoice from InterMune. Such payment shall be made by Roche to InterMune via wire transfer to an account designated by InterMune in the invoice.

8.2 Event Payments. Subject to the terms and conditions of this Agreement, Roche shall pay to InterMune the non-refundable milestone event payments in the amounts specified below, on a Product-by-Product basis (or Licensed Compound-by-Licensed Compound basis, as applicable) (each an “Event Payment”) no later than [***] after Roche receives an invoice from InterMune and the following events have occurred:

Event	Amount
Upon release by InterMune in good faith of the [***] kilogram ([***] Kg) lot of cGMP material of ITMN-191(1)	Ten Million U.S. Dollars ($U.S. 10,000,000)
Upon Successful Completion of the first Combination Toxicology Study conducted by or on behalf of Roche for ITMN-191(1)	[***] U.S. Dollars ($U.S. [***])
Upon Initiation by or on behalf of Roche of the first Chronic Toxicology Study For any Licensed Compound (other than ITMN-191)(2)	[***] U.S. Dollars ($U.S. [***])

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Event	Amount
Upon Successful Completion of the [***] or first Phase I Clinical Trial (which Phase I Clinical Trial was conducted by or on behalf of Roche) for each Collaboration Compound that is a Licensed Compound with multiple ascending dose proof of concept (POC)	[***] U.S. Dollars ($U.S. [***])
Upon Initiation by or on behalf of Roche of the first Phase II Clinical Trial	[***] U.S. Dollars ($US [***])
Upon Successful Completion of a Phase II Clinical Trial in the non-responder population conducted by or on behalf of Roche	[***] U.S. Dollars ($US [***])
Upon Initiation by or on behalf of Roche of a Phase III Clinical Trial	[***] U.S. Dollars ($U.S. [***])
Upon Filing by or on behalf of Roche of an NDA in the [***](3)	[***] U.S. Dollars ($U.S. [***])
Upon Filing by or on behalf of Roche of an NDA equivalent in a [***]	[***] U.S. Dollars ($U.S. [***])
Upon Filing by or on behalf of Roche of an NDA equivalent in [***]	[***] U.S. Dollars ($U.S. [***])
Upon receipt by or on behalf of Roche of Marketing Authorization in the [***](3)	[***] U.S. Dollars ($U.S. [***])
Upon receipt by or on behalf of Roche of Marketing Authorization in a [***]	[***] U.S. Dollars ($U.S. [***])
Upon receipt by or on behalf of Roche of Marketing Authorization in [***]	[***] U.S. Dollars ($U.S. [***])

(1)	For purposes of clarification, these Event Payments shall only apply for ITMN-191.
(2)	For purposes of clarification, these Event Payments shall only apply for Licensed Compounds other than ITMN-191.
(3)	The events set forth above with respect to “Filing of an NDA in the United States” and “receipt of Marketing Authorization in the United States” shall, in the event of an [***] Opt-Out for a particular Product, be [***] U.S. Dollars ($U.S. [***]) and [***] Million U.S. Dollars ($U.S. [***]), respectively.
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Roche shall notify InterMune promptly after the achievement of each of the foregoing events.

8.2.1 Credit for ITMN-191.

(a)	With respect to ITMN-191 (or the related Product comprising ITMN-191), each of the above Event Payments shall be paid only once, for the first occurrence of the triggering event, regardless of how many times such event is subsequently achieved for ITMN-191 (or the related Product). If [***] advances a [***] (or the related Product comprising such [***]), then Event Payments for such [***] (or the related Product) would be the same as ITMN-191 (or the related Product) so long as ITMN-191 (or the related Product) remains under development and/or commercialization at the time the Event Payments are achieved for such Collaboration Compound (or the related Product).
(b)	However, if ITMN-191 (or the related Product) is dropped from development or if ITMN-191 (or the related Product) does not receive Marketing Authorization, then the first Collaboration Compound (or the Product comprising such Collaboration Compound) that is advanced will receive Event Payments only for those events that were not achieved by ITMN-191 (or the related Product) prior to ITMN-191 (or the related Product) being dropped from development or not receiving Marketing Authorization. For example, if ITMN-191 received Event Payments for the Successful Completion of the [***] and was subsequently dropped from Development, then for the first Collaboration Compound to be advanced, InterMune would not receive the Event Payments already achieved by ITMN-191 but would be eligible to receive all other unpaid Event Payments for such Collaboration Compound. For purposes of clarification, in the event InterMune receives Event Payments for ITMN-191 for the events “release by InterMune in good faith of the Transition Plan Deliverables” and “Successful Completion of the first Combination Toxicology Study conducted by or on behalf of Roche for ITMN-191” described in this Section 8.2 (“ITMN-191 Events”) and ITMN-191 is subsequently dropped from Development, then the first Collaboration Compound to be advanced shall not be subject to the Event Payment for the “Initiation by or on behalf of Roche of the first Chronic Toxicology Study for any Licensed Compound” event as such event is in lieu of the ITMN-191 Events for Licensed Compounds other than[***]ITMN-191.
(c)	Furthermore, in the event any subsequent Collaboration Compound (or the related Product comprising such subsequent Collaboration Compound), is advanced following the first Collaboration Compound

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(or the related Product) described in subsection (b) above, then any Event Payment set forth in this Section 8.2 for events achieved by such subsequent Collaboration Compound (or the related Product) will be reduced by [***] percent ([***]%). For example, assuming ITMN-191 (or the related Product) is dropped from Development or does not receive Marketing Authorization and that Compound X is the first Collaboration Compound being advanced under subsection (b) above and Compound Y is the second Collaboration Compound being advanced under this subsection (c), the Event Payments for events achieved by Compound Y under this Section 8.2 will be paid at [***]percent ([***]%) of the amounts set forth for such events.

8.2.2 Definition of Successful Completion. For purposes of this Section 8.2, the following shall apply:

(a)

With respect to the [***] or first [***] for each Collaboration Compound that is a Licensed Compound with multiple ascending dose proof of concept (POC), “Successful Completion” shall mean [***] which leads to the [***] (which decision shall be made within [***] ([***]) days of the availability of the [***] and [***] for such study). Any decision to be made under this subsection (a) shall be made by [***] delivering to [***] written notice of such decision within the applicable timeframe described above. In the event [***] delivers written notice to [***] that it has determined not to move forward with the Development of the Licensed Compound or [***] does not deliver written notice of its decision within the applicable timeframe, [***] shall be deemed to have made the decision not to move forward with the Development of such Licensed Compound and [***] shall terminate all rights with respect to such Licensed Compound for the entire Territory pursuant to Section [***] hereof.

(b)

With respect to the Combination Toxicology Study, “Successful Completion” shall mean the determination by [***] in good faith that no [***] or other [***] of the [***] that do not allow [***] to [***] [***] have been [***] with ITMN-191 in such study (which determination shall be made no later than the earlier of (i) [***] ([***]) days after Initiation of such study; and (ii) [***] provided that [***] has delivered to [***] sufficient quantities of ITMN-191 by [***]). Any determination to be made under this subsection (b) shall be made by [***] delivering to [***] written notice of such determination within the applicable timeframe described above. In the event [***] does not deliver notice of its determination within the specified timeframe, [***] shall be deemed to have made the determination that Successful Completion has occurred for purposes of this Section 8.2. In the event [***] makes the determination in good faith that Successful Completion has not occurred (and delivers notice

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to [***] thereof within the specified timeframe), [***] may (but is not obligated to) terminate this Agreement with respect to ITMN-191 for the [***] [***] or in its [***] pursuant to Section 12.3 hereof. In the event [***] the Combination Toxicology Study and terminates the Agreement with respect to ITMN-191 or in its [***] prior to the availability of data to enable the determination of whether such [***] (or other [***] that do not [***] [***] [***] [***]) are [***] with ITMN-191 in such study and [***] was not the [***] of any [***] [***] finding in [***] for ITMN-191, then [***] shall pay the Event Payment as if Successful Completion of the Combination Toxicology Study has been achieved.

(c)

With respect to the Phase II Clinical Trial in the non-responder population, “Successful Completion” shall mean that [***] or, if such [***] subsequently decides to move forward with or continue Development of such Licensed Compound in a non-responder population.

8.2.3 Sales Performance Milestones. Upon achievement of an event listed below with respect to the first occurrence, Roche shall pay the following amounts once and once only:

Event	Amount
Upon the first occurrence of aggregate annual Net Sales in the Territory over $[***] million during a 12 month period	[***] U.S. Dollars ($U.S. [***])
Upon the first occurrence of aggregate annual Net Sales in the Territory over $[***] during a 12 month period	[***] U.S. Dollars ($U.S. [***])
Upon the first occurrence of aggregate annual Net Sales in the Territory over $[***] during a 12 month period	[***] U.S. Dollars ($U.S. [***])
Upon the first occurrence of aggregate annual Net Sales in the Territory over $[***] during a 12 month period	[***] U.S. Dollars ($US [***]0)

8.3 Royalties.

8.3.1 Royalties Payable By Roche. Subject to the terms and conditions of this Agreement, including InterMune’s Opt-Out right, Roche shall pay InterMune

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royalties, calculated on a Product-by-Product basis, as set forth in this Section 8.3.

(a) Product Royalties.

(i) Royalty Tiers if No Exercise of Opt-Out. In the event that InterMune has not exercised its Opt-Out for a Product, Roche shall pay InterMune royalties in an amount equal to the following percentage of Net Sales in the ROW Territory of such Product by Roche, its Affiliates and its permitted sublicensees (on a Product-by-Product basis):

(1)	[***] percent ([***]%) of Net Sales in the ROW Territory in each Calendar Year up to and including [***] U.S. Dollars ($U.S. [***]).
(2)	[***] percent ([***]%) of Net Sales in the ROW Territory in each Calendar Year for the portion of Net Sales exceeding [***] U.S. Dollars ($U.S. [***]) up to and including [***] U.S. Dollars ($U.S. [***]).
(3)	[***] percent ([***]%) of Net Sales in the ROW Territory in each Calendar Year for the portion of Net Sales exceeding [***] U.S. Dollars ($U.S. [***]).

(ii) Royalty Tiers if Exercise of Opt-Out during Development. In the event that InterMune has exercised its Opt-Out during Development for a Product, Roche shall pay InterMune royalties in an amount equal to the following percentage of aggregate Net Sales in the Territory of such Product by Roche, its Affiliates and its permitted sublicensees (on a Product-by-Product basis) in the relevant territories:

(1)	[***] percent ([***]%) of Net Sales in the Territory in each Calendar Year up to and including [***] U.S. Dollars ($U.S. [***]).
(2)	[***] percent ([***]%) of Net Sales in the Territory in each Calendar Year for the portion of Net Sales exceeding [***] U.S. Dollars ($U.S. [***]) up to and including [***] U.S. Dollars ($U.S. [***]).
(3)	[***] percent ([***]%) of Net Sales in the Territory in each Calendar Year for the portion of Net Sales exceeding [***] U.S. Dollars ($U.S. [***]).

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(iii) Royalty Tiers if Exercise of Opt-Out During Preparation of Co-Commercialization Plan/Budget. In the event that Opt-Out occurs during preparation of a Co-Commercialization Plan/Budget for a Product under Section 4.4.3(a)(iii), Roche shall pay InterMune royalties in an amount equal to the following percentage of aggregate Net Sales in the Territory of such Product by Roche, its Affiliates and its permitted sublicensees (on a Product-by-Product basis) in the relevant territories:

(1)	[***] percent ([***]%) of Net Sales in the Territory in each Calendar Year up to and including [***] U.S. Dollars ($U.S. [***]).
(2)	[***] percent ([***]%) of Net Sales in the Territory in each Calendar Year for the portion of Net Sales exceeding [***] U.S. Dollars ($U.S. [***]) up to and including [***] U.S. Dollars ($U.S. [***]).
(3)	[***] percent ([***]%) of Net Sales in the Territory in each Calendar Year for the portion of Net Sales exceeding [***] U.S. Dollars ($U.S. [***]).

(b)

Royalties on each Product at the rates set forth above shall continue on a country-by-country basis until the expiration of the later of: (i) the last-to-expire Valid Claim covering the making, using, selling, offering for sale, importation or exportation of the Licensed Compound or Product; or (ii) for a period of [***] ([***]) years after First Commercial Sale of such Product in such country (the “Royalty Period”).

(c)

All royalties are subject to the following conditions:

(i)	no royalties shall be due upon the sale or other transfer among Roche or its Affiliates, but in such cases the royalty shall be due and calculated upon Roche’s or its Related Party’s Net Sales to the first independent Third Party;
(ii)	no royalties shall accrue on the sale or other disposition of Product by Roche or its Affiliates for use in a Clinical Trial; and
(iii)	no royalties shall accrue on the disposition of Product in reasonable quantities by Roche or its Affiliates as samples (promotion or otherwise) or as donations (e.g., to non-profit

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institutions or government agencies for a non-commercial purpose).

(d)	In the event that there is no Valid Claim covering the making, using, selling, offering for sale, importation or exportation of the Licensed Compound or Product in a country, the royalties on each Product shall be decreased by [***] percent. Royalties payable upon such Products shall be in consideration of the InterMune Know-How provided under this Agreement.
(e)	If, during the Royalty Period, a Third Party receives Marketing Authorization for and commences commercial sale of a Generic Product in a country in which a royalty is payable under this Section 8.3 and such Generic Product represents [***] percent ([***]%) or more of the units sold during such Calendar Quarter for such Product as evidenced by data from IMS Health or another data service acceptable to both Parties, then Roche shall have the right to reduce any royalties due under Section 8.3 on account of the sale of such Products for the Generic Product indication by [***] percent ([***]%) beginning on the first date of the applicable Calendar Quarter and for so long as such Third Party continues sales of such Generic Product in such country above the threshold level. For the avoidance of doubt, the reduction in royalties pursuant to this Section 8.3.1(e) for generic competition or Section 8.3.1(d) for lack of a Valid Claim, shall not, in the aggregate, exceed [***] percent ([***]%).
(f)	Any royalty reduction shall only be made after taking into account royalties due by InterMune under the [***]. By way of example, if Roche were to pay InterMune a royalty of $[***] and InterMune owed a royalty of $[***] under the [***], the maximum Roche’s royalty paid to InterMune may be reduced is by [***]. Roche shall have the right to audit the royalties due and paid by InterMune under the [***] in accordance with Section 8.6.

8.3.2

Compulsory Licenses. If a compulsory license is granted to a Third Party, through the order, decree or grant of a governmental authority having competent jurisdiction, authorizing such Third Party to manufacture, use, sell, offer for sale, import or export a Product in any country in the Territory with a royalty rate lower than the royalty rate provided by Section 8.3.1 then the royalty rate to be paid by Roche on Net Sales in that country under Section 8.3.1 shall be reduced [***] [***].

8.3.3

Third Party Licenses. In the event that one or more Third Party Licenses (other than the Third Party Licenses under the [***] and [***]) are required by Roche or its Affiliates in order to make, have made, use, offer to sell, sell import and/or export Licensed Compound or Product(s) (hereinafter

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“Additional Third Party Patent Licenses”), Roche shall be obligated to make any payments thereunder with no right of credit or offset against the royalty payments due InterMune by Roche under Section 8.3.1 above.

8.3.4

Pre-Existing Royalty Obligations to [***] and [***]. As of the Effective Date, the royalty-based [***] and the [***] are in full force and effect. InterMune has provided a complete copy of both the [***] and the [***] to Roche prior to the Effective Date. InterMune shall be solely responsible for payments under the [***] and the [***]. If InterMune is not required or does not make a royalty based payment to [***] as a result of (i) any Third Party action against [***] or (ii) the natural expiration of the royalty term set forth in the [***] as of the Effective Date hereof (and, for purposes of clarification, not due to any action taken by InterMune to curtail or shorten such royalty term or to pay down or pay off such royalty to [***]), then any applicable royalty rate due to InterMune pursuant to this Agreement shall be reduced by [***] percent ([***]%).

8.4	Co-Commercialization Profit Split; Operating Expenses. The Parties shall calculate the Co-Commercialization Profit Split and Operating Expenses as set forth in attached Exhibit A, unless InterMune shall have exercised the Opt-Out. Sections 8.5 and 8.6 shall not be applicable to the Co-Commercialization Profit Split and Operating Expenses calculations and reports and audit rights related to such calculations shall be as set forth in attached Exhibit A.
8.5	Reports; Payment of Royalty. During the term of this Agreement following the First Commercial Sale of a Product and in addition to any reports which are due under Exhibit A, Roche shall furnish to InterMune a quarterly written report for the Calendar Quarter showing (a) the Adjusted Gross Sales and the Net Sales of the Product sold by Roche or its Affiliates during such quarter on a country-by-country basis; (b) the date of any First Commercial Sale of the Product in each country during such quarter; (c) the Net Sales of all Products subject to royalty payments sold by Roche and its Affiliates during the reporting period; (d) the royalties payable under this Agreement; and (e) any Sales Milestones due based on the cumulative aggregate annual Net Sales under Section 8.2.3. In addition, Roche shall furnish InterMune with sufficient additional information so as to meet its reporting and payment obligations under the [***]. Reports shall be due on the sixtieth (60th) day following the close of each Calendar Quarter. Royalties shown to have accrued by each royalty report shall be due and payable on the date such royalty report is due. Roche shall keep records in sufficient detail to enable the royalties payable hereunder to be determined.
8.6	Audits. Roche and its Affiliates shall keep, and shall require its licensees and sublicensees to keep, full, true and accurate books of accounts containing all particulars that may be necessary for the purpose of calculating all royalties payable under this Agreement.

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	Such books of accounts shall be kept at their principal place of business. At the expense of InterMune, InterMune has the right to engage Roche’s officially appointed worldwide independent public accountant to perform, on behalf of InterMune an audit of such books and records of Roche and its Affiliates, its licensees and sublicensees, that are deemed necessary by Roche’s independent public accountant to report on Net Sales of Product for the period or periods requested by InterMune and the correctness of any report or payments made under this Agreement.
	Upon timely request and at least sixty (60) working days’ prior written notice from InterMune, such audit shall be conducted in the countries specifically requested by InterMune, during regular business hours in such a manner as to not unnecessarily interfere with Roche’s normal business activities, and shall be limited to results in the two (2) calendar years prior to audit notification.
	Such audit shall not be performed more frequently than once per calendar year nor more frequently than once with respect to records covering any specific period of time. All information, data documents and abstracts herein referred to shall be used only for the purpose of verifying royalty statements or compliance with this Agreement, shall be treated as Roche Confidential Information subject to the obligations of this Agreement and need neither be retained more than one (1) year after completion of an audit hereof, if an audit has been requested; nor more than two (2) years from the end of the calendar year to which each shall pertain; nor more than one (1) year after the date of termination of this Agreement.
	Audit results and findings shall be shared by Roche and InterMune. If the audit reveals an overpayment, InterMune shall reimburse Roche for the amount of the overpayment within thirty (30) days. If the audit reveals an underpayment, Roche shall make up such underpayment within thirty (30) days and reimburse InterMune for audit fees incurred by InterMune in conducting such audit provided the underpayment is greater than [***] percent ([***]%).
	The failure of InterMune to request verification of any royalty calculation within the period during which corresponding records must be maintained will be deemed to be acceptance of the royalty reporting.
8.7	Payment Exchange Rate. All payments to be made under this Agreement shall be made in United States dollars and may be paid by bank wire transfer in immediately available funds to such bank account in the United States as may be designated in writing by a Party from time to time. In the case of sales outside the United States, the rate of exchange to be used in computing the amount of currency equivalent in United States dollars due InterMune shall be made at the average year-to-date rate of exchange as retrieved from the Reuters system (or with respect to Roche any other source then routinely used by Roche) for the applicable time period.

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8.8 Income Tax Withholding. If laws, rules or regulations require withholding of income taxes or other taxes imposed upon payments set forth in Article 8, a Party shall make such withholding payments as may be required and shall subtract such withholding payments from the payments set forth in Article 8. Such Party shall submit appropriate proof of payment of the withholding taxes to the other Party within a reasonable period of time.

ARTICLE 9 — REPRESENTATIONS, WARRANTIES AND COVENANTS

9.1 Representations and Warranties of Each Party. Each Party represents and warrants to the other Party that, as of the Effective Date:

9.1.1	it is duly organized, validly existing and in good standing under the laws of the jurisdiction of incorporation;
9.1.2	it has the full right, power and authority to enter into this Agreement and to perform its obligations hereunder;
9.1.3	this Agreement has been duly-executed by it and is legally binding upon it, enforceable in accordance with its terms (except in all cases as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and except that the availability of the equitably remedy of specific performance or injunctive relief is subject to the discretion of the court or other tribunal before which any proceeding may be brought);
9.1.4	the execution, delivery and performance of this Agreement by it does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it may be bound, nor violate any material law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it;
9.1.5	it has not previously assigned, transferred, conveyed or otherwise encumbered its right, title and interest in, as to InterMune, the InterMune Patent Rights or InterMune Know-How or, as to Roche, the Roche Patent Rights or the Roche Know-How, and will not do so during the term of this Agreement other than with the prior written consent of the other Party; and
9.1.6	it has (or will have at the time performance is due) maintained and will maintain and keep in full force and effect all material agreements (including license agreements) and filings (including patent filings) necessary to perform its material obligations hereunder.

9.2 Additional Representations, Warranties and Covenants of InterMune. InterMune hereby further represents and warrants to Roche that:

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9.2.1	as of the Effective Date, to InterMune’s knowledge, there are no claims, judgments or settlements against or owed by InterMune and no pending or threatened claims or litigation relating to the InterMune Patent Rights and InterMune Know-How; and
9.2.2	as of the Effective Date, InterMune has taken reasonable measures to protect the confidentiality of the InterMune Know-How and will continue to take such measures during the term of the Agreement; and
9.2.3	it has not granted, and will not grant (except as otherwise permitted by the terms of this Agreement) during the term of this Agreement, any Third Party, including any academic organization or agency, any rights to make, have made, use, sell, offer for sale, import or export Licensed Compounds or Products.

9.3 Additional Representations, Warranties and Covenants of Roche. Roche hereby further represents, warrants and covenants to InterMune that:

9.3.1	as of the Effective Date, to Roche’s knowledge, there are no claims, judgments or settlements owed by Roche and no pending claims or litigation relating to the Roche Patent Rights and Roche Know-How;
9.3.2	as of the Effective Date, Roche has taken reasonable measures to protect the confidentiality of the Roche Know-How and will continue to take such measures during the term of the Agreement; and
9.3.3	it has not granted, and will not grant (except as otherwise permitted by the terms of this Agreement) during the term of this Agreement, any Third Party, including any academic organization or agency, any rights to Reverted Compounds, Passed Compounds , Licensed Compounds or Products.

9.4 HSR Act.

9.4.1 InterMune and Roche shall make all necessary initial filings under the HSR Act as promptly as practicable but in no event more than five (5) business days following the execution of this Agreement. Subject to the terms and conditions of this Agreement, each of InterMune and Roche will use all Commercially Reasonable Efforts to do, or cause to be done, all things necessary, proper or advisable to, as promptly as practicable, (i) obtain all consents, approvals or actions of, make all filings with and give all notices to governmental or regulatory authorities or any other public or private third parties required of either Party to consummate the transactions contemplated by this Agreement, and (ii) provide such other information and communications to such governmental or regulatory authorities as the other party or such governmental or regulatory authorities may reasonably request. In addition to and not in limitation of the foregoing, each of the Parties will

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(x) take promptly all actions necessary to make the filings required of InterMune and Roche or their respective Affiliates under the HSR Act and under any similar or comparable foreign antitrust statute or regulation, (y) request early termination with the Federal Trade Commission (the “FTC”) and comply at the earliest practicable date with any request for additional information received by such Party or its Affiliates from the FTC or the Antitrust Division of the Department of Justice (the “Antitrust Division") pursuant to the HSR Act or from similar or comparable foreign governmental authorities, and (z) cooperate with the other Party in connection with such Party’s filings under the HSR Act and comparable foreign statutes and in connection with resolving any investigation or other inquiry concerning the transactions contemplated by this Agreement commenced by the FTC, the Antitrust Division, or state attorneys general or comparable foreign authorities. Each party shall give the other party reasonably prior notice of any communication with or any proposed communication, understanding or agreement with any governmental or regulatory authority with respect to the transactions contemplated by this Agreement. None of the parties shall independently participate in any meeting, or engage in any substantive conversation, with any such governmental or regulatory authority in respect of any filings or inquiry without giving the other party prior notice of the meeting and, unless prohibited by such governmental or regulatory authority, the opportunity to attend and/or participate. Notwithstanding the foregoing, neither Party nor any of their respective Affiliates shall be required to divest or hold separate or otherwise take or commit to take any action that limits its freedom of action with respect to, or its ability to retain, any of its businesses, assets or product lines or that otherwise could materially adversely affect such Party or its Affiliates.

9.4.2

If the transactions contemplated by this Agreement are subject to the notification requirements of the HSR Act or any other applicable governmental law, then the effectiveness of this Agreement and the transactions contemplated hereunder shall be subject to and contingent upon the expiration or termination of all applicable waiting periods under the HSR Act or other applicable law. Subject to the terms and conditions of this Agreement, each Party shall use all reasonable efforts to take, or cause to be taken, all reasonable actions and to do, or cause to be done, all things necessary and appropriate to satisfy the condition subsequent and to consummate the transactions contemplated by this Agreement. Each Party shall cooperate with the other Party in the preparation, execution and filing of all documents that are required or permitted to be filed on or before the Closing Date for the purpose of consummating this transaction, including, filings pursuant to the HSR Act or other governmental filing. Each Party shall bear its own costs (including counsel or other expert fees) with respect to preparing, executing and filing such documents.

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9.4.3 Either Party may terminate this Agreement in its entirety, upon ten (10) days prior written notice to the other Party if the condition subsequent under this Section 9.4 has not been fulfilled within three (3) months after the Execution Date, in which case, upon termination, there shall be no liabilities for obligations on the part of either Party except if there has been a breach of this Section 9.4.

9.5 Disclaimer of Warranties. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT OR MANDATED BY APPLICABLE LAW (WITHOUT THE RIGHT TO WAIVE OR DISCLAIM), NEITHER PARTY MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO A LICENSED COMPOUND, PRODUCT, ANY PATENT RIGHTS, KNOW-HOW, GOODS, SERVICES, RIGHTS, OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING IMPLIED WARRANTIES OF PERFORMANCE, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS.

ARTICLE 10— INTELLECTUAL PROPERTY RIGHTS

10.1 Research Information and Inventions. The entire right, title and interest in:

10.1.1	InterMune Know-How shall be owned solely by InterMune;
10.1.2	Roche Know-How shall be owned solely by Roche; and
10.1.3	Joint Know-How shall be owned jointly by InterMune and Roche.

Determination of whether an invention was made by one Party or jointly by the Parties shall be made in accordance with the principles of inventorship under the United States patent laws. InterMune shall promptly disclose to Roche in writing the development, making, conception and/or reduction to practice of InterMune Know-How and Joint Know-How at the time when InterMune is ready to file a patent application. Roche shall promptly disclose to InterMune in writing the development, making, conception and/or reduction to practice of Roche Know-How and Joint Know-How at the time when Roche is ready to file a patent application.

10.2 Filing, Prosecution and Maintenance of Patents

10.2.1 By InterMune. InterMune shall have the first right to file, prosecute and maintain in the Territory, upon appropriate consultation with Roche, patents and patent applications Covering the InterMune Patent Rights licensed to Roche under this Agreement and Joint Patent Rights. In the event InterMune does elect to prosecute or maintain such InterMune Patent Rights or Joint Patent Rights, InterMune shall do so in good faith. InterMune may elect not to prosecute or maintain such InterMune Patent Rights or Joint Patent Rights

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	and, if so, InterMune shall promptly notify Roche and Roche shall have the right to prosecute or maintain such patent applications and patents, in which case, if Roche elects to prosecute or maintain such patent applications and patents, Roche shall do so in good faith.
10.2.2	By Roche. Roche shall have the first right to file, prosecute and maintain in the Territory, upon appropriate consultation with InterMune, patents and patent applications Covering the Roche Patent Rights licensed to InterMune under this Agreement. In the event Roche does elect to prosecute or maintain such Roche Patent Rights, Roche shall do so in good faith. Roche may elect not to prosecute or maintain such Roche Patent Rights and, if so, Roche shall promptly notify InterMune and InterMune shall have the right to prosecute or maintain such patent applications and patents, in which case, if InterMune elects to prosecute or maintain such patent applications and patents, InterMune shall do so in good faith.
10.2.3	Procedures Under Sections 10.2.1 and 10.2.2.

(a)

In each case under Sections 10.2.1 and 10.2.2, the Party with first right to file, prosecute or maintain shall give notice to the other Party of any desire to cease prosecution and/or maintenance of the applicable patent rights on a country-by-country basis in the Territory and, in such case, shall permit the other Party, in such other Party’s sole discretion, to continue prosecution or maintenance of such patent rights at the other Party’s own expense. If the other Party elects to continue prosecution or maintenance based on the Party with the first rights’ election not to file pursuant to Section 10.2.1 or 10.2.2, the initial Party shall execute such documents and perform such acts at such initial Party’s expense as may be reasonably necessary to permit the other Party to continue such prosecution or maintenance. The other Party may, at its discretion, seek input from the initial Party, including technical information and assistance, in the prosecution or maintenance of the patent applications or patents, and the initial Party shall provide such input as it is reasonably able to provide in a timely manner and at its own expense.

(b)

The Party assuming responsibility for prosecution or maintenance of the patent applications or patents shall keep the non-responsible Party advised of the status of the patent applications or patents in the Territory. The Party assuming responsibility for prosecution or maintenance of the patent applications or patents in a Major Market country shall provide copies of any papers related to the filing, prosecution and maintenance of such patent applications or patents, so that the non-responsible Party shall have at least [***] ([***]) calendar days (or in the event of a deadline that does not reasonably permit such [***] ([***]) days, a reasonable period) to comment on

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any prosecution document being filed in a [***]. In the event of such comment, the responsible Party shall give [***] consideration to such comment, [***] as set forth [***] in this Section 10.2.3, the [***] regarding any prosecution matter shall rest with the [***]. The responsible Party shall promptly give notice to the non-responsible Party of the grant, lapse, revocation, surrender, invalidation or abandonment of any patent applications or patents for which they have prosecution or maintenance responsibility pursuant to this Article 10.

(a)

With respect to any patent or application in the [***] or [***] being prosecuted or maintained by [***] in a [***] that includes a [***], [***] shall have the following enhanced rights of participation:

(i)

In the event that [***] proposes to take action that would abandon, terminate, or cancel a [***] or narrow a [***] to exclude from its scope a [***] (or a method of making or using the same) without [***] any other [***] of comparable scope in that [***], [***] shall seek the written consent of [***] at least [***] calendar days prior to taking the proposed action (or in the event of a deadline that does not reasonably permit such [***] days, a reasonable period), which written consent shall not unreasonably be withheld. Failure of [***] to respond to such a request within such [***] (or in the event of a deadline that does not reasonably permit such [***], a reasonable period) shall be taken as written consent, and any written opposition to the proposed action shall be accompanied by a reasoned statement in support thereof, and [***] shall additionally make a good faith effort to suggest alternative actions that would address the relevant objectives. [***] and [***] each agree to respond in good faith to discussions initiated by the other party relating to such issues to seek an amicable resolution.

(ii)

In the event that [***] terminates this Agreement for cause under Section [***], or in the event of a [***], upon the written request of [***] shall: engage outside counsel to prosecute any application pending or to be filed in a [***] that includes a [***] (to the extent such application is not already being prosecuted by outside counsel); and (to the extent permitted under local law) prepare and file at [***] expense (or lend all necessary cooperation and execute all necessary documents to allow [***] to prepare and file) one or more continuing applications in [***] which [***] may prosecute in [***] sole discretion, which are and shall continue to be expressly limited to one or both [***] (including salts, hydrates, enantiomers, and esters thereof), formulations or compositions thereof,

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and/or methods of making or using the same. With respect to these continuing applications which [***] chooses to prosecute, [***] shall, as the responsible Party in filing, prosecuting and maintaining such applications, do so in good faith and provide [***] the right to comment on any prosecution document being filed as set forth in Section 10.2.3 hereof; provided, however that in the event [***] chooses to prosecute such continuing applications as a result of a [***], [***] shall provide [***] the right to comment only on applications that are [***] or otherwise [***] for [***] which [***] shall consider in good faith. In the event that [***] proposes to take action that would abandon, terminate or cancel a [***] or narrow a [***] to exclude from its scope a [***] (or a method of making or using the same) without filing or maintaining any other [***] of comparable scope in that [***], [***] may do so provided that such action would have no impact on the [***] due to [***] under [***] hereunder.

10.2.4 With respect to all patent applications or patents hereunder, the responsible Party shall bear the cost and expenses related to such patent applications and patents.

10.3 Interference, Opposition, Reexamination and Reissue.

10.3.1	Each Party shall promptly inform the other Party of learning of any patent office instituted or Third Party request for, or filing or declaration of, any interference, opposition or reexamination relating to the InterMune Patent Rights, Roche Patent Rights or Joint Patent Rights. InterMune shall be the lead Party on any InterMune Patent Rights and Joint Patent Rights, and Roche shall be the lead Party on any Roche Patent Rights. Roche and InterMune shall thereafter consult and cooperate fully to determine a course of action with respect to any such proceeding. The Parties shall have the right to review and comment on any submission to be made in connection with such proceeding.
10.3.2	Neither Party shall initiate or request any interference, opposition, reexamination or reissue proceeding relating to patent applications or patents licensed to the other Party under this Agreement without the prior written consent of the other Party, which consent shall not be unreasonably withheld.
10.3.3	In connection with any interference, opposition, reexamination or reissue proceeding relating to patent applications or patents licensed to the other Party under this Agreement, Roche and InterMune shall cooperate fully and shall provide each other with any information or assistance that either may reasonably request. The Parties shall keep each other informed of developments in any such action or proceeding, including, to the extent

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	permissible by law, consultation on and approval of any settlement, the status of any settlement negotiations and the terms of any offer related thereto.
10.3.4	Each Party shall bear the expense of any interference, opposition, reexamination, or reissue proceeding relating to its respective patent applications or patents licensed to the other Party under this Agreement.

10.4 Enforcement and Defense.

10.4.1

Each Party shall give notice to the other Party of (i) any infringement of InterMune Patent Rights, Roche Patent Rights, or Joint Patent Rights, or (ii) any misappropriation or misuse of InterMune Know-How, Roche Know-How or Joint Know-How, that may come to that Party’s attention. Roche and InterMune shall thereafter consult and cooperate fully to determine a course of action, including the commencement of legal action by either or both Roche and InterMune to terminate any such infringement or any misappropriation or misuse. With regard to InterMune Patent Rights, InterMune Know-How and Joint Patent Rights, InterMune, upon notice to Roche, shall have the first right to initiate and prosecute such legal action at its own expense and in the name of InterMune and Roche, or to control the defense of any declaratory judgment action relating to InterMune Patent Rights, InterMune Know-How or Joint Patent Rights if the litigation is not directed at an accused compound or product that is the same as a Licensed Compound(s) or Product(s). With regard to InterMune Patent Rights, InterMune Know-How and Joint Patent Rights, Roche, upon notice to InterMune, shall have the first right to initiate and prosecute such legal action at its own expense and in the name of InterMune and Roche, or to control the defense of any declaratory judgment action relating to InterMune Patent Rights, InterMune Know-How or Joint Patent Rights if the litigation is directed at an accused compound or product that is the same as a Licensed Compound(s) or Product(s). Each Party shall promptly inform the other party if it elects not to exercise such first right and the other party shall thereafter have the right to either initiate and prosecute such action or to control the defense of such declaratory judgment action in the name of Roche and InterMune. With regard to Roche Patent Rights and Roche Know-How, Roche, upon notice to InterMune, shall have the first right to initiate and prosecute such legal action at its own expense and in the name of Roche and InterMune, or to control the defense of any declaratory judgment action relating to Roche Patent Rights or Roche Know-How. Roche shall promptly inform InterMune if it elects not to exercise such first right and InterMune shall thereafter have the right to either initiate and prosecute such action or to control the defense of such declaratory judgment action in the name of InterMune and, if necessary, Roche. Each Party shall have the right to be represented by counsel of its own choice.

10.4.2

In the event that a Party elects not to initiate and prosecute an action as provided in Section 10.4.1, and the other Party elects to do so, the costs of any

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	agreed-upon course of action to terminate infringement or misappropriation or misuse, including the costs of any legal action commenced or the defense of any declaratory judgment, shall be paid by the Party initiating and prosecuting such action.
10.4.3	For any action as provided in Section 10.4.1, in the event that either Party is unable to initiate or prosecute such action solely in its own name, the other Party shall join such action voluntarily and shall execute and cause its Affiliates to execute all documents necessary for such other Party to initiate litigation to prosecute and maintain such action. In connection with any action, Roche and InterMune shall cooperate fully and shall provide each other with any information or assistance that either may reasonably request. Each Party shall keep the other informed of developments in any action or proceeding, including, to the extent permissible by law, consultation on and approval of any settlement, the status of any settlement negotiations and the terms of any offer related thereto.
10.4.4	Any recovery obtained by either or both Roche and InterMune in connection with or as a result of any action contemplated by this Section 10.4, whether by settlement or otherwise, shall be shared in order as follows:

(a)	the Party which initiated and prosecuted the action shall recoup all of its reasonable costs and expenses incurred in connection with the action;
(b)	the other Party shall then, to the extent possible, recover its reasonable costs and expenses incurred in connection with the action;
(c)	the amount of any recovery remaining shall then be allocated between the Parties as follows: (i) any compensatory damages shall be treated as Net Sales hereunder; and (ii) any punitive damages shall be awarded to the Party initiating the action.

10.4.5 The Parties shall inform each other of any certification regarding their respective patents and patent applications licensed under this Agreement it has received pursuant to either 21 U.S.C. §§355(b)(2)(A)(iv) or (j)(2)(A)(vii)(IV) or its successor provisions, or any similar provisions in a country in the Territory other than the United States, and shall provide the other Party with a copy of such certification within five (5) days of receipt. InterMune’s and Roche’s rights with respect to the initiation and prosecution of any legal action as a result of such certification or any recovery obtained as a result of such legal action shall be as defined in Sections 10.4.1 through 10.4.4 hereof; provided, that the respective Party may exercise its first right to initiate and prosecute any action and shall inform the other Party of such decision within ten (10) days of receipt of the certification, after which time the other Party shall have the right to initiate and prosecute such action. Regardless of which

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Party has the right to initiate and prosecute such action, both Parties shall, as soon as practicable after receiving notice of such certification, convene and consult with each other regarding the appropriate course of conduct for such action. The non-initiating Party shall have the right to be kept fully informed and participate in decisions regarding the appropriate course of conduct for such action, and the right to join and participate in such action.

10.5 Patent Term Restoration. The Parties hereto shall cooperate with each other, including providing necessary information, documents and assistance as the other Party may reasonably request, in obtaining patent term restoration or supplemental protection certificates or their equivalents in any country in the Territory where applicable to InterMune Patent Rights, Roche Patent Rights and Joint Patent Rights. In the event that elections with respect to obtaining such patent term restoration or supplemental protection certificates or their equivalents are to be made, Roche shall have the right to make the election and InterMune agrees to abide by such election; provided that in the event Roche elects not to file a patent term restoration or supplemental protection certificate or their equivalents, Roche shall (a) promptly inform InterMune of its intention not to file and (b) grant to InterMune the right to file such patent term extension and provide necessary information, documents and assistance as InterMune may reasonably request.

ARTICLE 11 — INDEMNIFICATION; LIMITATION OF LIABILITY

11.1 Mutual Indemnification. Each Party shall indemnify, defend and hold harmless the other Party, its Affiliates, and its licensors, and all of their respective officers, directors, employees and agents from and against any and all claims, suits, actions, demands, damages and liabilities, including reasonable legal costs and fees and other expenses of litigation (collectively, “Claims") brought by a Third Party (any of the foregoing, a “Loss") arising out of or resulting from directly or indirectly (a) the breach by the indemnifying Party of any warranty, representation or covenant by or obligation of such Party in this Agreement, or (b) the gross negligence, recklessness or intentional acts or omissions of the indemnifying Party, its Affiliates or agents and their respective officers, directors, employees and agents with respect to this Agreement and the transactions contemplated hereby.

11.2 Indemnification by Roche. Except to the extent InterMune is required to indemnify Roche under Sections 11.1 or 11.3, Roche agrees to indemnify, defend and hold harmless InterMune, its Affiliates, and its licensors, and all of their respective officers, directors, employees and agents (collectively, the “InterMune Indemnitees") from and against any and all Losses to which any InterMune Indemnitee may become subject to arising out of or resulting from directly or indirectly: (a) the negligence, recklessness, bad faith, intentional wrongful acts or omissions of Roche or its Affiliates (or, to the extent permitted under this Agreement, their respective agents, contractors, distributors, representatives or other persons or entities working on their behalf), including in connection with Development, Co-Funded Development, Commercialization, Co-Commercialization, Co-Promotion or manufacture of the Licensed Compounds and

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	Products (including any patent infringement or product liability claims including any manufacturing or other product defects, failure to comply with regulatory and other legal requirements, failure to provide adequate warnings and misuse of the Products), except to the extent Losses arise out of the negligence, recklessness, bad faith, intentional wrongful acts or omissions of InterMune or its Affiliates (or, to the extent permitted under this Agreement, their respective agents, contractors, distributors, representatives or other persons or entities working on their behalf); and (b) material breach by Roche (or conduct or omission by any of its Affiliates, which if performed or failed to be performed by Roche would be a breach by Roche) of the terms of, or the representations and warranties made by it in, this Agreement.
11.3	Indemnification by InterMune. Except to the extent Roche is required to indemnify InterMune under Sections 11.1 or 11.2, InterMune agrees to indemnify, defend and hold harmless Roche, its Affiliates, and all of their respective officers, directors, employees and agents (collectively, the “Roche Indemnitees") from and against any and all Losses to which any Roche Indemnitee may become subject to arising out of or resulting from directly or indirectly: (a) the negligence, recklessness, bad faith, intentional wrongful acts or omissions of InterMune or its Affiliates (or, to the extent permitted under this Agreement, their respective agents, contractors, distributors, representatives or other persons or entities working on their behalf), including in connection with Development, Co-Funded Development, Co-Commercialization or Co-Promotion of the Licensed Compounds and Products (including any patent infringement or product liability claims including any manufacturing or other product defects, failure to comply with regulatory and other legal requirements, failure to provide adequate warnings and misuse of the Products), except to the extent Claims arise out of the negligence, recklessness, bad faith, intentional wrongful acts or omissions of Roche or its Affiliates (or, to the extent permitted under this Agreement, their respective agents, contractors, distributors, representatives or other persons or entities working on their behalf); (b) the negligence, recklessness, bad faith, intentional wrongful acts or omissions of InterMune or its Affiliates (or, to the extent permitted under this Agreement, their respective agents, contractors, distributors, representatives or other persons or entities working on their behalf), including in connection with Development or Commercialization of the Reverted Compounds, Passed Compounds and products containing such Reverted Compounds or Passed Compounds (including any patent infringement or product liability claims including any manufacturing or other product defects, failure to comply with regulatory and other legal requirements, failure to provide adequate warnings and misuse of the Products), except to the extent Losses arise out of the negligence, recklessness, bad faith, intentional wrongful acts or omissions of Roche or its Affiliates (or, to the extent permitted under this Agreement, their respective agents, contractors, distributors, representatives or other persons or entities working on their behalf)and (c) material breach by InterMune (or conduct or omission by any of its Affiliates, which if performed or failed to be performed by InterMune would be a breach by InterMune) of the terms of, or the representations and warranties made by it in, this Agreement.
11.4	Indemnification in Connection with Co-Commercialization. In the event of any product liability or other Claim related solely to the Co-Commercialization Country for

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which neither Party is entitled to indemnification hereunder, the Parties shall treat Losses therefrom as Operating Expenses.

11.5

Control of Defense. In the event of any Claim against the InterMune Indemnitees or the Roche Indemnitees (individually, the “Indemnified Party"), the Indemnified Party shall promptly notify to the other Party (the “Indemnifying Party") in writing of the Claim. Such Claim for indemnity shall indicate the nature of the Claim and the basis therefor. Promptly after a Claim is made for which the Indemnified Party seeks indemnity, the Indemnified Party shall permit the Indemnifying Party, at its option and expense, to assume the complete defense of such Claim, provided that (i) the Indemnified Party will have the right to participate in the defense of any such Claim at its own cost and expense, (ii) the Indemnifying Party will conduct the defense of any such Claim with due regard for the business interests and potential related liabilities of the Indemnified Party, and (iii) the Indemnifying Party will not agree to any settlement that would admit liability on the part of the Indemnified Party or involve relief other than payment of money, without the approval of the Indemnified Party, not to be unreasonably withheld; and provided, further, that if it is reasonably likely that the Parties may have conflicting interests or if it is otherwise not advisable under applicable legal and ethical requirements for the Indemnifying Party’s defense counsel to represent both Parties, separate independent counsel shall be retained for each Party at its own expense. The Indemnified Party shall have the right, at its election, to release and hold harmless the Indemnifying Party from its obligations hereunder with respect to such Claim and assume the complete defense of the same in return for payment by the Indemnifying Party to the Indemnified Party of the amount of the Indemnifying Party’s settlement offer. The Indemnifying Party will not, in defense of any such Claim, except with the consent of the Indemnified Party, consent to the entry of any judgment or enter into any settlement which does not include, as an unconditional term thereof, the giving by the claimant or plaintiff to the Indemnified Party of a release from all liability in respect thereof. After notice to the Indemnified Party of the Indemnifying Party’s election to assume the defense of such Claim, the Indemnifying Party shall be liable to the Indemnified Party for such legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof at the request of the Indemnifying Party. As to those Claims with respect to which the Indemnifying Party does not elect to assume control of the defense, the Indemnified Party will afford the Indemnifying Party an opportunity to participate in such defense at the Indemnifying Party’s own cost and expense, and will not settle or otherwise dispose of any of the same without the consent of the Indemnifying Party.

11.6 Exclusive Remedy

The rights and remedies provided pursuant to this Article 11 are the sole and exclusive remedies of the Parties with respect to the Losses subject to indemnification under this Article 11.

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11.7	Limitation of Liability
	IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY UNDER THIS AGREEMENT FOR ANY LOSS OF PROFITS, LOSS OF BUSINESS OR INTERRUPTION OF BUSINESS, OR FOR ANY OTHER INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OF ANY KIND, EVEN If SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGES PROVIDED, THAT THIS LIMITATION SHALL NOT LIMIT THE INDEMNIFICATION OBLIGATION OF SUCH PARTY UNDER THE PROVISIONS OF ARTICLE 11 FOR SUCH DAMAGES CLAIMED BY A THIRD PARTY AND NOTHING IN THIS SECTION 11.7 IS INTENDED TO LIMIT ROCHE’S PAYMENT OBLIGATIONS UNDER ARTICLE 8. IN NO CASE SHALL EITHER PARTY BE LIABLE FOR ANY REPRESENTATION OR WARRANTY MADE BY THE OTHER PARTY TO ANY THIRD PARTY. THE FOREGOING LIMITATION OF LIABILITY SHALL NOT APPLY TO THE EXTENT OF A PARTY’S GROSS NEGLIGENCE, RECKLESSNESS OR INTENTIONAL ACTS OR OMISSIONS.
11.8	Insurance. Each Party agrees to self-insure or to obtain and maintain at its cost and expense, while this Agreement is in effect, including any surviving obligations: (i) commercial general liability insurance including contractual liability insurance; (ii) products liability insurance; (iii) property damage insurance; (iv) professional liability insurance; (v) workers compensation insurance; and (vi) automobile insurance in amounts appropriate to the conduct of such Party’s activities under this Agreement.

ARTICLE 12 — TERM AND TERMINATION

12.1	Term and Expiration. This Agreement shall be effective as of the Effective Date and unless terminated earlier pursuant to this Article 12, this Agreement shall continue in effect until expiration of all royalty obligations hereunder. Upon expiration of this Agreement, Roche’s and InterMune’s licenses pursuant to Section 5.2 shall become irrevocable, fully paid-up, perpetual licenses.
12.2	Early Termination of Research Program Term.

12.2.1	Termination of Research Program at Roche’s Discretion. Roche shall have the option, in its sole discretion, to terminate the Research Program prior to the expiration of the Research Program Term (i.e., prior to the expiration of the [***] ([***]) year period from the Effective Date hereof), upon not less than [***] days prior written notice to InterMune.
12.2.2	Termination of Research Program Upon Agreement by Parties. Upon agreement by both Parties in writing, the Parties may terminate the Research Program prior to the expiration of the Research Program Term at any time.

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12.2.3 Consequences of Early Termination of Research Program.

(a)	Upon Roche’s early termination of the Research Program pursuant to Section 12.2.1, Roche’s Opt-In Option for Passed Compounds described in Section 5.3.5 and 5.3.6 and Roche’s Right of First Negotiation for [***] compounds described in Section 6.3.2 shall automatically terminate and be of no further force or effect and this Agreement shall otherwise remain in full force and effect.
(b)	In the event both Parties agree in writing to the early termination of the Research Program pursuant to Section 12.2.2, Roche’s Right of First Negotiation for [***] compounds in Section 6.3.2 shall not be impacted by such termination and this Agreement shall otherwise remain in full force and effect.

12.3 Termination in Roche’s Discretion. Roche shall have the option, in its sole discretion, at any time after the [***]-month anniversary of the Effective Date, to terminate this Agreement (i) on a Licensed Compound-by-Licensed Compound (i.e., Roche terminating rights to a Licensed Compound for purposes of the entire Territory); (ii) Product-by-Product (i.e., Roche terminating rights to a Product for purposes of the entire Territory); (iii) country-by-country basis, subject to Section 12.3.1 below (i.e., Roche terminating rights for one or more Licensed Compounds or Products for purposes of a country within the Territory) or (iv) in its entirety, upon not less than one hundred eighty (180) days prior written notice to InterMune subject to the following:

12.3.1 Limitations on Termination on a Country-By-Country Basis.

(a)

Notwithstanding anything to the contrary contained herein, with respect to Roche’s termination rights on a country-by-country basis within the Major Markets without terminating the entire Agreement, Roche may only terminate this Agreement with respect to (i) no more than one (1) country within the Major European Market after Marketing Authorization is received therein in the event Roche terminates this Agreement with respect to Japan as specified herein and (ii) no more than two (2) countries within the Major European Market after Marketing Authorization is received therein in the event this Agreement is not terminated with respect to Japan as specified herein. Any termination of this Agreement by Roche with respect to a country within the Major European Market as permitted herein may only be done with twelve (12) months prior written notice to InterMune, and Roche, during the twelve (12) month notice period, shall reasonably assist in the transition of all rights and obligations for such terminated country to InterMune.

(b)

Notwithstanding the foregoing, in the event Chugai issues to Roche or InterMune a termination notice with respect to the rights granted to Roche under this Agreement for Japan or Chugai is not designated as an Affiliate of Roche under this Agreement by the Initiation of the first

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Phase III Clinical Trial for a Product, within sixty (60) days of either the termination notice from Chugai or non-designation of Chugai as a Roche Affiliate, as applicable, Roche shall deliver to InterMune either a reasonably detailed plan for engaging another Third Party reasonably acceptable to InterMune to perform Development and Commercialization efforts in Japan pursuant to this Agreement or a written notice terminating this Agreement with respect to Japan (in which case termination of this Agreement with respect to Japan shall be effective immediately upon delivery of termination notice by Roche). In the event Roche delivers to InterMune a plan to engage another Third Party reasonably acceptable to InterMune to perform Development and Commercialization efforts in Japan, then Roche shall use Commercially Reasonable Efforts to execute on such plan and engage such a Third Party no later than six (6) months after the delivery of such plan to InterMune. At any time during such six (6) month period, in the event Roche is unable to engage another Third Party reasonably acceptable to InterMune after using Commercially Reasonable Efforts, then Roche may terminate this Agreement with respect to Japan upon written notice to InterMune; provided, however, that this Agreement will be deemed automatically terminated with respect to Japan in the event that Roche has not engaged another Third Party to perform its Development and Commercialization efforts in Japan upon the expiration of such six (6) month period.

12.3.2 Consequences of Termination of Agreement (i) on a Licensed Compound-by-Licensed Compound basis, (ii) on a Product-by-Product basis or (iii) on a country-by-country basis. With respect to termination by Roche of this Agreement on a Licensed Compound-by-Licensed Compound, Product-by-Product and/or country-by-country basis in accordance with Section 12.3 hereof, the following consequences shall apply:

(a)

InterMune’s license grants to Roche pursuant to Article 5 shall terminate as of the termination date with respect to such terminated Licensed Compound, Product and/or country only, and Roche shall cease all research, development, commercialization or manufacture of such terminated Licensed Compound or Product in the terminated country or in the Territory, as applicable only, except with respect to Roche’s fulfilling its obligations under subsections (f) and (g) below.

(b)

Roche hereby grants to InterMune an irrevocable, exclusive, fully paid-up, royalty-free, perpetual license under the Roche Know-How and Roche Patent Rights and under Roche’s rights in the Joint Know-How and Joint Patent Rights to develop, make, have made, use, import, export, offer for sale and sell (i) the terminated Licensed Compound or Product in the Territory and/or (ii) the Licensed Compound and/or Product in the terminated country, as applicable.

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(c)	Except with respect to the terminated Licensed Compound or Product and/or the terminated country, as applicable, this Agreement shall otherwise remain in full force and effect.
(d)	For each terminated Licensed Compound or Product, Roche: (a) shall transfer to InterMune all rights to such Licensed Compound or Product and the related Development programs (including all rights to any IND or other filing related to the Marketing Authorization and the right to reference the relevant Drug Master File with respect to such terminated Licensed Compound or Product); and shall promptly provide to InterMune access to all the related material clinical and preclinical data at no cost to InterMune (other than the direct costs of assembling, reproducing and transmitting such data). In the case where Roche has terminated its rights to one or more Licensed Compounds and Products only for a certain country in the Territory, Roche: (a) shall transfer to InterMune all rights to all Licensed Compound and/or Product for purposes of such terminated country and the related Development programs in such terminated country (including all rights to any IND or other filing related to the Marketing Authorizations and the right to reference the relevant Drug Master File with respect to the License Compounds and/or Products for such terminated country); and shall promptly provide to InterMune access to all the related material clinical and preclinical data at no cost to InterMune (other than the direct costs of assembling, reproducing and transmitting such data).
(e)	Roche shall within a reasonable amount of time after termination return or cause to be returned to InterMune with respect to a terminated Licensed Compound, Product and/or country only, all related and reasonably available InterMune Know-How, InterMune Patent Rights, Joint Patent Rights and Joint Know-How in tangible form, as well as any other material provided by InterMune to Roche in any medium; provided that Roche may retain: (a) a single archival copy solely for the purpose of determining the extent of disclosure hereunder and assuring compliance with the surviving provisions of this Agreement; (b) any portion which is contained in laboratory notebooks (subject to the continued confidentiality obligations of this Agreement); and (c) any portion which Roche is required by applicable law to retain. Notwithstanding the foregoing, with respect to Joint Know-How and Joint Patent Rights, Roche shall have the right, as a joint owner thereof, to use and to keep a copy of the Joint Know-How and Joint Patent Rights for any purpose, subject to any continuing licenses to InterMune under this Agreement.
(f)	In the case where Roche has terminated its rights with respect to a Licensed Compound or Product for purposes of the entire Territory, to

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the extent Roche (or an Affiliate of Roche) is manufacturing (on its own or through any Third Party contract manufacturer) any such terminated Licensed Compound or Product, Roche (or its Affiliate) shall continue, for a period up to [***] ([***]) years, to manufacture (or have manufactured) such Licensed Compounds and Products and shall supply such Licensed Compounds and Products to InterMune in quantities sufficient to satisfy InterMune’s requirements under the manufacturing transfer and transition plan (described in subsection (g) below) and for InterMune to assume all Development and Commercialization activities which supply shall be at Roche’s Fully Burdened Manufacturing Cost plus [***] percent ([***]%). In the case where Roche has terminated its rights to a Licensed Compound or Product only with respect to a country within the Territory in accordance with Section 12.3, so long as Roche (or an Affiliate of Roche) is manufacturing (on its own or through any Third Party contract manufacturer) such Licensed Compound or Product for the remaining countries within the Territory, InterMune shall have the right to purchase from Roche such Licensed Compound or Product for Development and Commercialization within such terminated country at Roche’s Fully Burdened Manufacturing Cost plus [***] ([***]%). Any manufacturing and supply by Roche for InterMune will be conducted pursuant to a manufacturing and supply agreement which will be negotiated by the Parties in good faith and using Commercially Reasonable Efforts.

(g)

In the case where Roche has terminated this Agreement with respect to a Licensed Compound or Product for the entire Territory, for a period of time to be agreed upon by the Parties up to twenty-four (24) months, Roche shall assist InterMune as reasonably requested in (i) causing the assignment to InterMune of any and all applicable Third Party manufacturing and supply agreements for such terminated Licensed Compound or Product, to the extent possible, and/or (ii) transferring the manufacturing process for such terminated Licensed Compound or Product to InterMune or a Third Party contract manufacturer engaged by InterMune. Such assistance shall include assisting InterMune in developing and executing a reasonable transfer and transition plan and providing reasonable technical and regulatory assistance and documentation relating to the manufacture, testing and supply of such terminated Licensed Compound or Product as necessary for InterMune to assume rights under the applicable Third Party manufacturing and supply agreements assigned to InterMune or, as applicable, for InterMune to be qualified or to qualify a Third Party for the manufacturing of such terminated Licensed Compound or Product. Roche shall also reasonably assist InterMune with the working up and use of the technology and with the training of

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InterMune’s personnel to the extent which may reasonably be necessary in relation to the Development and Commercialization, including the manufacture of such terminated Licensed Compound or Product by InterMune. In this regard, Roche will receive InterMune’s scientific and manufacturing staff in its premises for certain reasonable periods, the term of which will be agreed by the parties. In the case of a manufacturing transfer to InterMune or a Third Party designated by InterMune, if despite using Commercially Reasonable Efforts InterMune is not able to complete the qualification of an alternative manufacturer within the agreed upon time period, then Roche shall continue to reasonably assist InterMune for a period of time up to an addition six (6) month period at the FTE rate specified in Exhibit A.

(h)

Roche shall provide InterMune with any technical data incorporated in the Roche Know-How, including but not limited to, access to the CMC section (in the case of any manufacturing transfer) to give effect to the provisions of this Sections 12.3.2.

12.3.3 Consequences of Termination of Agreement in its Entirety. With respect to termination by Roche of this Agreement in its entirety in accordance with Section 12.3 hereof, the following consequences shall apply:

(a)	InterMune’s license grants to Roche pursuant to Article 5 shall terminate as of the termination date with respect to all Licensed Compounds and Products, and Roche shall cease all research, development, commercialization or manufacture of such Licensed Compounds and Products, except with respect to Roche’s fulfilling its obligations under subsections (e) and (f) below.
(b)	Roche hereby grants to InterMune an irrevocable, exclusive, fully paid-up, royalty-free, perpetual license under the Roche Know-How and Roche Patent Rights and under Roche’s rights in the Joint Know-How and Joint Patent Rights to develop, make, have made, use, import, export, offer for sale and sell Licensed Compounds and Products in the Territory.
(c)	For each Licensed Compound and Product, Roche: (a) shall transfer to InterMune all rights to such Licensed Compound or Product and the related Development programs (including all rights to any IND or other filing related to the Marketing Authorization and the right to reference the relevant Drug Master File with respect to such Licensed Compound or Product); and shall promptly provide to InterMune access to all material clinical and preclinical data at no cost to InterMune (other than the direct costs of assembling, reproducing and transmitting such data).

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(d)	Roche shall within a reasonable amount of time after termination return or cause to be returned to InterMune with respect to all Licensed Compounds and Products, all reasonably available InterMune Know-How, InterMune Patent Rights, Joint Patent Rights and Joint Know-How in tangible form, as well as any other material provided by InterMune to Roche in any medium; provided that Roche may retain: (a) a single archival copy solely for the purpose of determining the extent of disclosure hereunder and assuring compliance with the surviving provisions of this Agreement; (b) any portion which is contained in laboratory notebooks (subject to the continued confidentiality obligations of this Agreement); and (c) any portion which Roche is required by applicable law to retain. Notwithstanding the foregoing, with respect to Joint Know-How and Joint Patent Rights, Roche shall have the right, as a joint owner thereof, to use and to keep a copy of the Joint Know-How and Joint Patent Rights for any purpose, subject to any continuing licenses to InterMune under this Agreement.
(e)	To the extent Roche (or an Affiliate of Roche) is manufacturing (on its own or through any Third Party contract manufacturer) any Licensed Compounds or Products, Roche (or its Affiliate) shall continue, for a period up to [***], to manufacture (or have manufactured) such Licensed Compounds and Products and shall supply such Licensed Compounds and Products to InterMune in quantities sufficient to satisfy InterMune’s requirements under the manufacturing transfer and transition plan (described in subsection (f) below) and for InterMune to assume all Development and Commercialization activities which supply shall be at Roche’s Fully Burdened Manufacturing Cost plus [***] percent ([***]%). Any manufacturing and supply by Roche for InterMune will be conducted pursuant to a manufacturing and supply agreement which will be negotiated by the Parties in good faith and using Commercially Reasonable Efforts.
(f)	Roche shall provide InterMune with any technical data incorporated in the Roche Know-How, including but not limited to, access to the CMC section, to give effect to the provisions of this Section 12.3.3. For a period of time to be agreed upon by the Parties up to [***], Roche shall assist InterMune as reasonably requested in (i) causing the assignment to InterMune of any and all applicable Third Party manufacturing and supply agreements for all Licensed Compounds and Products, to the extent possible, and/or (ii) transferring the manufacturing process for such Licensed Compounds and Products to InterMune or a Third Party contract manufacturer engaged by InterMune. Such assistance shall include assisting InterMune in developing and executing a reasonable transfer and transition plan and providing reasonable technical and regulatory assistance and

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	documentation relating to the manufacture, testing and supply of such Licensed Compounds and Products as necessary for InterMune to assume rights under the applicable Third Party manufacturing and supply agreements assigned to InterMune or, as applicable, for InterMune to be qualified or to qualify a Third Party for the manufacturing of such Licensed Compounds and Products. Roche shall also reasonably assist InterMune with the working up and use of the technology and with the training of InterMune’s personnel to the extent which may reasonably be necessary in relation to the Development and Commercialization, including the manufacture of such Licensed Compounds and Products by InterMune. In this regard, Roche will receive InterMune’s scientific and manufacturing staff in its premises for certain reasonable periods, the term of which will be agreed by the parties. In the case of a manufacturing transfer to InterMune or a Third Party designated by InterMune, if despite using Commercially Reasonable Efforts InterMune is not able to complete the qualification of an alternative manufacturer within the agreed upon time period, then Roche shall continue to reasonably assist InterMune for a period of time up to an addition [***] at the FTE rate specified in Exhibit A.
(g)	Roche’s license grant to InterMune pursuant to Section 5.2.3 shall continue with respect to the Reverted Compounds and become fully paid-up, irrevocable and perpetual licenses.
(h)	Roche’s license grant to InterMune pursuant to Section 5.2.4 shall continue with respect to such Passed Compounds and become fully paid-up, irrevocable and perpetual licenses.

12.4 Termination for Cause or Upon Bankruptcy Event.

12.4.1

Termination for Cause. This Agreement may be terminated at any time during the term of this Agreement upon written notice by either Party if the other Party is in breach of its material obligations hereunder by causes and reasons within its control and has not cured such breach within ninety (90) days after notice requesting cure of the breach; provided, however, the notice shall describe the alleged breach with sufficient particularity to allow the other Party to remedy or otherwise respond; provided further, the ninety (90) day cure period shall be tolled until such time as the existence of a material breach is determined pursuant to Section 13.6.

12.4.2

Termination for Bankruptcy. This Agreement may be terminated at any time during the term of this Agreement by either Party upon the filing or institution of bankruptcy, reorganization, liquidation or receivership proceedings, or upon an assignment of a substantial portion of the assets for the benefit of creditors by the other Party; provided, however, that in the case

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	of any involuntary bankruptcy proceeding such right to terminate shall only become effective if the Party consents to the involuntary bankruptcy or such proceeding is not dismissed within ninety (90) days after the filing thereof.
12.4.3	Bankruptcy Effect Under Bankruptcy Code. If this Agreement is terminated by a Party pursuant to Section 12.4.2 due to the rejection of this Agreement by or on behalf of the other Party under Section 365 of the United States Bankruptcy Code (the “Code”), all licenses and rights to licenses granted under or pursuant to this Agreement are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the Code, licenses of rights to “intellectual property” as defined under Section 101(35A) of the Code. The Parties agree that a licensee of such rights under this Agreement shall retain and may fully exercise all of its rights and elections under the Code, and that upon commencement of a bankruptcy proceeding by or against a Party under the Code, the other Party shall be entitled to a complete duplicate of or complete access to (as the first Party deems appropriate), any such intellectual property and all embodiments of such intellectual property. Such intellectual property and all embodiments thereof shall be promptly delivered to the other Party (i) upon any such commencement of a bankruptcy proceeding upon written request therefore by such other Party, unless the first Party elects to continue to perform all of its obligations under this Agreement or (ii) if not delivered under (i) above, upon the rejection of this Agreement by or on behalf of the first Party upon written request therefore by the other Party.
12.4.4	Consequences of Termination by InterMune. Upon InterMune’s termination of the Agreement pursuant to Sections 12.4.1 or 12.4.2, the following provisions shall apply:

(a)	InterMune’s license grants to Roche pursuant to Article 5 shall terminate as of the termination date with respect to all Licensed Compounds and Products, and Roche shall cease all research, development, commercialization or manufacture of such Licensed Compounds and Products, except with respect to Roche’s fulfilling its obligations under subsections (e) and (f) below.
(b)	Roche hereby grants to InterMune an irrevocable, exclusive, fully paid-up, royalty-free, perpetual license under the Roche Know-How and Roche Patent Rights and under Roche’s rights in the Joint Know-How and Joint Patent Rights to develop, make, have made, use, import, export, offer for sale and sell Licensed Compounds and Products in the Territory.
(c)	For each Licensed Compound and Product, Roche: (a) shall transfer to InterMune all rights to such Licensed Compound or Product and the related Development programs (including all rights to any IND or other filing related to the Marketing Authorization and the right to

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	reference the relevant Drug Master File with respect to such Licensed Compound or Product); and shall promptly provide to InterMune access to all material clinical and preclinical data at no cost to InterMune (other than the direct costs of assembling, reproducing and transmitting such data).
(d)	Roche shall within a reasonable amount of time after termination return or cause to be returned to InterMune with respect to all Licensed Compounds and Products, all reasonably available InterMune Know-How, InterMune Patent Rights, Joint Patent Rights and Joint Know-How in tangible form, as well as any other material provided by InterMune to Roche in any medium; provided that Roche may retain: (a) a single archival copy solely for the purpose of determining the extent of disclosure hereunder and assuring compliance with the surviving provisions of this Agreement; (b) any portion which is contained in laboratory notebooks (subject to the continued confidentiality obligations of this Agreement); and (c) any portion which Roche is required by applicable law to retain. Notwithstanding the foregoing, with respect to Joint Know-How and Joint Patent Rights, Roche shall have the right, as a joint owner thereof, to use and to keep a copy of the Joint Know-How and Joint Patent Rights for any purpose, subject to any continuing licenses to InterMune under this Agreement.
(e)	To the extent Roche (or an Affiliate of Roche) is manufacturing (on its own or through any Third Party contract manufacturer) any Licensed Compounds or Products, Roche (or its Affiliate) shall continue, for a period up to [***] ([***]) years, to manufacture (or have manufactured) such Licensed Compounds and Products and shall supply such Licensed Compounds and Products to InterMune in quantities sufficient to satisfy InterMune’s requirements under the manufacturing transfer and transition plan (described in subsection (f) below) and for InterMune to assume all Development and Commercialization activities which supply shall be at Roche’s Fully Burdened Manufacturing Cost plus [***] percent ([***]%). Any manufacturing and supply by Roche for InterMune will be conducted pursuant to a manufacturing and supply agreement which will be negotiated by the Parties in good faith and using Commercially Reasonable Efforts.
(f)	Roche shall provide InterMune with any technical data incorporated in the Roche Know-How, including but not limited to, access to the CMC section, to give effect to the provisions of this Sections 12.4.4. For a period of time to be agreed upon by the Parties up to twenty-four (24) months, Roche shall assist InterMune as reasonably requested in (i) causing the assignment to InterMune of any and all applicable Third

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	Party manufacturing and supply agreements for all Licensed Compounds and Products, to the extent possible, and/or (ii) transferring the manufacturing process for such Licensed Compounds and Products to InterMune or a Third Party contract manufacturer engaged by InterMune. Such assistance shall include assisting InterMune in developing and executing a reasonable transfer and transition plan and providing reasonable technical and regulatory assistance and documentation relating to the manufacture, testing and supply of such Licensed Compounds and Products as necessary for InterMune to assume rights under the applicable Third Party manufacturing and supply agreements assigned to InterMune or, as applicable, for InterMune to be qualified or to qualify a Third Party for the manufacturing of such Licensed Compounds and Products. Roche shall also reasonably assist InterMune with the working up and use of the technology and with the training of InterMune’s personnel to the extent which may reasonably be necessary in relation to the Development and Commercialization, including the manufacture of such Licensed Compounds and Products by InterMune. In this regard, Roche will receive InterMune’s scientific and manufacturing staff in its premises for certain reasonable periods, the term of which will be agreed by the parties. In the case of a manufacturing transfer to InterMune or a Third Party designated by InterMune, if despite using Commercially Reasonable Efforts InterMune is not able to complete the qualification of an alternative manufacturer within the agreed upon time period, then Roche shall continue to reasonably assist InterMune for a period of time up to an addition six (6) month period at the FTE rate specified in Exhibit A.
(g)	Roche’s license grant to InterMune pursuant to Section 5.2.3 shall continue with respect to the Reverted Compounds and become fully paid-up, irrevocable and perpetual licenses.
(h)	Roche’s license grant to InterMune pursuant to Section 5.2.4 shall continue with respect to such Passed Compounds and become fully paid-up, irrevocable and perpetual licenses.

12.4.5 Consequences of Termination by Roche. Upon Roche’s termination of the Agreement pursuant to Sections 12.4.1 or 12.4.2, the following provisions shall apply:

(a)	Roche’s license grants to InterMune pursuant to Article 5 shall terminate as of the termination date, subject to Section 12.4.5(b) and Section 12.4.5(c).
(b)	If, on the date that Roche provides InterMune with written notice of a material breach, InterMune has acquired rights and licenses to

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	Reverted Compounds pursuant to the terms and conditions of this Agreement, Roche’s license grant to InterMune pursuant to Section 5.2.3, shall continue with respect to the Reverted Compounds and become fully paid-up, irrevocable and perpetual licenses.
(c)	If, on the date that Roche provides InterMune with written notice of a material breach, InterMune is developing Passed Compounds, Roche’s license grant to InterMune pursuant to Section 5.2.4 shall continue with respect to such Passed Compounds and become fully paid-up, irrevocable and perpetual licenses.
(d)	InterMune’s license grants to Roche pursuant to Article 5 shall become irrevocable, perpetual licenses (and the financial provisions of Sections 8.2 through 8.8 shall continue).
(e)	InterMune shall within a reasonable amount of time after such termination return or cause to be returned to Roche all reasonably available Roche Know-How, Roche Patent Rights, Joint Patent Rights and Joint Know-How in tangible form, as well as any other material provided by Roche to InterMune in any medium; provided that InterMune may retain: (a) a single archival copy solely for the purpose of determining the extent of disclosure hereunder and assuring compliance with the surviving provisions of this Agreement; (b) any portion which is contained in laboratory notebooks (subject to the continued confidentiality obligations of this Agreement); and (c) any portion which InterMune is required by applicable law to retain. Notwithstanding the foregoing, with respect to Joint Know-How and Joint Patent Rights, InterMune shall have the right, as a joint owner thereof, to use and to keep a copy of the Joint Know-How and Joint Patent Rights for any purpose, subject to any continuing licenses to Roche under this Agreement.
(f)	[***] shall have rights to prosecute continuing patent applications as set forth in Section [***].

12.5 Consequences of InterMune’s Termination Pursuant to Section 6.2.3 or Section 6.2.4.

12.5.1	InterMune’s license grants to Roche pursuant to Article 5 shall terminate as of the termination date with respect to all Licensed Compounds and Products, and Roche shall cease all research, development, commercialization or manufacture of such Licensed Compounds and Products, except with respect to Roche’s fulfilling its obligations under Sections 12.5.5 and 12.5.6 below.
12.5.2	Roche hereby grants to InterMune an irrevocable, exclusive, fully paid-up, royalty-free, perpetual license under the Roche Know-How and Roche Patent

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	Rights and under Roche’s rights in the Joint Know-How and Joint Patent Rights to develop, make, have made, use, import, export, offer for sale and sell Licensed Compounds and Products in the Territory.
12.5.3	For each Licensed Compound and Product, Roche: (a) shall transfer to InterMune all rights to such Licensed Compound or Product and the related Development programs (including all rights to any IND or other filing related to the Marketing Authorization and the right to reference the relevant Drug Master File with respect to such Licensed Compound or Product); and shall promptly provide to InterMune access to all material clinical and preclinical data at no cost to InterMune (other than the direct costs of assembling, reproducing and transmitting such data).
12.5.4	Roche shall within a reasonable amount of time after termination return or cause to be returned to InterMune with respect to all Licensed Compounds and Products, all reasonably available InterMune Know-How, InterMune Patent Rights, Joint Patent Rights and Joint Know-How in tangible form, as well as any other material provided by InterMune to Roche in any medium; provided that Roche may retain: (a) a single archival copy solely for the purpose of determining the extent of disclosure hereunder and assuring compliance with the surviving provisions of this Agreement; (b) any portion which is contained in laboratory notebooks (subject to the continued confidentiality obligations of this Agreement); and (c) any portion which Roche is required by applicable law to retain. Notwithstanding the foregoing, with respect to Joint Know-How and Joint Patent Rights, Roche shall have the right, as a joint owner thereof, to use and to keep a copy of the Joint Know-How and Joint Patent Rights for any purpose, subject to any continuing licenses to InterMune under this Agreement.
12.5.5	To the extent Roche (or an Affiliate of Roche) is manufacturing (on its own or through any Third Party contract manufacturer) any Licensed Compounds or Products, Roche (or its Affiliate) shall continue, for a period up to [***] ([***]) years, to manufacture (or have manufactured) such Licensed Compounds and Products and shall supply such Licensed Compounds and Products to InterMune in quantities sufficient to satisfy InterMune’s requirements under the manufacturing transfer and transition plan (described in Section 12.5.6 below) and for InterMune to assume all Development and Commercialization activities which supply shall be at Roche’s Fully Burdened Manufacturing Cost plus [***]percent[***]. Any manufacturing and supply by Roche for InterMune will be conducted pursuant to a manufacturing and supply agreement which will be negotiated by the Parties in good faith and using Commercially Reasonable Efforts.

12.5.6 Roche shall provide InterMune with any technical data incorporated in the Roche Know-How, including but not limited to, access to the CMC section, to give effect to the provisions of this Sections 12.5. For a period of time to be

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	agreed upon by the Parties up to twenty-four (24) months, Roche shall assist InterMune as reasonably requested in (i) causing the assignment to InterMune of any and all applicable Third Party manufacturing and supply agreements for all Licensed Compounds and Products, to the extent possible, and/or (ii) transferring the manufacturing process for such Licensed Compounds and Products to InterMune or a Third Party contract manufacturer engaged by InterMune. Such assistance shall include assisting InterMune in developing and executing a reasonable transfer and transition plan and providing reasonable technical and regulatory assistance and documentation relating to the manufacture, testing and supply of such Licensed Compounds and Products as necessary for InterMune to assume rights under the applicable Third Party manufacturing and supply agreements assigned to InterMune or, as applicable, for InterMune to be qualified or to qualify a Third Party for the manufacturing of such Licensed Compounds and Products. Roche shall also reasonably assist InterMune with the working up and use of the technology and with the training of InterMune’s personnel to the extent which may reasonably be necessary in relation to the Development and Commercialization, including the manufacture of such Licensed Compounds and Products by InterMune. In this regard, Roche will receive InterMune’s scientific and manufacturing staff in its premises for certain reasonable periods, the term of which will be agreed by the parties. In the case of a manufacturing transfer to InterMune or a Third Party designated by InterMune, if despite using Commercially Reasonable Efforts InterMune is not able to complete the qualification of an alternative manufacturer within the agreed upon time period, then Roche shall continue to reasonably assist InterMune for a period of time up to an addition [*** month period at the FTE rate specified in Exhibit A.
12.5.7	Roche’s license grant to InterMune pursuant to Section 5.2.3 shall continue with respect to the Reverted Compounds and become fully paid-up, irrevocable and perpetual licenses.
12.5.8	Roche’s license grant to InterMune pursuant to Section 5.2.4 shall continue with respect to such Passed Compounds and become fully paid-up, irrevocable and perpetual licenses.

12.6 Effect of Expiration or Termination; Survival. Expiration or termination of this Agreement shall not relieve the Parties of any obligation accruing prior to such expiration or termination. Roche will pay its share of costs and expenses (but not Event Payments) planned prior to the termination notice but incurred or accrued before or during the notice period and not reasonably cancelable thereafter. Any expiration or termination of this Agreement shall be without prejudice to the rights of either Party against the other accrued or accruing under this Agreement prior to expiration or termination, including the obligation to pay royalties for Product(s) or Licensed Compound sold prior to such expiration or termination. The provisions of Article 7 shall survive the expiration or termination of this Agreement and shall continue in effect for ten (10) years. In addition,

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the provisions of Article 1, Sections 2.1.2 and 2.1.3, Article 9, Article 10, Article 11, Article 12 and Article 13 shall survive any expiration or termination of this Agreement.

ARTICLE 13 — MISCELLANEOUS

13.1 Force Majeure. Neither Party shall be held liable to the other Party nor be deemed to have defaulted under or breached this Agreement for failure or delay in performing any obligation under this Agreement to the extent such failure or delay is caused by or results from causes beyond the reasonable control of the affected Party, including embargoes, war, acts of war (whether war be declared or not), acts of terrorism, insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances, fire, floods, or other acts of God, or acts, omissions or delays in acting by any governmental authority or the other Party. The affected Party shall notify the other Party of such force majeure circumstances as soon as reasonably practical, and shall promptly undertake all reasonable efforts necessary to cure such force majeure circumstances.

13.2 Assignment/Change of Control.

13.2.1

Assignment. Subject to Section 13.2.2, each Party without the consent of the other Party, may assign this Agreement and any or all of its rights and obligations hereunder (i) to an Affiliate, or (ii) to an entity that merges with or acquires a controlling interest in such Party in connection with a Change of Control. Any permitted assignee shall assume all assigned obligations of its assignor under this Agreement. The assigning Party shall promptly notify the other Party of any such Change of Control and any such assignment and shall use all reasonable efforts to provide such notification at least twenty (20) days before the completion of the Change of Control and before the assignment. Except as specifically provided in this Section 13.2.1, this Agreement may not be assigned or otherwise transferred, nor may any right or obligation hereunder be assigned or transferred, by either Party without the consent of the other Party. Any attempted assignment not in accordance with this Section 13.2.1 shall be void.

13.2.2

InterMune Change of Control. In the event InterMune undergoes a Competing Pharma Change of Control during the term of this Agreement, InterMune (or the surviving entity of the Change of Control transaction, as applicable) shall have a period of [***] ([***]) days following the closing of such Competing Pharma Change of Control transaction, at its discretion, to [***] or [***] its [***] to the research or development program in the [***] or its commercial rights to a [***] with [***] in the [***], as applicable. In the event InterMune (or the surviving entity of the Change of Control transaction, as applicable) chooses not to [***] or [***] such [***], upon the expiration of the aforementioned [***]([***]) day period, Roche shall have the right, at any time, and at its sole discretion, to elect in writing some or all of the following, provided such election is made within [***] ([***]) days after the expiration of the [***]([***]) day [***] period:

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(a)	Article 3 (providing for the participation of [***] in decision-making through the Committees) shall be of no further force and effect.
(b)	upon sixty (60) days prior written notice, [***] may terminate [***] if [***] has previously elected such arrangement pursuant to [***]; or, if [***] has not previously exercised such [***], then the [***] shall thereafter be of no further force and effect.
(c)	upon sixty (60) days prior written notice, [***] may terminate any [***] efforts by [***] FTEs; provided, however, for purposes of clarity, [***] shall not be deemed to have exercised an [***] with respect to any Product or Licensed Compound and [***] shall continue to receive the same [***], milestones and royalties as if [***] is continuing with such [***].
(d)	Roche shall have the right to require InterMune, including the Change of Control party, to adopt reasonable procedures to be agreed upon in writing with Roche to control the dissemination of all Confidential Information of Roche and other confidential or proprietary information with respect to the development and commercialization of Licensed Compounds and Products (collectively “Sensitive Information") after such Change of Control. The purposes of such procedures shall be to strictly limit such disclosures to only those personnel having a need-to-know Sensitive Information in order for InterMune to perform its obligations under this Agreement and to prohibit the use of Sensitive Information in the Field for competitive reasons against Roche and its Affiliates, including the use of Sensitive Information for the development or commercialization of competing products in the Field.
(e)	[***] will have the right to prosecute continuing applications as set forth in Section [***].
(f)	In the event that the Change of Control party is engaged in the discovery research and/or pre-clinical development of a More Advanced Competing Product, then the [***] shall be deemed terminated. In the event that the Change of Control party is engaged in the clinical development or commercialization of a More Advanced Competing Product, then the [***] shall be deemed terminated.

For purposes of this Section 13.2.2, a “Competing Pharma Change of Control” shall mean a Change of Control of InterMune where the acquiror or other transaction party to the Change of Control transaction has a research or development program in the [***] or a [***] with [***] in the [***].

13.3 Severability. If any one or more of the provisions contained in this Agreement is held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of

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the remaining provisions contained herein shall not in any way be affected or impaired thereby, unless the absence of the invalidated provision(s) adversely affects the substantive rights of the Parties. The Parties shall in such an instance use their best efforts to replace the invalid, illegal or unenforceable provision(s) with valid, legal and enforceable provision(s) which, insofar as practical, implement the purposes of this Agreement.

13.4

Notices. All notices which are required or permitted hereunder shall be in writing and sufficient if delivered personally, sent by facsimile (and promptly confirmed by personal delivery or overnight courier) or sent by nationally-recognized overnight courier, addressed as follows:

if to InterMune, to:	InterMune, Inc.
	3280 Bayshore Blvd.
	Brisbane, CA 94005
	Attention: [***]
and:	Attention: [***]
and:	Latham & Watkins LLP
	12636 High Bluff Drive, Suite 400
	San Diego, CA 92130
	Attention: [***]
if to Roche, to:	Hoffmann-La Roche Inc.
	340 Kingsland Street
	Nutley, NJ 07110
	Attention: [***]
And	F.Hoffmann-La Roche Ltd.
	Grenzacherstrasse 124
	CH-4070
	Basel, Switzerland
	Attention: [***]

or to such other address(es) as the Party to whom notice is to be given may have furnished to the other Party in writing in accordance herewith. Any such notice shall be deemed to have been given: (a) when delivered if personally delivered or sent by facsimile on a business day (or if delivered or sent on a non-business day, then on the

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	next business day); or (b) on the business day after dispatch if sent by nationally-recognized overnight courier.
13.5	Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware and the patent laws of the United States without reference to any rules of conflict of laws.
13.6	Dispute Resolution.

13.6.1	With respect to any dispute, controversy or claim arising from or related to this Agreement or the breach thereof (“Dispute"), such Dispute shall first be referred to an Executive from each Party for attempted resolution by good faith negotiations. Any such Dispute shall be submitted to such senior executives no later than thirty (30) days following such request by either Party. Such Executives shall attempt in good faith to resolve any such Dispute within thirty (30) days after submission of the Dispute. In the event the Executives are unable to resolve the Dispute, the Parties shall otherwise negotiate in good faith and use reasonable efforts to settle. If the Parties do not fully settle, and a Party wishes to pursue the matter, each such Dispute that is not an Excluded Claim shall be finally resolved by binding arbitration in accordance with the Commercial Arbitration Rules and Supplementary Procedures for Large Complex Disputes of the American Arbitration Association (“AAA”), and judgment on the arbitration award may be entered in any court having jurisdiction thereof.
13.6.2	The arbitration shall be conducted by a panel of three persons experienced in the pharmaceutical business: within thirty (30) days after initiation of arbitration, each Party shall select one person to act as arbitrator and the two Party-selected arbitrators shall select a third arbitrator within thirty (30) days of their appointment. If the arbitrators selected by the Parties are unable or fail to agree upon the third arbitrator, the third arbitrator shall be appointed by the AAA. The place of arbitration shall be San Francisco, California if Dispute is submitted by Roche and New Jersey if Dispute is submitted by InterMune, and all proceedings and communications shall be in English.
13.6.3	Either Party may apply to the arbitrators for interim injunctive relief until the arbitration award is rendered or the controversy is otherwise resolved. Either Party also may, without waiving any remedy under this Agreement, seek from any court having jurisdiction any injunctive or provisional relief necessary to protect the rights or property of that Party pending the arbitration award. The arbitrators shall have no authority to award punitive or any other type of damages not measured by a Party’s compensatory damages. Each Party shall bear its own costs and expenses and attorneys’ fees and an equal share of the arbitrators’ fees and any administrative fees of arbitration.

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13.6.4

Except to the extent necessary to confirm an award or as may be required by law, neither a Party nor an arbitrator may disclose the existence, content, or results of an arbitration without the prior written consent of both Parties. In no event shall an arbitration be initiated after the date when commencement of a legal or equitable proceeding based on the dispute, controversy or claim would be barred by the applicable Delaware statute of limitations.

13.6.5

As used in this Section, the term “Excluded Claim” shall mean a Dispute that concerns (a) the validity or infringement of a patent, trademark or copyright; or (b) any antitrust, anti-monopoly or competition law or regulation, whether or not statutory.

13.7 Entire Agreement; Amendments. This Agreement, together with the Schedules and Exhibits hereto, contains the entire understanding of the Parties with respect to the subject matter hereof and supersedes and cancels all previous express or implied agreements and understandings, negotiations, writings and commitments, either oral or written, in respect to the subject matter hereof. The Schedules and Exhibits to this Agreement are incorporated herein by reference and shall be deemed a part of this Agreement. This Agreement may be amended, or any term hereof modified, only by a written instrument duly executed by authorized representatives of both Parties hereto.

13.8 Headings. The captions to the several Articles, Sections and subsections hereof are not a part of this Agreement, but are merely for convenience to assist in locating and reading the several Articles and Sections hereof.

13.9 Independent Contractors. It is expressly agreed that the Parties (including all entities and persons working on its behalf, including subcontractors), shall be independent contractors and that the relationship between InterMune and Roche shall not constitute a partnership, joint venture or agency. Neither Party shall have the authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other Party, without the prior written consent of such Party.

13.10 Waiver. The waiver by either Party hereto of any right hereunder, or of any failure of the other Party to perform, or of any breach by the other Party, shall not be deemed a waiver of any other right hereunder or of any other breach by or failure of such other Party whether of a similar nature or otherwise.

13.11 Cumulative Remedies. No remedy referred to in this Agreement is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to in this Agreement or otherwise available under law.

13.12 Waiver of Rule of Construction. Each Party has had the opportunity to consult with counsel in connection with the review, drafting and negotiation of this Agreement. Accordingly, the rule of construction that any ambiguity in this Agreement shall be construed against the drafting Party shall not apply.

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13.13 Business Day Requirements. In the event that any notice or other action or omission is required to be taken by a Party under this Agreement on a day that is not a business day then such notice or other action or omission shall be deemed required to be taken on the next occurring business day.

13.14 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

[Signature Page Follows]

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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Execution Date.

HOFFMANN-LA ROCHE INC.		INTERMUNE, INC.
BY:	/s/ FREDERICK C. KENTZ, III	BY:	/s/ DANIEL G. WELCH
NAME:	Frederick C. Kentz, III	NAME:	Daniel G. Welch
TITLE:	Vice President	TITLE:	President and Chief Executive Officer
F.HOFFMANN-LA ROCHE LTD
BY:	/s/ DR. PETER HUG
NAME:	Peter Hug
TITLE:	Executive Vice President, Pharma Partnering
BY:	/s/ STEFAN ARNOLD
NAME:	Stefan Arnold
TITLE:	Str. Director

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SCHEDULES

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SCHEDULE 1.80

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SCHEDULE 1.92

LEAD COMPOUND REQUIREMENTS

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SCHEDULE 2.1

SCHEDULE 4.9

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EXHIBIT A
FINANCIAL APPENDIX

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EXHIBIT B

Third Party License Agreements

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EXHIBIT C

[See Attached Initial Press Releases]

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EX-10.110

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

Exhibit 10.110

December 21, 2006

Dr. Kurt Konopitzky
Head Division Biopharmaceutical Operations
Boehringer Ingelheim Austria GmbH
Dr. Boehringer-Gasse 5 — 11
A-1121 Vienna, Austria

Re: Amendment No. 4 to the Data Transfer, Clinical Trial and Market Supply Agreement, dated as of January 27, 2000

Dear Mr. Konopitzky;

As you know, InterMune, Inc. (“InterMune”) and Boehringer Ingelheim Austria GmbH (“BI Austria”) are parties to that certain Data Transfer, Clinical Trial and Market Supply Agreement effective January 27, 2000, as amended effective June 19, 2002, September 18, 2003 and July 26, 2005 (the “Agreement”). This letter (this “Amendment”) will confirm our agreement to amend the Agreement as follows, effective as of the date first set forth above:

1.	The parties hereby agree to replace Section 2 of Amendment No. 3 to the Agreement dated July 26, 2005 in its entirety as follows:
	“The parties hereby agree that InterMune’s obligation to purchase [ * ] of [ * ] of the PRODUCT for [ * ] pursuant to Section 3.2.1 of the Agreement shall be [ * ] for such [ * ] without liability or penalty to InterMune with regard to the aforementioned [ * ]; provided, however that InterMune shall also pay to BI Austria a sum of Three Million Three Hundred Ninety-Four Thousand Fifty Euros (3,394,050€) for such [ * ] before the end of 2006 as consideration for a price reduction per vial for purchases of PRODUCT by InterMune in 2007 and 2008 (as set forth in detail in Section 4.1 of the Agreement). The parties further hereby agree that with respect to such [ * ] that InterMune is required[ * ] to purchase in [ * ] pursuant to Section 3.2.1 of the Agreement after giving effect to the modification thereto as set forth in this Section 3 of this Amendment, [ * ] will be produced by BI Austria in the [ * ] for delivery to InterMune in the [ * ] and [ * ] will have [ * ] of in the [ * ] of [ * ].”
2.	The Agreement is hereby amended by adding at the end of Section 4.1 the following:

“Notwithstanding the foregoing, the per unit price (i.e., [ * ] price) to be paid by InterMune for purchases of PRODUCT for each of the [ * ] shall be [ * ] the amount derived by [ * ] Euros ([ * ]€) by the total number of units (i.e., number [ * ]) of PRODUCT purchased and received by InterMune for each [ * ] (“Per Unit [ * ] Calculation”).

The Parties understand and agree that since purchases of PRODUCT and payment therefor will occur periodically throughout the course of each [ * ], the Parties will cooperate with one another in good faith to first estimate the total number of units of PRODUCT InterMune will purchase and receive for [ * ] at the [ * ] (“Projected Units”). The Parties will use the Projected Units in the Per Unit [ * ] Calculation for purposes of BI Austria’s charges and invoices to InterMune and InterMune’s payments for PRODUCTS purchased during the course of the [ * ]. At the [ * ], a reconciliation will be conducted by the Parties by comparing the Per Unit [ * ] Calculation using the Projected Units with the Per Unit [ * ] Calculation using the total number of units of PRODUCTS actually purchased and received by InterMune for the [ * ]. If InterMune has underpaid because the total number of units of PRODUCTS actually purchased and received by InterMune for the [ * ] is more than the Projected Units, then InterMune will pay to BI Austria the amount of the difference. If InterMune has overpaid because the total number of units of Products actually purchased and received by InterMune for the [ * ] is less than the Projected Units, then BI Austria shall reimburse InterMune for the amount of such overpayment.

By way of example, assume that the Parties estimate [ * ]. [ * ], BI Austria would be charging InterMune a per unit price for PRODUCTS purchased by InterMune that will take into account a per unit [ * ] of [ * ]€ (derived by [ * ]). Assume further that at [ * ], InterMune has actually purchased [ * ] of PRODUCT in total such that the [ * ] price InterMune owes BI Austria for [ * ] should have been [ * ] (i.e., derived by [ * ]) rather than [ * ]. Consequently, InterMune would have been overpaying BI Austria for the purchases of PRODUCT [ * ] and BI Austria would be obligated to reimburse InterMune the amount for which InterMune overpaid.

[ * ], in the event InterMune does not purchase [ * ] as defined in the second (2^nd) paragraph of Section 3.2.1 of this Agreement and the total number of units of PRODUCT actually purchased and received by InterMune [ * ] does not result in [ * ] equal to [ * ] Euros ([ * ]€), then InterMune shall be entitled to apply the difference between [ * ] Euros ([ * ]€) and the [ * ] for the total number of units of PRODUCTS purchased and received by InterMune [ * ] to offset that amount InterMune is required to pay to BI Austria under the second (2^nd) paragraph of Section 3.2.1 as a result of [ * ] (i.e., that amount equal to [ * ] and that amount of PRODUCT actually purchased and received by InterMune [ * ]).”

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

Except as set forth above, all terms and conditions of the Agreement will remain in full force and effect. Any capitalized term used herein and not otherwise defined will have the same meaning as set forth in the Agreement. In the event of any conflict between this Amendment and the Agreement, the terms of this Amendment shall govern to the extent of such conflict.

Please acknowledge your agreement to the above by countersigning both enclosed copies of this letter where indicated below, and returning one original to the attention of Lucinda Y. Quan, Director, Legal Affairs at InterMune, Tel: (415) 466-2223, Fax: (415) 466-2323. We would be happy to proceed based on receipt of a facsimile copy while awaiting the original.

Sincerely,
InterMune, Inc.		Accepted and Agreed:
		Boehringer Ingelheim Austria GmbH
By:	/s/ Daniel G. Welch
	Daniel G. Welch,
	President and Chief Executive Officer	By:	/s/ Kurt Konopitzky Dr. Kurt Konopitzky
			Head Division Biopharmaceuticals
Date:	December 21, 2006		Division
		Date:	December 22, 2006
		Boehringer Ingelheim Austria GmbH
		By:	/s/ Monika Henninger Dr. Monika Henninger
			Head, Customer Relations & Projects
		Date:	December 22, 2006

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

EX-10.111

Exhibit 10.111

KEVIN V. RYAN (CA Bar No. 118321)
United States Attorney

MARK KROTOSKI (CA Bar No. 138549)
Chief, Criminal Division

IOANA PETROU (CA Bar No. 170834)
Assistant United States Attorney

450 Golden Gate Avenue, Box 36055
San Francisco, California 94102
Telephone: (415) 436-7189
Facsimile: (415) 436-6748
Ioana.Petrou@usdoj.gov

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN FRANCISCO DIVISION

UNITED STATES OF AMERICA,		No. CR 06-0707 JSW
	Plaintiff,	VIOLATION: 21 U.S.C. §§ 331(k),
	v.	333(a)(2) — Misbranding
INTERMUNE, INC.		SAN FRANCISCO VENUE
	Defendant.	DEFERRED PROSECUTION AGREEMENT

DEFERRED PROSECUTION AGREEMENT

     InterMune, Inc. (“InterMune”), by its undersigned officer, and the Department of Justice, by the United States Attorney’s Office for the Northern District of California (the “Department”), enter into this Agreement in resolution of the Department’s ongoing criminal investigation into matters relating to the promotion of the pharmaceutical product Actimmune^® (interferon gamma-1b) by InterMune from a time period spanning 2000 to 2003.

     For purposes of this Agreement, the relevant time period is from August 2002 through January 2003 (the “Investigative Period”). The effective date of this Agreement will be the date that it is accepted by the Court for the Northern District of California.

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     This Agreement is binding upon InterMune, Inc. and the Attorney General for the United States, the United States Department of Justice, and all United States Attorneys. This Agreement does not bind the Tax Division of the U.S. Department of Justice or the Internal Revenue Service of the U.S. Department of the Treasury. InterMune, Inc. understands that this Agreement does not bind any state or local prosecutive authorities.

INFORMATION

     1. The United States will file an Information in the United States District Court for the Northern District of California charging InterMune with One Count of doing an act, with intent to defraud or mislead, with respect to a drug while the drug was held for sale after shipment in interstate commerce that resulted in the drug being misbranded, in violation of Title 21, United States Code, Sections 331(k) and 333(a)(2) (the “Information”).

THE DEPARTMENT’S INVESTIGATION

     2. During the course of the investigation, the Department notified InterMune that certain former InterMune personnel violated federal criminal law, specifically that certain former InterMune employees promoted Actimmune^® for unapproved indications and made misleading statements regarding Actimmune in violation of: (a) the Federal Food, Drug and Cosmetic Act, 21 U.S.C. § 331; and (b) Health Care Fraud, 18 U.S.C. § 1347. As described more fully below, InterMune has provided extensive cooperation to the Department in this investigation.

     3. InterMune does not contest that the Department has developed evidence during its investigation that one or more former InterMune employees violated federal criminal law during the Investigative Period. One or more former InterMune employees instructed certain members of the Actimmune sales force and a specialty pharmacy to promote Actimmune for idiopathic pulmonary fibrosis, an indication other than those for which the drug had received FDA approval. InterMune acknowledges that part of the Department’s investigation is set forth in Attachment A and does not contest the facts set forth in Attachment A. InterMune accepts responsibility for the conduct of its former employees and conduct its former employees directed. InterMune does not endorse, ratify or condone criminal conduct, and, as set forth below, has taken steps to prevent such conduct from occurring in the future.

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COOPERATION AND REMEDIAL MEASURES

     4. InterMune provided substantial cooperation and assistance to the Department’s investigation.

A.	First, InterMune disclosed the results of internal investigations that had occurred prior to the Department’s investigation and related to the conduct set forth in Attachment A.
B.	Second, InterMune fully complied with the subpoena served by the Department and provided significant information regarding the conduct of certain former employees and officers.
C.	Third, InterMune made numerous presentations that were helpful to the Department’s investigation.
D.	Fourth, InterMune made certain current employees and officers who were employed by the Company during the period of investigation available to the Department in connection with its investigation.

InterMune has agreed to, and will, continue to fully cooperate with the Department as may be reasonably required during the term of this agreement, which is two (2) years from the effective date of this Agreement.

     5. InterMune’s management team — the great majority of whom were hired after the Investigative Period — also instituted numerous and comprehensive compliance changes, including new compliance policies, audits and internal reviews, and revised sales representative compensation programs. These compliance changes were instituted by the Company prior to the commencement of the Department’s investigation.

AGREEMENT

     6. Based upon InterMune’s significant cooperation and the corrective measures it has implemented, and InterMune’s commitment to implement and audit such measures and its willingness to continue to cooperate with the Department in its investigation of these matters, the Department, on the understandings specified below, agrees that the Department shall recommend to the Court that prosecution of InterMune on the Information be deferred for a period of two (2) years from the effective date of this Agreement (the “Effective Period”). InterMune shall expressly waive all rights to a speedy trial pursuant to the Sixth Amendment of the United States Constitution, Title 18, United States Code, Section 3161, Federal Rule of

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Criminal Procedure 48(b), and any applicable Local Rules of the United States District Court for the Northern District of California for the period during which this Agreement is in effect.

     7. The Department agrees that if InterMune is in compliance with all of its obligations under this Agreement, the Department will, within 30 days of the expiration of two (2) years from the effective date of this Agreement, seek dismissal with prejudice of the Information filed against InterMune pursuant to paragraph 1 of this Agreement, and this Agreement shall expire. Except in the event of a breach of this Agreement, the Department will bring no additional criminal charges against InterMune relating to or arising out of matters set forth in the Information or in Attachment A or the promotion of Actimmune during the period 2000 through 2003; the Department acknowledges that this Agreement protects InterMune from indictment and/or trial as to such matters. InterMune and the Department understand that the Agreement to defer prosecution of InterMune must be approved by the Court, in accordance with 18 U.S.C. § 3161(h)(2). Should the Court decline to approve the Agreement to defer prosecution for any reason, both the Department and InterMune are released from any obligation imposed upon them by this Agreement, and this Agreement shall be null and void.

     8. This Agreement does not provide any protection to any former employee of InterMune or any other entity, except successor entities as described in Paragraph 19, below. InterMune understands and agrees that if it violates this Agreement, the Department can prosecute InterMune for any crimes committed by its employees, officers or directors relating to the promotion of Actimmune^®.

The understandings on which this Agreement are premised are:

     9. For the Effective Period, InterMune shall continue to fully cooperate with the Department regarding any matter relating to the Department’s investigation of the promotion of Actimmune about which InterMune has information or knowledge, including, but not limited to, the following: (a) InterMune shall truthfully disclose all information of which it may be aware with respect to the activities of InterMune, its directors, officers and employees, about which the Department shall inquire; (b) InterMune shall provide to the Department, on written request, any document, record or other tangible evidence, including but not limited to information and documents concerning presentations, publications, and patient registries, about which the Department shall inquire; (c) InterMune shall provide to the Department reasonable access to InterMune’s facilities, documents and employees. In addition,

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A.	InterMune will use its best efforts to continue to make records and witnesses available during the Effective Period regarding activities of the Company during the Investigative Period, provided, however, this agreement to cooperate does not apply to any information provided by InterMune to legal counsel after May 2, 2004 in connection with the provision of legal advice and the legal advice itself, and nothing in this Agreement shall be construed to require InterMune to provide any such information or advice to the Department.
B.	This agreement by InterMune to cooperate shall not be construed as a waiver with respect to third parties of the attorney-client privilege, work-product protection, or any other privilege applicable to information or documents provided to the Department pursuant to this Agreement; InterMune neither expressly nor implicitly waives its right to assert any privilege that may be available against entities other than the Department of Justice.
C.	This agreement to cooperate shall not apply in the event that the Department pursues a criminal prosecution against InterMune.

     10. Upon request of the Department, with respect to any issue relevant to its investigation of the promotion of Actimmune at any time (not limited to the Investigative Period), InterMune shall designate knowledgeable employees, agents or attorneys to provide non-privileged information and/or materials on InterMune’s behalf to the Department. It is further understood that InterMune must at all times give complete, truthful and accurate information to the Department.

     11. With respect to any information, testimony, document, record or other tangible evidence relating to the promotion of Actimmune provided by InterMune to the Department or a grand jury, InterMune consents to any and all disclosures to governmental law enforcement entities of such materials as the Department, in its reasonable discretion and in good faith, deems appropriate. With respect to any such materials that constitute “matters occurring before the grand jury” within the meaning of Rule 6(e) of the Federal Rules of Criminal Procedure, InterMune further consents to a) any order sought by the Department permitting such disclosure and b) the Department’s ex parte or in camera application for such orders. The Department agrees that any material which comprises trade secrets or other proprietary information shall, prior to disclosure to any governmental entity, be redacted of such information, or be accompanied by a prominent warning notifying the agency of the protected status of the

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material. Nothing in this paragraph shall be construed as a waiver of InterMune’s rights in the materials it provides to the Department, and such materials shall not be provided to non-governmental entities without InterMune’s prior written consent.

     12. InterMune agrees that it will use its best efforts to not make any public statements, in litigation or otherwise, materially contradicting the facts set forth in Attachment A, or its representations in this Agreement. Any such statements shall constitute a breach of this Agreement, and InterMune thereafter would be subject to prosecution unless it cures its breach as set forth below. Upon the Department’s providing written notice to InterMune of such a contradictory statement, InterMune may avoid a breach of this Agreement by publicly repudiating such statement within 72 hours after receipt of written notification by the Department.

     13. InterMune is simultaneously entering into an agreement with the Department’s Civil Division (the “Civil Settlement Agreement”) regarding the payment of money to settle certain civil claims. InterMune is also simultaneously entering into a Corporate Integrity Agreement (“CIA”) with the Office of Inspector General of the Department of Health and Human Services (“OIG-HHS”) to implement certain specified compliance measures. Failure by InterMune to comply fully with those material terms of the Civil Settlement Agreement called to occur during the Effective Period of this Agreement may constitute a breach of this Agreement, provided, however, that a breach of the CIA referenced in the Civil Settlement Agreement does not constitute a breach of this Agreement. Any disputes arising under the CIA shall be resolved exclusively through the dispute resolution provisions of the CIA. The parties understand that nothing in this paragraph shall be construed to enlarge the Effective Period of this Agreement, or to delay the dismissal of the Information as described in paragraph 7 if at the time specified therein, InterMune is in full compliance with its obligations under the Civil Settlement Agreement. The parties further understand and agree that this paragraph does not deprive InterMune of its rights under the Civil Settlement Agreement or the common law to contest the existence of a breach of the Civil Settlement Agreement in the Northern District of California. The Department further agrees that nothing in this paragraph shall be construed by the United States as affecting the underlying nature of InterMune’s obligations under the Civil Settlement Agreement.

     14. It is further understood that should it be determined that InterMune has deliberately given materially false, incomplete, or misleading information under this Agreement,

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or has committed any criminal health care fraud offense during the Effective Period, or that InterMune has otherwise knowingly, intentionally and materially violated any provision of this Agreement, InterMune shall, in the Department’s reasonable discretion and in good faith, thereafter be subject to prosecution for any federal criminal violation of which the Department has knowledge. Any such prosecutions may be premised on information provided by InterMune to the Department. Moreover, InterMune agrees that any criminal prosecutions relating to the unlawful promotion of Actimmune from 2000 through 2003 that are not time-barred by the applicable statute of limitations on the effective date of this Agreement may be commenced against InterMune in accordance with this Agreement, notwithstanding the expiration of the statute of limitations between the effective date of this Agreement and its expiration date two years after the date this Agreement is accepted by the Court. By this Agreement, InterMune expressly intends to and does waive any rights with respect to the statute of limitations as described in the preceding sentence.

     15. It is further agreed that should it be determined that InterMune has knowingly, intentionally and materially violated any provision of this Agreement:

A.	all statements made by InterMune to the Department, FDA, HHS-OIG, the FBI or any other federal agency, or any testimony given by InterMune before a grand jury, the United States Congress, the SEC, or elsewhere, whether prior or subsequent to this Agreement, including this Agreement and the statement of facts in Attachment A, shall be admissible in evidence in any and all criminal proceedings brought by the Department against InterMune;
B.	nothing in this agreement shall prohibit the admission in such proceedings of any evidence derived from such statements or testimony; and
C.	InterMune shall not assert any claim under the United States Constitution, Rule 11(f) of the Federal Rules of Criminal Procedure, Rule 410 of the Federal Rules of Evidence, or any other federal rule, that statements made by InterMune prior to or subsequent to this Agreement, or any leads therefrom, should be suppressed.

     16. In the event the Department asserts that InterMune has breached any provision of this Agreement, the Department shall provide written notice to InterMune and will provide InterMune with a two-week period from receipt of such notice, except as otherwise specified herein, in which to make a presentation to the Department, or its designee, to demonstrate that

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no breach has occurred, or, to the extent applicable, that the breach was not knowing, intentional or material, or has been cured. The Department shall have four weeks from providing written notice to InterMune asserting a breach to file a motion with the Court asserting the breach and seeking a finding of a breach; however, this motion shall not be filed less than 15 days from the day the Department provides InterMune written notice asserting the breach. In the event a motion is filed by the Department, the Court shall determine whether a breach occurred by a preponderance of the evidence.

     17. InterMune agrees to not enter into any joint defense agreements relating to the Department’s investigation during the Effective Period of this Agreement without Department approval, and InterMune further agrees to withdraw from current joint defense agreements, if any exist, for which the Department does not approve of InterMune’s continuing participation. The Department agrees that its approval pursuant to this paragraph will not be unreasonably withheld.

     18. The Company agrees that if it sells or merges all or substantially all of its business operations as they exist as of the date of this Agreement to or into a single purchaser or group of affiliated purchasers during the term of this Agreement, it shall provide the Government with reasonable prior notice and it shall include in any contract for sale or merger a provision binding the purchaser-successor to the obligations described in this Agreement.

     19. With respect to the matters described in this Agreement, and with the exception of the agreements described in paragraph 13, and the letter from Ethan M. Posner to the Department dated October 9th, 2006, this Agreement supersedes all prior, if any, understandings, promises, and/or conditions between the Department and InterMune. This Agreement may not be modified except in writing signed by all the parties.

     20. InterMune hereby warrants and represents that the Board of Directors of InterMune has duly authorized, in a specific resolution, the execution and delivery of this Agreement by InterMune, and that the person signing the Agreement has authority to bind InterMune. InterMune agrees that either a duly authorized corporate officer or a duly authorized attorney for InterMune, at the discretion of the Court, shall appear on behalf of InterMune to enter into this Agreement.

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On Behalf of the United States Department of Justice:

	/s/ KEVIN V. RYAN
DATE	Kevin V. Ryan
	United States Attorney
	Northern District of California
	/s/ IOANA PETROU
	Ioana Petrou
	Assistant United States Attorney
On Behalf of InterMune, Inc.
	/s/ ROBIN STEELE
DATE	Robin Steele
	Senior Vice President
	InterMune, Inc.
	3280 Bayshore Boulevard
	Brisbane, CA 94005
	/s/ ETHAN POSNER
DATE	Ethan Posner
	Covington & Burling
	Counsel to InterMune, Inc.

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Attachment A

Introduction

     InterMune, Inc., first incorporated in 1998, is a biopharmaceutical company focused on developing and commercializing innovative therapies in pulmonology and hepatology.

     During the Investigative Period (August 2002 through January 2003), InterMune derived the majority of its revenue from Actimmune^® (interferon gamma- 1b). Actimmune was approved by the United States Food and Drug Administration (“FDA”) for the treatment of chronic granulomatous disease and severe, malignant osteopetrosis. These diseases affect very small patient populations. The vast majority of Actimmune sales during the Investigative Period were attributable to prescriptions for the treatment of idiopathic pulmonary fibrosis (“IPF”), a debilitating, fatal lung disease for which there is no FDA-approved treatment and which afflicts approximately 83,000 Americans.

Dissemination of Misleading Information Regarding Phase III Trial of Actimmune

     1. Commencing in October 2000 and through 2002 InterMune conducted a global Phase III clinical trial of Actimmune for the treatment of IPF that was designed to study whether Actimmune extended the time to disease progression or death. The primary endpoint was progression-free survival , measured from randomization of the test subjects either to disease progression or death, and, in addition, there were a number of secondary endpoints, including overall patient survival. In this clinical study, 330 IPF patients were studied in a double-blind, placebo-controlled trial conducted at 58 centers in the United States and Europe. Study participants received either a placebo or 200 micrograms of Actimmune injected subcutaneously three times per week. All patients were to remain in the trial until the last patient received 48 weeks of therapy. Median treatment duration was 60 weeks.

     2. On August 16, 2002, a select number of InterMune personnel received data from the clinical trial. On August 19, 2002, the data was also provided to the Data Monitoring Committee (“DMC”), which had been established in accordance with the protocol of the trial as an independent committee that monitored safety and efficacy data throughout the trial in order to determine if it was scientifically and ethically appropriate to continue the trial, and to review data from the completed trial. The data showed that the trial failed to achieve statistical significance on the primary endpoint agreed between InterMune and the FDA, or any agreed upon secondary endpoint, including overall survival. After receiving the data, InterMune

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conducted some additional analysis of the mortality data that involved breaking the patient population into subgroups.

     3. Certain senior InterMune personnel discussed these preliminary trial results, including the exploratory subgroup analysis, with representatives of the FDA in an informal telephone conference on August 27, 2002. The purpose of the call was to provide InterMune with the FDA reviewers’ preliminary impressions of the data. The FDA representatives told InterMune that any substantive comments represented their own opinions and did not reflect the official opinion of the FDA. During the telephone conference, one FDA representative noted that the study failed to demonstrate efficacy on its primary endpoint. The FDA representative suggested that while the data appeared to show an optimistic trend on overall survival, because the data had failed to achieve statistical significance in the primary endpoint previously agreed with the FDA at the outset of the trial, it as the representative’s opinion that FDA was unlikely to approve the use of Actimmune for the treatment of IPF without further rigorous clinical testing.

     4. On August 28, 2002, InterMune publicly announced the results of the Phase III clinical trial of Actimmune for the treatment of IPF in the form of a press release. Former employees of InterMune approved the press release, which was headlined “InterMune Announces Phase III Data Demonstrating Survival Benefit of Actimmune in IPF, with the subheading “Reduces Mortality by 70% in Patients With Mild to Moderate Disease.” In the release, InterMune’s then-President and CEO characterized the clinical trial results as indicating that “Actimmune may extend the lives of patients suffering from this debilitating disease” and further stated that “Actimmune is the only available treatment demonstrated to have clinical benefit in IPF, with improved survival data in two controlled clinical trials.”

     5. By letter dated September 5, 2002 to InterMune, the Chair of the DMC expressed his “serious concerns” with the August 28, 2002 press release. The letter reminded InterMune of, “the DMC’s assessment that the trial had failed to establish benefit on the primary endpoint” and that there was no statistically significant evidence of benefit for any of the secondary endpoints. The letter also stated that the press release provided a “serious misrepresentation of results obtained from exploratory data subgroup analyses,” referring specifically to the subheading and other statements concerning a survival benefit in the mild to moderate subgroup.

     6. In approximately mid-October 2002, a specialty pharmacy that distributed Actimmune disseminated a fax concerning Actimmune for IPF to more than 2,000

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pulmonologists. Distribution of the fax had been approved by a former InterMune employee. The fax, like the August 28, 2002 press release, began with the headline, “InterMune Announces Phase III Data Demonstrating Survival Benefit of Actimmune in IPF,” and continued with the subheading, “Reduces Mortality by 70% in Patients with Mild to Moderate Disease.” The fax also included a copy of the InterMune press release.

     7. During approximately September to October 2002, the same speciality pharmacy, again with the approval of a former InterMune employee, distributed a patient letter by mail to Actimmune patients, which was sent along with their Actimmune prescriptions. The patient letter was prepared by the specialty pharmacy’s clinical staff from information, including the press release, provided by former InterMune personnel and provided the same misleading information about the results of the Phase III Actimmune trial results.’ The letter stated that “On August 28, 2002, InterMune, Inc. announced that preliminary data from its Phase III clinical trial of Actimmune (Interferon gamma-lb) injection for the treatment of [IPF) showed a statistically significant reduction in mortality by 70% in patients with mild to moderate IPF. Interferon gamma- lb is the first treatment ever to show any meaningful impact in this disease in clinical trials. These results indicate that Actimmune should be used early in the course of treatment of this disease in order to realize the most favorable long-term survival benefit.” A former InterMune employee approved the final version of the patient letter.

     8. Notwithstanding the fact that the Phase III trial failed to establish statistically significant benefits on its primary endpoint or any of its secondary endpoints, including overall survival, and notwithstanding the evaluation of the results by the FDA and DMC, certain former InterMune employees encouraged InterMune sales force personnel to inform physicians that Actimmune demonstrated a survival benefit in mild to moderate IPF patient populations, and certain former sales force personnel did so. Certain former sales personnel also distributed or showed the specialty pharmacy documents to physicians during sales visits.

ASAP Registry

     9. In 2001, InterMune established the “Actimmune Safe and Appropriate Use Program” (the “ASAP Registry” or the “Registry”), a registry that collected information about IPF patients taking Actimmune. As described in the Registry Services Agreement between InterMune and the third-party administrator of the Registry, the ASAP Registry was an observational database designed to obtain data on “variation in current diagnostic and therapeutic management of patients receiving Actimmune.” Information from the Registry was

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to be available to InterMune and to participating physicians for research and analysis and “as a basis for scientific presentations and publications.”

     10. During the Investigative Period, the ASAP Registry was operated substantially by InterMune sales and marketing personnel. During the Investigative Period, InterMune sales representatives were the principal source of Registry enrollment, and were also the principal points of contact for physicians and their offices with respect to the Registry. Sales representatives received incentive payments for patients they enrolled.

     11. Although one purpose the ASAP Registry was to gather data on Actimmune patients and make that data available to physicians who had patients enrolled in the Registry, InterMune did not share the data directly with physicians. InterMune provided a brief summary presentation at a scientific meeting in late 2002 in San Diego.

     12. During the Investigative Period, there were a number of regulatory and operational issues raised by the third-party administrator concerning the ASAP Registry, including various issues relating to good clinical practices and the extent of InterMune sales representatives’ participation in the operation of the Registry.

     13. In the spring of 2002, an outside consultant was retained by InterMune to assess the ASAP Registry. In June 2002, the consultant issued a final audit report, which identified a number of problems with the Registry and concluded that absent significant changes, data from the Registry would most likely not be accepted by the regulatory authorities.

Sales Force

     14. InterMune employed approximately sixty sales representatives focusing on pulmonology and, in particular, Actimmune, during the Investigative Period. The FDA had not approved Actimmune for the treatment of pulmonary disorders at that time.

     15. In January 2001, InterMune acquired rights to Amphotec^®, an anti-fungal drug approved by the FDA for the treatment of aspergillosis, including pulmonary aspergillosis. Amphotec was primarily administered in a hospital setting. Prior to the fall of 2002, InterMune’s sales representatives had not marketed Amphotec for pulmonary aspergillosis outside the hospital setting. However, in the fall of 2002, sales force personnel relied on Amphotec for access to pulmonologists’ offices, where the primary purpose for access to the offices was to discuss Actimmune for IPF.

     16. InterMune’s Sales Incentive Compensation Plan for 2002 provided that sales representatives would receive a quarterly bonus based on 7% of incremental Actimmune sales

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and 3.5% of incremental Amphotec sales. The Plan also provided that the bonuses paid to Regional Sales Directors were derived in part from the total earnings of the sales representatives in their regions.

     17. During the Investigative Period several sales force personnel sometimes created and used their own marketing aids in discussions with physicians concerning Actimmune for IPF. For example, one former sales representative wrote and distributed an invitation letter to an educational program, which one physician recipient characterized as “against the spirit of FDA regulations.”

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Attachment C — Acknowledgment of Agreement

     This Agreement supersedes all prior, if any, written or oral understandings, promises, and/or conditions between the Department and Intermune, Inc., with the exception of the Civil Settlement Agreement incorporated herein, the Corporate Integrity Agreement referred to herein, and the letter from Ethan Posner to the Department dated October 9, 2006. No additional promises, agreements, and conditions have been entered into and none will be entered into unless in writing and signed by all parties.

On Behalf of the United States Department of Justice:

10-24-06	/s/ KEVIN V. RYAN
DATE	Kevin V. Ryan
	United States Attorney
	Northern District of California
	/s/ IOANA PETROU Ioana Petrou
	Assistant United States Attorney
On Behalf of Intermune, Inc.
October 24, 2006	/s/ ROBIN STEELE
DATE	Robin Steele
	Senior Vice President and General Counsel
	Intermune, Inc.
	3280 Bayshore Boulevard
	Brisbane, CA 94005
10-24-06	/s/ ETHAN M. POSNER
DATE	Ethan M. Posner
	Covington & Burling
	Counsel to Intermune, Inc.

EX-10.112

Exhibit 10.112

CIVIL, SETTLEMENT AGREEMENT

I. PARTIES

     This Settlement Agreement (“Agreement”) is entered into by and between the United States of America, acting through the United States Department of Justice and the United States Attorney’s Office for the Northern District of California, on behalf of the Office of Inspector General (“OIG-HHS”) of the United States Department of Health and Human Services (“HHS”); the United States Office of Personnel Management (“OPM”); the United States Department of Defense TRICARE Management Activity (“TMA”); the United States Department of Defense, Defense Logistics Agency (“DLA”), on behalf of the Defense Supply Center- Philadelphia (“DSCP”) (collectively “the United States”); InterMune, Inc. (“InterMune”), a Delaware corporation with its principal place of business in Brisbane, California; and Joan Gallagher (“Relator”) (hereafter referred to as “the Parties”), through their authorized representatives.

II. PREAMBLE

     As a preamble to this Agreement, the Parties agree to the following:

A.

WHEREAS, at all relevant times, InterMune distributed, marketed and sold pharmaceutical products in the United States, including a drug it sold under the trade name Actimmune®;

B.

WHEREAS, on or about July 9, 2004, Relator Joan Gallagher filed a qui tam action in the United States District Court for the Eastern District of Pennsylvania, captioned United States of America ex rel. Joan Gallagher v. InterMune, Inc., Civil Action No. 04 CV 3249 (E.D. Pa.). On October 7, 2004, the qui tam action was transferred to the United States District Court for the Northern District of California (“Court”), now captioned United States of America ex rel. Joan Gallagher v. InterMune, Inc., C 04-4323 MHP (N.D. Cal.)(the “Civil Action”);

C.	WHEREAS InterMune has agreed to enter into a Deferred Prosecution Agreement (“DPA”) with the United States Attorney for the Northern District of California. The United States has filed an Information in the United States District Court for the Northern District of California (the “Court”) charging InterMune with One Count of doing an act, with intent to defraud or mislead, with respect to a drug while the drug was held for sale after shipment in interstate commerce that results in the drug being misbranded, in violation of Title 2 1, United States Code, Section 33 1(k) (the “Information”);
D.	WHEREAS, the United States and InterMune will file with the Court the DPA, which states that the Department of Justice will recommend to the Court that prosecution of InterMune for the conduct charged in the Information be deferred for a period of 2 years from the date the Court approves the DPA and that the Department of Justice will seek dismissal with release of the Information thereafter if InterMune is in compliance with all of its obligations under the DPA;
E.	WHEREAS, InterMune has entered into or will be entering into separate settlement agreements (“Medicaid State Settlement Agreements”) with the states which will be receiving settlement funds from InterMune pursuant to Paragraph 1(c) below for the Covered Conduct described in Paragraph G below (hereinafter referred to as the “Medicaid Participating States”);
F.	WHEREAS, the United States and the Medicaid Participating States allege that InterMune caused to be submitted claims for payment for Actimmune to Medicaid Programs, established pursuant to or in connection with Title XIX of the Social Security Act (“Act”), 42 U.S.C. §§ 1396-1396y (the “Medicaid

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Program”); and the United States further alleges that InterMune caused to be submitted claims for payment of Actimmune to the Medicare Program, 42 U.S.C. §§ 1395-1395hhh, TRICARE Program (formerly known as the Civilian Health and Medical Program of the Uniformed Services (“CHAMPUS”)), 10 U.S.C. §§ l071-1110, which is administered by the Department of Defense through TMA, and to the Federal Employees Health Benefits Program (“FEHBP”), 5 U.S.C. §§ 8901-8914, and that InterMune caused purchases of Actimmune by the Department of Veterans Affairs (“DVA”) and DSCP;

G.

WHEREAS, the United States contends that it has claims under the False Claims Act, 31 U.S.C. §§ 3729-3733, and that it and the Medicaid Participating States (hereinafter collectively referred to as the “Government”) have certain other civil claims against InterMune for allegedly engaging in the following conduct with respect to the marketing, promotion and sale of Actimmune:

          (i) The Government contends that between January 1, 2001 and June 30, 2003, InterMune knowingly and willfully promoted the sale and use of Actimmune for the treatment of idiopathic pulmonary fibrosis (“IPF”), a use for which Actimmune had not been approved by the United States Food and Drug Administration (“FDA”), and knowingly caused the submission of claims to the Government as described in subparagraph (v) below. Actimmune has only been approved by the FDA to treat two rare diseases, chronic granulomatous disease and severe, malignant osteopetrosis;

          (ii) The Government contends that notwithstanding the fact that InterMune’s Phase 111 clinical trial of Actimmune for the treatment of IPF failed to establish statistically significant benefits on its primary endpoint or any of its secondary endpoints, including overall

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survival, certain former InterMune employees encouraged InterMune sales force personnel to inform physicians that Actimmune demonstrated a survival benefit in mild to moderate IPF patient populations, and certain former sales force personnel did so;

          (iii) The Government contends that InterMune’s promotion of Actimmune for IPF violated the Food, Drug, and Cosmetic Act, 21 U.S.C. §§ 331(a) & (d);

          (iv) The Government contends that the use of Actimmune for IPF was not a “medically accepted indication” pursuant to 42 U.S.C. § 1396r-8(k)(6);

          (v) The Government further contends that the conduct described in the foregoing subparagraphs (i) through (iv) resulted in claims for Actimmune being submitted to the Medicaid, Medicare, FEHBP and TRICARE Programs, and in DVA and DSCP purchasing Actimmune for dispensing to patients for an unapproved indication, between January 1, 2001 and June 30, 2005, in violation of the False Claims Act, 31 U.S.C. §§ 3729-3733.

     InterMune’s conduct as described in the Civil Action, the DPA and in Preamble Paragraph G of this Agreement is hereafter referred to as the “Covered Conduct.”

H.	WHEREAS, the United States also contends that it has certain administrative claims against InterMune for engaging in the Covered Conduct, as specified in Paragraphs 5-8 below;
I.	WHEREAS, the United States and the Relator have reached an agreement with respect to the Relator’s claim of entitlement under 31 U.S.C. § 3730(d) to a share of the proceeds of this Agreement;
J.	WHEREAS, the Relator and InterMune have reached an agreement with respect to the Relator’s claim of entitlement under 31 U.S.C. § 3730(d) to attorneys’ fees and costs;

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K.	WHEREAS, this Agreement is neither an admission of facts or liability by InterMune (with the exception of such admissions as InterMune makes in connection with the DPA referenced in Paragraph C above and accepted by the Court) nor a concession by the Government that its claims are not well founded; and
L.	WHEREAS, to avoid the delay, expense, inconvenience and uncertainty of protracted litigation of these claims, the Parties mutually desire to reach a full and final settlement as set forth in this Agreement.

III. TERMS AND CONDITIONS

     NOW, THEREFORE, in reliance on the representations contained herein and in consideration of the mutual promises, covenants, and obligations in this Agreement, and for good and valuable consideration, receipt of which is hereby acknowledged, the Parties agree as follows:

     1. InterMune shall pay to the United States and the Medicaid Participating States, collectively, the sum of thirty-six million, nine hundred forty-four thousand, forty-three dollars ($36,944,043), plus any interest that may have accrued between November 1, 2006 and the Effective Date of this Agreement at a rate of 5% per annum (“Settlement Amount”). On the Effective Date of this Agreement, as defined in paragraph 32 herein, this sum shall constitute a debt due and immediately owing to the United States and the Participating States. InterMune shall discharge its debt to the United States and the Medicaid Participating States under the following terns and conditions:

          a. InterMune shall pay to the United States the principal sum of $30,249,229 (the “Federal Settlement Amount”). InterMune shall pay the Federal Settlement Amount, plus

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interest accrued thereon at the rate of 5% per annum, in accordance with the payment schedule attached hereto as Exhibit A (“Payment Schedule”). Within 10 days after the Effective Date of this Agreement, InterMune shall pay the United States the initial fixed payment in the amount of $4,093,925 (“Initial Payment”), plus any interest that may have accrued between November 1, 2006 and the Effective Date, and thereafter make principal payments with interest according to the schedule in Exhibit A.

          b. All payments set forth in this Paragraph l(a) shall be made to the United States by electronic funds transfer pursuant to written instructions provided by the Office of the United States Attorney for the Northern District of California. The entire principal balance of the Federal Settlement Amount or any portion thereof, plus any interest accrued on the principal as of the date of any prepayment, may be prepaid without penalty.

          c. InterMune shall pay to the Medicaid Participating States the sum of $6,694,814 (“Medicaid State Settlement Amount”). InterMune shall pay the Medicaid State Settlement Amount, plus interest accrued thereon at the rate of 5% per annum, in accordance with the Payment Schedule found at Exhibit A. Within 10 days after the Effective Date of this Agreement, InterMune shall set aside $906,075, plus any interest that may have accrued between November 1, 2006 and the Effective Date, into an interest-bearing account of its own choosing (“deposit account”) as agreed upon between InterMune and the National Association of Medicaid Fraud Control Units Settlement Team (the “NAMFCU Team”) and, upon reaching agreements with, and obtaining release from each of the Medicaid Participating States and receipt of written payment instructions from the NAMFCU Team, shall pay the State Settlement Amount plus any additional interest earned in the deposit account as directed by each settling Medicaid Participating State. Upon reaching final agreements with, and obtaining release from

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the Medicaid Participating States, InterMune shall thereafter make fixed pro rata payments according to the schedule in Exhibit A and as directed by each settling Medicaid Participating State. The entire principal balance of the Medicaid State Settlement Amount or any portion thereof, plus any interest accrued on the principal as of the date of any prepayment, may be prepaid without penalty.

          d. InterMune shall pay attorneys’ fees to the Relator in the amount of $40,000. This amount shall be paid as an electronic funds transfer to the Relator’s attorney (to be allocated in accordance with their instructions) no later than seven (7) business days after the stipulations of dismissal are filed as set forth in Paragraph 13.

     2. If the Court does not accept the DPA as described in Preamble Paragraph D or refuses to impose the agreed upon disposition for whatever reason, this Agreement shall be null and void at the option of either the United States or InterMune. If either the United States or InterMune exercises this option, which option shall be exercised by notifying all Parties, through counsel, in writing within ten (10) business days of the Court’s decision, the Parties will not object to the voiding of this Agreement and the Agreement will be deemed rescinded. If this Agreement is rescinded, InterMune will not plead, argue or otherwise raise any defenses under the theories of statute of limitations, laches, estoppel or similar theories, to any such civil or administrative claims, actions or proceedings relating to the Covered Conduct which are brought by the United States within 90 calendar days of notification to all other Parties of that rescission, except to the extent such defenses were available before the Effective Date of this Agreement.

     3. Subject to the exceptions in Paragraphs 4, 5, 6, 7 and 8, in consideration of the obligations of InterMune set forth in this Agreement, conditioned upon InterMune’s payment in full of the Settlement Amount, subject to Paragraph 20 below (concerning bankruptcy

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proceedings commenced within 91 days of the Effective Date of this Agreement, as defined below), and subject to the Court’s approval of the DPA described in Preamble Paragraph D, the United States, on behalf of itself, and its officers, agents, agencies, and departments, as set forth above, hereby fully and finally releases InterMune, its predecessors, subsidiaries, corporate parents and affiliates, successors and assigns, and current or former officers, directors, and employees, except as excluded in Paragraph 4, below, from any civil or administrative monetary claim that the United States has against InterMune under the False Claims Act, 3 1 U.S.C. §§ 3729-3733; the Program Fraud Civil Remedies Act, 31 U.S.C. §§ 3801-38 12; the Civil Monetary Penalties Law, 42 U.S.C. § 1320a-7a; any statutory provision applicable to the federally-funded programs in this Agreement for which the Civil Division, United States Department of Justice, has actual and present authority to assert and compromise pursuant to 28 C.F.R. Part 0, Subpart I, § 0.45(d); and common law claims for fraud, payment by mistake, unjust enrichment or disgorgement for the Covered Conduct.

     4. Notwithstanding any term of this Agreement, the United States specifically does not herein release any person or entity from any of the following claims or liabilities: (a) any potential criminal, civil or administrative claims arising under Title 26, U.S. Code (Internal Revenue Code); (b) any criminal liability; (c) any potential liability to the United States (or any agencies thereof) for any conduct other than the Covered Conduct; (d) any claims based upon obligations created by this Agreement; (e) except as explicitly stated in Paragraphs 5, 6, 7 and 8 of this Agreement, any administrative liability, including mandatory exclusion from Federal health care programs; (f) any express or implied warranty claims or other claims for defective or deficient products and services; (g) any claims for personal injury or property damage or for other consequential damages arising from the Covered Conduct; (h) any claim based on a failure

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to deliver items or services due; or (i) any civil or administrative claims against individuals, including current and former directors, officers, and employees of InterMune, its predecessors, subsidiaries, and its corporate parent and affiliates, who, related to the Covered Conduct, receive written notification that they are the target of a criminal investigation, are criminally indicted or charged, or are convicted, or who enter into a criminal plea agreement.

     5. In consideration of the obligations of InterMune set forth in this Agreement and in the Corporate Integrity Agreement (“CIA”), conditioned upon InterMune’s payment in full of the Settlement Amount, and subject to Paragraph 20 below (concerning bankruptcy proceedings commenced within 91 days of the effective date of this Agreement), the OIG-HHS agrees to release and refrain from instituting, directing, or maintaining any administrative action seeking exclusion against InterMune from Medicare, Medicaid or other Federal health care programs (as defined in 42 U.S.C. § 1320a-7b(f)) under 42 U.S.C. § 1320a-7a (Civil Monetary Penalties Law), or 42 U.S.C. §§ 1320a-7(b)(7) (permissive exclusion for fraud, kickbacks, and other prohibited activities), for the Covered Conduct except as reserved in Paragraph 4 above, and as reserved in this Paragraph. The OIG-HHS expressly reserves all rights to comply with any statutory obligations to exclude InterMune from the Medicare, Medicaid, or other Federal health care programs under 42 U.S.C. § 1320a-7(a) (mandatory exclusion) based upon the Covered Conduct. Nothing in this Paragraph precludes the OIG-HHS from taking action against entities or persons, or for conduct and practices, for which claims have been reserved in Paragraph 4, above. InterMune will immediately begin implementing its obligations under the CIA upon execution of this Agreement.

     6. In consideration of the obligations of InterMune set forth in this Agreement, conditioned upon InterMune’s full payment of the Settlement Amount, and subject to Paragraph

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20 below (concerning bankruptcy proceedings commenced within 91 days of the effective date of this Agreement or any payment under this Agreement), TMA agrees to release and refrain from instituting, directing, or maintaining any administrative action seeking exclusion or suspension from the TRICARE Program against InterMune and its predecessors, subsidiaries, corporate parents, affiliates, successors and assigns, or its current directors, officers or employees under 32 C.F.R. § 199.9 for the Covered Conduct, except as reserved in Paragraph 4 above, and as reserved in this Paragraph. TMA expressly reserves its authority to exclude InterMune under 32 C.F.R. § 199.9 (f)(l)(i)(A), (f)(l)(i)(B), and (f)(l)(iii), based upon the Covered Conduct. Nothing in this Paragraph precludes TMA or the TRICARE Program from taking action against entities or persons, or for conduct and practices, for which claims have been reserved in Paragraph 4, above.

     7. In consideration of the obligations of InterMune in this Agreement, conditioned upon InterMune’s full payment of the Settlement Amount, and subject to Paragraph 20 below (concerning bankruptcy proceedings commenced within 91 days of the Effective Date of this Agreement or any payment under this Agreement), OPM agrees to release and refrain from instituting, directing, or maintaining any administrative action seeking debarment from FEHBP against InterMune and its predecessors, subsidiaries, corporate parents, affiliates, successors and assigns, or its current directors, officers or employees under 5 U.S.C. § 8902a or 5 C.F.R. Part 970 for the Covered Conduct, except as reserved in Paragraph 4, above. OPM expressly reserves all rights to comply with any statutory obligations to debar InterMune from the FEHBP under 5 U.S.C. § 8902a(b) (mandatory debarment) based upon the Covered Conduct. Nothing in this Paragraph precludes OPM from taking action against entities or persons, or for conduct and practices, for which claims have been reserved in Paragraph 4, above.

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     8. In consideration of the obligations of InterMune set forth in this Agreement, conditioned upon InterMune’s full payment of the Settlement Amount, and subject to Paragraph 20 below (concerning bankruptcy proceedings commenced within 91 days of the effective date of this Agreement or any payment under this Agreement), DSCP/DLA agrees to defer to the OIG-HHS for any contractor integrity issues arising from this settlement and the Covered Conduct. Nothing in this Paragraph precludes DLA from taking action against entities or persons, or for conduct and practices, for which claims have been reserved in Paragraph 4, above.

     9. Relator and her heirs, successors, attorneys, agents, and assigns agree not to object to this Agreement and agree and confirm that settlement of this Civil Action, and the payment schedule set forth in Exhibit A, is fair, adequate and reasonable under all the circumstances, agree not to challenge this Agreement pursuant to 31 U.S.C. § 3730(c)(2)(B), and expressly waive the opportunity for a hearing on any objection to this Agreement pursuant to 31 U.S.C. § 3730(c)(2)(B).

     10. Upon her receipt of the pro rata share of the Initial Payment, the Relator, individually, and for her heirs, successors, agents and assigns, fully and finally releases, waives, and forever discharges the United States, its agencies (including, but not limited to, the OIG-HHS, TMA, OPM, DVA, and DLA), employees, servants, and agents from any claims arising from or relating to 31 U.S.C. § 3730 from any claims arising from the filing of the qui tam civil action, and from any other claims for a share of the Federal Settlement Amount, and in full settlement of any claims Relator may have under this Agreement. This Agreement does not resolve or in any manner affect any claims the United States has or may have against the Relator

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arising under Title 26, U.S. Code (Internal Revenue Code), or any claims arising under this Agreement.

     11. The United States agrees to pay the Relator $5,748,160 as her share of the proceeds pursuant to 31 U.S.C. § 3730(d)(the “Relator’s Share”). The United States will pay the Relator her pro rata share of each payment that InterMune pays the United States under the Payment Schedule set forth in Exhibit A. The United States will pay the Relator her pro rata share within 21 days of the United States’ receipt of each payment from InterMune. The Relator expressly understands and agrees that the United States is only liable to the Relator for funds actually received or collected by the United States.

     12. Conditioned upon InterMune’s full payment of the Settlement Amount, the Relator, individually, and for her heirs, successors, agents and assigns, fully and finally releases, waives, and forever discharges InterMune, its predecessors, subsidiaries, corporate parents and affiliates, successors and assigns, and current or former officers, directors, and employees, from any claims that the Relator has or may have that arises under or relates to any of the allegations in the Civil Action and/or the Covered Conduct, including claims for attorney’s fees, expense and costs pursuant to 31 U.S.C. § 3730(d). The Relator hereby represents and warrants that no other individual is entitled to assert any matter released in this paragraph in or through the Relator’s right.

     13. Upon execution of this Agreement by all parties, the United States will file a notice of intervention in the qui tam action and advise the Court that the parties have reached a civil settlement. Upon receipt of the full payments described in Paragraph l(a) and (c) above and in Exhibit A, the United States and Relator shall promptly sign and file in the Civil Action a

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Joint Stipulation of Dismissal with prejudice of the Civil Action pursuant to the terms of the Agreement.

     14. In consideration of the obligations of the United States set forth in this Agreement, InterMune and its predecessors, subsidiaries, corporate parents and affiliates fully and finally release the United States, its agencies (including, but not limited to, HHS, TMA, OPM and DVA), employees, servants, and agents from any claims (including attorneys’ fees, costs, and expenses of every kind and however denominated) which they have asserted, could have asserted, or may assert in the future against the United States, its agencies, employees, servants, and agents, related to or arising from the United States’ criminal and civil investigations of the Civil Action and the Covered Conduct.

     15. In consideration of the obligations of the Relator set forth in this Agreement, InterMune, and its predecessors, subsidiaries, corporate parents and affiliates, and all of their agents, successors and assigns, hereby fully and finally release the Relator and her respective heirs, successors, assigns, agents and attorneys from any claims they have asserted, could have asserted, or may assert in the future against the Relator arising from the filing of the Civil Action and the United States’ criminal and civil investigations of the Civil Action and the Covered Conduct.

     16. The Settlement Amount shall not be decreased as a result of the denial of claims for payment now being withheld from payment by any Federal or State payer, related to the Covered Conduct; and InterMune shall not resubmit to any Federal or State payer any previously denied claims related to the Covered Conduct, and shall not appeal any such denials of claims.

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     17. InterMune agrees to the following:

          a. Unallowable Costs Defined: that all costs (as defined in the Federal Acquisition Regulations (FAR) 48 C.F.R. § 31.205-47 and in Titles XVIII and XIX of the Social Security Act, 42 U.S.C. §§ 1395-1395hhh and 1396-1396y, and the regulations and official program directives promulgated thereunder) incurred by or on behalf on InterMune, its present or former officers, directors, employees, shareholders, and agents in connection with: (1) the matters covered by this Agreement and the related DPA; (2) the United States’ civil and criminal investigation of the matters covered by this Agreement; (3) InterMune’s investigation, defense, and any corrective actions undertaken in direct response to the United States’ civil and criminal investigations in connection with the matters covered by this Agreement (including attorneys’ fees); (4) the negotiation and performance of this Agreement, the DPA, and the Medicaid State Settlement Agreement, (5) the payments made to the United States or any State pursuant to this Agreement, the DPA, or the Medicaid State Settlement Agreement and any payments that InterMune may make to Relator; (6) the negotiation of, and the obligations undertaken pursuant to the CIA, including to (i) retain an independent review organization to perform annual reviews as described in Section III.D of the CIA; and (ii) prepare and submit reports to the OIG-HHS, are unallowable costs on Government contracts with DVA, DLA and other agencies and under the Medicare Program, Medicaid Program, TRICARE Program, and FEHBP. However, nothing in this Paragraph affects the status of costs that are not allowable based on any other authority applicable to InterMune. (All costs described or set forth in this Paragraph 17(a) are hereafter, “unallowable costs”).

          b. Future Treatment of Unallowable Costs: If applicable, these unallowable costs will be separately estimated and accounted for by InterMune, and it will not charge such

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unallowable costs directly or indirectly to any contracts with the United States or any State Medicaid Program, or seek payment for such unallowable costs through any cost report, cost statement, information statement, or payment request submitted by them or any of their subsidiaries to Medicare, Medicaid, TRICARE, FEHBP, DLA or DVA.

          c. Treatment of Unallowable Costs Previously Submitted for Payment: If applicable, InterMune further agrees that within 90 days of the Effective Date of this Agreement, it will identify to applicable Medicare and TRICARE fiscal intermediaries, carriers, and/or contractors, and Medicaid, DLA, DVA, and FEHBP fiscal agents, any unallowable costs (as defined in this Paragraph) included in payments previously sought from the United States, or any State Medicaid Program, including, but not limited to, payments sought in any cost reports, cost statements, information reports, or payment requests already submitted by InterMune or any of its subsidiaries, and will request, and agree, that such cost reports, cost statements, information reports, or payment requests, even if already settled, be adjusted to account for the effect of the inclusion of the unallowable costs. InterMune agrees that the United States, at a minimum, will be entitled to recoup from InterMune any overpayment plus applicable interest as a result of the inclusion of such unallowable costs on previously-submitted cost reports, information reports, cost statements, or requests for payment. Any payment due after the adjustments have been made shall be paid to the United States pursuant to the direction of the Department of Justice, and/or the affected agencies. The United States reserves its rights to disagree with any calculations submitted by InterMune or any of its subsidiaries on the effect of inclusion of unallowable costs (as defined in this Paragraph) on InterMune’s or any of its subsidiaries’ cost reports, cost statements, or information reports. Nothing in this Agreement shall constitute a

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waiver of the rights of the United States to examine or reexamine the unallowable costs described in this Paragraph.

     18. InterMune agrees that it will not seek payment for any of the health care billings covered by this Agreement from any health care beneficiaries or their parents or sponsors. InterMune waives any causes of action against these beneficiaries or their parents or sponsors based upon the claims for payment covered by this Agreement.

     19. InterMune expressly warrants that it has reviewed its financial situation and that it is currently solvent within the meaning of 11 U.S.C. §§ 547(b)(3) and 548(a)(l)(B)(ii)(I), and expects to remain solvent following the payments to the United States hereunder. Further, the Parties expressly warrant that, in evaluating whether to execute this Agreement, the Parties (a) have intended that the mutual promises, covenants and obligations set forth herein constitute a contemporaneous exchange for new value given to InterMune, within the meaning of 11 U.S.C. § 547(c)(l), and (b) have concluded that these mutual promises, covenants and obligations do, in fact, constitute such a contemporaneous exchange.

     20. In the event InterMune or any other party commences, within 91 days of the Effective Date of this Agreement (defined below), or of any payment made hereunder, any case, proceeding, or other action under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, (a) seeking to have any order for relief of InterMune’s debts, or seeking to adjudicate InterMune as bankrupt or insolvent, or (b) seeking appointment of a receiver, trustee, custodian or other similar official for InterMune for all or any substantial part of its assets, InterMune agrees as follows:

          a. InterMune’s obligations under this Agreement may not be avoided pursuant to 11 U.S.C. § 547 or 548, and InterMune will not argue or otherwise take the position

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in any such case, proceeding or action that: (i) InterMune’s obligations under this Agreement may be avoided under 11 U.S.C. § 547 or 548; (ii) InterMune was insolvent at the time this Agreement was entered into, or became insolvent as a result of the payment made to the United States hereunder; or (iii) the mutual promises, covenants and obligations set forth in this Agreement do not constitute a contemporaneous exchange for new value given to InterMune;

          b. In the event that InterMune’s obligations hereunder are avoided for any reason, including, but not limited to, the exercise of a trustee’s avoidance powers under the Bankruptcy Code, the United States, at its sole option, may rescind the releases in this Agreement, and bring any civil and/or administrative claim, action or proceeding against InterMune for the claims that would otherwise be covered by the releases provided in this Agreement. If the United States chooses to do so, InterMune agrees that, for purposes only of any case, action, or proceeding referenced in the first clause of this Paragraph, (i) any such claims, actions or proceedings brought by the United States (including any proceedings to exclude InterMune from participation in Medicare, Medicaid, or other Federal Health Care programs) are not subject to an “automatic stay” pursuant to 11 U.S.C. Section 362(a) as a result of the action, case or proceeding described in the first clause of this Paragraph, and that InterMune will not argue or otherwise contend that the United States’ claims, actions or proceedings are subject to an automatic stay; (ii) that InterMune will not plead, argue or otherwise raise any defenses under the theories of statute of limitations, laches, estoppel or similar theories, to any such civil or administrative claims, actions or proceedings which are brought by the United States within 30 calendar days of written notification to InterMune that the releases herein have been rescinded pursuant to this Paragraph, except to the extent such defenses were available before the Effective Data of this Agreement; and (iii) the United States

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and the Participating States have valid claims against InterMune in at least the aggregate amount of the Settlement Amount and they may pursue their claims, inter alia, in the case, action or proceeding referenced in the first clause of this Paragraph, as well as in any other case, action, or proceeding; and

          c. InterMune acknowledges that its agreement in this Paragraph is provided in exchange for valuable consideration provided in this Agreement.

     21. In the event that InterMune fails to pay any and all of the payments owed pursuant to this Agreement within 30 calendar days of the due date (“Default”), any dismissals as to InterMune shall, at the United States’ option, be null and void, and the Settlement Amount referenced in Paragraph 1 above, less any payments already made, shall become immediately due and payable and shall bear interest at the Medicare interest rate (per 42 C.F.R. part 405.378) as of the date of Default until payment of the Settlement Amount is made in full.

     Furthermore, in the event of a breach of the payment provisions as described in the preceding paragraph, the United States may at its option: 1) rescind its releases; 2) offset the remaining unpaid balance of the Settlement Amount from any amounts due and owing to InterMune by any department, agency, or agent of the United States at the time of Default; 3) reinstitute an action or actions against InterMune in this Court; and 4) InterMune agrees not to contest any draw, offset, or collection action undertaken by the United States pursuant to this Paragraph, either administratively or in any court.

     In the event of a Default of any payment under this Agreement, InterMune agrees to pay the United States all reasonable costs of collection and enforcement of this Agreement, including attorneys’ fees and expenses. In the event the United States reinstitutes an action under this Paragraph, InterMune expressly agrees not to plead, argue, or otherwise raise any defense under

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the theories of statute of limitations, laches, estoppel, or similar theories, to any civil or administrative claims, which: (a) are filed by the United States within 30 calendar days of written notification to InterMune that this Agreement has been made a nullity, and (b) relates to the Covered Conduct, except to the extent these defenses were available on September 4, 2006.

     22. In the event of Default as defined in Paragraph 21 above, OIG-HHS may exclude InterMune from participating in all Federal health care programs until InterMune pays the Settlement Amount and reasonable costs as set forth in Paragraphs 1 and 21 above. OIG- HHS will provide written notice of any such exclusion to InterMune. InterMune waives any further notice of the exclusion under 42 U.S.C. § 1320a-7(b)(7), and agrees not to contest such exclusion either administratively or in any state or federal court. Reinstatement to program participation is not automatic. If at the end of the period of exclusion InterMune wishes to apply for reinstatement, InterMune must submit a written request for reinstatement to the OIG in accordance with the provisions of 42 C.F.R. §§ 1001.3001-.3005. InterMune will not be reinstated unless and until the OIG approves such request for reinstatement.

     23. InterMune has provided financial statements to the United States and the United States has relied on the accuracy and completeness of these financial statements in reaching this Agreement. If the United States learns that the historical financial statements contained in InterMune SEC filings made between May 2005, and the Effective Date, either (a) failed to disclose a material non-contingent asset or assets in which InterMune had an interest (a “Material Nondisclosure”); or (b) contained any other knowing, material misrepresentation or omission regarding the financial condition of InterMune (a “Knowing Material Misrepresentation”), the United States may at its option pursue relief under this Paragraph 23 as follows: (a) the United States shall provide InterMune with written notice of the nature of the Material Nondisclosure or

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Knowing Material Misrepresentation; (b) within ten (10) calendar days of the date of the written notice, InterMune shall provide the United States, in writing, with any explanation it may have regarding the Material Nondisclosure or Knowing Material Misrepresentation referenced in the written notice; (c) if unsatisfied with InterMune’s explanation, as determined in its sole and absolute discretion, the United States may file an action seeking relief under this Paragraph 23 in which action the United States shall bear the burden of establishing by a preponderance of the evidence the Material Nondisclosure or Knowing Material Misrepresentation; (d) if the court finds a Material Nondisclosure or Knowing Material Misrepresentation, then - (i) the Settlement Amount shall be increased by one hundred percent (100%) of the amount of the Material Nondisclosure or Knowing Material Misrepresentation; (ii) the remaining unpaid principal portion of the Settlement Amount (including the increase specified in subparagraph (d)(i) above) shall become accelerated and immediately due and payable, with interest at a simple rate of 5% from the Effective Date of this Agreement to the date of the court finding, and at the Medicare interest rate (per 42 C.F.R. part 405.378) from the date of the court finding until the date of payment; (iii) the United States may offset the remaining unpaid balance of the Settlement Amount (inclusive of interest and the increase specified in subparagraph (d)(i) above) from any amounts due and owing to InterMune by any department, agency, or agent of the United States; and (iv) InterMune shall immediately pay the United States all reasonable costs incurred in the action seeking relief under this Paragraph 23, including attorney’s fees and expenses.

     24. If, after the Effective Date of this agreement and before the company has made all payments required pursuant to Paragraph 1 of this Agreement, the company obtains a cumulative total of more than $150,000,000.00 in cash financing from (1) license fees and milestone payments paid to the company pursuant to partnering agreements, (2) external debt financing,

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and/or (3) external equity financing, the company shall notify the United States and apply twenty percent (20%) of the excess over $150,000,000.00 (“excess cash amount”) to make advance payments against the Settlement Amount. The company shall make the advance payment(s) first by paying the outstanding principal owed (plus any interest accrued on that principal through the advance payment date) in 2011 and shall continue to make such advance payments in reverse chronological order until the excess cash amount is reduced to zero. The payment schedule referenced in Exhibit A shall remain in effect until the balance of the Settlement Amount is paid off. Cash financing, for purposes of this paragraph, is limited to the sources enumerated in the first sentence of this paragraph and shall expressly exclude any increase in operating revenues after the Effective Date or reimbursement of research or development expenses from a partner. Advance payments made by the company pursuant to this paragraph shall not exceed $10,000,000.00 in any single calendar year. Further, in the event InterMune is sold (either through an asset sale or an equity sale) or merged into another non-affiliated entity, then all remaining payments owed pursuant to the Settlement Agreement, are accelerated and become immediately due and payable.

     In addition to notifying the United States when it has obtained more than $150,000,000 in cash financing, InterMune will be required to provide the United States with notice within ten days of each financing arrangement or agreement (agreement) it obtains after the Effective Date of the settlement after the cumulative financing described in the preceding paragraph totals $150,000,000, along with a copy of each such financing agreement. InterMune further agrees that it shall pay the U.S. all amounts required under this provision within 10 days following receipt of external financing which causes a prepayment under this paragraph. Amounts that are due under this paragraph and not paid when due will be considered amounts in Default. Default

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amounts are subject to the Default provisions (except that Default will be effective immediately and not within 30 days of the due date) contained in this Settlement Agreement as specified in paragraph 21, including the Default rate of interest at the Medicare interest rate (per 42 C.F.R. part 405.378) beginning as of the date of Default until payment of the Settlement Amount is made in full.

     25. InterMune waives and will not assert any defenses it may have to any criminal prosecution or administrative action relating to the Covered Conduct that may be based in whole or in part on a contention that, under the Double Jeopardy Clause in the Fifth Amendment of the Constitution, or under the Excessive Fines Clause in the Eighth Amendment of the Constitution, this Agreement bars a remedy sought in such criminal prosecution or administrative action.

     26. The Parties each represent that this Agreement is freely and voluntarily entered into without any degree of duress or compulsion whatsoever.

     27. Except as otherwise stated herein, this Agreement is intended to be for the benefit of the Parties only, and by this instrument the Parties do not release any claims against any other person or entity.

     28. Nothing in any provision of this Agreement constitutes an agreement by the United States, InterMune or the Relator concerning the characterization of the Settlement Amount or the relator’s share for purposes of the Internal Revenue Laws, Title 26 of the United States Code.

     29. Except as expressly provided in this Agreement, each party to this Agreement will bear its own legal and other costs incurred in connection with this matter, including the preparation and performance of this Agreement.

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     30. This Agreement is governed by the laws of the United States. The Parties agree that the United States District Court for the Northern District of California shall retain jurisdiction over this Agreement until all the terms and conditions have been completely satisfied. The Parties agree that the exclusive jurisdiction and venue for any dispute arising between and among the Parties under this Agreement will be the United States District Court for the Northern District of California, including any dispute regarding Relator’s share of the settlement, except that disputes arising under the CIA shall be resolved through the dispute resolution provisions set forth in the CIA.

     31. The undersigned InterMune signatories represent and warrant that they are authorized by their Board of Directors to execute this Agreement. The undersigned signatory or signatories for the Relator represents and warrants that he is authorized to execute this Agreement on behalf of the Relator. The undersigned United States signatories represent that they are signing this Agreement in their official capacities and they are authorized to execute this Agreement on behalf of the United States through their respective agencies and departments, and, in the case of the OIG-HHS and TMA, on behalf of their respective Departments.

     32. This Agreement is effective on the later of (1) the date of signature of the last signatory to the Agreement, or (2) the date the Court approves the DPA as described in Preamble Paragraph D (the “Effective Date”). Facsimiles of signatures shall constitute acceptable binding signatures for purposes of this Agreement.

     33. This Agreement shall be binding on all successors, transferees, heirs and assigns of the Parties.

     34. This Agreement and Exhibit A attached hereto, together with the CIA, and the DPA described in Preamble Paragraphs C and D, constitute the complete agreement between the

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Parties with regard to the Covered Conduct. This Agreement may not be amended except by written consent of all the Parties, except that only InterMune and OIG-HHS must agree in writing to a modification of the CIA, without the consent of any other party to this Agreement or the DPA.

     35. InterMune and the Relator hereby consent to the United States’ disclosure of this Agreement, and information about this Agreement, to the public.

     36. This Agreement may be executed in counterparts, each of which shall constitute an original and all of which shall constitute one and the same Agreement.

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UNITED STATES OF AMERICA

By:	/s/ ALEX G. TSE
	ALEX G. TSE	Dated:
	Assistant United States Attorney
	United States Attorney’s Office
	Northern District of Columbia
By:	/s/ ANDY J. MAO
	ANDY J. MAO	Dated:
	Trial Attorney
	Commercial Litigation Branch
	Civil Division
	United States Department of Justice
By:	/s/ GREGORY E. DEMSKE
	GREGORY E. DEMSKE	Dated:
	Assistant Inspector General for Legal Affairs
	Office of Counsel to the Inspector General
	Office of Inspector General
	U.S. Department of Health and Human Services
By:	/s/ LAUREL C. GILLESPIE
	LAUREL C. GILLESPIE	Dated:
	Deputy General Counsel
	TRICARE Management Activity
	United States Department of Defense

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By:	/s/ KATHLEEN McGETTIGAN
	KATHLEEN McGETTIGAN	Dated:
	Deputy Associate Director
	Center for Retirement & Insurance Services
	United States Office of Personnel Management
By:	/s/ J. DAVID COPE
	J. DAVID COPE	Dated:
	Assistant Inspector General for Legal Affairs \
	United States Office of Personnel Management

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By:	/s/ LAUREL C. GILLESPIE
	LAUREL C. GILLESPIE	Dated:
	Deputy General Counsel
	TRICARE Management Activity
	United States Department of Defense
By:	/s/ SUSAN CHADICK
	SUSAN CHADICK	Dated:
	Deputy General Counsel
	Defense Logistics Agency

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INTERMUNE, INC.

By:	/s/ ROBIN STEELE
	Robin Steele, General Counsel	Dated:
	InterMune, Inc.
By:	/s/ ETHAN M. POSNER
	ETHAN M. POSNER	Dated:
	Covington & Burling LLP

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RELATOR

By:	/s/ JOAN GALLAGHER
	JOAN GALLAGHER	Dated:
By:	/s/ JOHN A. BERANBAUM
	JOHN A. BERANBAUM	Dated:
	Beranbaum Menken Ben-Asher & Biermann LLP

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EXHIBIT A: PAYMENT SCHEDULE

TOTAL PAYMENT

Year	Payment		Interest at 5%		Principal		Balance
								36,944,043.50
11/1/2006		5,000,000.00		—		5,000,000.00		31,944,043.50
11/1/2007		5,000,000.00		1,597,202.18		3,402,797.83		28,541,245.68
11/3/2008		6,500,000.00		1,427,062.28		5,072,937.72		23,468,307.96
11/2/2009		7,000,000.00		1,173,415.40		5,826,584.60		17,641,723.36
11/1/2010		9,000,000.00		882,086.17		8,117,913.83		9,523,809.52
11/1/2011		10,000,000.00		476,190.48		9,523,809.52		0.00
Total		42,500,000.00				36,944,043.50

PAYMENT TO THE UNITED STATES

Year	Payment		Interest at 5%		Principal		Balance
								30,249,228.50
11/1/2006		4,093,924.98		—		4,093,924.98		26,155,303.52
11/1/2007		4,093,924.98	$	1,307,765		2,786,159.80		23,369,143.72
11/3/2008		5,322,102.47	$	1,168,457		4,153,645.29		19,215,498.43
11/2/2009		5,731,494.97	$	960,775		4,770,720.05		14,444,778.38
11/1/2010		7,369,064.96	$	722,239		6,646,826.04		7,797,952.34
11/1/2011		8,187,849.96	$	389,898		7,797,952.34		0.00
Total		34,798,362.32		4,549,133.82		30,249,228.50

PAYMENT TO THE MEDICAID PARTICIPATING STATES

Year	Payment		Interest at 5%		Principal		Balance
								6,694,815.00
11/1/2006		906,075.02		—		906,075.02		5,788,739.98
11/1/2007		906,075.02	$	289,437		616,638.02		5,172,101.96
11/3/2008		1,177,897.53	$	258,605		919,292.43		4,252,809.53
11/2/2009		1,268,505.03	$	212,640		1,055,864.55		3,196,944.97
11/1/2010		1,630,935.04	$	159,847		1,471,087.79		1,725,857.18
11/1/2011		1,812,150.04	$	86,293		1,725,857.18		0.00
Total		7,701,637.68		1,006,822.68		6,694,815.00

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EX-10.113

Exhibit 10.113

Corporate Integrity Agreement
between the
Office of Inspector General
of the
Department of Health and Human Services
and
InterMune, Inc.

I. Preamble

     InterMune, Inc. (InterMune) hereby enters into this Corporate Integrity Agreement (CIA) with the Office of Inspector General (OIG) of the United States Department of Health and Human Services (HHS) to promote compliance with the statutes, regulations, and written directives of Medicare, Medicaid, and all other Federal health care programs (as defined in 42 U.S.C. § 1320a-7b(f)) (Federal health care program requirements) and the statutes, regulations and written directives of the Food and Drug Administration (FDA requirements). Contemporaneously with this CIA, InterMune is entering into a Settlement Agreement with the United States. InterMune will also enter into settlement agreements with various States, and InterMune’s agreement to this CIA is a condition precedent to those agreements.

     Prior to the investigation of InterMune by the United States, InterMune established a comprehensive voluntary compliance program (Compliance Program), which includes a corporate Compliance Officer and Compliance’ Committee, a Code of Conduct for all employees, written policies and procedures, educational and training initiatives, review and disciplinary procedures, a confidential disclosure program, and internal review procedures designed, as represented by InterMune, to promote compliance with applicable laws and the promotion of high ethical standards.

     InterMune shall continue the operation of the Compliance Program in accordance with the terms set forth below for the term of this CIA. InterMune may modify its Compliance Program as appropriate, but, at a minimum, InterMune shall ensure that during the term of this CIA, it shall comply with the integrity obligations enumerated in this CIA.

II. Term and Scope of the CIA

     A. The period of the compliance obligations assumed by InterMune under this CIA shall be 5 years from the effective date of this CIA, unless otherwise specified. The effective date shall be the date on which the final signatory of this CIA executes this CIA (Effective Date). Each one-year period, beginning with the one-year period following the Effective Date, shall be referred to as a “Reporting Period.”

     B. Sections VII, IX, X, and XI shall expire no later than 120 days after OIG’s receipt of: (1) InterMune’s final Annual Report; or (2) any additional materials submitted by InterMune pursuant to OIG’s request, whichever is later.

     C. The scope of this CIA shall be governed by the following definitions:

          1. “Covered Persons” includes:

1

a. all owners who are natural persons (other than shareholders who: (1) have an ownership interest of less than 5%; and (2) acquired the ownership interest through public trading), officers, directors, and employees of InterMune; and

b. all contractors, subcontractors, agents, and other persons who perform sales, marketing, promotional, pricing, government contract, and research and development activities (except preclinical researchers and clinical investigators) on behalf of InterMune.

Notwithstanding the above, this term does not include part-time or per diem employees, contractors, subcontractors, agents, and other persons who are not reasonably expected to work more than 160 hours per year, except that any such individuals shall become “Covered Persons” at the point when they work more than 160 hours during the calendar year.

          2. “Relevant Covered Persons” includes all Covered Persons of InterMune whose job responsibilities relate to the provision of information about or services relating to InterMune’s products; distribution of Actimmune or other InterMune products; research and development (except preclinical researchers and clinical investigators); or the sales, marketing, or promotion of ‘InterMune’s products (hereafter collectively referred to as “Product Services Related Functions.”) This includes, but is not limited to, Medical Science Liaisons, and any individuals who work in the following areas: Clinical Affairs, Medical Affairs, Regulatory, Legal Affairs, Corporate Compliance, Corporate Administration, and Commercial Operations.¹

          3. “Third Party Personnel” shall mean personnel of the entities with whom InterMune has or may, in the future, enter agreements to distribute and purchase its products, joint venture agreements and/or other agreements to co-market its products. InterMune has represented that: 1) Third Party Personnel are employed by other independent entities; 2) InterMune does not control Third Party Personnel; and 3) it would be commercially impracticable to compel the compliance of Third Party Personnel with the requirements set forth in this CIA. However, InterMune agrees to use its best efforts to promote compliance by Third Party Personnel with Federal health care program and FDA requirements as set forth below in Sections III.B and V.

          4. An “Educational or Informational Activity” shall mean any continuing medical education (CME), disease awareness, or other scientific, educational or professional program, meeting, or event, including, but not limited to, sponsorship of booths or activities at medical conferences or symposia.

¹ If there are future changes in the organizational structure of InterMune, individuals who undertake the functions of the specific groups enumerated in the preceding sentence shall be considered Relevant Covered Persons.

2

III. Corporate Integrity Obligations

     To the extent not already accomplished, InterMune shall maintain a Compliance Program throughout the term of this CIA that includes the following elements:

     A. Compliance Officer and Committee.

          1. Compliance Officer. InterMune presently has a Compliance Officer with responsibility for administering InterMune’s Compliance Program. InterMune shall continue to employ an individual to serve as its Compliance Officer during the term of the CIA. The Compliance Officer shall be responsible for developing and implementing policies, procedures, and practices designed to ensure compliance with the requirements set forth in this CIA and with Federal health care program requirements and FDA requirements. The Compliance Officer shall be a member of senior management of InterMune, shall make periodic (at least quarterly) reports regarding compliance matters directly to the Board of Directors of InterMune, and shall be authorized to report on such matters to the Board of Directors at any time. The Compliance Officer shall also have the option of reporting any matter directly to the CEO. The Compliance Officer shall not be or be subordinate to the General Counsel or Chief Financial Officer. The Compliance Officer shall be responsible for monitoring the day-to-day compliance activities engaged in by InterMune as well as for any reporting obligations created under this CIA.

     InterMune shall report to OIG, in writing, any changes in the identity or position description of the Compliance Officer, or any actions or changes that would affect the Compliance Officer’s ability to perform the duties necessary to meet the obligations in this CIA, within 15 days after such a change.

          2. Compliance Committee. Prior to the Effective Date, InterMune established a Compliance Committee, and InterMune .shall maintain the Compliance Committee during the term of this CIA. The Compliance Committee shall, at a minimum, include the Compliance Officer and other members of senior management necessary to meet the requirements of this CIA (e.g., senior executives of relevant departments, such as Clinical Affairs, Medical Affairs, Regulatory, Legal Affairs, Corporate Compliance, Corporate Administration, and Commercial Operations.) The Compliance Officer shall chair the Compliance Committee. The Compliance Committee shall support the Compliance Officer in fulfilling his/her responsibilities (e.g., shall assist in the analysis of the organization’s risk areas and shall oversee monitoring of internal and external audits and investigations).

     InterMune shall report to OIG, in writing, any changes in the composition of the Compliance Committee, or any actions or changes that would affect the Compliance Committee’s ability to perform the duties necessary to meet the obligations in this CIA, within 15 days after such a change.

     B. Written Standards.

          1. Code of Conduct. Prior to the Effective Date, InterMune established a written Code of Conduct applicable to all Covered Persons. InterMune shall continue to make the promotion of, and adherence to, the Code of Conduct an element in evaluating the performance of all employees. The Code of Conduct shall, at a minimum, set forth:

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a. InterMune’s commitment to full compliance with all Federal health care program and FDA requirements, including its commitment to market, sell, promote, research, develop, and advertise its products in accordance with such requirements;

b. InterMune’s requirement that all of its Covered Persons shall be expected to comply with all Federal health care program and FDA requirements and with InterMune’s own Policies and Procedures as implemented pursuant to Section III.B (including the requirements of this CIA);

c. the requirement that all of InterMune’s Covered Persons shall be expected to report to the Compliance Officer, or other appropriate individual designated by InterMune, suspected violations of any Federal health care program or FDA requirements or of InterMune’s own Policies and Procedures;

d. the possible consequences to both InterMune and Covered Persons of failure to comply with Federal health care program and FDA requirements and with InterMune’s own Policies and Procedures and the failure to report such noncompliance; and

e. the right of all individuals to use the Disclosure Program described in Section III.E, and InterMune’s commitment to nonretaliation and to maintain, as appropriate, confidentiality and anonymity with respect to such disclosures.

     To the extent not already accomplished, within 90 days after the Effective Date, each Covered Person shall certify, in writing, that he or she has received, read, understood, and shall abide by InterMune’s Code of Conduct. New Covered Persons shall receive the Code of Conduct and shall complete the required certification within 30 days after becoming a Covered Person or within 90 days after the Effective Date, whichever is later.

     Within 90 days after the Effective Date, and annually thereafter by the anniversary of the Effective Date, InterMune shall send a letter to all entities which employ Third Party Personnel. The letter shall outline InterMune’s obligations under the CIA and its commitment to full compliance with all Federal health care program and FDA requirements. The letter shall include a description of InterMune’s Compliance Program. InterMune shall attach a copy of its Code of Conduct to the letter and shall ask that the other entity either: (a) make a copy of InterMune’s Code of Conduct and the description of InterMune’s Compliance Program available to all relevant personnel within its organization; or (b) represent to InterMune that it has and enforces a substantially comparable Code of Conduct and Compliance Program for relevant persons within its organization.

     InterMune shall periodically review the Code of Conduct to determine if revisions are appropriate and shall make any necessary revisions based on such review. Any revised Code of Conduct shall be distributed within 30 days after any revisions are finalized. Each Covered

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Person shall certify,-in writing, that he or she has received, read, understood, and shall abide by the revised Code of Conduct within 30 days after the distribution of the revised Code of Conduct.

     Distribution may include publishing the Code of Conduct on InterMune’s intranet or other internal web site available to all employees. If InterMune uses such an electronic method of distribution, it must notify the individuals receiving the Code of Conduct that the Code of Conduct will be distributed in such a manner and InterMune must monitor the distribution to ensure that all appropriate individuals received the Code of Conduct.

          2. Policies and Procedures. To the extent not already accomplished, within 90 days after the Effective Date, InterMune shall implement written Policies and Procedures regarding the operation of InterMune’s Compliance Program and its compliance with Federal health care program and FDA requirements. At a minimum, the Policies and Procedures shall address:

a. the subjects relating to the Code of Conduct identified in Section III.B.1;

b. selling, marketing, and promoting InterMune products in compliance with all applicable Federal health care program requirements, including, but not limited to, the Federal anti-kickback statute, codified at 42 U.S.C. § 1320a-7b(b);

c. selling, marketing, promoting, advertising, and disseminating information about InterMune’s products: in compliance with all applicable FDA requirements, including procedures governing the response to requests for information about off-label uses;

d. compensation (including salaries and bonuses) for Covered Persons that are designed to ensure that financial incentives do not inappropriately motivate sales and marketing personnel to engage in the improper promotion, sales, and marketing of InterMune’s products;

e. employee discipline for violations of InterMune’s Policies and Procedures, including those policies relating to Federal health care program and FDA requirements;

f. appropriate mechanisms by which Medical Affairs receives and responds to requests for information about off-label uses of InterMune’s products, including but not limited to, the following: the form and content of information disseminated by Medical Affairs in response to such requests; and the internal review process for the information disseminated.

The Policies and Procedures shall include a requirement that InterMune develop a database (the Medical Affairs Inquiries Database) that includes the following items of information for each unique inquiry (Inquiry) received for information about InterMune’s products: 1) date of Inquiry;

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2) form of Inquiry (e.g., fax, phone, etc.); 3) name of the requesting health care professional (HCP); 4) nature and topic of request (including exact language of the Inquiry if made in writing); 5) an evaluation of whether the Inquiry relates to information about an off-label indication for the product; 6) nature/form of the response from InterMune (including a record of the materials provided to the HCP in response to the request); 7) the name of the InterMune representative who called on or interacted with the HCP; and 8) the status and findings of any follow-up review conducted by InterMune in situations in which it appears that the Inquiry may have related to improper off-label promotion;

g. speaker programs, advisory board programs, focus group programs, and all other consultant arrangements. These policies shall be designed to ensure that the consultant arrangements and related events are used for legitimate and lawful purposes in accordance with applicable Federal health care program and FDA requirements. The policies shall include requirements about the uses, content, and circumstances of such arrangements and events;

h. funding of, or participation in, any Educational or Informational Activity as defined in Section II.C.4 above (e.g., third party educational grants or sponsorship for CME or other third-party educational programs or events). These Policies and Procedures shall be designed to ensure that InterMune’s funding and/or sponsorship of such programs satisfies all applicable Federal health care program and FDA requirements related to the sponsorship of any Educational or Informational Activity.

The Policies and Procedures shall require: 1) the disclosure of InterMune’s financial support of the Educational or Informational Activity and any financial relationships with faculty, speakers, or organizers at such Educational or Informational Activity; 2) that the Educational or Informational Activity have an educational focus; 3) that the Educational or Informational Activity be independent; 4) that the Educational or Informational Activity be non-promotional in tone/nature; and 5) that the information provided at the Educational or Informational Activity be fair, balanced, accurate and not misleading;

i. funding of charitable grants or sponsorships in a manner that is designed to ensure that InterMune’s funding complies with all applicable Federal health care program requirements and FDA requirements; and

j. sponsorship or funding of research activities (including clinical trials, market research, or authorship of articles or other publications) by InterMune in a manner that is designed to ensure that InterMune’s funding or sponsorship of such activities complies with all applicable Federal health care program and FDA requirements. In addition, such Policies and

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Procedures shall ensure that sales and marketing activities are separate from clinical trial enrollment.

     To the extent not already accomplished, within 90 days after the Effective Date, the relevant portions of the Policies and Procedures shall be distributed to all individuals whose job functions relate to those Policies and Procedures. Appropriate and knowledgeable staff shall be available to explain the Policies and Procedures.

     At least annually (and more frequently, if appropriate), InterMune shall assess and update, as necessary, the Policies and Procedures. Within 30 days after the effective date of any revisions, the relevant portions of any such revised Policies and Procedures shall be distributed to all individuals whose job functions relate to those Policies and Procedures.

     Distribution may include publishing such Policies and Procedures on InterMune’s intranet or other internal web site available to all employees. If InterMune uses such an electronic method of distribution, it must notify the individuals receiving the Policies and Procedures that the Policies and Procedures will be distributed in such a manner and InterMune must monitor the distribution to ensure that all appropriate individuals received the Policies and Procedures. Appropriate and knowledgeable staff shall be available to explain the Policies and Procedures.

     C. Training and Education.

          1. General Training. Within 90 days after the Effective Date, InterMune shall provide at least two hours of General Training to each Covered Person. This training, at a minimum, shall explain InterMune’s:

a. CIA requirements;

b. InterMune’s Compliance Program (including the Code of Conduct and the Policies and Procedures as they pertain to general compliance issues); and

c. in general, the proper methods of promoting, marketing, selling, conducting research (including clinical trials), and disseminating information about InterMune’s products in accordance with Federal health care program and FDA requirements.

     To the extent that General Training provided to Covered Persons during the 90 days immediately prior to the execution of this CIA satisfies the requirements of Sections III.C.1.b-c, above, the- OIG shall credit the training toward the training requirements set forth in this Section III.C.1 for the first Reporting Period. InterMune may satisfy its remaining General Training obligation for those Covered Persons who received training as described above by notifying the Covered Persons of the fact that InterMune entered a CIA and notifying them of InterMune’s requirements and obligations under the CIA.

     New Covered Persons shall receive the General Training described above within 30 days after becoming a Covered Person or within 90 days after the Effective Date, whichever is later.

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After receiving the initial General Training described above, each Covered Person shall receive at least one hour of General Training in each subsequent Reporting Period.

          2. Specific Training. Within 90 days after the Effective Date, each Relevant Covered Person shall receive at least four hours of Specific Training in addition to the General Training required above. This Specific Training shall include a discussion of:

a. all Federal health care program requirements relevant to the proper methods for selling, marketing, promoting, and providing information about InterMune’s products, including, but not limited to, the requirements of the Federal anti-kickback statute; the Civil Monetary Penalties Law; the civil False Claims Act; and the Medicaid Drug Rebate statute;

b. all applicable FDA requirements relevant to promotion, marketing, research (including clinical trials), and dissemination of information about InterMune’s products including but not limited to, the requirements of the Federal Food, Drug, and Cosmetic Act and FDA regulations;

c. the personal obligation of each Relevant Covered Person involved in Product Services Related Functions to comply with all applicable legal requirements;

d. the legal sanctions for violations of the Federal health care program requirements or FDA requirements relating to Product Services Related Functions; and

e. examples of proper and improper practices relating to Product Services Related Functions.

     New Relevant Covered Persons shall receive this training within 30 days after the beginning of their employment or becoming Relevant Covered Persons, or within 90 days after the Effective Date, whichever is later. An InterMune employee who has completed the Specific Training shall review a new Relevant Covered Person’s work, to the extent that the work relates to Product Services Related Functions, until such time as the new Relevant Covered Person completes his or her Specific Training.

     To the extent that Specific Training provided to Relevant Covered Persons during the 90 days immediately prior to the execution of this CIA satisfies the requirements of this Section III.C.2, the OIG shall credit the training toward the Specific Training requirements for the first Reporting Period.

     After receiving the initial Specific Training described in this Section, each Relevant Covered Person shall receive at least two hours of Specific Training in each subsequent Reporting Period.

          3. Certification. Each individual who is required to receive training shall certify, in writing, or in electronic form, if applicable, that he or she has received the required training. The certification shall specify the type of training received and the date received. The

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Compliance Officer (or designee) shall retain the certifications, along with all course materials. These shall be made available to OIG, upon request.

          4. Qualifications of Trainer. Persons providing the training shall be knowledgeable about the subject area(s) of their training, including the applicable Federal health care program and FDA requirements.

          5. Update of Training. InterMune shall review the training annually, and, where appropriate, update the training to reflect changes in Federal health care program or FDA requirements, any issues discovered during internal audits or any of the IRO Reviews, and any other relevant information.

          6. Computer-based Training. InterMune may provide the training required under this CIA through appropriate computer-based training approaches. If InterMune chooses to provide computer-based training, it shall make available appropriately qualified and knowledgeable staff or trainers to answer questions or provide additional information to the individuals receiving such training.

     D. Review Procedures.

          1. General Description.

a. Engagement of Independent Review Organization. Within 90 days after the Effective Date, InterMune shall engage an entity (or entities), such as an accounting, auditing, or consulting firm (hereinafter “Independent Review Organization” or “IRO”), to perform a Promotional and Product Services Engagement. Each IRO engaged by InterMune shall have expertise in Federal health care program and FDA requirements applicable to the Promotional and Product Services Engagement. Each IRO shall assess, along with InterMune, whether it can perform the IRO review in a professionally independent and/or objective fashion, as appropriate to the nature of the engagement, taking into account any other business relationships or other engagements that may exist. The applicable requirements relating to the IRO are outlined in Appendix A to this CIA, which is incorporated by reference.

b. Description and Frequency of Reviews. The Promotional and Product Services Engagement shall consist of two components — a systems review (the Promotional and Product Services Systems Review) and a transactions review (Promotional and Product Services Transactions Review), as described more fully in Appendix B to this CIA, which is incorporated by reference.

The Promotional and Product Services Transactions Review shall be performed annually and shall cover each of the Reporting Periods. The IRO(s) shall perform all components of each of these annual Reviews.

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If there are no material changes in InterMune’s systems, processes, policies, and practices relating to Product Services Related Functions, the IRO shall perform the Promotional and Product Services Systems Review for two Reporting Periods to be selected by the OIG. As set forth in Appendix B, if InterMune materially changes its systems, processes, policies, and practices relating to Product Services Related Functions, then the IRO shall perform a Promotional and Product Services Systems Review for the Reporting Period(s) in which such changes were made in addition to conducting the Review for the two Reporting Periods selected by the OIG.

The OIG will select the Reporting Periods in which the Systems Reviews shall be conducted based, in part, on information provided by InterMune about the size of InterMune, the nature of the functions undertaken by InterMune employees e.g. sales and marketing activities, research activities, etc.), the number of products that InterMune is actively marketing, and other aspects of InterMune’s business. InterMune shall report such information to the OIG 90 days prior to the end of each Reporting Period. The OIG shall review the information submitted and shall notify InterMune at least 30 days prior to the end of each Reporting Period whether InterMune shall be required to retain an IRO to conduct a Systems Review in the next upcoming Reporting Period. The OIG will not require a Systems Review in the first Reporting Period.

c. Retention of Records. The IRO and InterMune shall retain and make available to OIG, upon request, all work papers, supporting documentation, correspondence, and draft reports (those exchanged between the IRO and InterMune) related to the reviews.

          2. Review Reports. The IRO shall prepare a report based upon each Promotional and Product Services Transaction Review and Promotional and Product Services Systems Review performed. Information to be included in each Report is described in Appendix B.

          3. Validation Review. In the event OIG has reason to believe that: (a) any of InterMune’s IRO Reviews fails to conform to the requirements of this CIA; or (b) the IRO’s findings or Review results are inaccurate, OIG may, at its sole discretion, conduct its own review to determine whether the Review in question complied with the requirements of the CIA and/or the findings or Review results are inaccurate (Validation Review). InterMune shall pay for the reasonable cost of any such review performed by OIG or any of its designated agents. Any Validation Review of Reports submitted as part of InterMune’s final Annual Report must be initiated no later than one year after InterMune’s final submission (as described in Section II) is received by OIG.

     Prior to initiating a Validation Review, OIG shall notify InterMune of its intent to do so and provide a written explanation of why OIG believes such a review is necessary. To resolve any concerns raised by OIG, InterMune may request a meeting with OIG to: (a) discuss the

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results of any Review submissions or findings; (b) present any additional information to clarify the results of the Review in question or to correct the inaccuracy of the Review; and/or (c) propose alternatives to the proposed Validation Review. InterMune agrees to provide any additional information as may be requested by OIG under this Section in an expedited manner. OIG will attempt in good faith to resolve any IRO Review issues with InterMune prior to conducting a Validation Review. However, the final determination as to whether or not to proceed with a Validation Review shall be made at the sole discretion of OIG.

          4. Independence/Objectivity Certification. The IRO shall include in its report(s) to InterMune a certification or sworn affidavit that it has evaluated its professional independence and/or objectivity, as appropriate to the nature of the engagement, with regard to the applicable Review and that it has concluded that it is, in fact, independent and/or objective.

     E. Disclosure Program.

     Prior to the Effective Date, InterMune established a disclosure program designed to facilitate communications relating to compliance with Federal health care program and FDA requirements and with InterMune’s policies (Disclosure Program). During the term of this CIA, InterMune shall continue to maintain a Disclosure Program that includes a mechanism e.g., the toll-free Code of Conduct Ethics Helpline) to’ enable individuals to disclose, to the Compliance Officer or some other person who is not in the disclosing individual’s chain of command, any identified issues or questions associated with InterMune’s policies, conduct, practices, or procedures with respect to a Federal health care program or FDA requirement believed by the individual to be a potential violation of criminal, civil, or administrative law. InterMune shall appropriately publicize the existence of the disclosure mechanism (e.g., via periodic e-mails to employees or by posting the information in prominent common areas).

     The Disclosure Program shall continue to emphasize a nonretribution, nonretaliation policy, and shall continue to include a reporting mechanism for anonymous communications for which appropriate confidentiality shall be maintained. Upon receipt of a disclosure, the Compliance Officer (or designee) shall gather all relevant information from the disclosing individual. The Compliance Officer (or designee) shall make a preliminary, good faith inquiry into the allegations set forth in every disclosure to ensure that he or she has obtained all of the information necessary to determine whether a further review should be conducted. For any disclosure that is sufficiently specific so that it reasonably: (1) permits a determination of the appropriateness of the alleged improper practice; and (2) provides an opportunity for taking corrective action, InterMune shall conduct an internal review of the allegations set forth in the disclosure and ensure that proper follow-up is conducted.

     The Compliance Officer (or designee) shall continue to maintain a disclosure log, which shall include a record and summary of each disclosure received (whether anonymous or not), the status of the respective internal reviews, and any corrective action taken in response to the internal reviews. The disclosure log shall be made available to OIG upon request.

     F. Ineligible Persons.

          1. Definitions. For purposes of this CIA:

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a.	an “Ineligible Person” shall include an individual or entity who:
	i is currently excluded, debarred, suspended, or otherwise ineligible to participate in the Federal health care programs or in Federal procurement or nonprocurement programs; or
	ii has been convicted of a criminal offense that falls within the ambit of 42 U.S.C. § 1320a-7(a), but has not yet been excluded, debarred, suspended, or otherwise declared ineligible.
b.	“Exclusion Lists” include:
	i the HHS/OIG List of Excluded Individuals/Entities (available through the Internet at http://www.oig.hhs.gov); and
	ii the General Services Administration’s List of Parties Excluded from Federal Programs (available through the Internet at http://www.epls.gov).

c. “Screened Persons” include prospective and current owners (other than shareholders who: (1) have an ownership interest of less than 5%; and (2) acquired the ownership interest through public trading), officers, directors, employees, contractors, and agents of InterMune.

          2. Screening Requirements. InterMune has a policy to not hire or engage as a Covered Person any Ineligible Person, and it shall maintain that policy during the term of the CIA. InterMune shall continue to ensure that all Screened Persons are not Ineligible Persons, by implementing the following screening requirements.

a. InterMune shall screen all Screened Persons against the Exclusion Lists prior to engaging their services and, as part of the hiring or contracting process, shall require such Screened Persons to disclose whether they are Ineligible Persons.

b. InterMune shall screen all Screened Persons against the Exclusion Lists within 90 days after the Effective Date and on an annual basis thereafter.

c. InterMune shall implement a policy requiring all Screened Persons to disclose immediately any debarment, exclusion, suspension, or other event that makes that person an Ineligible Person.

     Nothing in this Section affects the responsibility of (or liability for) InterMune to refrain (if applicable) from billing Federal health care programs for items or services furnished, ordered, or prescribed by an Ineligible Person. InterMune understands that items or services furnished by excluded persons are not payable by Federal health care programs and that InterMune may be liable for overpayments and/or criminal, civil and administrative sanctions for employing or

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contracting with an excluded person regardless of whether InterMune meets the requirements of Section III.F.

          3. Removal Requirement. If InterMune has actual notice that a Screened Person has become an Ineligible Person, InterMune shall remove such Screened Person from responsibility for, or involvement with, InterMune’s business operations related to the Federal health care programs and shall remove such Screened Person from any position for which the Screened Person’s compensation or the items or services furnished, ordered, or prescribed by the person are paid in whole or part, directly or indirectly, by Federal health care programs or otherwise with Federal funds at least until such time as the Screened Person is reinstated into participation in the Federal health care programs.

          4. Pending Charges and Proposed Exclusions. If InterMune has actual notice that a Screened Person is charged with a criminal offense that falls within the ambit of 42 U.S.C. §§ 1320a-7(a), 1320a-7(b)(1)-(3), or is proposed for exclusion during the Screened Person’s employment or contract term, InterMune shall take all appropriate actions to ensure that the responsibilities of that Screened Person have not and shall not adversely affect the accuracy of any claims submitted to any Federal health care program.

     G. Notification of Government Investigation or Legal Proceedings.

     Within 30 days after discovery, InterMune shall notify OIG, in writing, of any ongoing investigation or legal proceeding known to InterMune conducted or brought by a governmental entity or its agents involving an allegation that InterMune has committed a crime or has engaged in fraudulent activities in the United States. This notification shall include a, description of the allegation, the identity of the investigating or prosecuting agency, and the status of such investigation or legal proceeding. InterMune shall also provide written notice to OIG within 30 days after the resolution of the matter, and shall provide OIG with a description of the findings and/or results of the investigation or, proceedings, if any.

     H. Notification of Reportable Event.

          1. Definition of Reportable Event. For purposes of this CIA; a “Reportable Event” means anything that involves a matter that a reasonable person would consider a probable violation of criminal, civil, or administrative laws applicable to any Federal health care program, and/or applicable to any FDA requirements relating to the, promotion of prescription drugs for which penalties or exclusion may be authorized. A Reportable Event may be the result of an isolated event or a series of occurrences.

          2. Reporting of Reportable Events. Current policies of InterMune require reporting of violations of its current policies. If InterMune determines (after a reasonable opportunity to conduct an appropriate review or investigation of the allegations) through any means that there is a Reportable Event, InterMune shall notify OIG, in writing, within 30 days after making the determination that the Reportable Event exists. The report to OIG shall include the following information:

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a. a complete description of the Reportable Event, including the relevant facts, persons involved, and legal and Federal health care program and/or FDA authorities implicated;

b. a description of InterMune’s actions taken to correct the Reportable Event; and

c. any further steps InterMune plans to take to address the Reportable Event and prevent it from recurring.

     I. Notification of Communications with FDA.

     Within 30 days after the date of any written report, correspondence, or communication from InterMune to the FDA that materially discusses InterMune’s or a Covered Person’s unlawful or improper promotion of InterMune’s products (including any improper dissemination of information about off-label indications), InterMune shall provide a copy of the report, correspondence, or communication to the OIG. InterMune shall also provide written notice to the OIG within 30 days after the resolution of any such disclosed off-label matter, and shall provide the OIG with a description of the findings and/or results of the matter, if any.

     J. Review of Records Reflecting the Content of Detailing Sessions.

     InterMune has represented that, as of the Effective Date, it does not currently have employees or agents engaged in the direct promotion of any product. If, in the future, InterMune reestablishes a sales force for the direct promotion of Actimmune or any other product, InterMune agrees to obtain non-InterMune records (e.g., Verbatims or similar records) generated by an independent entity (Survey Entity) reflecting the purported content and subject matter of detailing interactions between sales representatives and HCPs for up to three InterMune products. In order to satisfy its obligations under this Section III.J, InterMune may propose that it obtain an alternative type of survey record (e.g., message recall studies) rather than the records of the detailing sessions. The OIG will consider InterMune’s proposal, and, after considering InterMune’s proposal, shall, in its discretion, identify the type of survey records to be obtained.

     Prior to the re-establishment of any sales force, InterMune shall notify the OIG of this development and provide specific information about the sales staff and InterMune’s products to the OIG. After reviewing the information provided by InterMune and engaging in a dialogue with InterMune about the issue, the OIG shall provide more specific information to InterMune about the requirements of this Section III.J. The OIG shall have the discretion to establish the specific requirements of this Section III.J consistent with the provisions set forth herein. However, in general terms, this Section III.J will require InterMune to contract with a Survey Entity to conduct inquiries into the content and subject matter of the detailing interactions (or alternate types of inquiries as proposed by InterMune) between InterMune sales personnel and HCPs for each Reporting Period in which InterMune has such a sales force. For each product designated by the OIG (Covered Product), InterMune shall obtain records reflecting the purported content and subject matter of detailing sessions (or alternate types of records) in all regions across the United States.

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     InterMune shall review the records obtained and shall identify any instances in which the records appear to indicate that Covered Persons may have discussed and/or disseminated information about off-label uses of the Covered Products. InterMune shall make findings based on its, review (Off-Label Findings) and shall take any responsive action it deems necessary. If necessary for purposes of its review, InterMune shall endeavor to gather additional factual information about the circumstances relating to any Off-Label Findings. As part of each Annual Report, InterMune shall provide the OIG with copies of the underlying records of the detailing interactions, a copy of InterMune’s Off-Label Findings, and a description of the action(s), if any, InterMune took in response to the Off-Label Findings.

IV. New Business Units or Locations

     In the event that, after the Effective Date, InterMune changes locations or sells, closes, purchases, or establishes a new business unit or location, InterMune shall notify OIG of this fact as soon as possible, but no later than within 30 days after the date of change of location, sale, closure, purchase, or establishment. This notification shall include the address of the new business unit or location, phone number, fax number, any Federal health care program provider identification number and/or supplier number, and any corresponding contractor’s name and address that has issued each Federal health care program provider number. Each new business unit or location shall be subject to all the requirements of this CIA.

V. Implementation and Annual Reports

     A. Implementation Report. Within 120 days after the Effective Date, InterMune shall submit a written report to OIG summarizing the status of its implementation of the requirements of this CIA (Implementation Report). The Implementation Report shall, at a minimum, include:

          1. a copy of the letter (including all attachments) required by Section III.B sent to each entity which employs Third Party Personnel; ii) a list of all existing distribution, purchase, joint venture and/or co-marketing agreements; and iii) a description of the entities’ response to InterMune’s letter;

          2. the name, address, phone number, and position description of the Compliance Officer required by Section III.A, and a summary of other noncompliance job responsibilities the Compliance Officer may have;

          3. the names and positions of the members of the Compliance Committee required by Section III.A;

          4. a copy of InterMune’s Code of Conduct required by Section III.B.1;

          5. a copy of all Policies and Procedures required by Section III.B.2;

          6. the number of individuals required to complete the Code of Conduct certification required by Section III.B.1, the percentage of individuals who have completed such certification, and an explanation of any exceptions (the documentation supporting this information shall be available to OIG, upon request);

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          7. the, following information regarding each type of training required by Section III.C:

a. a description of such training, including a summary of the topics covered, the length of sessions and a schedule of training sessions;

b. the number of individuals required to be trained, percentage of individuals actually trained, and an explanation of any exceptions.

     A copy of all training materials and the documentation supporting this information shall be available to OIG, upon request.

          8. a description of the Disclosure Program required by Section III.E;

          9. the following information regarding the IRO(s): (a) identity, address, and phone number; (b) a copy of the engagement letter; (c) a summary and description of any and all current and prior engagements and agreements between InterMune and the IRO; and (d) the proposed start and completion dates of each Review;

          10. a certification from the IRO regarding its professional independence and/or objectivity with respect to InterMune;

          11. a description of the process by which InterMune fulfills the requirements of Section III.F regarding Ineligible Persons;

          12. the name, title, and responsibilities of any person who is determined to be an Ineligible Person under Section III.F; and the actions taken in response to the screening and removal obligations set forth in Section III.F;

          13. a list of all of InterMune’s locations (including locations and mailing addresses); the corresponding name under which each location is doing business; the corresponding phone numbers and fax numbers; each location’s Federal health care program provider and/or supplier number(s) (if applicable); and the name and address of each Federal health care program contractor to which InterMune currently submits claims (if applicable);

          14. a description of InterMune’s corporate structure, including identification of any parent and sister companies, subsidiaries, and their respective lines of business; and

          15. the certifications required by Section V.C.

     B. Annual Reports. InterMune shall submit to OIG annually a report with respect to the status of, and findings regarding, InterMune’s compliance activities for each of the 5 Reporting Periods (Annual Report).

Each Annual Report shall include, at a minimum:

          1. a copy of the letter (including all attachments) required by Section III.B sent to each entity which employs Third Party Personnel; ii) a list of all existing distribution,

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purchase, joint venture and/or co-marketing agreements; and iii) a description of the entities’ response to InterMune’s letter to the OIG;

          2. any change in the identity, position description, or other noncompliance job responsibilities of the Compliance Officer and any change in the membership of the Compliance Committee described in Section III.A;

          3. a summary of any significant changes or amendments to the Policies and Procedures required by Section III.B and the reasons for such changes (e,&., change in contractor policy) and copies of any compliance-related Policies and Procedures;

          4. the number of individuals required to complete the Code of Conduct certification required by Section III.B.1, the percentage of individuals who have completed such certification, and an explanation of any exceptions (the documentation supporting this information shall be available to OIG, upon request);

          5. the following information regarding each type of training required by Section III.C:

a. a description of such training, including a summary of the topics covered, the length of sessions and a schedule of training sessions;

b. the number of individuals required to be trained, percentage of individuals actually trained, and an explanation of any exceptions.

A copy of all training materials and the documentation supporting this information shall be available to OIG, upon request.

          6. a complete copy of all reports prepared pursuant to Section III.D, along with a copy of the IRO’s engagement letter (if applicable);

          7. InterMune’s response and corrective action plan(s) related to any issues raised by the reports prepared pursuant to Section III.D;

          8. a summary and description of any and all current and prior engagements and agreements between InterMune and the IRO, if different from what was submitted as part of the Implementation Report;

          9. a certification from the IRO regarding its professional independence and/or objectivity with respect to InterMune;

          10. a summary of all internal reviews, audits, or analyses related to Product Services Related Functions (including, at a minimum, the objective of the review, audit, or analysis; the protocol or methodology for the review, audit, or analysis; and the results of the review, audit, or analysis) and any corrective action plans developed in response to such reviews, audits, or analyses;

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          11. a summary of Reportable Events (as defined in Section III.H) identified during the Reporting Period and the status of any corrective and preventative action relating to all such Reportable Events;

          12. a summary of the disclosures in the disclosure log required by Section III.E that relate to Federal health care programs or to FDA requirements;

          13. any changes to the process by which InterMune fulfills the requirements of Section III.F regarding Ineligible Persons;

          14. the name, title, and responsibilities of any person who is determined to be an Ineligible Person under Section III.F; the actions taken by InterMune in response to the screening and removal obligations set forth in Section III.F;

          15. a summary describing any ongoing communication with the FDA required to have been reported pursuant to Section III.I. The summary shall include a description of the matter, and the status of such matter;

          16. a copy of all information required by Section III.J;

          17. a list and description of all actively promoted InterMune products; and information about the estimated relative usage (e.g., the percentage) of those products for off-label purposes;

          18. a summary describing any ongoing investigation or legal proceeding required to have been reported pursuant to Section III.G. The summary shall include a description of the allegation, the identity of-the investigating or prosecuting agency, and the status of such investigation or legal proceeding;

          19. a description of all changes to the most recently provided list of InterMune’s locations (including addresses) as required by Section V.A.13; the corresponding name under which each location is doing business; the corresponding phone numbers and fax numbers; each location’s Federal health care program provider number(s), and/or supplier number(s); and the name and address of each Federal healthcare program contractor to which InterMune currently submits claims (if applicable); and

          20. the certifications required by Section V.C.

     The first Annual Report shall be received by OIG no later than 60 days after the end of the first Reporting Period. Subsequent Annual Reports shall be received by OIG no later than the anniversary date of the due date of the first Annual Report.

     C. Certifications. The Implementation Report and Annual Reports shall include a certification by the Compliance Officer that:

          1. to the best of his or her knowledge, except as otherwise described in the applicable report, InterMune is in compliance with all of the requirements of this CIA;

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          2. he or she has reviewed the Report and has made reasonable inquiry regarding its content and believes that the information in the Report is accurate and truthful;

          3. if applicable, InterMune has complied with its obligations under the Settlement Agreement: (a) not to resubmit to any Federal health care program payors any previously denied claims related to the Covered Conduct addressed in the Settlement Agreement, and not to appeal any such denials of claims; (b) not to charge to or otherwise seek payment from federal or state payors for unallowable costs (as defined in the Settlement Agreement); and (c) to identify and adjust any past charges or claims for unallowable costs; and

          4. InterMune’s: 1) Policies and Procedures as referenced in Section III.B.2 above; 2) templates for standardized contracts and other similar documents; 3) training materials used for purposes of Section III.C, above; and 4) promotional or educational materials containing claims or information about InterMune’s products have been reviewed by competent legal counsel and have been found to be in compliance with the requirements of the Federal anti-kickback statute, the Prescription Drug Marketing Act, and other applicable laws. If the applicable legal requirements have not changed, after the initial review of the documents listed above, only material changes to the documents must be reviewed by competent legal counsel. The certification shall include a description of the document(s) reviewed and approximately when’ the review was completed. The documentation supporting this certification shall be available to OIG, upon request.

     D. Designation of Information. InterMune shall clearly identify any portions of its submissions that it believes are trade secrets, or information that is commercial or financial and privileged or confidential, and therefore potentially exempt from disclosure under the Freedom of Information Act (FOIA), 5 U.S.C. § 552. InterMune shall refrain from identifying any information as exempt from disclosure if that information does not meet the criteria for exemption from disclosure under FOIA.

VI. Notifications and Submission of Reports,

     Unless otherwise stated in writing after the Effective Date, all notifications and reports required under this CIA shall be submitted to the following entities:

OIG:	Administrative and Civil Remedies Branch
	Office of Counsel to the Inspector General
	Office of Inspector General
	U.S. Department of Health and Human Services
	Cohen Building, Room 5527
	330 Independence Avenue, S.W.
	Washington, DC 20201
	Telephone: 202.619.2078
	Facsimile: 202.205.0604
InterMune	Malcolm McKay
	Compliance Officer
	InterMune, Inc.

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	3280 Bayshore Blvd.
	Brisbane, CA 94005
	Telephone: 415.466.2284
	Facsimile: 415.466.2384
With a copy to:	Robin Steele
	Senior Vice President
	General Counsel and Corporate Secretary
	InterMune, Inc.
	3280 Bayshore Blvd.
	Brisbane, CA 94005
	Telephone: 415.466.2264
	Facsimile: 415.508.0006

Unless otherwise specified, all notifications and reports required by this CIA may be made by certified mail, overnight mail, hand delivery, or other means, provided that there is proof that such notification was received. For purposes of this requirement, internal facsimile confirmation sheets do not constitute proof of receipt.

VII. Oig Inspection, Audit, and Review Rights

     In addition to any other rights OIG may have by statute, regulation, or contract, OIG, or its duly authorized representative(s) may examine or request copies of InterMune’s books, records, and other documents and supporting materials and/or conduct on-site reviews of any of InterMune’s locations for the purpose of verifying and evaluating: (a) InterMune’s compliance with the terms of this CIA; and (b) InterMune’s compliance with the requirements of the Federal health care programs in which it participates and with applicable FDA requirements. The documentation described above shall be made available by InterMune to OIG or its duly authorized representative(s) at all reasonable times for inspection, audit, or reproduction. Furthermore, for purposes of this provision, OIG or its duly authorized representative(s) may interview any of InterMune’s employees, contractors, or agents who consent to be interviewed at the individual’s place of business during normal business hours or at such other place and time as may be mutually agreed upon between the individual and OIG. InterMune shall assist OIG or its duly authorized representative(s) in contacting and arranging interviews with such individuals upon OIG’s request. InterMune’s employees may elect to be interviewed with or without a representative of InterMune present.

VIII. Document and Record Retention

     InterMune shall maintain for inspection all documents and records relating to reimbursement from the Federal health care programs, or to compliance with this CIA, for 6 years (or longer if otherwise required by law) from the Effective Date.

IX. Disclosures

     Consistent with HHS’s FOIA procedures, set forth in 45 C.F.R. Part 5, OIG shall make a reasonable effort to notify InterMune prior to any release by OIG of information submitted by

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InterMune pursuant to its obligations under this CIA and identified upon submission by InterMune as trade secrets, or information that is commercial or financial and privileged or confidential, under the FOIA rules. With respect to such releases, InterMune shall have the rights set forth at 45 C.F.R. § 5.65(d).

X. Breach And Default Provisions

     InterMune is expected to fully and timely comply with all of its CIA obligations. A breach of this CIA does not constitute a breach of the Settlement Agreement or the Deferred Prosecution Agreement between InterMune and the United States executed simultaneously herewith. Similarly, a breach of this CIA does not constitute a breach of the settlement agreements with individual States referenced in the preamble. Any breach of the terms of those agreements does not constitute a breach of this CIA, except to the extent that such a breach independently also constitutes a breach of this CIA. Section X of this CIA specifies all of the remedies available to the OIG if InterMune fails to satisfy its obligations under this CIA. The remedies available to the OIG under this Section X do not preempt or limit any actions that the United States or any individual States may take against InterMune under any separate appropriate authorities.

     A. Stipulated Penalties for Failure to Comply with Certain Obligations. As a contractual remedy, InterMune and OIG hereby agree that failure to comply with certain obligations as set forth in this CIA may lead to the imposition of the following monetary penalties (hereinafter referred to as “Stipulated Penalties”) in accordance with the following provisions.

          1. A Stipulated Penalty of $2,500 (which shall begin to accrue on the day after the date the obligation became due) for each day InterMune fails to establish and implement any of the following obligations as described in Section III:

a. a Compliance Officer;

b. a Compliance Committee;

c. a written Code of Conduct;

d. written Policies and Procedures;

e. the training of Covered Persons;

f. a Disclosure Program;

g. Ineligible Persons screening and removal requirements;

h. Notification of Government investigations or legal proceedings;

i. notification of communications regarding off-label related matters; and

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j. a review of records reflecting the content of detailing sessions.

          2. A Stipulated Penalty of $2,500 (which shall begin to accrue on the day after the date the obligation became due) for each day InterMune fails to engage an IRO, as required in Section III.D and Appendices A and B.

          3. A Stipulated Penalty of $2,500 (which shall begin to accrue on the day after the date the obligation became due) for each day InterMune fails to submit the Implementation Report or the Annual Reports to OIG in accordance with the requirements of Section V by the deadlines for submission.

          4. A Stipulated Penalty of $2,500 (which shall begin to accrue on the day after the date the obligation became due) for each day InterMune fails to submit the annual Report associated with any of the Reviews in accordance with the requirements of Section III.D and Appendix B.

          5. A Stipulated Penalty of $1,500 for each day InterMune fails to grant access to the information or documentation as required in Section VII. (This Stipulated Penalty shall begin to accrue on the date InterMune fails to grant access.)

          6. A Stipulated Penalty of $5,000 for each false certification submitted by or on behalf of InterMune as part of its Implementation Report, Annual Report, additional documentation to a report (as requested by the OIG), or otherwise required by this CIA.

          7. A Stipulated Penalty of $1,000 for each day InterMune fails to comply fully and adequately with any obligation of this CIA. OIG shall provide notice to InterMune, stating the specific grounds for its determination that InterMune has failed to comply fully and adequately with the CIA obligation(s) at issue and steps InterMune shall take to comply with the CIA. (This Stipulated Penalty shall begin to accrue 10 days after InterMune receives this notice from OIG of the failure to comply.) A Stipulated Penalty as described in this Subsection shall not be demanded for any violation for which OIG has sought a Stipulated Penalty under Subsections 1-6 of this Section.

     B. Timely Written Requests for Extensions. InterMune may, in advance of the due date, submit a timely written request for an extension of time to perform any act or file any notification or report required by this CIA. Notwithstanding any other provision in this Section, if OIG grants the timely written request with respect to an act, notification, or report, Stipulated Penalties for failure to perform the act or file the notification or report shall not begin to accrue until one day after InterMune fails to meet the revised deadline set by OIG. Notwithstanding any other provision in this Section, if OIG denies such a timely written request, Stipulated Penalties for failure to perform the act or file the notification or report shall not begin to accrue until three business days after InterMune receives OIG’s written denial of such request or the original due date, whichever is later. A “timely written request’ ‘is defined as a request in writing received by OIG at least five business days prior to the date by which any act is due to be performed or any notification or report is due to be filed.

     C. Payment of Stipulated Penalties.

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          1. Demand Letter. Upon a finding that InterMune has failed to comply with any of the obligations described in Section X.A and after determining that Stipulated Penalties are appropriate, OIG shall notify InterMune of: (a) InterMune’s failure to comply; and (b) OIG’s exercise of its contractual right to demand payment of the Stipulated Penalties (this notification is referred to as the “Demand Letter”).

          2. Response to Demand Letter. Within 10 days after the receipt of the Demand Letter, InterMune shall either: (a) cure the breach to OIG’s satisfaction and pay the applicable Stipulated Penalties; or (b) request a hearing before an HHS administrative law judge (ALJ) to dispute OIG’s determination of noncompliance, pursuant to the agreed upon provisions set forth below in Section X.E. In the event InterMune elects to request an ALJ hearing, the Stipulated Penalties shall continue to accrue until InterMune cures, to OIG’s satisfaction, the alleged breach in dispute. Failure to respond to the Demand Letter in one of these two manners within the allowed time period shall be considered a material breach of this CIA and shall be grounds for exclusion under Section X.D.

          3. Form of Payment. Payment of the Stipulated Penalties shall be made by certified or cashier’s check, payable to: “Secretary of the Department of Health and Human Services,” and submitted to OIG at the address set forth in Section VI.

          4. Independence from Material Breach Determination. Except as set forth in Section X.D.1.c, these provisions for payment of Stipulated Penalties shall not affect or otherwise set a standard for OIG’s decision that InterMune has materially breached this CIA, which decision shall be made at OIG’s discretion and shall be governed by the provisions in Section XD, below.

     D. Exclusion for Material Breach of this CIA.

          1. Definition of Material Breach. A material breach of this CIA means:

a. a failure by InterMune to report a Reportable Event, and take corrective action, as required in Section III.H;

b. a repeated or flagrant violation of the obligations under this CIA, including, but not limited to, the obligations addressed in Section X.A;

c. a failure to respond to a Demand Letter concerning the payment of Stipulated Penalties in accordance with Section X.C; or

d. a failure to engage and use an IRO in accordance with Section III.D and Appendices A-B.

          2. Notice of Material Breach and Intent to Exclude. The parties agree that a material breach of this CIA by InterMune constitutes an independent basis for InterMune’s exclusion from participation in the Federal health care programs. Upon a determination by OIG that InterMune has materially breached this CIA and that exclusion is the appropriate remedy, OIG shall notify InterMune of: (a) InterMune’s material breach; and (b) OIG’s intent to exercise

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its contractual right to impose exclusion (this notification is hereinafter referred to as the “Notice of Material Breach and Intent to Exclude”).

          3. Opportunity to Cure. InterMune shall have 30 days from the date of receipt of the Notice of Material Breach and Intent to Exclude to demonstrate to OIG’s satisfaction that:

a. InterMune is in compliance with the obligations of the CIA cited by OIG as being the basis for the material breach;

b. the alleged material breach has been cured; or

c. the alleged material breach cannot be cured within the 30-day period, but that: (i) InterMune has begun to take action to cure the material breach; (ii) InterMune is pursuing such action with due diligence; and (iii) InterMune has provided to OIG a reasonable timetable for curing the material breach.

          4. Exclusion Letter. If, at the conclusion of the 30-day period, InterMune fails to satisfy the requirements of Section X.D.3, OIG may exclude InterMune from participation in the Federal health care programs. OIG shall notify InterMune in writing of its determination to exclude InterMune (this letter shall be referred to hereinafter as the “Exclusion Letter”). Subject to the Dispute Resolution provisions in Section X.E, below, the exclusion shall go into effect 30 days after the date of InterMune’s receipt of the Exclusion Letter. The exclusion shall have national effect and shall also apply to all other Federal procurement and nonprocurement programs. Reinstatement to program participation is not automatic. After the end of the period of exclusion, InterMune may apply for reinstatement by submitting a written request for reinstatement in accordance with the provisions at 42 C.F.R. §§ 1001.3001-.3004.

     E. Dispute Resolution

          1. Review Rights. Upon OIG’s delivery to InterMune of its Demand Letter or of its Exclusion Letter, and as an agreed-upon contractual remedy for the resolution of disputes arising under this CIA, InterMune shall be afforded certain review rights comparable to the ones that are provided in 42 U.S.C. § 1320a-7(f) and 42 C.F.R. Part 1005 as if they applied to the Stipulated Penalties or exclusion sought pursuant to this CIA. Specifically, OIG’s determination to demand payment of Stipulated Penalties or to seek exclusion shall be subject to review by an HHS ALJ and, in the event of an appeal, the HHS Departmental Appeals Board (DAB), in a manner consistent with the provisions in 42 C.F.R. § 1005.2-1005.21. Notwithstanding the language in 42 C.F.R. § 1005.2(c), the request for a hearing involving Stipulated Penalties shall be made within 10 days after receipt of the Demand Letter and the request for a hearing involving exclusion shall be made within 25 days after receipt of the Exclusion Letter.

          2. Stipulated Penalties Review. Notwithstanding any provision of Title 42 of the United States Code or Title 42 of the Code of Federal Regulations, the only issues in a proceeding for Stipulated Penalties under this CIA shall be: (a) whether InterMune was in full and timely compliance with the obligations of this CIA for which OIG demands payment; and

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(b) the period of noncompliance. InterMune shall have the burden of proving its full and timely compliance and the steps taken to cure the noncompliance, if any. OIG shall not have the right to appeal to the DAB an adverse ALJ decision related to Stipulated Penalties. If the ALJ agrees with OIG with regard to a finding of a breach of this CIA and orders InterMune to pay Stipulated Penalties, such Stipulated Penalties shall become due and payable 20 days after the ALJ issues such a decision unless InterMune requests review of the ALJ decision by the DAB. If the ALJ decision is properly appealed to the DAB and the DAB upholds the determination of OIG, the Stipulated Penalties shall become due and payable 20 days after the DAB issues its decision.

          3. Exclusion Review. Notwithstanding any provision of Title 42 of the United States Code or Title 42 of the Code of Federal Regulations, the only issues in a proceeding for exclusion based on a material breach of this CIA shall be:

a. whether InterMune was in material breach of this CIA;

b. whether such breach was continuing on the date of the Exclusion Letter; and

c. whether the alleged material breach could not have been cured within the 30-day period, but that: (i) InterMune had begun to take action to cure the material breach within that period; (ii) InterMune has pursued and is pursuing such’ action with due diligence; and (iii) InterMune provided to OIG within that period a reasonable timetable for curing the material breach and InterMune has followed the timetable.

     For purposes of the exclusion herein, exclusion shall take effect only after an ALJ decision favorable to OIG, or, if the ALJ rules for InterMune, only after a DAB decision in favor of OIG. InterMune’s election of its contractual right to appeal to the DAB shall not abrogate OIG’s authority to exclude InterMune upon the issuance of an ALJ’s decision in favor of OIG.

     If the ALJ sustains the determination of OIG and determines that exclusion is authorized, such exclusion shall take effect 20 days after the ALJ issues such a decision, notwithstanding that InterMune may request review of the ALJ decision by the DAB. If the DAB finds in favor of OIG after an AU decision adverse to OIG, the exclusion shall take effect 20 days after the DAB decision. InterMune shall waive its right to any notice of such an exclusion if a decision upholding the exclusion is rendered by the ALJ or DAB. If the DAB finds in favor of InterMune, InterMune shall be reinstated effective on the date of the original exclusion.

          4. Finality of Decision. The review by an ALJ or DAB provided for above shall not be considered to be an appeal right arising under any statutes or regulations. Consequently, the parties to this CIA agree that the DAB’s decision (or the ALJ’s decision if not appealed) shall be considered final for all purposes under this CIA.

XI. Effective and Binding Agreement

     Consistent with the provisions in the Settlement Agreement pursuant to which this CIA is entered, InterMune and OIG agree as follows:

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     A. This CIA shall be binding on the successors, assigns, and transferees of InterMune;

     B. This CIA shall become final and binding on the date the final signature is obtained on the CIA;

     C. Any modifications to this CIA shall be made with the prior written consent of the parties to this CIA;

     D. The undersigned InterMune signatories represent and warrant that they are authorized to execute this CIA. The undersigned OIG signatory represents that he is signing this CIA in his official capacity and that he is authorized to execute this CIA.

On Behalf of Intermune, Inc.

/s/ ROBIN STEELE
Robin Steele	Date
Senior Vice President and General Counsel
InterMune, Inc.
/s/ MALCOLM MCKAY
Malcolm McKay	Date
Compliance Officer
InterMune, Inc.
/s/ ETHAN POSNER
Ethan Posner, Esq.	Date
Counsel for InterMune, Inc.

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On Behalf of the Office of Inspector
General of the Department of Health and Human Services

/s/ GREGORY E. DEMSKE
Gregory E. Demske	Date
Assistant Inspector General for Legal Affairs Office of Inspector General U.S. Department of Health and Human Services

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APPENDIX A
INDEPENDENT REVIEW ORGANIZATION

     This Appendix contains the requirements relating to the Independent Review Organization (IRO) required by Section III.D of the CIA.

A. IRO Engagement.

     InterMune shall engage an IRO that possesses the qualifications set forth in Paragraph B, below, to perform the responsibilities in Paragraph C, below. The IRO shall conduct the review in a professionally independent and/or objective fashion, as set forth in Paragraph D. Within 30 days after OIG receives written notice of the identity of the selected IRO, OIG will notify InterMune if the IRO is unacceptable. Absent notification from OIG that the IRO is unacceptable, InterMune may continue to engage the IRO.

     If InterMune engages a new IRO during the term of the CIA, this IRO shall also meet the requirements of this Appendix. If a new IRO is engaged, InterMune shall submit the information identified in Section V.A.9 to OIG within 30 days of engagement of the IRO. Within 30 days after OIG receives written notice of the identity of the selected IRO, OIG will notify InterMune ‘if the IRO is unacceptable. Absent notification from OIG that the IRO is unacceptable, InterMune may continue to engage the IRO.

B. IRO Qualifications.

The IRO shall:

1. assign individuals to conduct the Promotional and Product Services Engagement who have expertise in the Federal health care program and FDA requirements applicable to sales, marketing, research, and promotion of pharmaceutical products. The assigned individuals shall also be knowledgeable about the general requirements of the Federal health care program(s) under which InterMune products are reimbursed;

          1. assign individuals to design and select the Promotional and Product Services Engagement samples who are knowledgeable about the appropriate statistical sampling techniques; and

          2. have sufficient staff and resources to conduct the reviews required by the CIA on a timely basis.

C. IRO Responsibilities.

The IRO shall:

          1. perform each Promotional and Product Services Engagement in accordance with the specific requirements of the CIA, including Appendix B to the CIA;

          2. follow all applicable Federal health care program and FDA requirements in making assessments in Promotional and Product Services Engagement;

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          3. respond to all OIG inquires in a prompt, objective, and factual manner; and

          4. prepare timely, clear, well-written reports that include all the information required by Appendices A and B.

D. IRO Independence/Objectivity.

The IRO must perform the Promotional and Product Services Engagement in a professionally independent and/or objective fashion, as appropriate to the nature of the engagement, taking into account any other business relationships or engagements that may exist between the IRO and InterMune.

E. IRO Removal/Termination.

1.	Provider. If InterMune terminates its IRO during the course of the engagement, InterMune must submit a notice explaining its reasons to OIG no later than 30 days after termination. InterMune must engage a new IRO in accordance with Paragraph A of this Appendix.
2.	OIG Removal of IRO. In the event OIG has reason to believe that the IRO does not possess the qualifications described in Paragraph B, is not independent and/or objective as set forth in Paragraph D, or has failed to carry out its responsibilities as described in Paragraph C, OIG may, at its sole discretion, require InterMune to engage a new IRO in accordance with Paragraph A of this Appendix.
	Prior to requiring InterMune to engage a new IRO, OIG shall notify InterMune of its intent to do so and provide a written explanation of why OIG believes such a step is necessary. To resolve any concerns raised by OIG, InterMune may request a meeting with OIG to discuss any aspect of the IRO’s qualifications, independence or performance of its responsibilities and to present additional information regarding these matters. InterMune shall provide any additional information as may be requested by OIG under this Paragraph in an expedited manner. OIG will attempt in good faith to resolve any differences regarding the IRO with InterMune prior to requiring InterMune to terminate the IRO. However, the final determination as to whether or not to require InterMune to engage a new IRO shall be made at the sole discretion of OIG.

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Appendix B to CIA for InterMune, Inc.
Promotional and Product Services Engagement

I. IRO Engagement, General Description

As specified more fully below, InterMune shall retain an Independent Review Organization(s) (IRO) to perform engagements to assist InterMune in assessing and evaluating its systems, processes, policies, and procedures related to sales, marketing, promotion, and product services activities (Promotional and Product Services Engagement). The Promotional and Product Services Engagement shall consist of two components — a systems review (the Promotional and Product Services Systems Review) and a transactions review (the Promotional and Product Services Transactions Review), as described more fully below. InterMune may engage, at its discretion, a single entity to perform both components of the Promotional and Product Services Engagement, provided that the entity has the necessary expertise and capabilities to perform both.

     As set forth below and in the CIA, InterMune shall engage an IRO to conduct the Promotional and Product Services Transactions Review for each year of the CIA. If there are no material changes in InterMune’s systems, processes, policies, and practices relating to Product Services Related Functions, the IRO shall perform the Promotional and Product Services Systems Review for two Reporting Periods to be selected by the OIG. The OIG will not require a Systems Review in the first Reporting Period.

     If InterMune materially changes its systems, processes, policies, and practices relating to Product Services Related Functions, then the IRO shall perform a Promotional and Product Services Systems Review for the Reporting Period(s) in which such changes were made in addition to conducting the Review for the two Reporting Periods selected by the OIG. The additional Systems Review(s) shall consist of: 1) an identification of the material changes; 2) an assessment of whether other systems, processes, policies, and practices previously reported did not materially change; and 3) a review of the systems, processes, policies, and practices that materially changed.

II. Promotional and Product Services Systems Review

A. Description of Reviewed Policies and Practices

     The Promotional and Product Services Systems Review shall be a review of InterMune’s systems, processes, policies, and procedures (including the controls on those systems, processes, policies, and procedures) relating to Product Services Related Functions. For at least two Reporting Periods, the IRO shall review InterMune’s systems, processes, policies, and procedures associated with the following (hereafter “Reviewed Policies and Practices”):

1. InterMune’s systems, policies, processes, and procedures applicable to the manner in which InterMune representatives (including sales personnel and/or Medical Science Liaisons (MSLs)) handle requests or inquiries relating to information about off-label uses of InterMune products, and the manner in which InterMune disseminates materials relating to off-label uses of products. This review includes:

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(i) the manner in which field personnel and/or Medical Affairs receive and respond to requests for information about off-label uses;

(ii) the form and content of information disseminated by Medical Affairs;

(iii) InterMune’s internal review process for the information disseminated by Medical Affairs;

(iv) InterMune’s systems, processes, and procedures (including its Medical Affairs Inquiries Database) to track requests for information about off-label uses of products and responses to those requests;

(v) the manner in which InterMune collects and supports information reported in its Medical Affairs Inquiries Database;

(vi) the processes and procedures by which the Compliance Officer (and other appropriate individuals within InterMune) identify situations in which it appears that improper off-label promotion may have occurred; and

(vii) InterMune’s processes and procedures for investigating, documenting, resolving, and taking appropriate disciplinary action for, potential situations involving off-label promotion;

2. InterMune’s policies and procedures applicable to the manner and circumstances under which Medical Affairs personnel (including MSLs) participate in meetings or events with physicians, pharmacists, or other health care professionals (HCPs) (either alone or with members of the sales force) and the role of the Medical Affairs personnel at such meetings or events;

3. InterMune’s systems, policies, processes, and procedures relating to the retention of HCPs as consultants (e.g.., including as members of advisory boards, focus groups, or clinical research project teams) or speakers. This shall include a review of:

(i) the criteria used to determine whether, how many, and under what circumstances (including the venue for the performance of any services) InterMune will enter contracts for such consulting or speaking arrangements;

(ii) the processes and criteria used to identify and select HCPs with whom InterMune enters consultant, speaker, or other contractual arrangements, including the role played by sales representatives in the process. This includes a review of InterMune’s internal review and approval process for such contracts, and the circumstances under which there may be exceptions to the process;

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(iii) InterMune’s tracking or monitoring of services provided or the work performed by the consultants or speakers (including the receipt of the consultants’ work product, if any);

(iv) InterMune’s policies and procedures related to circumstances, if any, under which the recipient or the recipient’s agent is required to disclose the existence of the consulting or speaking arrangement in place between InterMune and the HCP;

(v) the uses made of work product received from consultants or speakers, if any;

(vi) InterMune’s processes for establishing the amounts paid to HCPs and the reasons or justifications for any differentials in the amounts paid to different HCPs;

(vii) the criteria used to determine under what circumstances entertainment, recreation, travel, lodging, meals and/or other items or reimbursements are provided to consultants or speakers, and InterMune’s processes for establishing the amounts reimbursed or the type of entertainment or recreation provided;

(viii) whether and in what manner InterMune tracks or monitors the prescribing habits or product use of individuals or entities with whom it enters consulting, speakers, or other contractual arrangements, if any; and

(ix) the budget funding source within InterMune (e.g., department or division) for the consulting or contractual arrangement;

4. InterMune’s systems, policies, processes, and procedures relating to funding or sponsorship of any Educational or Informational Activity. This review shall include a review of the following items:

(i) the processes and procedures used to approve the funding or sponsorship of an Educational or Informational Activity;

(ii) the criteria used to determine whether and under what circumstances the funding or sponsorship will be provided;

(iii) the processes and criteria used to select recipients of the funding or sponsorships, including the role played by sales representatives in the processes (if any), and the circumstances under which there may be exceptions to the processes;

(iv) InterMune’s policies and procedures related to circumstances, if any, under which the recipient or the recipient’s agent is required to disclose InterMune’s funding or sponsorship and any financial relationship InterMune may have with the recipients;

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(v) InterMune’s policies or procedures for determining and memorializing the amounts paid to recipients of the funding or sponsorship and the purpose or justifications for the amounts paid;

(vi) InterMune’s policies and procedures relating to the independence of any programs funded through the funding or sponsorship;

(vii) InterMune’s policies and procedures relating to the content and promotional nature of any programs sponsored through the funding or sponsorships;

(viii) whether and in what manner InterMune tracks or monitors the prescribing habits or product use of individuals or entities receiving the funding or sponsorship, if any; and

(ix) the budget funding source within InterMune (e.g., department or division) from which the funding or sponsorships are provided;

5. InterMune’s systems, policies, processes, and procedures relating to funding or sponsorship of research agreements, grants, and/or research collaborations (including clinical trials and independent research) (collectively “Research Activities”). This review shall include a review of the following items:

(i) the processes and procedures used by InterMune to approve funding for Research Activities;

(ii) the criteria used to determine whether, and under what circumstances, InterMune will fund or otherwise participate in the Research Activities;

(iii) the processes and criteria used to select the recipients of funding for Research Activities, including the role played by any InterMune field personnel in the processes (if any), sand the circumstances under which there may be exceptions to the processes;

(iv) InterMune’s policies and procedures for requiring the recipient of the funding to disclose InterMune’s participation in or funding of Research Activities and any financial relationship InterMune may have with the recipient;

(v) InterMune’s policies or procedures for determining and memorializing the amounts paid to participants in the Research Activities and the purpose or justifications for the amounts paid;

(vi) InterMune’s policies and procedures relating to the independence of the Research Activities funded by InterMune;

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(vii) whether and in what manner InterMune tracks or monitors the prescribing habits or product use of individuals or entities receiving funding or otherwise participating in the Research Activities, if any; and

(viii) the budget funding source within InterMune (e.g., department or division) for the Research Activity;

6. InterMune’s systems, policies, processes, and procedures relating to the provision of any gifts, meals, receptions, travel, entertainment or other items of value (collectively `Expenses” ),to HCPs. This shall include a review of:

(i) the criteria used to determine whether, how many, and under what circumstances (including the venue for the performance of any services) InterMune will reimburse for Expenses of HCPs;

(ii) the processes and criteria used to identify and select HCPs to whom InterMune provides reimbursement of Expenses. This includes a review of InterMune’s internal review and approval process for such Expenses, the circumstances under which there may be exceptions to the processes, and the role played by sales representatives in the process;

(iii) InterMune’s tracking or monitoring of services provided, or the work performed by the HCPs in exchange for the Expenses, if any;

(iv) the uses made of work product received from HCPs receiving Expenses from InterMune, if any;

(v) InterMune’s processes for establishing the amounts paid to HCPs and the reasons or justifications for any differentials in the amounts paid to different HCPs;

(vi) whether and in what, manner InterMune tracks or monitors the prescribing habits or product use of HCPs who receive Expenses from InterMune, if any; and

(vii) the budget funding source within InterMune (e.g., department or division) for the Expenses;

7. InterMune’s systems, policies, processes, and procedures relating to charitable contributions by InterMune. This review shall include a review of the following items:

(i) the processes and procedures used to approve charitable contributions;

(ii) the criteria used to determine whether and under what circumstances the charitable contributions will be provided;

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(iii) the processes and criteria used to select and approve recipients of the charitable contributions, including the role played by field personnel in the processes (if any), and the circumstances under which there may be exceptions to the processes;

(iv) InterMune’s policies and procedures related to circumstances, if any, under which the recipient or the recipient’s agent is required to disclose InterMune’s charitable contribution and any financial relationship InterMune may have with the recipients;

(v) InterMune’s policies or procedures for determining and memorializing the amounts paid to recipients of the charitable contribution and the purpose or justifications for the amounts paid;

(vi) InterMune’s policies and procedures relating to the independence of any programs funded through the charitable contribution;

(vii) InterMune’s policies and procedures relating to the content and promotional nature of any programs sponsored through the charitable contributions;

(viii) whether and in what manner InterMune tracks or monitors the prescribing habits or product use of individuals or entities receiving the charitable contribution, if any; and

(ix) the budget funding source within InterMune (e.g., department or division) from which the charitable contributions are provided;

8. InterMune’s systems, policies, processes, and procedures relating to internal reviews conducted by: (i) InterMune’s Medical Review Committee; and (ii) InterMune’s Promotional Review Committee;

9. InterMune’s systems, policies, processes, and procedures for tracking expenditures (individual and aggregate) associated with the Reviewed Policies and Practices;

10. InterMune’s policies, processes, and procedures relating to the disciplinary actions that InterMune may impose in the event a Covered Person violates a InterMune policy or procedure;

11. InterMune’s systems, polices, processes and procedures for compensating (including with salaries and bonuses) non-Overtime Eligible employees, with regard to whether the systems, policies, processes, and procedures are designed to ensure that financial incentives do not inappropriately motivate sales and marketing personnel to engage in the improper promotion, sales, and marketing of InterMune’s products. This shall include a review of the bases upon which compensation is determined and the extent to which compensation is based on product performance; and

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12. InterMune’s systems, processes, policies, and procedures relating to the development of call plans for InterMune’s sales staff. This shall include a review of the basis upon which specialties are included or excluded from the call plan based upon their potential on-label and off-label utilization of InterMune products promoted by the sales staff.

B. Promotional and Product Services Systems Review Report

     The IRO shall prepare a report based upon its Systems Review. For each of the Reviewed Policies and Practices identified in Section II.A above, the report shall include the following items:

     a) a description of the documentation (including policies) reviewed and any personnel interviewed;

     b) a detailed description of InterMune’s systems, policies, processes, and practices with regard to the items identified in Sections IIA.1-12 above, including a general description of InterMune’s control and accountability systems (e.g., documentation and approval requirements, tracking mechanisms) and written policies regarding the Reviewed Policies and Practices;

     c) a description of the manner in ‘,which the control and accountability systems and the written policies relating to the items identified in Sections II.A.1-12 above are made known or disseminated within InterMune;

     d) a detailed description of any system used to track and respond to requests for information about InterMune’s products that come to Medical Affairs;

     e) a description of InterMune’s systems, policies, processes, and procedures for tracking expenditures associated with the Reviewed Policies and Practices or other promotional activities;

     f) a general description of the disciplinary measures InterMune has established for failure to comply with its systems, processes, policies and procedures relating to the Reviewed Policies and Practices;

     g) a detailed description of InterMune’s compensation system (including salaries and bonuses) for non-Overtime Eligible employees, including a description of the bases upon which compensation is determined and the extent to which compensation is based on product performance. To the extent that InterMune may establish compensation differently for individual products, the IRO shall report separately on each such type of compensation arrangement;

     h) findings and supporting rationale regarding any weaknesses in InterMune’s systems, processes, policies, and practices relating to the Reviewed Policies and Practices, if any; and

     i) recommendations to improve any of the systems, policies, processes, or practices relating to the Reviewed Policies and Practices, if any.

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Prior to the IRO’s submission of the report to the OIG, InterMune shall be provided with a copy of the report and an opportunity to respond to each comment made by the IRO. Provided it does not delay the timely filing of the Annual Reports, any responses by InterMune may be included in the IRO report submitted to the OIG. Otherwise, any responses by InterMune to the IRO’s findings may be submitted separately to the OIG following the Annual Report submission.

III. Promotional and Product Services Transactions Review

The IRO shall conduct a Promotional and Product Services Transactions Review for each of the Reporting Periods. As described below, the Transactions Review shall include reviews of a sample of Inquiries reflected in the Medical Affairs Inquiries Database.

A. Promotional and Product Services Transactions Review

          1. Review of Inquiries Made to Medical Affairs Group

     InterMune has in place a policy addressing the discussion and dissemination of information about non-FDA approved uses of products (off-label information). This policy provides, among other things, that Covered Persons may not directly or indirectly solicit, encourage, or promote unapproved uses of a product to HCPs. InterMune also has established a Medical Affairs unit to respond to requests for information about off label uses of InterMune products.

     a) Information To Be Included in Medical Affairs Inquiries Database

     InterMune shall document and record all inquiries that Medical Affairs receives from HCPs regarding Actimmune or other InterMune products in a database (Medical Affairs Inquiries Database). Medical Affairs shall record in the Medical Affairs Inquiries Database the following information about each unique inquiry (Inquiry) received for information about InterMune’s products: 1) date of inquiry; 2) form of inquiry (e.g., fax, phone, etc.); 3) name of requesting HCP; 4) nature and topic of request (including exact language of the inquiry if made in writing); 5) an evaluation of whether the inquiry relates to information about an off-label indication for the product; 6) nature/form of the response from InterMune (including a record of the materials provided to the HCP in response to the request); 7) the name of the InterMune representative who called on or interacted with the HCP; and 8) the status and findings of any follow-up review conducted by InterMune in situations in which improper off-label promotion is suspected.

     b) Internal Review of Medical Affairs Inquiries Database

     On a semi-annual basis, the Compliance Officer or other appropriate personnel shall review the Medical Affairs Inquiries Database and related information, as appropriate, and shall generate a report summarizing the items of information outlined in Section III.A.1.a above for each Inquiry handled by Medical Affairs during the preceding two, quarters (the Medical Affairs Inquiry Report). On a semi-annual basis, the Compliance Officer shall review the Medical Affairs Inquiry Reports to assess whether the information contained in the report suggests that improper-off—label promotion may have occurred in connection with any Inquiry(ies). If the Compliance Officer, in consultation with other appropriate InterMune personnel, suspects that

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improper off-label promotion may have occurred in connection with one or more Inquiries, the Compliance Officer shall undertake a follow-up review of the Inquiry (Off-Label Review), make findings based on his/her Off-Label Review, and take any responsive action (including disciplinary action) deemed necessary and appropriate.

     c) IRO Review

     As part of the Promotional and Product Services Transactions Review, the IRO shall evaluate InterMune’s processes relating to its Medical Affairs Inquiries Database. Specifically, the IRO shall select a random sample of 50 Inquiries from among the Inquiries reflected in the Medical Affairs Inquiries Database for each Reporting Period. One half of the Inquiries reviewed by the IRO shall be Inquiries for which InterMune conducted an Off-Label Review, and the other half shall be Inquiries for which InterMune did not conduct an Off-Label Review.

For each Inquiry reviewed, the IRO shall determine:

(i) whether each item of information listed above in Section III.A.1.a is reflected in the Medical Affairs Inquiries Database for each reviewed Inquiry; and

(ii) for each Inquiry for which the Compliance Officer conducted an Off Label Review, the basis for suspecting that improper off-label promotion may have occurred; the steps undertaken as part of the Off-Label Review; the findings of the Compliance Officer as a result of the Off-Label Review; and any follow-up actions taken by InterMune based on the Compliance Officer’s findings.

B. Promotional and Product Services Transactions Review Report

     For each Reporting Period, the IRO shall prepare a Report based on its Promotional and Product Services Transactions Review. Each Report shall include the following:

          1. Elements to Be Included:

a. Promotional and Product Services Transactions Review Objectives: A clear statement of the objectives intended to be achieved by the Review;

b. Engagement Protocol: A detailed narrative description of the procedures performed and a description of the universe of Inquiries from which samples were selected; and

c. Sources of Data: A full description of documentation (and/or other information) relied upon by the IRO when performing the Promotional and Product Services Transactions Review.

          2. Results to Be Included:

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The following results shall be included in each Promotional and Product Services Transactions Review Report:

a. a description of each type of sample unit reviewed, including the number of each type of sample reviewed (i, e., the number of Inquiries) and an identification of the types of documents and information reviewed for the Inquiries;

b. for each Inquiry sample unit, the IRO shall summarize the information contained in the Medical Affairs Inquiry Database about the Inquiry;

c. for each Inquiry sample unit, the IRO shall state its findings and supporting rationale, as to whether: (i) each item of information listed in Section III.A.1.a is reflected in the Medical Affairs Inquiries Database for each reviewed Inquiry; and (ii) for each Inquiry for which the Compliance Officer conducted an Off-Label Review, the basis for suspecting that improper off-label promotion may have occurred; the steps undertaken as part of the Off-Label Review; the findings of the Compliance Officer as a result of the Off-Label Review; and any follow-up actions taken by InterMune as a result of the Compliance Officer’s findings;

d. the findings and supporting rationale regarding any weaknesses in InterMune’s systems, processes, policies, and practices relating to the Inquiries, if any; and

e. recommendations for improvement in InterMune’s systems, processes, policies, and practices relating to the Inquiries, if any.

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EX-21.1

Exhibit 21.1

List of Subsidiaries

InterMune Canada Inc. (Canada)

InterMune Europe Limited (United Kingdom)

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (Forms S-8 Nos. 333-34510, 333-59316, 333-81172, 333-92276, 333-102907, 333-112380 and 333-116866) pertaining to the 1999 Equity Incentive Plan, the Amended and Restated 2000 Equity Incentive Plan, the Amended and Restated 2000 Non-Employee Directors’ Stock Option Plan and the 2000 Employee Stock Purchase Plan of InterMune, Inc., (Form S-1 No. 333-45460) and (Form S-3 Nos. 333-75794, 333-115516 and 333-139713) and in the related Prospectuses, of our reports dated March 12, 2007 with respect to the consolidated financial statements and schedule of InterMune, Inc., InterMune, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of InterMune, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2006.

/s/ ERNST & YOUNG LLP  

March 26, 2007
Palo Alto, California

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Daniel G. Welch, certify that:

1.	I have reviewed this Annual Report on Form 10-K of InterMune, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 26, 2007

/s/ Daniel G. Welch

Daniel G. Welch

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, John C. Hodgman, certify that:

1.	I have reviewed this Annual Report on Form 10-K of InterMune, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 26, 2007

/s/ John C. Hodgman

John C. Hodgman

Senior Vice President of Finance Administration

and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION

     Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Daniel G. Welch, Chief Executive Officer of InterMune, Inc. (the “Company”), and John C. Hodgman, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:

1.	The Company’s Annual Report on Form 10-K for the year ended December 31, 2006, to which this Certification is attached as Exhibit 32.1 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and
2.	The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned have set their hands hereto as of the 26th day of March, 2007.

/s/ Daniel G. Welch	/s/ John C. Hodgman
Daniel G. Welch	John C. Hodgman
Chief Executive Officer	Chief Financial Officer

This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of InterMune, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.