10-K 1 itmn-10k_20131231.htm FORM 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, 2013

or

¨

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

(IRS Employer

incorporation or organization)

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  þ    No  ¨

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  ¨    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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

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.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 Large accelerated filer þ

  

Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)

  

Smaller reporting company ¨

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

As of June 28, 2013, the last business day of the registrant’s second fiscal quarter, the aggregate market value (based upon the closing sales price of such stock as reported on The NASDAQ Global Select Market) of the voting and non-voting stock held by non-affiliates of the registrant was $782,644,758, which excludes an aggregate of 531,348 shares of the registrant’s common stock held by affiliates as of such date. 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 January 31, 2014, the number of outstanding shares of the registrant’s common stock was 89,716,970 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2014 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 Annual Report on Form 10-K.

 

 


INTERMUNE, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

TABLE OF CONTENTS

 

PART I

 

 

    ITEM 1.

 

BUSINESS

  3

 

    ITEM 1A.

 

RISK FACTORS

18

 

    ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

44

 

    ITEM 2.

 

PROPERTIES

44

 

    ITEM 3.

 

LEGAL PROCEEDINGS

45

 

    ITEM 4.

 

MINE SAFETY DISCLOSURES

46

 

PART II

 

 

    ITEM 5.

 

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

47

 

    ITEM 6.

 

SELECTED FINANCIAL DATA

48

 

    ITEM 7.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

50

 

    ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

59

 

    ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

61

 

    ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

92

 

    ITEM 9A.

 

CONTROLS AND PROCEDURES

92

 

    ITEM 9B.

 

OTHER INFORMATION

96

 

PART III

 

 

    ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

96

 

    ITEM 11.

 

EXECUTIVE COMPENSATION

96

 

    ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

96

 

    ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

96

 

    ITEM 14.

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

96

 

PART IV

 

 

    ITEM 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

97

 

SIGNATURES

98

 

 

 

 

2


PART I

 

 

ITEM 1.   BUSINESS

 

Forward-Looking Statements

 

This Annual Report on Form 10-K (the “Annual 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 about:

·

product and product candidate development;

·

the market or markets for our products or product candidates;

·

the ability of our products to treat patients in our markets;

·

the ability to achieve certain pricing and reimbursement levels for our product in various countries in the European Union, Canada and elsewhere, including our estimates of the number of patients who meet certain disease progression measures (e.g., forced vital capacity);

·

the timing of concluding and announcing pricing and reimbursement discussions in various countries in the European Union and elsewhere;

·

the timing of receipt of top-line results from our ASCEND clinical trial and our expected announcement thereof;

·

expectations around the enrollment size, timing and results of our ongoing clinical trials, including the PANORAMA and LOTUSS trials;

·

our expectations regarding the effectiveness of our strategic priorities and our ability to take successful actions to achieve our three point strategy;

·

opportunities to establish development or commercial alliances;

·

timing and expectations of when our products or product candidates may be marketed or made available to patients in various jurisdictions;

·

commercial launch preparations, including the timing of launches in the European Economic Area, or the EEA, and the implementation of the commercial infrastructure required for commercial launches in Europe and the United States;

·

the scope and enforceability of our intellectual property rights, including the anticipated durations of patent protection and marketing exclusivity in the European Union, United States and other jurisdictions, and including claims that we or our collaborators may infringe third-party intellectual property rights or otherwise be required to pay license fees and/or royalties under such third-party rights;

·

governmental regulation and approval;

·

requirement of additional funding to complete research and development and commercialize products;

·

liquidity and sufficiency of our cash resources;

·

future revenue, including those from product sales and collaborations, adequacy of revenue reserve levels, future expenses, future financial performance and trends;

·

the uses of our cash resources, including the proceeds from our registered underwritten public offerings in 2013;

·

our future research and development expenses and other expenses; and

·

our operational and legal risks.

3


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 Annual Report, including those discussed in this Annual Report under “Item 1A. Risk Factors” below. Because the factors referred to above, as well as the factors discussed in this Annual 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 this Annual Report, unless otherwise indicated, “InterMune,” “we,” “our,” “us” or the “Company” refers to InterMune, Inc.

Overview

 

We are a biotechnology company focused on the research, development and commercialization of innovative therapies in pulmonology and orphan fibrotic diseases. In pulmonology, we are focused on therapies for the treatment of idiopathic pulmonary fibrosis (IPF), a progressive, irreversible, unpredictable and ultimately fatal lung disease. Pirfenidone, the only medicine approved for IPF anywhere in the world, is approved for marketing by InterMune in all 28 member countries of the European Union (EU) and Canada. In September 2011, we launched commercial sales of pirfenidone in Germany under the trade name Esbriet, and Esbriet is now also commercially available in various European countries, including key markets such as France, Italy and the UK. In addition, we launched in Canada in January 2013. Pirfenidone is not approved for sale in the United States but is currently in a Phase 3 clinical trial to support regulatory registration in the United States. Our research programs are focused on the discovery of targeted, small-molecule therapeutics and biomarkers to treat and monitor serious pulmonary and fibrotic diseases.

 

We are also pursuing the registration of pirfenidone to treat IPF in the United States. After reviewing various regulatory and clinical development options and following our discussions with the United States Food and Drug Administration, or the FDA, we commenced an additional pivotal Phase 3 clinical study of pirfenidone in IPF in July 2011, known as the ASCEND trial. The results of the ASCEND trial will supplement the existing Phase 3 clinical study data from our CAPACITY clinical trials to support the potential registration of pirfenidone to treat IPF in the United States.

 

In January 2013, we completed a registered underwritten public offering of 15,525,000 shares of our common stock and a concurrent registered underwritten public offering of $120.8 million aggregate principal amount of 2.50% convertible senior notes due 2017. The resulting aggregate net proceeds from the common stock offering were approximately $145.7 million, after deducting underwriting discounts and expenses. The resulting aggregate net proceeds from the convertible note offering were approximately $116.8 million, after deducting underwriting discounts and expenses. In January 2013, we used a portion of the net proceeds from the convertible note offering to repurchase approximately $66.6 million of our outstanding 5.00% convertible senior notes due 2015 for proceeds of $72.2 million. In November 2013, we completed a registered underwritten public offering of 7,475,000 shares of our common stock. The resulting aggregate net proceeds from the common stock offering were approximately $91.5 million, after deducting underwriting discounts and expenses. We intend to use the remaining proceeds from these offerings to fund the commercialization of Esbriet and to advance our strategic plan, including the initiatives described below.

 

We were incorporated in California in 1998 and reincorporated in Delaware in 2000 in connection with our initial public offering. We have established wholly-owned subsidiaries in various countries, primarily to support our commercialization of Esbriet in Europe including subsidiaries in Austria, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland and the UK, as well as in Canada. Our worldwide corporate headquarters are in Brisbane, California and our European headquarters are in Muttenz, Switzerland.

Our total revenue and income (loss) from continuing operations for each of the years ended, and our total assets as of December 31, 2013, 2012 and 2011 are summarized in the following table:

 

 

 

2013

 

 

2012(1)

 

 

2011(1)

 

 

 

(in thousands)

 

Total revenue

 

$

70,339

 

 

$

26,174

 

 

$

5,407

 

Net loss

 

 

(219,568

)

 

 

(150,081

)

 

 

(154,774

)

Total assets

 

 

462,633

 

 

 

363,466

 

 

 

472,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Total revenue excludes amounts related to Actimmune product sales which have been reclassified to discontinued operations.

4


 

Esbriet® (pirfenidone)

 

Pirfenidone is an orally active, small molecule compound that has been developed for the treatment of IPF. In September 2011, we launched commercial sales of pirfenidone in Germany under the trade name Esbriet, and Esbriet is now also commercially available in various European countries, including key markets such as France, Italy and the UK. In addition, we launched in Canada in January 2013. We continue to prepare for the commercial launch of Esbriet in other countries in Europe.

 

We have launched in 13 of our original 15 targeted European countries. We currently expect to provide an update on the pricing and reimbursement discussions on Esbriet in the remaining two of our initial 15 targets: Spain and the Netherlands in the first half of 2014.

 

Clinical Programs

 

Our ASCEND trial is intended to support regulatory registration of pirfenidone in the United States. The trial is a multinational, randomized, double-blind, placebo controlled Phase 3 trial of 555 patients designed to evaluate the safety and efficacy of Esbriet® (pirfenidone) in IPF patients with mild to moderate impairment in lung function. Patients were randomly assigned 1:1 to receive oral pirfenidone (2403 mg/day) or placebo. The primary endpoint is change in percent predicted forced vital capacity (FVC), with the primary outcome analysis a Rank ANCOVA at Week 52. The magnitude of effect will be presented on a categorical basis as the proportion of patients with decrements of FVC percent predicted less than 0% or greater than 10% at pre-specified study time points. The study was powered by estimating the treatment effect size of pirfenidone based on the results of the intent-to-treat analysis of the pooled results of the two previous CAPACITY Phase 3 studies.

 

Key secondary endpoints include change in six-minute walk test (6MWT) distance and progression-free survival, which will be based on the earliest of time to death, FVC decrement of 10% or greater, or decrement in 6MWT distance of 50 meters or more. Additional secondary endpoints in ASCEND include all-cause mortality and on-treatment IPF-related deaths (both evaluated independently in ASCEND as well as pooled with the previous CAPACITY data), and dyspnea. Based on the relatively low mortality rate in this patient population and the treatment effect on mortality seen in CAPACITY, ASCEND is not adequately powered for the mortality endpoint, even after pooling with CAPACITY data. However, if the treatment effect in ASCEND on mortality were more pronounced than that seen in CAPACITY, it may be possible pooling ASCEND and CAPACITY, to derive a favorable effect on mortality.

 

Relative to InterMune’s two previous studies of pirfenidone in IPF (CAPACITY), the entry criteria for ASCEND were refined to enrich the study population for patients who are more likely to experience decline in lung function during the study. This included modest changes to the eligibility criteria for FVC, DLco, FEV1/FVC ratio, and time since diagnosis. These changes may increase the likelihood of demonstrating significant findings on multiple endpoints in ASCEND. The median baseline percent predicted FVC of patients enrolled in ASCEND is 68% compared with 73% in CAPACITY.

 

During 2013, we initiated a randomized, double-blind, placebo controlled Phase 2 clinical study, known as the PANORAMA trial, designed to evaluate the safety and tolerability of N–acetylcysteine (NAC) in patients with IPF and who are currently being treated with Esbriet (pirfenidone). NAC is a pharmaceutical drug and nutritional supplement used primarily as a mucolytic agent and in the management of paracetamol/acetaminophen overdose. NAC is an antioxidant that has been used alone or in combination with other agents, including Esbriet, for the treatment of IPF. However, NAC is not approved for the treatment of IPF by any major regulatory agency and no controlled data currently exists regarding the safety and tolerability of Esbriet and NAC in combination. To characterize the safety and tolerability of NAC when prescribed in patients treated with Esbriet, we have initiated the PANORAMA trial. The PANORAMA trial is expected to enroll approximately 250 patients at approximately 70 centers in Europe with a treatment duration of six months. However, depending on the results of the PANTHER trial, a trial sponsored by the National Institutes of Health to evaluate NAC versus placebo in the treatment of IPF patients, we may modify or terminate our PANORAMA trial.

 

In addition, in 2013 we initiated the LOTUSS trial, a Phase 2, multinational, open-label, 16-week, randomized, parallel-group, safety and tolerability study of Esbriet (pirfenidone) in patients with systemic sclerosis-related interstitial lung disease (SSc-ILD). Systemic sclerosis (SSc), also known as scleroderma, is an autoimmune connective tissue disorder resulting in, among other features, excessive collagen production and tissue fibrosis. SSc is a multi-organ disease that can involve the lungs, skin, heart, gut and kidneys. Most affected patients are women and are between 30 to 50 years old at diagnosis. Lung involvement (SSc-ILD) eventually occurs in more than 70% of SSc patients, and is the leading cause of functional impairment as well as the leading cause of mortality in this population. There are currently no licensed pharmacological agents approved to treat SSc-ILD although some patients receive immunosuppressive drugs. Therefore, we believe SSc-ILD represents a significant unmet medical need. We have applied for orphan drug designation status for pirfenidone in the United States and the EU. We expect to enroll approximately 50 patients across approximately 20 sites in the United States, Canada and Italy.

 

5


Our Strategy

 

We recently refined our strategy to focus on steps to maintain the revenue growth and territorial expansion of Esbriet while also investing to become a leader in specialty fibrotic diseases. Our first priority remains the successful launch and commercialization of Esbriet for IPF, including planning and executing a successful US launch if Esbriet is approved in the United States. As our second priority, we believe we must invest in product innovation and new data generation to maximize growth of Esbriet in the treatment of IPF. Our third strategic priority is to grow beyond Esbriet and invest in internal development and business development to expand our pipeline into specialty fibrotic diseases outside of IPF.

 

This year, in addition to initiating our PANORAMA and LOTUSS clinical trials, we took a number of steps forward in executing this strategy as follows:

·

We made plans to increase the security and integrity of our Esbriet manufacturing supply chain to reduce the risk of interruption of supply and to prepare for a U.S. launch;

·

We undertook a program to investigate new dosage forms of pirfenidone and identify what innovations would be viewed as important improvements by IPF patients and treating physicians;

·

We advanced a drug discovery program to optimize the pirfenidone chemotype and explore the potential for developing a new drug with an improved efficacy, convenience and side effect profile relative to pirfenidone;

·

Our research team has continued to analyze our extensive collection of outcome-correlated-biosamples with a view to identifying biomarkers that correlate with disease progression, disease activity or treatment response. We believe that our sample collection may identify cellular components and pathways that can in future be targeted for therapeutic intervention;

·

We have advanced our internal drug discovery efforts in IPF, including the development of potent antagonists of the lysophosphatidic acid receptor 1 (LPA-1). The LPA-1 receptor is a G-protein coupled receptor (GPCR) identified as an important mediator of fibrosis;

 

Meanwhile, to support our commercialization efforts of Esbriet in Europe, we continued to invest in the establishment of a commercial infrastructure within Europe, and to increase our employee headcount in that region.

 

We are completing our pivotal Phase 3 clinical trial to evaluate pirfenidone in IPF, known as ASCEND, in an effort to support approval of pirfenidone for the treatment IPF in the United States. We achieved full enrollment with a total of 555 randomized patients in January 2013. The last patient completed the trial in early 2014, and we currently expect top-line results from ASCEND no later than early second quarter of 2014.

 

We remain committed to our three-point strategy of successfully commercializing Esbriet, continuing to innovate around Esbriet, and expanding our pipeline to generate innovative product candidates. There can be no assurance that we will achieve our strategic objectives or that any of the initiatives identified above will be successful. We will face challenges and may need to make difficult decisions about how best to manage and allocate our resources. Similarly, there can be no assurances that we will be able to fund all of our initiatives from our revenue or cash on hand, or that we will be able to raise the external capital that may be necessary to fund these initiatives.

Idiopathic Pulmonary Fibrosis (IPF)

 

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 with a median survival time from diagnosis of two to five years. Published epidemiology studies suggest there is a range of between 62,000 and 82,000 IPF patients in the company’s 15 targeted European market countries. Our research suggests that there is a range of between 50,000 and 70,000 diagnosed cases of IPF in the United States. Approximately two-thirds of the affected patients are believed to have mild to moderate functional impairment. In the United States, it is believed that approximately 15,000 to 20,000 new IPF cases develop each year, with a similar rate of incidence in the EU. Pirfenidone is the only commercially approved drug for the treatment of mild to moderate IPF and is now approved in (i) the EU and Canada and is sold by us under the trade name Esbriet, (ii) Japan and is sold by Shionogi under the trade name Pirespa®, (iii) India and is sold by Cipla Ltd. under the trade name Pirfenex®, and (iv) China and is sold by Shanghai Genomics, Inc. under the trade name Etuary®.

 

6


Divesture of Assets

 

Sale of Actimmune®

 

On June 19, 2012, we completed the divestiture of our worldwide development and commercialization rights to the pharmaceutical product containing Interferon Gamma-1b sold by us under the trade name Actimmune® for $55.0 million in cash, plus certain conditional royalty payments for a period of two years following the closing. Such divestiture was consummated pursuant to the terms of the Asset Purchase Agreement, dated as of May 17, 2012, that we entered into with Vidara Therapeutics International Limited, an Irish company, Vidara Therapeutics Holdings LLC, a Delaware limited liability company and Vidara Therapeutics Research Limited, an Irish company. For the year ended December 31, 2011, the sales of Actimmune accounted for the majority of our product revenue. For all periods presented, Actimmune revenues and expenses are reclassified within discontinued operations.

 

License, Collaboration and Other Agreements

 

Pirfenidone

 

Marnac, Inc./KDL GmbH (pirfenidone)

 

In November 2007, we entered into asset purchase agreements with Marnac and KDL whereby we purchased, among other things, pirfenidone-related assets. Under the terms of the asset purchase agreements, we made payments of approximately $13.7 million and are required to make future milestone payments in connection with the continued development and regulatory approval of pirfenidone in certain countries. On February 28, 2011, we received authorization to market Esbriet in the EU and made a milestone payment of $20.0 million in the aggregate to Marnac and KDL and have capitalized such payment as acquired product rights. A future contingent payment of up to an additional $20.0 million is required to be made by us only if positive Phase 3 data and product approval in the United States are achieved. The asset purchase agreements do not affect the rights to pirfenidone in Japan, Korea and Taiwan, which rights are licensed by Marnac and KDL to Shionogi.

 

Shionogi Clinical Data License

 

In May 2004, we entered into an agreement with Shionogi which governs the exchange and use of certain documents and information relating to the parties’ respective clinical trials of pirfenidone. In February 2010, we entered into an amendment to such May 2004 agreement that gives us an option to exercise a license to obtain access to certain patient level data from the Shionogi Phase 3 clinical trial with pirfenidone in patients with IPF, or SP3. This license provides that we pay Shionogi a royalty on pirfenidone sales in a particular jurisdiction for a specified period of time in the event (i) we use the SP3 patient level data as “pivotal study data” (as defined in the license) in connection with a particular regulatory filing in such jurisdiction, and (ii) the regulatory authority grants marketing approval based on a filing that contains SP3 patient level data used as pivotal study data. We did not use SP3 patient level data as pivotal study data in our recently approved EU MAA. Similarly, we did not use SP3 patient level data as pivotal study data in our U.S. NDA, as indicated by the FDA in its Complete Response Letter relating to our U.S. NDA for pirfenidone to treat patients with IPF.

 

In March 2012, following the EU’s grant of marketing approval for Esbriet (pirfenidone), Shionogi demanded that we agree that Shionogi is entitled to royalty payments on our sales of Esbriet (pirfenidone) in Europe, based on Shionogi’s interpretation of our May 2004 agreement with Shionogi (as amended). On July 5, 2012, Shionogi filed a complaint against us in the United States District Court for the Northern District of California. Shionogi’s complaint alleged principally that we breached that agreement with Shionogi governing the exchange and use of certain documents and information relating to the parties’ respective clinical trials of pirfenidone. The complaint alleged that we breached the agreement by utilizing certain of Shionogi’s information in our MAA and other submissions for pirfenidone with the EMA and then failing to pay royalties to Shionogi on net sales of Esbriet (pirfenidone) in the European Union. In the alternative, the complaint alleged that, if we did not use Shionogi’s information in a way that would trigger a royalty obligation under the agreement, we had an obligation to do so as an exclusive licensee. Shionogi sought, among other things, unspecified monetary damages and a declaration that we are obligated to pay royalties to Shionogi on net sales of Esbriet (pirfenidone) in the European Union. In February 2013, we reached an agreement on the material terms of a settlement with Shionogi relating to the complaint and, in May 2013, we entered into a final complete settlement agreement. The principal terms of the settlement agreement include: (i) dismissal of the litigation with prejudice; (ii) a royalty payment from us to Shionogi on net sales of Esbriet (pirfenidone) in the EU of 4.25% for sales commencing on January 1, 2013 and ending on the date of the expiration of orphan drug status in the EU (February 2021); (iii) no royalty payments on net sales of Esbriet in the EU prior to January 1, 2013; (iv) no royalty payments on sales of Esbriet in Canada; (v) no royalty payments on sales of Esbriet in the U.S. or sales in any other jurisdiction (other than the EU), unless we submit certain Shionogi clinical information in connection with an application for regulatory approval in that jurisdiction; and (vi) the Shionogi clinical information in our current NDA in the U.S. would not trigger payment of a royalty on sales of Esbriet in the U.S.

 

7


Going forward, we do not intend to use Shionogi clinical information, including SP3 patient level data, as pivotal study data in our regulatory filings in the United States or in other jurisdictions. However, should we later elect to do so, and should the relevant regulatory authority grant marketing approval based on a regulatory filing containing such data used as pivotal study data, we may owe a royalty to Shionogi on sales of pirfenidone in such jurisdiction for a specified period of time.

 

Manufacturing and Supply Arrangements

 

We enter into contractual arrangements with qualified third-party manufacturers to manufacture and package our products and product candidates. This manufacturing strategy enables us to more efficiently direct financial resources to the development and commercialization of products rather than diverting resources to establishing a significant internal manufacturing infrastructure.

 

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

 

In January 2009, we entered into a definitive supply agreement with Signa and ACIC for the clinical and commercial supply of the API for pirfenidone. The supply agreement generally provides for the exclusive supply by Signa and ACIC and the exclusive purchase (except in certain limited circumstances) by us of the API for pirfenidone with respect to the territories where we hold exclusive rights to pirfenidone. Under the terms of this supply agreement, we are not required to make minimum annual purchases. The pirfenidone API will be purchased by us based upon a rolling forecast. The supply agreement was made effective as of December 17, 2008 and will continue for the longer of (i) 10 years thereafter or (ii) seven years from the date of approval of a finished product containing the API for pirfenidone. If Signa and ACIC are not able to supply all of our requirements for the API for pirfenidone, we may purchase the API from a second source third-party supplier. Either party has the right to terminate the supply agreement if the other party materially breaches its obligations thereunder or in the event the manufacture, use, sale or importation of the API is found to be infringing of a third-party’s intellectual property rights and such third-party is unwilling to provide either Signa and ACIC or us with a license. In addition, we have the right to terminate the supply agreement in the event it is not commercially reasonable for us to sell or purchase the API or a finished product containing the API. In light of our receipt of marketing authorization of Esbriet in the EU, we have assigned this agreement to InterMune International AG, our wholly-owned subsidiary and European headquarters located in Muttenz, Switzerland.

 

Catalent Pharma Solutions LLC (pirfenidone)

 

In September 2009, we entered into a commercial manufacturing agreement with Catalent Pharma Solutions, LLC (Catalent) to process and encapsulate the API for pirfenidone and to supply us with bulk pharmaceutical pirfenidone product for commercial use. The agreement generally provides for the exclusive supply by Catalent and the exclusive purchase (except in certain limited circumstances) by us of the bulk pharmaceutical pirfenidone product with respect to certain territories where we hold exclusive rights to pirfenidone. In the fourth year of the agreement, Catalent’s exclusive supply and our exclusive purchase obligations under the agreement will only apply to 50% of our commercial requirements for the bulk pharmaceutical pirfenidone product in the United States while supply and purchase obligations of the parties under the agreement will be non-exclusive for the other geographical territories subject to the agreement. Furthermore, after the fifth year of the agreement, the supply and purchase obligations of the parties under the agreement will become non-exclusive for all territories subject to the agreement. Under the terms of this agreement, we are not required to make any minimum annual purchases. The bulk pharmaceutical pirfenidone product is required to be purchased by us based upon a rolling forecast. The agreement was made effective as of September 10, 2009 and is scheduled to continue for an initial term of five (5) years from the date of our commercial launch of pirfenidone, if approved by a regulatory agency, subject to renewal. If Catalent is not able to supply all of our requirements for the bulk pharmaceutical pirfenidone product, we may purchase such product from a second source supplier. Either party has the right to terminate the supply agreement if the other party materially breaches its obligations thereunder. In light of our receipt of marketing authorization of Esbriet (pirfenidone) in the EU, we have assigned this agreement to InterMune International AG, our wholly-owned subsidiary and European headquarters located in Muttenz, Switzerland.

 

Patents and Proprietary Rights

 

Based on our own internal research efforts and observations made during our clinical trials, we have filed numerous patents relating to the safe and effective use of pirfenidone to treat patients with IPF and other diseases.

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Pirfenidone

 

The composition of matter patents for pirfenidone expired in the 1990’s. In 2002, we licensed from Marnac and its co-licensor KDL certain worldwide rights, excluding Japan, Korea and Taiwan, to develop and commercialize pirfenidone for all fibrotic diseases, including renal, liver and pulmonary fibrosis covered by certain of their use patents. Effective November 21, 2007, we entered into asset purchase agreements with Marnac and KDL whereby we effectively terminated the prior license agreement by purchasing, among other things, the pirfenidone-related assets covered by such prior license agreement. Among the patents we purchased under the asset purchase agreements are U.S. Patent Nos. 5,310,562; 5,962,478; 6,090,822, 6,300,349 and related foreign equivalents. Given that U.S. Patent No. 5,310,562 expired 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, except to the extent we are able to secure additional intellectual property in connection with novel treatment methods. We also own the European counterpart of U.S. Patent Nos. 5,962,478 and 6,300,349, validated in Germany and the United Kingdom, and have sought extended patent protection for Esbriet through 2021 by filing applications for a Supplemental Patent Certificate in these countries. In addition to the patents we acquired from Marnac and KDL, we have been pursuing additional pirfenidone-related intellectual property including patent rights relating to the safe and effective use of pirfenidone based upon observations from our extensive clinical development of pirfenidone. We currently have five additional patents granted in the EU covering the safe and/or efficacious administration of pirfenidone to IPF patients, as well as 16 issued patents in the United States covering the formulation or uses of pirfenidone. These patents have expiration dates between 2026 and 2030, and we currently anticipate that these patents will provide us with additional market exclusivity in the EU following the expiration of orphan drug status in 2021. We will only enjoy market exclusivity for a particular indication in countries in which we have (i) regulatory exclusivity such as orphan drug status or new chemical entity data exclusivity, or (ii) patent protection. For a description of certain intellectual property issues relating to the intellectual property we acquired and the other intellectual property we are pursuing, please see “Item 1A. Risk Factors-Following expiration of orphan drug designation in the EU, and if approved for commercial use by the FDA, in the United States, our current intellectual property portfolio may not be sufficient to protect the continued exclusivity of pirfenidone for the treatment in adults of mild to moderate IPF” below.

 

Commercial Operations

 

Esbriet® (pirfenidone)

 

To support our commercialization efforts of Esbriet in Europe and Canada, we have invested significantly and continue to invest in the establishment of a commercial infrastructure within these regions. As of December 31, 2013 we had a total of 170 employees in various offices located in Europe and 21 employees located in Canada. Esbriet is sold primarily through distributors to hospitals and pharmacies.

 

Pirfenidone is the only approved therapy in the world for the treatment of IPF. In 2011, we received marketing authorization for pirfenidone in the EU for use in adults for the treatment of mild to moderate IPF. In the succeeding ten quarters we have successfully concluded pricing negotiations with reimbursement authorities in 13 European countries. In each country we initiated commercial sales following the successful conclusion of these negotiations.

 

In anticipation of the ASCEND read out, the company is also investing both in pre-launch activities, such as disease education, as well as in infrastructure build out including medical affairs, marketing and commercial support functions to support the U.S. commercialization of pirfenidone.

 

The following table summarizes our historical commercial launches by year:

 

Year of Commercial Launch

2011

 

2012

 

2013

Germany

 

Denmark

 

Belgium

 

 

Norway

 

Canada

 

 

Luxembourg

 

Finland

 

 

Austria

 

Ireland

 

 

Iceland

 

Italy

 

 

Sweden

 

United Kingdom

 

 

France

 

 

 

 

 

 

 

 

We continue to prepare for the commercial launch of Esbriet in additional countries in the EU. With respect to Spain, considering a Royal Decree introduced in 2012 affecting health care expenditures and pharmaceuticals and the continuing economic challenges of the country, we currently anticipate being able to provide an update regarding pricing and reimbursement of Esbriet in the first half of 2014.

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In October 2012, we received marketing authorization from Health Canada for pirfenidone for use in adults for the treatment of mild to moderate IPF. We have successfully launched Esbriet in Canada in the private market segment which represents 30% of the overall IPF market in Canada. We are working with the public payer system in Canada to secure reimbursement and anticipate being able to provide an update in the second half of 2014.

 

Competition

 

There is currently no FDA approved therapy available for the treatment of IPF, however, we are currently conducting an additional Phase 3 clinical trial in IPF known as ASCEND that we anticipate will support approval of pirfenidone to treat IPF in the United States. We believe that the primary competition for pirfenidone in the EU, Canada and in the U.S (if pirfenidone is approved by the FDA for the treatment of IPF) will initially consist of off-label use of products that are approved for other indications including corticosteroids and N-acetylcysteine (NAC), and possibly newly approved agents for the treatment of IPF. The competitive landscape for new IPF products has seen numerous failures but continues to evolve.

 

In late 2011, a placebo-controlled study conducted by the NHLBI comparing corticosteroids, NAC (N-acetylcysteine) (a generic drug) and azathioprine (triple therapy) to NAC alone stopped the triple therapy arm of the study due to toxicity. The remaining arm of this trial known as the PANTHER trial, studying NAC- alone versus placebo has completed its enrollment and results are projected to be publically available in the first half of 2014. Boehringer Ingelheim has published phase 2 data for BIBF-1120 (nintedanib), a tyrosine-kinase inhibitor that is being studied to treat several types of cancer and has showed potential efficacy in IPF. Patient enrollment in its two Phase 3 trials for BIBF-1120 in IPF (INPULSIS) is complete and results are projected to be publically available in the first half of 2014. In January 2009, Gilead Sciences, Inc. (Gilead) initiated a Phase 3 clinical study of ambrisentan for the treatment of IPF that was halted in December 2010 due to lack of efficacy. In December 2010, Gilead acquired Arresto Biosciences (Arresto) thereby gaining access to Arresto’s Phase 1 humanized monoclonal antibody compound, AB0024, now called simtuzumab and currently in Phase 2 clinical development for the treatment of IPF. Furthermore, there are other products in various stages of phase 2 development for IPF, including BMS-986020 (Bristol Myers Squibb, aquirer of Amira), FG-3019 (Fibrogen), lebrikizumab (Genentech/Roche), STX-100 (Biogen, acquirer of Stromedix), and tralokinumab (MedImmune/AstraZeneca).

 

Total Revenue by Geographic Region

 

Our total revenue by region for the years ended December 31, 2013, 2012 and 2011, were as follows:

 

 

 

2013

 

 

2012(1)

 

 

2011(1)

 

 

 

(in thousands)

 

North America

 

$

5,928

 

 

$

-

 

 

$

2,629

 

Europe

 

 

64,411

 

 

 

26,174

 

 

 

2,778

 

Total

 

$

70,339

 

 

$

26,174

 

 

$

5,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Total revenue excludes amounts related to Actimmune product sales which have been reclassified to discontinued operations.

 

Medical Affairs

 

We have Medical Affairs personnel in the Unites States, Europe and Canada that maintain and provide current, scientific-based information about Esbriet and pulmonology in general for the benefit of heath care providers, patients and caregivers, as well as our employees. Our Medical Affairs team also supports medical education, medical information and our publication efforts.

 

Government Regulation

 

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. The European Medicines Agency, or EMA, is a centralized body of the EU whose main responsibility is the protection and promotion of public health through the evaluation and supervision of medicines for human use. The EMA coordinates the evaluation and supervision of medicinal products, including our product Esbriet, throughout the 28 EU member states in a network of 34 national competent authorities in the EU and EEA. With respect to Canada, Health Canada’s Therapeutic Products Directorate (TPD) is the national authority that regulates, evaluates and monitors the safety, efficacy, and quality of therapeutic and diagnostic products available to Canadians.

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Product Approval

 

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.

 

Prior to commencing a clinical trial in the United States, 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 1: The drug is initially introduced into healthy human subjects or patients and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion.

·

Phase 2: 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 2 clinical trials may be divided into early Phase 2 clinical trials, which are referred to as Phase 2a clinical trials, during which pilot studies are performed to determine initial activity and late Phase 2 clinical trials, which are referred to as Phase 2b clinical trials, that generally consist of controlled trials often involving several hundred patients in traditional drug development programs.

·

Phase 3: When Phase 2 clinical trials demonstrate that a dosage range of the product is effective and has an acceptable safety profile, Phase 3 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 2 clinical trial to fail in a more rigorous and reliable Phase 3 clinical trial.

 

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 2 clinical trials, and thus these trials are frequently referred to as Phase 1/2 clinical trials.

 

The FDA and regulatory authorities in other territories may require, or companies may pursue, additional clinical trials after a product is approved. These are called Phase 4 studies. The results of Phase 4 studies can confirm the effectiveness of a drug and can provide important safety information to augment the FDA’s adverse drug reaction reporting system. For example, in connection with our receipt of marketing authorization for Esbriet in the EU, we committed to conduct routine safety surveillance of spontaneous adverse drug reactions (ADRs) and to conduct a PASS (Post Authorization Safety Study) in the form of a registry to systematically collect and monitor ADRs in patients who have been prescribed Esbriet.

 

The results of product development, preclinical studies and clinical trials are submitted to the FDA as part of a Biologics License Application (BLA), New Drug Application (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. Once the submission is accepted for filing, the FDA begins an in-depth review of the application. Under the goals and policies agreed to by the FDA under the Prescription Drug User Fee Act (PDUFA), the FDA has ten (10) months in which to complete its initial review of a standard new molecular entity (NME) application and respond to the applicant, and six (6) months for a priority NME application. The FDA does not always meet its PDUFA goal dates, and in certain circumstances the PDUFA goal date may be extended. The FDA may not act quickly or favorably in reviewing applications, and we may encounter significant difficulties or costs in any efforts to obtain FDA approvals, which could delay or preclude us from marketing our product candidates. 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.

 

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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.

 

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.

 

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. Further, 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. 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.

 

Post-Approval Regulation

 

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. Often, even after a drug has been approved by the FDA for sale, the FDA may require that certain post-approval requirements be satisfied, including the conduct of additional clinical studies and trials. If such post-approval conditions are not satisfied, the FDA may impose civil money penalties, declare the product misbranded or prohibit the introduction of the drug in interstate commerce. In addition, holders of an approved NDA or BLA are required to: report certain adverse reactions to the FDA; comply with certain requirements concerning advertising and promotional labeling for their products; submit drug safety or adverse event reports; and continue to have quality control and manufacturing procedures conform to cGMP after approval.

 

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. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance. Discovery of problems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved product, including withdrawal of the product from the market. 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.

 

Orphan Drug Designation

 

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). The EMA has granted orphan drug designation for Esbriet and therefore we currently expect to have 10 years of market exclusivity as a result of this designation in the EU. We have filed and intend to file for orphan drug designation for those diseases we target that meet the criteria for orphan drug exclusivity. Pirfenidone has been granted orphan drug designation for the treatment of IPF by the FDA and EMA. Although obtaining FDA and EMA 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 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.

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Ex-U.S. Regulations

 

We are also subject to a variety of regulations and oversight in countries outside of the United States governing medicinal products and medical devices, including with respect to pre- and post-authorization clinical studies, product manufacturing, advertising and promotion, distribution, and safety reporting. Outside of the United States, our ability to market a product generally depends upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. In any country, however, we will generally be permitted to commercialize a product if the appropriate regulatory authority is satisfied that we have presented adequate evidence of safety, quality and efficacy. In addition, many countries have adopted specific legal frameworks and procedures to enable the supply of unauthorized medicinal products in the context of named patient or compassionate use programs. These programs are subject to different requirements and subject to different rules in the countries where we operate.

 

In the EU, marketing authorization for medicinal products can be obtained through several different procedures. The centralized procedure allows a company to submit a single application to the EMA, which approves the application if it meets certain quality, safety, and efficacy requirements. A centralized marketing authorization is valid in all EU member states. The centralized procedure is mandatory for certain medicinal products, including orphan medicinal products and advanced therapy medicinal products, and optional for certain other products. Unlike the centralized procedure, the national procedure requires a separate application to, and leads to separate approval by, each EU member state. The decentralized procedure allows applicants to file identical applications to several EU member states and receive simultaneous national approvals based on the recognition by EU member states of an assessment by a reference member state, and the mutual recognition procedure similarly is based on the acceptance by EU member states of the assessment and/or authorization of a medicinal product by a reference member state. The making available or placing on the EU market of unauthorized medicinal products is generally prohibited, but EU Member States may exceptionally and temporarily allow the making available of such products to individual patients or a group of patients. Clinical studies must be conducted in accordance with the requirements of the EU Clinical Trial Directive and applicable good clinical practice standards. The time needed to secure approval for medicinal products may be longer or shorter than that required for FDA approval. The regulatory approval and oversight process in other countries includes all of the risks associated with regulation by the FDA and certain state regulatory agencies as described above.

 

Irrespective of the different marketing authorization tracks, various additional requirements apply to the manufacturing and placing on the EU market of medicinal products. The manufacturing of medicinal products in the EU requires a manufacturing authorization, and the manufacturing authorization holder must comply with various requirements set out in the EU Medicinal Products Directive, as amended by the EU Falsified Medicines Directive aimed at preventing falsified medicines from entering into the legal supply chain. These requirements include compliance with EU equivalent cGMP standards when manufacturing active pharmaceutical ingredients outside of the EU with the intention to import the active pharmaceutical ingredients into the EU.

 

The holder of an EU marketing authorization for a medicinal product must also comply with the EU’s revised pharmacovigilance legislation adopted in 2010, which entered into force in mid-2012 and entails many new and revised requirements for conducting pharmacovigilance, as well as the codification of various existing requirements previously set out in guidance. EU regulators now can, for example, require post-authorization efficacy studies at the time of approval of a medicinal product or afterwards, and require additional monitoring of products placed on the EU market. Compliance with the pharmacovigilance requirements, as well as the requirements of the EU Paediatric Regulation, is subject to the EU Penalties Regulation, which enables the European Commission to impose financial penalties on central marketing authorization holders for violation of specific pharmacovigilance and pediatric requirements. National marketing authorization holders may be subject to civil, criminal or administrative sanctions in case of non-compliance with the EU requirements applicable to the manufacturing and marketing of medicinal products.

 

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Our international business activities face a variety of additional legal and compliance requirements. For example, our interactions with health care professionals are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, which prohibits the offering, promising, giving, or authorizing others to give anything of value, either directly or indirectly, to a non-U.S. government official in order to influence official action, or otherwise obtain or retain business. The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. We are also subject to applicable anti-bribery laws in the countries in which we operate, such as the U.K. Bribery Act of 2010, or the UK Bribery Act, which became effective on July 1, 2011. The UK Bribery Act prohibits companies which do business with the United Kingdom and their employees and representatives from giving, offering, or promising bribes to any person, including non-UK government officials, as well as requesting, agreeing to receive, or accepting bribes from any person. In addition, under the UK Bribery Act, companies may be held liable for failing to prevent employees and persons associated with the company from violating the Act. Other countries in which we operate have enacted similar laws. We have ongoing efforts that are designed to ensure our compliance with these laws, including training, policies, procedures, and internal controls. However, there is no certainty that all employees and third-party business partners (including our distributors, wholesalers, agents, contractors, and other partners) will comply with anti-bribery laws. In particular, we do not control the actions of manufacturers and other third-party agents, although we may be liable for their actions. Any violation of these laws may result in civil and criminal penalties, and could have a material adverse impact on our business.

 

We are subject to laws and regulations of the EU and of member states of the EU relating to the prohibition of anti-competitive agreements and the abuse of a dominant position. We are subject to similar laws and regulations of countries, outside the EU, where we do business. Failure to comply with competition laws could lead to enforcement actions by the European Commission or other competition agencies and significant penalties against us, which, in some cases, can be up to 10 per cent of our worldwide turnover.

 

We are also subject to laws and regulations in non-U.S. countries covering data privacy and the protection of health-related and other personal information. EU member states and other jurisdictions have adopted data protection laws and regulations, which impose significant compliance obligations. For example, the EU Data Protection Directive, as implemented into national laws by the EU member states, imposes strict obligations and restrictions on the ability to collect, analyze and transfer personal data, including health data from clinical trials and adverse event reporting. Failing to comply with these laws could lead to government enforcement actions and significant penalties against us, and adversely impact our operating results. A proposal for an EU Data Protection Regulation, intended to replace the current EU Data Protection Directive, is currently under consideration and, if adopted, could lead to additional and stricter requirements and penalties in the event of non-compliance.

 

Additional requirements and restrictions regarding, among other things, the export and importation of products, intellectual property rights, the environment, taxation and work safety apply in individual countries, and non-compliance with such requirements may result in civil, criminal or administrative sanctions.

 

Pharmaceutical Pricing and Reimbursement

 

In both U.S. and non-U.S. markets, our ability to commercialize our products successfully, and to attract commercialization partners for our products, depends in significant part on the availability of adequate financial coverage and reimbursement from third-party payors, including, in the United States, governmental payors such as the Medicare and Medicaid programs, managed care organizations, and private health insurers. Third-party payors decide which drugs they will pay for and establish reimbursement and co-pay levels. Third-party payors are increasingly examining the cost effectiveness of specialty products, in addition to their safety and efficacy. We will need to develop a value proposition for third-party payors to demonstrate the clinical value and potential cost effectiveness of a product. Even with clinical data, our third-party payors may not provide coverage, or may delay coverage, for our products or any of our product candidates that we commercialize, in whole or in part. At the least, we will need to be prepared for the barriers that third-party payors may put in place to limit access to product.

 

While we do not currently have any products approved for sale in the U.S. market, we expect that there will continue to be, legislative and regulatory proposals to change the healthcare system in ways that could impact our ability to sell our products in the U.S. profitably.

 

Outside of the United States, political, economic and regulatory developments are also subjecting the healthcare industry to fundamental changes and challenges. Pressure by governments and other stakeholders on prices and reimbursement levels continues to exist. Despite the recent reduction in the mandatory national discount in Germany, effective as of January 1, 2014, we expect in various European countries to be subject to continuous cost-cutting measures, such as lower maximum prices, budget caps, lower or lack of reimbursement coverage and incentives to use cheaper, usually generic, products as an alternative. In certain EU Member States, reimbursement is provided for unauthorized products provided through national named patient or compassionate use programs. Such reimbursement may no longer be available if authorization for named patient or compassionate use programs expire or are terminated. In other EU Member States, authorization and reimbursement policies may also delay commercialization of our products, or may adversely affect our ability to sell our products on a profitable basis.

 

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We are unable to predict what additional legislation, regulations or policies, if any, relating to the healthcare industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation, regulations or policies would have on our business. Any cost containment measures, including those listed above, or other healthcare system reforms that are adopted, could have a material adverse effect on our ability to operate profitably in the EU.

 

Finally, our current pricing and reimbursement will be likely reviewed in a number of countries after the results of the ASCEND trial, as well as the possible publication of data of other products currently being developed for the therapy of IPF. Depending on the outcome of ASCEND or clinical studies conducted by other companies – and especially in case of a negative result in the primary endpoint of the ASCEND trial – a downward revision of Esbriet pricing and reimbursement conditions may occur, with the possibility of a complete de-reimbursement of the product in certain countries and/or for certain patients.

 

United States Healthcare Reform

 

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010, together the Healthcare Reform Act, was adopted in the United States. This law substantially changes the way healthcare is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions that are expected to impact our business and operations, in some cases in ways we cannot currently predict. Changes that may affect our business include those governing enrollment in federal healthcare programs, reimbursement changes, rules regarding prescription drug benefits under the health insurance exchanges, and fraud and abuse and enforcement. These changes will impact existing government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program.

 

Additional provisions of the Healthcare Reform Act, some of which became effective in 2011, may negatively affect our revenues in the future. For example, as part of the Healthcare Reform Act’s provisions closing a funding gap that currently exists in the Medicare Part D prescription drug program (commonly known as the “donut hole”), we are required to provide a 50% discount on branded prescription drugs dispensed to beneficiaries within this donut hole. The Healthcare Reform Act also makes changes to the Medicaid Drug Rebate Program, discussed in more detail below, including increasing the minimum rebate from 15.1% to 23.1% of the average manufacturer price for most innovator products and from 11% to 13% for non-innovator products.

 

Many of the Healthcare Reform Act’s most significant reforms do not take effect until 2014 and thereafter, and their details will be shaped significantly by implementing regulations that have yet to be finalized. In 2012, the Supreme Court of the United States heard challenges to the constitutionality of the individual mandate and the viability of certain provisions of the Healthcare Reform Act. The Supreme Court’s decision upheld most of the Healthcare Reform Act and determined that requiring individuals to maintain “minimum essential” health insurance coverage or pay a penalty to the Internal Revenue Service was within Congress’s constitutional taxing authority. However, the Supreme Court struck down a provision in the Healthcare Reform Act that penalized states that choose not to expand their Medicaid programs through an increase in the Medicaid eligibility income limit from a state’s current eligibility levels to 133% of the federal poverty limit. As a result of the Supreme Court’s ruling, it is unclear whether states will expand their Medicaid programs by raising the income limit to 133% of the federal poverty level and whether there will be more uninsured patients in 2014 than anticipated when Congress passed the Healthcare Reform Act. For each state that does not choose to expand its Medicaid program, there will be fewer insured patients overall, which could impact our future sales, business and financial condition.

 

Freedom of Information Requests

 

We are also subject both in the U.S. and ex-U.S. to various regulatory schemes regarding freedom of information requests. For example, in September 2012, we were notified by the EMA that we had received a request in accordance with Regulation 1049/2001/EC regarding public access to documents held by institutions of the EU, for important aspects of our Esbriet MAA. We subsequently learned from EMA that the requestor of this information is a potential competitor with an ongoing Phase 3 clinical trial in IPF. In October 2012, we lodged an objection with EMA objecting to the disclosure of non-public commercially sensitive information contained in our MAA. In January 2013, the EMA rejected our objections. In February 2013, we filed an application with the General Court of the EU, challenging the decision of the EMA to disclose the information contained in our MAA that we consider commercially confidential and seeking an interim injunction preventing disclosure of the contested information prior to determination of the main action. The President of the General Court of the EU granted the application for injunctive relief. However EMA appealed that decision and, after a subsequent oral hearing at the CJEU, the issue was referred back to the General Court of the EU for reconsideration. A further decision from the General Court in relation to InterMune’s application for an interim injunction is expected shortly, with a trial in the main action anticipated before the end of 2014. There can be no assurance that we will be successful in our application to challenge the decision of the EMA or that we won’t in the future receive similar requests in the EU or domestically.

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Research and Development

 

Our research and development expenses were $113.5 million, $106.6 million and $75.0 million for the years ended December 31, 2013, 2012 and 2011.

 

Facilities

 

All of our facilities and long-lived assets are located in the United States, Europe and Canada. Our facilities in the United States currently consist of approximately 71,000 square feet of office space located at our headquarters at 3280 and 3260 Bayshore Boulevard, Brisbane, California. In July 2010, we entered into an extended lease agreement on our current facility for an additional term that expires in April 2016. We also currently maintain offices located in Muttenz, Switzerland, our European headquarters; Berlin, Germany; Milan, Italy; Paris, France; London, England; Madrid, Spain; Stockholm, Sweden; Vienna, Austria; Utrecht, the Netherlands; and Ontario, Canada. 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 facilities, if necessary, or to accommodate expansion of our operations, in the U.S., Europe and Canada.

 

Employees

 

As of December 31, 2013, we had 353 full-time employees, 162 in the U.S. and 191 internationally. Of the total, 97 were in research and development and 256 in selling, general and administration. We believe that we have good relationships with our employees.

 

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 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) 466-2228 or by sending an e-mail to ir@intermune.com.

 

We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events and press and earnings releases as part of our investor relations website. Investors and others can receive notifications of new information posted on our investor relations website in real time by signing up for email alerts and RSS feeds. Further corporate governance information, including our governance guidelines, board committee charters, and code of conduct, is also available on our Company website under the heading “Corporate Compliance and Governance.” The contents of our websites are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.

 

Executive Officers of the Registrant

 

The following table provides information regarding our executive officers and key employees as of February 15, 2014:

 

Name

 

Age

 

Title

Daniel G. Welch

 

56

 

Chairman, Chief Executive Officer and President

Paul D. Arata

 

59

 

Executive Vice President, Human Resources and Administration

Giacomo Di Nepi

 

60

 

Executive Vice President and Managing Director, Europe

John C. Hodgman

 

59

 

Executive Vice President of Finance and Chief Financial Officer

Jonathan A. Leff, M.D.

 

56

 

Executive Vice President, Research and Development

Sean P. Nolan

 

46

 

Executive Vice President and Chief Business Officer

Andrew Powell, Esq.

 

56

 

Executive Vice President, General Counsel and Corporate Secretary

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Daniel G. Welch. Mr. Welch has served as Chairman, Chief Executive Officer and President of the Company since May 2008, and as President and Chief Executive Officer of the Company and a member of the Board since September 2003. 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 (acquired by Perrigo). From September 1987 to August 2000, Mr. Welch served in various senior management roles at Sanofi-Synthelabo (now Sanofi) and its predecessor companies Sanofi and Sterling Winthrop. During his time at Sanofi, he led the successful worldwide launches of Plavix®, Eloxatin® and Avapro® as Vice President of Worldwide Marketing and he served as COO of the U.S. business. From November 1980 to September 1987, Mr. Welch was with American Critical Care, a division of American Hospital Supply. Mr. Welch currently serves on the boards of directors of Seattle Genetics and Hyperion Therapeutics and also serves on the Board of Directors of a private company. Mr. Welch holds a B.S. from the University of Miami and an M.B.A. from the University of North Carolina.

 

Paul D. Arata. Mr. Arata was named Executive Vice President, Human Resources and Administration in March 2013, after serving as Senior Vice President, Human Resources and Administration since joining the company in July 2012. Mr. Arata previously held human resources and administrative positions at a number of biotechnology, financial services and technology companies. Most recently he held the position of Senior Vice President Human Resources and Administration at Celera Corporation, a Quest Diagnostics Company. Prior to taking the lead HR position at Celera, Mr. Arata held the position of Vice President Human Resources and Site Services for Applera Corporation (Applied Biosystems and Celera). Prior to joining Applera, Mr. Arata held various human resources, administrative and management roles with Charles Schwab & Co., SBC Communications Inc. and Pacific Telesis Group. Mr. Arata holds a B.S. degree from Saint Mary’s College.

 

Giacomo Di Nepi. Mr. Di Nepi was named Executive Vice President and Managing Director, Europe in March 2013, after serving as Senior Vice President and Managing Director, Europe since joining the company in October 2009. Previously, he served as a consultant to InterMune on European commercial strategy. From 2006 to 2008, Mr. Di Nepi was CEO of Takeda Pharmaceuticals, Europe, based in London, with responsibility for Takeda’s European business, its geographic expansion and the setup of its newly formed European Headquarters. Between 1996 and 2006, he was with Novartis in Europe and the United States, most recently in Switzerland as Global Head of the Transplantation, Immunology and Infectious Diseases Business Unit, with direct responsibility from Development to Sales. He previously served as CEO of Novartis Italy and in Marketing and Sales roles in the U.S. subsidiary. From 1980 to 1996, Mr. Di Nepi was a Partner with McKinsey & Co. and was responsible for the Italian and a Core Member of the Global Pharmaceutical Practice. He served as Vice President of Farmindustria, the Italian Industry Association, and a member of the EFPIA Heads of Europe Committee. Mr. Di Nepi holds a degree in Economics from Bocconi University, Milan, Italy and an MBA from INSEAD, Fontainebleau, France.

 

John C. Hodgman. Mr. Hodgman has served as InterMune’s Executive Vice President and Chief Financial Officer since March 2013, after serving as Senior Vice President and Chief Financial Officer since joining the company in 2006. Mr. Hodgman previously held senior leadership positions at a number of biotechnology and technology companies. In 2005, he was President and Chief Executive Officer of Aerogen, Inc. where he directed the company’s merger with Nektar Corporation. From 1998 to 2005, he served as Chairman, President and CEO of Cygnus, Inc., where he led commercialization of the first FDA-approved, non-invasive continuous glucose monitoring system for patients with diabetes. Mr. Hodgman also served as Vice President of Finance and Chief Financial Officer of Cygnus from 1994 to 1998, in addition to serving as President of Cygnus’ Diagnostic Division. He previously served as Vice President of Operations and Finance, Chief Financial Officer of Central Point Software, Inc.; Vice President of Finance and Administration, Chief Financial Officer of Ateq Corporation; and as a management consultant for Price Waterhouse. He currently serves on the boards of a number of publicly and privately held biotechnology and technology companies. Mr. Hodgman holds a B.S. from Brigham Young University and an M.B.A. from the University of Utah.

 

Jonathan A. Leff. Dr. Leff has served as InterMune’s Executive Vice President, Research and Development since February 2012. Prior to InterMune he served as Chief Medical Officer from February 2011 at KaloBios Pharmaceuticals, Inc., a biotechnology company, and previously served as Vice President and Chief Medical Officer at Halozyme Therapeutics, Inc. Prior to joining Halozyme in 2009, he was Vice President and Global Head of Inflammation Clinical Development at Roche, where he managed the worldwide clinical development programs for MabThera®/Rituxan®, ocrelizumab, and Actemra®. From 2002 to 2007, Dr. Leff held various positions at Amgen, including Vice President, North American Medical Affairs, where he led the medical affairs department consisting of 500 professionals, and was responsible for oversight of post-registration studies in multiple therapeutic areas. From 1994 to 2002, Dr. Leff served at Merck, where he performed Phase 1-4 clinical studies of Singulair®. From 1984 to 1994, he trained and served in various positions at the University of Colorado, Denver, including director of the Outpatient Pulmonary Clinic. Dr. Leff holds a bachelor’s degree in Chemistry from the University of Pennsylvania, and received his M.D. from the University of Pennsylvania School of Medicine.

 

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Sean P. Nolan. Mr. Nolan has served as InterMune’s Executive Vice President and Chief Business Officer since joining the company in February 2013. Prior to joining InterMune, Mr. Nolan served as Vice President and Chief Commercial Officer at Reata Pharmaceuticals Inc., from August 2011 to December 2012. Previously, starting in 2004, he served as Vice President, Marketing and Sales Operations at Ovation Pharmaceuticals. In 2009, Ovation was acquired by the Danish pharmaceutical company H. Lundbeck. After leading the integration of Ovation, Mr. Nolan served as Chief Commercial Officer and then President of the newly created U.S. entity of Lundbeck, from April 2009 to October 2010. Mr. Nolan holds a B.A. in Biology from John Carroll University.

 

Andrew Powell, Esq. Mr. Powell has served as InterMune’s Executive Vice President, General Counsel and Secretary of InterMune since September 2013. Mr. Powell most recently served as Executive Vice President, General Counsel and Secretary at Cornerstone Therapeutics from November 2009 to August 2013. Mr. Powell previously served as Senior Vice President and General Counsel at ImClone Systems (now Eli Lilly), from July 2008 to January 2009 and as General Counsel at Collagenex Pharmaceuticals, a dermatology company, from September 2004 to June 2008. Mr. Powell previously held various positions at Baxter, a healthcare company from 1989 to August 2004. Mr. Powell holds a B.A. from the University of North Carolina at Chapel Hill and a J.D. from Stanford Law School.

 

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 in addition to other information and risk factors in this Annual 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 Annual 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 Annual Report.

 

Risks Related to Our Dependence on Pirfenidone

 

We are dependent on the commercial success of Esbriet (pirfenidone) for the treatment of IPF in the European Union, other European countries and Canada, and on the regulatory approval of pirfenidone for the treatment of IPF in the United States, which may never occur.

 

In February 2011, we were granted marketing authorization to commercialize Esbriet (pirfenidone) in the European Economic Area, which is comprised of the 28 Member States of the European Union plus Norway, Iceland, and Liechtenstein, for the treatment of adults with mild to moderate IPF. We have since launched the product in various European countries plus Canada. Pirfenidone is still under investigation for the treatment of IPF in the United States and has not been approved by the FDA. On June 19, 2012, we completed the divestiture of our worldwide development and commercialization rights to our only other commercial product, Actimmune.

 

Because we do not currently have a product candidate other than pirfenidone in clinical development, our future success depends on the continued commercialization of Esbriet in the EEA, and on obtaining regulatory approval from the FDA to market pirfenidone for the treatment of IPF in the United States. If our pirfenidone product is approved by the FDA, our future success will depend on our successful commercialization of pirfenidone in the United States together with continued commercialization of Esbriet in the EEA.

 

We may not succeed in our ongoing commercial efforts in the EEA, or, if pirfenidone is approved by the FDA, in our efforts to commercialize pirfenidone in the United States. We may experience delays in receiving, or may never receive, regulatory approval to market and sell pirfenidone in the United States. We may experience delays and unforeseen difficulties in the commercialization of Esbriet in one or more of the EEA member states. We could also experience significant competition in both the EEA and the United States, which could negatively affect our commercialization efforts.

 

If we also fail to develop future product candidates for the reasons stated in “Risks Related to the Development of Our Products and Product Candidates,” we will continue to be dependent on the successful commercialization of pirfenidone.

 

If we do not successfully commercialize Esbriet in the EEA and/or receive regulatory approval in the United States for pirfenidone for the treatment of IPF and subsequently successfully commercialize pifenidone in the United States, our ability to generate additional revenue will be jeopardized and, consequently, our business will be seriously harmed.

 

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The results of our ASCEND Phase 3 clinical trial may fail to demonstrate to the FDA sufficient efficacy of pirfenidone to permit approval by the FDA and may have a negative effect on sales of Esbriet in the EEA.

 

In November 2009, we submitted a new drug application, or NDA, to the FDA seeking approval of pirfenidone for IPF. Following submission of the NDA, the FDA convened an Advisory Committee to review the application and make a recommendation regarding approval. Although the Advisory Committee recommended approval of pirfenidone to reduce decline in lung function in patients with IPF, the FDA issued us a Complete Response Letter on May 4, 2010, requesting an additional clinical trial to support the efficacy of pirfenidone in IPF. Our NDA was supported by our CAPACITY 1 and CAPACITY 2 trials, which were designed using forced vital capacity, or FVC, as the primary endpoint, as opposed to mortality, even though the FDA had advised us that mortality would be the ideal endpoint and that the FDA was uncertain as to what would constitute a clinically meaningful treatment effect of pirfenidone based on FVC change. We met the primary endpoint of FVC change with statistical significance in our CAPACITY 2 trial but not in our CAPACITY 1 trial. While in our view the totality of the data from CAPACITY 1 and CAPACITY 2 supports the efficacy and safety of pirfenidone in IPF, the FDA disagreed with our view, issued a Complete Response Letter, and requested additional efficacy data.

 

We have evaluated our clinical development options to gain FDA approval of pirfenidone for the treatment of IPF within the United States, and we initiated an additional Phase 3 clinical trial known as the ASCEND trial during the second quarter of 2011. In January 2013, we completed enrollment in the ASCEND trial and in January 2014 the last patient out completed treatment in the trial. We do not have a Special Protocol Assessment, or SPA, in place with the FDA for the ASCEND trial, and the results of this Phase 3 clinical trial, together with the results of our CAPACITY trials, may not be satisfactory to the FDA to support approval of pirfenidone. The ASCEND trial is a 52 week trial with forced vital capacity, or FVC, as the primary endpoint. Key secondary endpoints include change in six-minute walk test (6MWT) distance and progression-free survival, which will be based on the earliest of time to death, FVC decrement of 10% or greater, or decrement in 6MWT distance of 50 meters or more. In our meeting with the FDA in March 2011 relating to our plans for the ASCEND trial, the FDA indicated that it would prefer a trial with a longer duration (72 weeks) if designed with a FVC endpoint. While the FDA indicated that a 52 week trial with a FVC endpoint could support approval, the FDA further indicated that a trial with a FVC endpoint would need to provide supportive evidence of an effect on mortality. Additional secondary endpoints in ASCEND do include all-cause mortality and on-treatment IPF-related deaths (both evaluated independently in ASCEND as well as pooled with the previous CAPACITY data), and dyspnea. However, based on the relatively low mortality rate in this patient population and the treatment effect on mortality seen in CAPACITY, ASCEND is not powered for the mortality endpoint, even after pooling with CAPACITY data. Although it may be possible to derive a favorable effect on mortality by pooling ASCEND and CAPACITY in the event the treatment effect in ASCEND on mortality is more pronounced than that seen in CAPACITY, since the trial is not powered for the mortality endpoint, we may not be able to demonstrate a treatment effect on mortality by pooling data from ASCEND with CAPACITY.

 

Whether data from our ASCEND trial when combined with the data from our CAPACITY trials will be sufficient to demonstrate an effect on mortality and/or to obtain FDA approval of pirfenidone for the treatment of IPF will depend on the results from the trial and be the subject of review by the FDA at the time of our anticipated NDA resubmission. If the results of the ASCEND trial are not satisfactory to the FDA to support regulatory approval of pirfenidone in the United States, then we will not be able to sell Esbriet in the United States. Further, the publicity of a negative or inconclusive outcome in the ASCEND trial or a negative regulatory outcome by the FDA for pirfenidone may negatively affect the sales of Esbriet in the EU and/or may be considered by EU regulatory agencies when assessing reimbursement for Esbriet, which may lead to a reduction in the amount of reimbursement amounts in certain countries. Additionally, as in any clinical trial, discovery of unknown problems with pirfenidone in the ASCEND trial could negatively impact the approved safety and efficacy profile and result in possible reduced sales or product withdrawal in the EU. Because of our dependence on the commercial success of Esbriet in the EU, a negative or inconclusive outcome in the ASCEND trial or a negative regulatory outcome by the FDA could materially and adversely affect our business and prospects, including, but not limited to, negatively impacting the pricing and reimbursement guidelines for Esbriet in one or more countries in the EU and thereby negatively impacting Esbriet revenue and our financial results. For additional risks related to clinical studies and government regulations, see the risks under “Risks Related to Government Regulation and Approval of Our Products and Product Candidates.”

19


 

Risks Related to the Commercialization of Our Products and Product Candidates

 

Our revenue from sales of Esbriet in the EEA is dependent upon the pricing and reimbursement guidelines adopted in each of the various countries in the EEA, which levels may vary and may fall well below our current expectations.

 

We currently have agreed pricing and /or reimbursement levels for Esbriet in Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Italy, Ireland, Luxembourg, Norway, Sweden, the UK and Canada. We have developed estimates of anticipated pricing in other countries, including in the United States, if pirfenidone is approved for sale. These estimates are our expectations, which are based upon the lethal nature of IPF, the lack of any approved therapies for IPF, the Orphan Drug designation of Esbriet, our perception of the overall cost benefit of Esbriet and the current pricing of therapies with a similar product profile, such as treatments for pulmonary hypertension.

 

Due to efforts to provide for containment of health care costs, the reimbursement institutions in the countries in which we seek approval for sale of Esbriet may not agree to our estimated level of pricing and reimbursement. Various countries that have approved Esbriet have mechanisms that may result in a reduction in our estimated level of governmental pricing and reimbursement. Furthermore, in various countries in the EEA, we may be subject to additional negotiated and confidential governmental clauses and/or discounts which, while customary and routine for reimbursed drugs in these countries, may also adversely impact our realized Esbriet price.

 

For example, in Germany pricing is subject to the rules of the German Act on the Reform of the Market for Medicinal Products (AMNOG) which provide terms that an orphan drug must be re-evaluated following the drug’s costs to the German health system of 50 million Euros inclusive of VAT and before rebate deduction in any 12-month period. Therefore, upon reaching that sales level, we will be required to submit a full Esbriet dossier to the G-BA and pass through the whole AMNOG process. This may require a new pricing agreement between InterMune and the SpiKK, that may result in a lower price than today’s negotiated price. The current price agreement between SpiKK and InterMune is valid until September 15.2014, upon that time point, both parties can terminate that contract and start new negotiations, which may end up in an additional rebate for Esbriet.

 

Similarly, in France, IPF is currently in the category of Affections de Longue Durée, or ALD’s (Long Term Diseases) which qualifies Esbriet for a certain level of reimbursement. However, the Transparency Commission of the French National Health Authority, the French agency responsible for assessing medicinal products and advising the health authorities on whether those products provide sufficient benefit to be covered by French National Health Insurance, may revise the criteria by which it defines ALD’s and IPF may not qualify as an ALD. In such case, IPF patients may not be fully reimbursed for the use of Esbriet for the treatment of IPF which may lead to decreased Esbriet utilization and negatively impact our ability to generate revenue from Esbriet sales in France.

 

In Italy, the Board of the Italian Drug Agency (AIFA) approved the pricing and reimbursement conditions for Esbriet under a risk-sharing arrangement, pursuant to which patients’ forced vital capacity (FVC) will be measured at six months after initiation of Esbriet therapy. Patients whose percent predicted FVC declines in absolute terms by 10 percent or more during the first six-month treatment period will not be eligible for reimbursement and their cost of therapy during their treatment period will be credited to the National Health Care System. We expect that between 10% and 15% of patients that initiate therapy will have such an FVC decline.

 

In England and Wales, the National Institute for Health and Clinical Excellence, or NICE, Appraisal Committee recommended pirfenidone as an option for treating IPF patients whose forced vital capacity (FVC) is between 50% and 80% of predicted at the initiation of therapy, but recommended that treatment with pirfenidone for these patients should be discontinued if there is evidence of disease progression, as defined by a decline in percentage predicted FVC of 10% or more within any 12-month period. Based on clinical study experience with Esbriet, we expect that between 10% and 15% of patients could meet this definition of disease progression in a given 12-month period.

 

An unfavorable outcome following the pricing and reimbursement review period in any country may result in lower than expected pricing and reimbursement guidelines in such country, as well as in other countries that reference their pricing to that country. This would adversely impact the anticipated revenue from Esbriet.

 

Expansion of our commercial infrastructure is a significant undertaking that requires substantial financial and managerial resources, and we may encounter delays or may not be successful in our efforts.

 

An unfavorable outcome following the pricing and reimbursement review period in any country may result in lower than expected pricing and reimbursement guidelines in such country, as well as in other countries that reference their pricing to that country. In addition, a negative or inconclusive outcome in the ASCEND trial or a negative regulatory outcome by the FDA could materially and adversely impact the pricing and reimbursement guidelines for Esbriet in any country in the EU and thereby negatively impacting Esbriet revenue from such country. This would adversely impact the anticipated revenue from Esbriet.

20


 

Additionally, we may encounter unforeseen delays in establishing our commercial operations, which may further increase the cost of, and the resources required for, successful commercialization. Given our limited commercial history, we do not have significant experience in a commercial launch of this size and may therefore be unsuccessful.

 

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

 

The development of our products and product candidates is an expensive process, and we anticipate that the annual cost of treatment for 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, including Esbriet in the EEA, will depend on many factors, including but not limited to:

cost of treatment;

pricing and availability of alternative products;

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

perceived efficacy and safety 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.

 

We are in the early stages of Esbriet commercialization in most of the countries in Europe and Canada and we are still developing information with regard to the market acceptance of Esbriet. As a result, we may have to revise our estimates regarding the acceptance of Esbriet under our current pricing structure, and/or reevaluate and/or change the current pricing for Esbriet. For more information, please see the risk factor above titled “Our revenue from sales of Esbriet in the EEA is dependent upon the pricing and reimbursement guidelines adopted in each of the various countries in the EEA, which levels may vary and may fall significantly below our current expectations.”

 

Our products or product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

 

Undesirable side effects caused by Esbriet could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities where we have not currently obtained approval. To date, patients treated with Esbriet have experienced some drug-related side effects. Additionally, if we or others later identify undesirable side effects caused by Esbriet, a number of potentially significant negative consequences could result, including:

 

regulatory authorities may withdraw approvals of such product;

regulatory authorities may order product recalls;

regulatory authorities may require additional warnings on the label;

we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;

we could be sued and held liable for harm caused to patients; and;

our reputation may suffer.

A high and unacceptable severity and prevalence of side effects could also result in the suspension or termination of any ongoing clinical trials, and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval for any or all targeted indications. The drug-related side effects could also affect patient recruitment or the ability of enrolled patients to complete clinical trials or result in potential product liability claims. Any of these occurrences could prevent us from achieving or maintaining market acceptance of Esbriet where authorized for marketing or obtaining regulatory approval in the United States, and may harm our business, financial condition and prospects significantly.

21


 

Pirfenidone or any future products may cause undesirable side effects that could limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, including withdrawal of regulatory approval.

 

If pirfenidone or any future products which receive marketing approval are later found to cause undesirable side effects, we could face one or more of the following:

 

a change in the labeling statements or withdrawal of regulatory approval of the product;

a recall of the product or change in the way the product is administered to patients;

additional restrictions on the marketing or the manufacturing processes for the product or any component thereof;

fines, injunctions or the imposition of civil or criminal penalties;

the need to conduct additional clinical trials;

we could be sued and held liable for harm caused to patients;

the product may become less competitive; or

our reputation may suffer.

 

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent us from generating significant revenues from its sale. If such side effects are found to be serious, we may be unable to sell pirfenidone or such other product, and may be forced to modify, delay, or discontinue our operations, which could materially diminish the value of your investment.

 

The pricing and profitability of our products may be subject to control by the government and other third-party payors, and if these entities do not provide coverage reimbursement patients for Esbriet or our other current or future products, our revenue and prospects for profitability will suffer.

 

The pricing and profitability of our products may be subject to control by governmental and other third-party payors. In addition, in many 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, such as those imposed in recent years. For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the Affordable Care Act contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of new programs. The Affordable Care Act, among other things, (i) increases the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program, extends the rebate program to individuals enrolled in Medicaid managed care organizations, and addresses new methodologies by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, and for drugs that are line extension products; (ii) establishes annual fees and taxes on manufacturers of certain branded prescription drugs, and (iii) enacts a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D.

 

Other significant legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011 among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation's automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year, which went into effect on April 1, 2013. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products once approved or additional pricing pressures.

 

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In addition to legislation and controls impacting pricing pressures in healthcare, our ability to successfully commercialize Esbriet or other product candidates for particular diseases, is highly dependent on the extent to which coverage and reimbursement for such products is available at all or in part from:

 

private health insurers, including managed care organizations;

governmental payors, such as state-run payors in the EU and Canada, as well as federal programs/payors such as Medicaid, the U.S. Public Health Service Agency and Veterans’ Administration; 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. If governmental and other third-party payors do not provide adequate coverage and reimbursement levels for Esbriet, or our other current or future products, market acceptance of our products will be reduced, and our sales will suffer. For more information, please see the risk factor above titled “Our revenue from sales of Esbriet in the EEA is dependent upon the pricing and reimbursement guidelines adopted in each of the various countries in the EEA, which levels may vary and may fall well below our current expectations.”

 

The activities of competitive drug companies, or others, may limit our revenue potential from our product and product candidates 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;

receive broader claims in their labels;

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, including but not limited to a generic version of pirfenidone.

 

Even if we are successful in developing effective drugs, our products may not compete effectively with our competitors’ current or future products. We expect that Esbriet may compete in the EEA and, if approved by the FDA in the U.S., with other products that are being developed for the treatment of IPF, including possible generic versions of pirfenidone in the U.S., EEA and potentially other markets following the expiration of, or in the absence of market exclusivity. Pirfenidone has certain formulation and method of use patents that protect it, but it has no composition of matter patent protection. Unless we have (i) Orphan Drug designation and enjoy the associated marketing exclusivity, (ii) other market or data exclusivity protection or (iii) other types of patent protection in a particular jurisdiction, we may face competition from a lower cost version of pirfenidone in such a jurisdiction earlier than we might like.

 

There are many pharmaceutical companies, biotechnology companies, public and private universities, government agencies and research organizations actively engaged in research and development of products, some of which may target the same indications as our product candidates. For example, in December 2010, Gilead entered into an agreement to acquire Arresto whereby Gilead gained access to Arresto’s Phase 1 humanized monoclonal antibody compound, AB0024, currently in clinical development for the treatment of IPF. In 2011, Bristol-Myers Squibb purchased Amira Pharmaceuticals and acquired their LPA1 receptor antagonist for study as a potential treatment of IPF. Additionally, Boehringer Ingelheim, or BI, has published phase 2 data for BIBF-1120 (nintedanib), a triple kinase inhibitor that is being studied to treat several types of cancers and has showed some potential efficacy at high doses in IPF. BI recently completed its Phase 3 trial and is expected to announce results shortly. Furthermore, there are at least seven products in various stages of phase 2 development for IPF, including CC-4047 and CC-930 from Celgene, CNTO-888 from Janssen (J&J), FG-3019 from Fibrogen, GC-1008 from Sanofi, QAX-576 from Novartis and STX-100 from Biogen Idec (acquirer of Stromedix).

 

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Finally, the National Institutes of Health sponsored the PANTHER trial to evaluate the use of NAC (N-acetylcysteine) (a generic drug) versus placebo in the treatment of IPF patients. The trial was recently completed. If NAC is shown to be an effective treatment for IPF, it may create competition in some territories. Since NAC is commercially marketed in the United States for other indications as a generic product, this may create pressure on volume and prices of Esbriet as physicians could prescribe NAC for the unapproved use of IPF in the United States. If NAC is FDA-approved for IPF, this could also create competition for Esbriet. 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.

 

Risks Related to the Development of Our Products and Product Candidates

 

Drug 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 the treatment of a specific disease, we must provide the FDA, the European Medicines Agency, or EMA, and other foreign regulatory authorities with clinical data that adequately demonstrate to the satisfaction of the FDA or foreign regulatory authorities the safety and efficacy of that product for the proposed indication. Drug 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 clinical trials, even after promising results in earlier preclinical or clinical trials. These setbacks have been caused by, among other things, preclinical findings made while clinical studies were underway and safety or efficacy observations made in clinical studies. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and the results of clinical trials by other parties may not be indicative of the results in trials we may conduct. For example, in March 2007, we terminated 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 DMC. For specific risks related to the pirfenidone development program, please see the risk factor titled “If our clinical trials fail to demonstrate to the satisfaction of the FDA, the EMA, and foreign regulatory authorities that any of our products or product candidates are safe and effective for the treatment of particular diseases, the FDA, the EMA, 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” below.

 

We do not know whether future clinical trials will be fully enrolled, initiated, or completed on schedule or at all.

 

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

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

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

we may not be able to identify or develop a product candidate that can be successful for clinical development;

patients experience adverse side effects or unsafe toxicity levels;

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.

 

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. For example, we experienced slower than anticipated patient enrollment in our ASCEND clinical trial, resulting in a delay to the development program.

 

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We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs or Ethics Committees of the institutions in which such trials are being conducted, by the Data Monitoring Committee, or DMC, for such trial or by the FDA, EEA Competent Authorities, or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA, EEA Competent Authorities, or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. For example, in March 2007, we terminated our development of Actimmune for patients with IPF after discontinuing the INSPIRE trial on the recommendation of the study’s independent DMC.

 

Our development costs will further increase if we have material delays in our current clinical trials for pirfenidone or if we need to perform more or larger clinical trials than initially planned for future product candidates. For example, in 2013, we initiated our PANORAMA trial, a randomized, double-blind, placebo controlled Phase 2 clinical study designed to evaluate the safety and tolerability of N–acetylcysteine (NAC) in patients with IPF and who are being treated with pirfenidone. In addition, we have also initiated our LOTUSS trial, a Phase 2, multinational, open-label, randomized, parallel-group, designed to study the safety and tolerability of pirfenidone in patients with systemic sclerosis-related interstitial lung disease. Any delays in enrollment or modifications to trial design for this study would increase our development costs. If there are any significant delays for any of our other current or planned clinical trials, our business, financial condition, financial results and the commercial prospects for our products and product candidates will be harmed, and our prospects for profitability will be impaired. In addition, delays or discontinuations of our clinical trials could require us to cease development efforts of a product candidate in part or altogether, which will harm our business or financial condition and the commercial prospects for such product and product candidate.

 

Whether we will have any future products other than those based on pirfenidone is largely dependent on the success of our research and development programs, which are at an early stage. Our drug candidates other than pirfenidone are still in early stages of development and we may not be able to successfully discover, develop, obtain regulatory approval for or commercialize any such drug candidates.

 

We intend to invest significant time and financial resources in our research and development programs. We currently have one product in the EU and Canada, Esbriet, based on pirfenidone, which is in Phase 3 clinical development in the United States. Whether we will have any future products other than those based on pirfenidone depends substantially upon our ability to discover, develop, obtain regulatory approval for and commercialize our other drug candidates successfully. Our research and development programs are prone to the significant and likely risks of failure inherent in drug development. We currently do not, and may never, have any other drug candidates in clinical trials, and we have not identified drug candidates for many of our research programs.

 

Before obtaining regulatory approvals for the commercial sale of any drug candidate for a target indication, we must demonstrate with substantial evidence gathered in well-controlled clinical trials, and, with respect to approval in the United States, to the satisfaction of the FDA, or, with respect to approval in other countries, similar regulatory authorities in those countries, that the drug candidate is safe and effective for use for that target indication. Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain, and subject to unanticipated delays. Despite our efforts, our drug candidates may not:

 

·

offer improvement over existing, comparable products;

·

be proven safe and effective in clinical trials; or

·

meet applicable regulatory standards.

 

Positive results in preclinical studies of a drug candidate may not be predictive of similar results in humans during clinical trials, and promising results from early clinical trials of a drug candidate may not be replicated in later clinical trials. Interim results of a clinical trial do not necessarily predict final results. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development. Accordingly, the results from completed preclinical studies and clinical trials for our drug candidates may not be predictive of the results we may obtain in later stage trials or studies. Our preclinical studies or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical studies or clinical trials, or to discontinue clinical trials altogether.

 

We do not expect any of our drug candidates to be commercially available for several years and some or all may never become commercially available. Accordingly, we may never generate revenues through the sale of products other than those based on pirfenidone.

 

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

 

If our clinical trials fail to demonstrate to the satisfaction of the FDA, EMA, and other foreign regulatory authorities that any of our products or product candidates are safe and effective for the treatment of particular diseases, the FDA, EMA and other 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.

 

We are not permitted to market our product candidates in the United States until we receive approval of an NDA from the FDA, or in any foreign countries until we receive the requisite approval from such countries. Before obtaining regulatory approvals for the commercial sale of any product candidate for a target indication, we must demonstrate with evidence gathered in preclinical and well-controlled clinical trials, and, with respect to approval in the United States, to the satisfaction of the FDA and, with respect to approval in other countries, similar regulatory authorities in those countries, that the product candidate is safe and effective for that target indication and that the manufacturing facilities, processes and controls are adequate. Our failure to adequately demonstrate the safety and effectiveness of any of our products or product candidates for the treatment of particular diseases may 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, the EMA and other 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 or trials have 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, EMA, or other foreign regulatory authorities. Preclinical and clinical data can be interpreted by the FDA, EMA and other foreign regulatory authorities, including their advisory committees, in different ways than we interpret the data, which could delay, limit or prevent regulatory approval. In addition, even if advisory committees to the FDA recommend approval of our product candidates, such recommendations are non-binding and the FDA may not approve our NDA for the product candidates. For example, nine of the twelve members of the Pulmonary-Allergy Drugs Advisory Committee, or PADAC, of the FDA recommended approval of pirfenidone to reduce decline in lung function in patients with IPF. However, notwithstanding the PADAC approval recommendation, we subsequently received a Complete Response Letter from the FDA requesting an additional clinical trial to support the efficacy of pirfenidone. If regulatory delays are significant or regulatory approval is limited or denied altogether, our financial results and commercial prospects will be harmed, and our prospects for profitability will be significantly impaired.

 

Both our CAPACITY and ASCEND trials were conducted without a SPA with the FDA. The FDA’s SPA process creates a written agreement between the sponsoring company and the FDA regarding clinical study design and other clinical study issues that can be used to support approval of a product candidate. We did not obtain a SPA agreement with the FDA and therefore there was no assurance that the results would provide a sufficient basis in the view of the FDA for the FDA to grant regulatory approval of a new drug application for pirfenidone for the treatment of IPF. In addition, while the FDA will consider and approve NDAs based on various endpoints, the FDA had indicated that mortality is the ideal endpoint for IPF clinical trials. We designed and conducted CAPACITY 1, CAPACITY 2 and ASCEND based on FVC change as the primary endpoint, as opposed to mortality. The FDA had advised us that they were uncertain as to what would constitute a clinically meaningful treatment effect of pirfenidone on this endpoint. The primary endpoint of FVC change was met with statistical significance in CAPACITY 2 but not in CAPACITY 1. In 2010, the FDA determined that our NDA application was not adequate to support the efficacy of pirfenidone for the treatment of IPF and issued to us a Complete Response Letter requesting an additional clinical trial to support the efficacy of pirfenidone in IPF.

 

Following issuance of the Complete Response Letter, we began the ASCEND trial during the second quarter of 2011. We did not obtain a SPA agreement with the FDA with respect to the ASCEND trial. Our ASCEND trial is a multinational, randomized, double-blind, placebo controlled Phase 3 trial of 555 patients designed to evaluate the safety and efficacy of Esbriet® (pirfenidone) in IPF patients with mild to moderate impairment in lung function. Patients were randomly assigned 1:1 to receive oral pirfenidone (2403 mg/day) or placebo. The primary endpoint is change in percent predicted forced vital capacity (FVC), with the primary outcome analysis a Rank ANCOVA at Week 52. The magnitude of effect will be presented on a categorical basis as the proportion of patients with decrements of FVC percent predicted less than 0% or greater than 10% at pre-specified study time points. The study was powered by estimating the treatment effect size of pirfenidone based on the results of the intent-to-treat analysis of the pooled results of the two previous CAPACITY Phase 3 studies.

 

Key secondary endpoints include change in six-minute walk test (6MWT) distance and progression-free survival, which will be based on the earliest of time to death, FVC decrement of 10% or greater, or decrement in 6MWT distance of 50 meters or more. Additional secondary endpoints in ASCEND include all-cause mortality and on-treatment IPF-related deaths (both evaluated independently in ASCEND as well as pooled with the previous CAPACITY data), and dyspnea. Based on the relatively low mortality rate in this patient population and the treatment effect on mortality seen in CAPACITY, ASCEND is not adequately powered for the mortality endpoint, even after pooling with CAPACITY data. However, if the treatment effect in ASCEND on mortality were more pronounced than that seen in CAPACITY, it may be possible pooling ASCEND and CAPACITY, to derive a favorable effect on mortality.

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Relative to InterMune’s two previous studies of pirfenidone in IPF (CAPACITY), the entry criteria for ASCEND were refined to enrich the study population for patients who are more likely to experience decline in lung function and disease progression during the study. This included modest changes to the eligibility criteria for FVC, DLco, FEV1/FVC ratio, and time since diagnosis. These changes increase the likelihood of demonstrating significant findings on multiple endpoints in ASCEND. The median baseline percent predicted FVC of patients enrolled in ASCEND is 68% compared with 73% in CAPACITY.

 

The results of ASCEND may not be sufficient to cause the FDA to grant regulatory approval for the sale of pirfenidone in the USA, or if such approval is granted, to cause the FDA to approve any mortality claim in the label of the approved product. If the FDA fails to approve pirfenidone for sale in USA, or if the claims permitted by such approval are limited, our business and prospects, may be materially and adversely affected, because of, among other factors, the potential negative impact on the pricing and reimbursement guidelines for Esbriet in any country in the EU and the consequent negative impact on Esbriet revenue from such country. For additional information related to the risk of the Phase 3 clinical study, please see the risk factor under the caption “Risks Related to Our Dependence on Pirfenidone— The results of our ASCEND Phase 3 clinical trial may fail to demonstrate to the FDA sufficient efficacy of pirfenidone to permit approval by the FDA and may have a negative effect on sales of Esbriet in the EEA.”

 

Even in the circumstances that we receive favorable data from ASCEND, FDA approval for pirfenidone, and successfully launch the product in the United States, there may be unforeseen adverse events that may cause us to update our label with additional safety information, limit our indication or require us to withdraw our product from the market. We may or may not be able to re-launch the product. Given our status as a one-product company with limited pipeline, this could have a material adverse effect on our ability to generate additional revenues, and consequently, our business will be seriously harmed.

 

We are subject to extensive and rigorous governmental regulation, including the requirement of FDA, EMA or other regulatory approval before our products and product candidates may be lawfully marketed. Even after we receive regulatory approval, we will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense.

 

The regulatory review and approval process of governmental authorities is lengthy, expensive and uncertain, and regulatory standards may change during the development of a particular product candidate. We are not permitted to market our product candidates in the United States or other countries until we have received requisite regulatory approvals. The FDA review process typically takes significant time to complete and approval is never guaranteed. Any regulatory approvals that we may receive may be subject to limitations on the indications for which the product may be marketed or the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase IV clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. Markets outside of the United States such as the EEA also have requirements for approval of drug candidates with which we must comply prior to marketing. Obtaining regulatory approval for marketing of a product candidate in one country does not ensure we will be able to obtain regulatory approval in other countries, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries. Also, any regulatory approval of any of our products or product candidates, once obtained, may be withdrawn.

 

Both before and after the approval of our product candidates and product, we, our product candidates, our product, our operations, our facilities, our suppliers, and our contract manufacturers, CROs, and contract testing laboratories are subject to extensive regulation by governmental authorities in the United States, the EEA and other countries, with regulations differing from country to country. In the United States, the FDA regulates, among other things, the pre-clinical testing, clinical trials, manufacturing, safety, efficacy, potency, labeling, storage, record keeping, quality systems, advertising, promotion, sale and distribution, marketing, and import and export of therapeutic products. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with current good manufacturing practice, or cGMP, requirements and cGCPs for any clinical trials that we conduct post-approval. Similar requirements exist in the EEA. In addition, quality control and manufacturing procedures must continue to conform to cGMPs regulations after approval, and the FDA, and EEA Competent Authorities periodically inspects manufacturing facilities to assess compliance with cGMP. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things, one or more of the following actions: notices of violation, untitled letters, warning letters, fines and other monetary penalties, unanticipated expenditures, delays in approval or refusal to approve a product candidate; product recall or seizure; interruption of manufacturing or clinical trials; operating restrictions; injunctions; and criminal prosecution. Any failure to receive the marketing approvals necessary to commercialize our product candidates could harm our business.

 

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The FDA’s, EMA, and EEA Member State policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. The FDA has increased its attention to product safety concerns in light of recent high profile safety issues with certain drug products in the United States. Moreover, heightened Congressional scrutiny on the adequacy of the FDA’s drug approval process and the agency’s efforts to assure the safety of marketed drugs has resulted in proposed agency initiatives and new legislation addressing drug safety issues. If adopted, any new legislation or agency initiatives could result in delays or increased costs during the period of product development, clinical trials and regulatory review and approval, as well as increased costs to assure compliance with any new post-approval regulatory requirements. These restrictions or requirements could require us to conduct costly studies. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, which would adversely affect our business, prospects and ability to achieve or sustain profitability

 

Our failure or alleged failure to comply with federal, state and foreign laws governing the promotion of our products, including anti-kickback, false claims and anti-corruption could result in civil and/or criminal sanctions and/or harm our business.

 

If we obtain FDA approval for any of our product candidates and begin commercializing those products in the United States, our operations may be directly, or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal False Claims Act, and physician sunshine laws and regulations. These laws may impact, among other things, our proposed sales, marketing, and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

 

·

the federal Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

·

the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government, and which may apply to entities that provide coding and billing advice to customers;

·

federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

·

the federal physician sunshine requirements under the Affordable Care Act, which requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to the Centers for Medicare & Medicaid Services information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members;

·

the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; and

·

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

 

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform legislation has strengthened these laws. For example, the recently enacted Affordable Care Act, among other things, amends the intent requirement of the Federal Anti-Kickback Statute and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

 

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Achieving and sustaining compliance with these laws may prove costly. In addition, any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the exclusion from participation in federal and state healthcare programs, imprisonment, or the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results.

 

We are also subject to the U.S. Foreign Corrupt Practices Act and anti-corruption laws, and similar laws in foreign countries, such as the U.K. Bribery Act of 2010, which became effective on July 1, 2011. In general, there is a worldwide trend to strengthen anticorruption laws and their enforcement. Any violation of these laws by us or our agents or distributors could create a substantial liability for us, subject our officers and directors to personal liability and also cause a loss of reputation in the market. Becoming familiar with and implementing the infrastructure necessary to comply with laws, rules and regulations applicable to new business activities and mitigate and protect against corruption risks could be quite costly. In addition, failure by us or our agents or distributors to comply with these laws, rules and regulations could delay our expansion and could adversely affect our business.

 

We are subject to similar laws in foreign countries where we conduct business. For example, within the EU, the control of unlawful marketing and promotional activities is a matter of national law in each of the member states. The member states of the EEA closely monitor perceived unlawful marketing and promotional activities by companies. We could face civil, criminal and administrative sanctions if any member state determines that we have breached our obligations under its national laws. Industry associations also closely monitor the activities of member companies. If these organizations or authorities name us as having breached our obligations under their regulations, rules or standards, our reputation would suffer and our business and financial condition could be adversely affected.

 

If we fail to comply with our reporting and payment obligations under governmental programs in the U.S. for our products, we could be subject to penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operations and future business prospects.

 

We anticipate participating in the Medicare Part D Coverage Gap Discount Program, the Medicaid Drug Rebate Program and other Federal and state government pricing programs in the U.S., and we may participate in additional government programs for our products, once approved, in the future. These programs generally will require us to pay rebates or provide discounts to government payors and their sponsors, enrollees or beneficiaries in connection with drugs that are dispensed and reimbursed under these programs. In some cases, such as with the Medicaid Drug Rebate Program, the rebates are based on pricing information that we report on a monthly and quarterly basis to the government agencies that administer the programs. The terms, scope and complexity of these government pricing programs change frequently and compliance requirements are subject to interpretation by the government or other regulatory bodies. Our activities relating to the reporting of prices for products we market in the future, the reporting of Medicaid rebate information and other information affecting federal and state and third-party reimbursement for our products, and the sale and marketing of our products, could become subject to scrutiny. Responding to a government inquiry, investigation or enforcement action, could be expensive and time-consuming, and could have a material adverse effect on our business, financial condition and results of operation.

 

With respect to the Medicare Part D program, the Centers for Medicare & Medicaid Services, the agency responsible for administering this outpatient drug program, or CMS, may impose civil monetary penalties on us from time to time for failure to meet certain regulatory requirements. CMS recently imposed two civil monetary penalties related to our failure to pay specified Part D sponsors within the required time frame, neither of which resulted in material amounts of money. Similar penalties may be imposed on us for these or other violations in the future. We do not believe that such penalties will have a material adverse effect on our business.

 

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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 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 cGMP 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 FDA Form 483 “notice of inspectional observations.” Failure to correct any deficiency could result in manufacturing delays and/or regulatory enforcement action.

 

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 product and, in the future, our product candidates.

 

We rely on third-party manufacturers to manufacture our clinical and commercial drug supplies, and our commercialization of any product or product candidates could be stopped, delayed or made less profitable if those third parties fail to obtain the approval of the FDA, Competent Authorities of the Member States of the EEA or comparable regulatory authorities, fail to provide us with sufficient quantities of drug product or fail to do so at acceptable quality levels or prices.

 

We do not currently have the resources, facilities or experience internally to manufacture Esbriet or any of our product candidates on a commercial scale or for purposes of clinical trials. 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, the EEA and foreign regulatory authorities must approve facilities that manufacture our products for commercial purposes, as well as the manufacturing processes and specifications for the product. We depend on, and we expect to continue to depend on, third parties for the manufacture of our product candidates for preclinical and clinical purposes, and we rely on third parties with FDA and/or EEA Competent Authority-approved manufacturing facilities for the manufacture of Esbriet for commercial purposes. We do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with the regulatory requirements, known as cGMPs, for manufacture of our drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA, the EEA or other regulatory authorities, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA, EEA Competent Authorities, or comparable foreign regulatory authorities do not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.

 

We have a long-term supply contract with Signa C.V. and ACIC Fine Chemicals Inc. for Esbriet active pharmaceutical ingredient and a contract with Catalent for the manufacture of the drug product for Esbriet. If we do not perform our obligations under these agreements, these agreements may be terminated.

 

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Our strategy to contract with third parties for the manufacture of 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 contractual penalties and/or be forced to take substantial inventory write-offs.

Manufacturers of our product and our product candidates are subject to ongoing periodic inspections by the EEA, FDA and other regulatory authorities for compliance with strictly enforced cGMP 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 change third-party manufacturers of a particular pharmaceutical product, the EEA, 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 may refuse to fulfill our commercial or clinical trial needs, which would require us to seek new manufacturing arrangements and may result in substantial delays in meeting market or clinical trial demands. For example, our current long-term supply contract with Signa C.V. and ACIC Fine Chemicals Inc. for the active pharmaceutical ingredient for Esbriet does not impose any obligation on such parties to reserve a minimum annual capacity for the production of such ingredient, which could impair our ability to obtain product from them in a timely fashion.

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, comply with regulatory requirements, or meet expected deadlines, we may not be able to obtain or maintain regulatory approvals for our products and product candidates and we may experience stock-outs. This would adversely impact our ability to successfully commercialize our products and product candidates. Furthermore, 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.

 

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

 

Our failure to set up an integrated supply chain in the United States may adversely affect our ability to commercialize a pirfenidone product if such a product is approved by the FDA for sale in the United States.

 

We do not currently have, nor do we plan to acquire, the infrastructure or internal capability to produce our commercial supply of a pirfenidone product in the United States if such a product receives FDA approval. We intend to contract with a third party supplier to provide our commercial supply of any pirfenidone products approved by the FDA for sale in the United States. However, we cannot guarantee that we will be able to find a such a third party supplier on terms acceptable to us or at all. Furthermore, the FDA must approve facilities that manufacture our products for commercial purposes in the United States, as well as the manufacturing processes and specifications for the product.

 

In addition, we would not directly control the manufacturing of, and would be completely dependent on, our contract manufacturers for compliance with the cGMP for manufacture of both active drug substances and finished drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we would have no direct control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. Furthermore, we expect that any contract manufacturers would be engaged with other companies to supply and/or manufacture materials or products for such companies, which would expose our manufacturers to regulatory risks for the production of such materials and products. As a result, failure to meet the regulatory requirements for the production of those materials and products could generally affect the regulatory clearance of our contract manufacturers’ facility. If the FDA did not approve these facilities for the manufacture of a pirfenidone product or if it withdrew its approval in the future, we would need to find alternative manufacturing facilities, which would negatively impact our ability to generate revenue from sales of pirfenidone products in the United States.

 

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A disruption in our ability to manufacture or ship Esbriet or a disruption in our distribution channels could result in significant product delays and adversely affect our results. This risk is exacerbated if we do not have back up providers of supply chain services.

 

We currently rely on single partners to provide services to us at many stages in our supply chain. Consequently should any of our single-source partners be unable to provide service, we may be unable to satisfy customer orders on a timely basis, if at all.

 

We currently ship Esbriet from third-party packaging facilities to our distributors in the EEA. A disruption in our ability to ship Esbriet to our distributors in the EEA or a disruption in our distribution channels in the EEA for any reason, including as a result of a natural disaster, terrorism or failure of our commercial carrier, could result in product delivery delays. If this were to occur, we may be unable to satisfy customer orders on a timely basis, if at all.

 

A significant disruptive event to our ability to manufacture or distribute Esbriet could adversely affect our ability to generate revenue from Esbriet and materially affect our business and results of operations and our ability to be prepared to launch a pirfenidone product in the United States, if approved for sale by the FDA.

 

We rely on third parties to conduct, monitor and manage our clinical trials, and those third parties may not perform satisfactorily.

 

We have relied upon and plan to continue to rely upon third-party CROs and other third parties, such as medical institutions and clinical investigators, to conduct, monitor and manage data for our ongoing preclinical and clinical programs. For example, we use CROs to conduct our new Phase 3 ASCEND trial for pirfenidone. We rely on these third parties for execution of our preclinical and clinical trials, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs are subject to cGCP requirements, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area, or EEA, and comparable foreign regulatory authorities for all of our products in clinical development. Regulatory authorities enforce these cGCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with cGCP regulations. In addition, our clinical trials must be conducted with product produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.

 

If any of our relationships with these third parties terminate, we may not be able to enter into arrangements with alternative CROs or other third parties or to do so on commercially reasonable terms. In addition, these third parties are not our employees, and except for remedies available to us under our agreements with them, we cannot control whether or not they devote sufficient time and resources to our clinical and preclinical programs. If our third parties need to be replaced, if they do not successfully carry out their contractual duties or meet expected deadlines, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may be delayed in or prevented from obtaining regulatory approvals for our product candidates, and may not be able to successfully commercialize our products and product candidates. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.

 

Switching or adding additional CROs and other third parties involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with these third parties, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects. We may not be able to locate any necessary acceptable replacements or enter into favorable agreements with them, if at all.

 

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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 pharmaceutical and biotechnology patents has emerged to date. Accordingly, we cannot predict with certainty the scope and breadth of patent claims that may be afforded to our patents and other companies’ patents. In addition, each country has its own rules regarding the allowability and enforceability of certain types of patents and therefore there can be no assurance that our patent applications will be granted or that our issued patents will be enforceable in any given jurisdiction. 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.

 

Any litigation, including any interference proceedings to determine priority of inventions, oppositions to patents in foreign countries or litigation against our partners may be costly and time consuming and could harm our business. Litigation may be necessary in some instances to determine the validity, enforceability, scope and infringement of certain of our proprietary rights. Litigation may be necessary in other instances to determine the validity, scope or non-infringement of patent rights claimed by third parties to be pertinent to the manufacture, use or sale of our products. Ultimately, the outcome of such litigation could adversely affect the validity and scope of our patent or other proprietary rights or hinder our ability to manufacture and market our products.

 

Furthermore, the recently enacted America Invents Act (AIA), which reformed certain patent laws in the U.S., may create additional uncertainty regarding patents. Among the significant changes are switching from a “first-to-invent” system to a “first-to-file” system, and the implementation of new procedures that permit competitors to challenge our patents in the U.S. Patent and Trademark Office after grant.

 

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 and result in an order from a court permanently prohibiting the infringing activity;

others will not interfere with, contest, or challenge our patents in patent offices or in court;

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;

competitors will not be able to design around our patents;

our ability to obtain additional patent protection will not be adversely impacted as a result of various regulatory matters that may cause certain of our proprietary data to become public;

we will develop additional proprietary technologies that are patentable; or

the patents of others will not have a material adverse effect on our business.

 

For example, the pirfenidone molecule itself has no composition of matter patent protection in the United States or elsewhere. We must therefore rely primarily on the protection afforded by formulation and method of use patents relating to the use of pirfenidone for the treatment in adults of mild to moderate IPF. While many countries such as the United States permit method of use patents relating to the use of drug products, in some countries the law relating to patentability of such use claims is evolving and may be unfavorably interpreted to prevent us from patenting some or all of our pending patent applications. There are some countries, such as Canada, that significantly limit the types of uses that are patentable, and other countries that currently do not allow method of use patents in any form. We cannot assure that our patents will be a sufficient, or any, barrier to prevent all potential competitors.

 

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In the EEA, patents are subject to a post-grant opposition period, and enforcement of patents is on a country-by-country basis subject to varying, complex and evolving national requirements and standards. Competitors could challenge the validity of our patent claims and challenge whether their product actually infringes those claims. Such challenges would involve complex legal and factual questions and entail considerable costs and investment of effort. In June 2012, opposition proceedings were filed in the European Patent Office against our European patent 2324831 B1, requesting that the patent be revoked on the basis that the invention is not patentable. The European Patent Office Opposition Division rendered its formal decision in December 2013, and the patent was not revoked. The Company will continue to vigorously defend the patent in the event that an appeal is taken. The Company can provide no assurances regarding the outcome of this matter.

 

Others have filed and in the future may file patent applications covering uses and formulations of pirfenidone, or other products in our development program. If a third-party has been or is in the future issued a patent that blocks our ability to commercialize any of our products, alone or in combination, for any or all of the diseases that we are targeting, we could 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.

 

We may be required to disclose clinical or other information the disclosure of which could compromise our ability to obtain, maintain or protect certain proprietary rights necessary for the development and commercialization of our products or product candidates.

 

We are also subject, in the U.S. and elsewhere, to various regulatory schemes that require disclosure of clinical trial data and/or allow access to our data via freedom of information requests.

 

For example, in September 2012, we were notified by the European Medicines Agency, or EMA, that we had received a request in accordance with Regulation 1049/2001/EC regarding public access to documents held by institutions of the EU. The request was made by a potential competitor and sought access to aspects of our Esbriet MAA. We are in the process of challenging the disclosure on the grounds, among others, that it would harm the Company’s intellectual property interests by placing confidential information into the public domain as potential prior art, and that such disclosure would harm the Company’s commercial interests and provide competitors with an unfair gain. There can be no assurance that we will ultimately be successful in preventing disclosure of the data in our MAA. There can be no assurance that we will ultimately be successful in preventing disclosure of the data in our MAA.

 

Additionally, we were notified by Health Canada in October 2013 that an access to information request had been lodged in accordance with Canada’s Access to Information Act, seeking access to documents covering important aspects of our Esbriet NDA. We successfully argued that the scope of this request be limited but there can be no assurance that such arguments will be successful in the future.

 

In the event that our proprietary data becomes public as a result of freedom of information requests, our competitive advantages may be diminished and our ability to obtain patent protection for certain inventions reflected in such data may be adversely affected.

 

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The pirfenidone molecule itself has no composition of matter patent protection in the United States or elsewhere, and may only be protected against competition for the treatment of IPF by orphan drug designation in the United States and European Union.

 

The pirfenidone molecule itself has no composition of matter patent protection in the United States or elsewhere. Because the extent and scope of patent protection for pirfenidone is limited, orphan drug designation is especially important. In the EU we have been granted orphan drug designation for pirfenidone for the treatment of IPF by the EMA, and we have been granted the associated market exclusivity until 2021. In the EU, the EMA’s Committee for Orphan Medicinal Products, or COMP, grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting not more than 5 in 10,000 persons in the European Union Community. Additionally, designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the EU would be sufficient to justify the necessary investment in developing the drug. In the EU, orphan drug designation also entitles a party to financial incentives such as reduction of fees or fee waivers and 10 years of market exclusivity is granted following approval. This period may be reduced to 6 years if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity.

 

We have received orphan drug designation for pirfenidone for the treatment of IPF by the FDA. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is intended to treat a rare disease or condition, defined as a patient population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers. In addition, if a product receives the first FDA approval for the indication for which it has orphan designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of 7 years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity or where the manufacturer is unable to assure sufficient product quantity. If we do not obtain orphan drug exclusivity for our pirfenidone in the United States, our competitors may then sell the same drug to treat the same condition sooner than if we had obtained orphan drug exclusivity and our revenues will be reduced. Moreover, we may not have the ability to prevent others from commercializing pirfenidone for (i) IPF after the orphan drug designation exclusivity period in the EU, and, if granted, in the United States, expires, (ii) uses covered by other patents held by third parties or (iii) other uses in the public domain for which there is no patent protection. Consequently, following expiration of orphan drug exclusivity protection in the EU, and, if granted, in the United States, we must rely primarily on the protection afforded by formulation and method of use patents relating to the safe and/or effective use of pirfenidone for IPF.

 

Although pirfenidone has received orphan drug marketing exclusivity in the EU for the treatment of patients with IPF and orphan drug designation in the United States, that exclusivity and designation may not effectively protect the product from competition. We may not be the first to obtain marketing approval in the United States for IPF due to the uncertainties associated with developing pharmaceutical products. Further, even if we obtain orphan drug exclusivity for pirfenidone in the United States, that exclusivity may not effectively protect the product from competition because different drugs with different active moieties can be approved for the same condition. Moreover, even after an orphan drug is approved, the FDA can subsequently approve the same drug with the same active moiety for the same condition if the FDA concludes that the later drug is safer, more effective, or makes a major contribution to patient care.

 

We could face competition from third-party products that have pirfenidone as the active pharmaceutical ingredient.

 

In addition, other third parties have obtained patents in the United States and elsewhere relating to formulation and methods of use of pirfenidone for the treatment of certain diseases. As a result, it is possible that we could face competition from third-party products that have pirfenidone as the active pharmaceutical ingredient. If a third-party were to obtain FDA approval in the United States for the use of pirfenidone, or regulatory approval in another jurisdiction, for an indication before we did, such third-party would be first to market and could establish the price for pirfenidone in these jurisdictions. Third-party products approved in another jurisdiction may be imported into the EU or other jurisdictions where the sale of Esbriet is approved.

 

Importation of third-party products, or of our own Esbriet product from jurisdictions where prices are lower than in the importing jurisdiction, whether or not such importation is legal, 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 in the United States and elsewhere. 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.

 

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Pirfenidone is the only commercially approved drug approved for the treatment of mild to moderate IPF. There are no other existing approved treatments. Therefore the incidence and prevalence of IPF that currently provide the basis of orphan drug designation in the European Union and the United States could change over time, and it is possible that orphan drug designation could be lost in these markets should the patient population exceed that required to maintain orphan drug status in these countries.

 

Market exclusivity afforded by orphan drug designation is generally offered as an incentive to drug developers to invest in developing and commercializing products for unique diseases that impact a limited number of patients. With respect to the United States, 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, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. Qualification to maintain orphan drug status is generally monitored by the regulatory authorities during the orphan drug exclusivity period, currently ten years and seven years from the date of approval in the EU and United States, respectively. IPF is currently a poorly diagnosed disease in these markets. It is possible that with the approval of Esbriet in the EU, and the potential approval of pirfenidone in the United States, the incidence and prevalence numbers for IPF could change in these markets. Should the incidence and prevalence of IPF patients who are eligible to receive pirfenidone for the treatment of IPF in these markets materially increase, it is possible that the orphan drug designation, and related market exclusivity, in these jurisdictions could be lost.

 

Our current intellectual property portfolio may not be sufficient to protect pirfenidone from competition for the treatment of mild to moderate IPF in adults after our orphan drug exclusivity expires in the European Union, and if we obtain approval and orphan drug exclusivity in the United States.

 

Because the pirfenidone molecule itself has no composition of matter patent protection in the United States or elsewhere, following expiration of orphan drug exclusivity in the EU, and any orphan drug exclusivity we may obtain if approved for commercial use by the FDA, in the United States, we must rely primarily on the protection afforded by the formulation and method of use patents relating to the safe and/or effective use of pirfenidone for the treatment in adults of mild to moderate IPF.

 

We have five granted patents and a number of pending patent applications in Europe relating to Esbriet’s formulation and use in IPF patients, particularly related to the safe and efficacious usage of the product. This collection of patents is expected to provide patent protection in Europe until 2033. We also have 16 issued patents in the United States relating to the formulation or safe and/or effective use of Esbriet in IPF patients, and a number of pending U.S. patent applications. In addition we have numerous pending patent applications under active prosecution in other foreign jurisdictions. The laws regarding patentability and enforceability of patents such as ours vary on a country by country basis, and there can be no assurance that we will be able to obtain or enforce patents in any given country.

 

These patents can be challenged by our competitors in various jurisdictions who may argue such patents are invalid or unenforceable or lack sufficient written description or enablement, or that the claims of the issued patents should be limited or narrowly construed. For example, in June 2012, opposition proceedings were filed in the European Patent Office against InterMune’s European patent 2324831 B1, requesting that the patent be revoked on the basis that the invention is not patentable. Although the patent was not revoked by the EPO, and while we intend to vigorously defend the patent if an appeal is taken, we have no assurance regarding the outcome of this matter. Additionally, even if the validity of these patents were upheld in a patent challenge, a court may refuse to stop the other party from practicing the activity at issue. Any of these outcomes would limit our ability to exclusively market pirfenidone for the treatment in adults of mild to moderate IPF in the EU, and if approved for commercial use by the FDA, in the United States, as well as certain other countries where we have filed for patent protection.

 

If we breach our collaboration agreement with Shionogi, our ability to develop and commercialize pirfenidone in other jurisdictions may be impaired.

 

We are party to a collaboration agreement with Shionogi that gives us an option to exercise a license for access to certain patient level data from the Shionogi Phase 3 clinical trial with pirfenidone in patients with IPF, which we refer to as SP3, to be used, along with other Shionogi clinical study information, as “pivotal study data” (as defined in the agreement) in connection with our regulatory filings. While we do not currently intend to use SP3 patient level data as pivotal study data in our regulatory filings in the United States or in other jurisdictions, we may elect to do so at a later point in time. Should we breach this agreement with Shionogi, we may lose our ability to use Shionogi’s patient level data in our regulatory filings in the United States or in other jurisdictions, which could adversely affect our ability to obtain regulatory approval of pirfenidone in such jurisdictions.

 

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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. 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 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 that 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 intellectual property that we license from third parties. Accordingly, we would be unable to exercise the same degree of control over this intellectual property as we would exercise over intellectual property that we own, and, as a result, we may lose our rights to such intellectual property and incur substantial costs. At the present time, there are no licensed patent matters for pirfenidone that fall into this category.

 

If our employees, consultants and/or 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.

 

Patent prosecution may not be appropriate or obtainable for certain of our technologies, and we may instead protect such proprietary information as trade secrets. 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 we continue to incur net losses for an extended period of time, we may be unable to continue our business.

 

We have incurred net losses since inception, and our accumulated deficit was approximately $1.3 billion at December 31, 2013. 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. 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.

 

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, along with anticipated cash flows from our sales of Esbriet, will be sufficient to fund our operating expenses, debt obligations and capital requirements under our current business plan through at least the next twelve months. However, our current plans and assumptions may change, and our capital requirements may increase. In particular, initiating the establishment of a commercial infrastructure in the United States to market Esbriet will require significant financial resources. Further, we may decide to prioritize one or more product development efforts or other programs within or outside of IPF as a result of our implementing our strategic initiatives, which may result in an increase in expenses. 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, delay or cease executing our three point strategic plan, 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.

 

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, or take certain cost saving efforts that could harm our financial results.

 

Because we have limited resources and 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 or we may elect to terminate our programs for and, in certain cases, our licenses to, such product candidates or programs in order to allocate resources to another program, which could cause us to fall behind our initial timetables for development of certain product candidates. For example, we may decide to delay, cease or forgo developing pirfenidone for a particular indication or a new potential product candidate, including our PANORAMA or LOTUSS trials or other discovery program, and allocate our resources solely to the commercialization of Esbriet for IPF. 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. 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.

 

Due to cash constraints or for strategic business reasons we may decide to take certain actions that reduce our expenses. For example, we sold to Roche our worldwide development and commercialization rights to danoprevir and received $175.0 million from the sale of such rights. As a result, our rights to share profits from sales of danoprevir in the United States have also been terminated.

 

Negative conditions in the global markets may impair the liquidity of a portion of our investment portfolio.

 

Our investment securities consist of high-grade corporate debt securities, government agency securities and direct government obligation securities. Due to recent credit market and global economic conditions, markets for certain fixed-income securities have been volatile and have experienced limitations in liquidity. If there is insufficient demand for the securities we hold, we may not have liquid access to our investments and may be required to recognize an impairment for those securities should we conclude that such impairment is other-than-temporary.

 

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

 

We initiated our commercial launch of Esbriet in Germany in September 2011 and subsequently in Austria, Belgium, Canada, Denmark, Finland, France, Iceland, Ireland, Italy, Luxembourg, Norway, Sweden and the UK and we plan to initiate commercial launches in additional countries in the EU in the future. While we have attempted to forecast demand for Esbriet in Germany, other European countries and Canada, until we have a sufficient history of commercial sales in such jurisdictions, we cannot know with certainty whether our inventory of Esbriet is in excess of or insufficient to meet demand. Furthermore, we have just recently established our sales organization in the EU and we do not yet know if the size of the sales organization is sufficient to successfully commercialize Esbriet, which makes accurately forecasting demand more difficult. If we fail to accurately forecast demand for Esbriet, we may face temporary supply shortages, which would impair our ability to generate revenue from such demand, or excess inventories, which may result in additional charges for such excess inventory.

 

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. We have product liability risk for all of our product candidates and for all of the clinical trials we conduct. 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.

 

If we materially breach the representations and warranties we made to Roche under the asset purchase agreement for the sale of danoprevir or to Vidara under the asset purchase agreement for the sale of Actimmune, or if we fail to perform any of our other contractual obligations under these agreements, Roche or Vidara, as applicable, has the right to seek indemnification from us for damages it suffers as a result of such breach or failure. These amounts could be significant.

 

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 asset purchase agreement for our sale of our worldwide development and commercialization rights to danoprevir. In addition, we have agreed to indemnify Vidara and its affiliates against losses suffered as a result of our material breach of representations and warranties and our other obligations in the asset purchase agreement for the sale of our worldwide development and commercialization rights to Actimmune. If one or more of our representations and warranties were not true at the time we made them to Roche or Vidara, or if we fail to perform any of our other contractual obligations under an agreement, we would be in breach of the applicable asset purchase agreement. In the event of a breach or failure by us to perform, Roche or Vidara, as applicable, has the right to seek indemnification from us for damages suffered by either of them as a result of such breach. The amounts for which we could become liable may be significant.

 

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.

 

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.

 

39


Failure to attract, retain and motivate skilled personnel and cultivate key academic collaborations will delay our product development programs and our business development efforts.

 

As of December 31, 2013, we had 353 full-time employees, and our success depends on our continued ability to attract, retain and motivate highly qualified management, scientific and commercial personnel, especially in Europe, 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 Chairman, 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.

 

Our ability to use our net operating losses and certain other tax attributes may be subject to annual limitations under federal and state tax law that could materially affect our ability to utilize such losses and attributes.

 

If a corporation undergoes an “ownership change” within the meaning of Section 382 of the Internal Revenue Code, or Section 382, the corporation’s ability to utilize any net operating losses, or NOLs, and certain tax credits and other attributes generated before such an ownership change, is limited. We believe that we have in the past experienced ownership changes within the meaning of Section 382 that have resulted in limitations under Section 382 (and similar state provisions) on the use of our NOLs and other tax attributes. Future changes in ownership could result in additional ownership changes within the meaning of Section 382 that could further limit our ability to utilize our NOLs and certain other tax attributes.

 

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

 

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer. In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations and the services we provide to customers, and damage our reputation, and cause a loss of confidence in our products and services, which could adversely affect our business.

 

Risks Related to our Securities

 

Our significant level of indebtedness could limit cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our obligations under our outstanding notes.

 

We have now and will continue to have a significant amount of indebtedness. As of January 31, 2014, we had $18.4 million of outstanding indebtedness under our 2015 Notes, $120.8 million of outstanding indebtedness under our 2017 Notes and $155.3 million of outstanding indebtedness under our 2018 Notes. We may also incur additional indebtedness to meet future financing needs. Our indebtedness could have significant negative consequences for our business, results of operations and financial condition, including:

increasing our vulnerability to adverse economic and industry conditions;

limiting our ability to obtain additional financing;

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

limiting our flexibility in planning for, or reacting to, changes in our business;

dilution experienced by our existing stockholders as a result of the conversion of our existing notes; and

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

 

40


As of December 31, 2013, our remaining debt service obligation on our existing notes through December 31, 2014 is $7.8 million in cash. In January 2013, we completed a registered underwritten public offering of 15,525,000 shares of our common stock and a concurrent registered underwritten public offering of $120.8 million aggregate principal amount of 2.50% convertible senior notes due 2017. We used a portion of the net proceeds from the convertible note offering to repurchase approximately $66.6 million of our outstanding 5.00% 2015 Notes. Following such repurchases, approximately $18.4 million of the 2015 Notes remain outstanding. As a result of the repurchase of our 2015 Notes, our annual debt service obligation for existing notes in 2013 was $8.8 million. Additionally, in November 2013, we completed a registered underwritten public offering of 7,475,000 shares of our common stock. The resulting net proceeds from the common stock offering were approximately $91.5 million, after deducting underwriting discounts and expenses. We cannot assure you that we will continue to maintain sufficient cash reserves or that our business will continue to generate cash flow from operations at levels sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness, or that our cash needs will not increase. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of our indebtedness then outstanding, we would be in default, which would permit the holders of the affected indebtedness to accelerate the maturity of such indebtedness and could cause defaults under our other indebtedness. A default under any of our indebtedness could have a material adverse effect on our business, results of operations and financial condition.

 

We may not have the ability to raise the funds necessary to finance any required repurchases of our existing notes, which would constitute an event of default under our indentures.

 

If a fundamental change occurs under our indenture for the 2017 Notes or 2018 Notes or if a designated event, such as the termination of trading of our common stock on The NASDAQ Global Select Market or a specified change of control transaction, occurs under our 2015 Notes indenture, prior to their applicable maturities, we may be required to repurchase all or part of such notes. While the 2015 Notes indenture would allow us in certain circumstances to pay the redemption price for the 2015 Notes in shares of our common stock if a designated event were to occur, the 2017 Notes indenture and the 2018 Notes indenture would not allow us to pay the applicable repurchase prices in shares of our common stock if a fundamental change were to occur. We may not have sufficient funds to pay the repurchase 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, we may in the future enter into credit agreements or other agreements that may contain provisions prohibiting redemption or repurchase of the existing notes under certain circumstances, or may provide that a designated event or fundamental change constitutes an event of default under that agreement. If a designated event, with respect to the 2015 Notes, or a fundamental change, with respect to the 2017 and 2018 Notes, occurs at a time when we are prohibited from repurchasing or redeeming the existing notes, we could seek a waiver from the holders of these notes or attempt to refinance these notes. If we were not able to obtain consent, we would not be permitted to repurchase or redeem the existing notes. Our failure to repurchase or redeem tendered notes would constitute an event of default under the 2015 Notes indenture, the 2017 Notes indenture and the 2018 Notes indenture, which might constitute a default under the terms of our other indebtedness.

 

41


We may fail to meet our publicly announced financial guidance or other expectations about our business, which would cause our stock to decline in value and affect the trading price of our common stock and outstanding notes.

 

There are a number of reasons why we might fail to meet our financial guidance or other expectations about our business, including, but not limited to, the following:

lower than anticipated sales of Esbriet in the EEA and Canada;

negative developments or setbacks in our application to obtain marketing approval for pirfenidone in the United States, including negative results of the ASCEND trial and/or a negative response from the FDA to our anticipated NDA resubmission based on data from this trial;

delays or unexpected difficulties in our commercialization efforts for Esbriet, including delays or difficulties in our anticipated commercial launches in Europe and Canada;

lower than expected pricing and reimbursement levels for Esbriet in the EU, including any adverse decisions by Germany’s Federal Joint Commission stemming from the IQWiG benefit assessment and negative reimbursement decisions by France’s National Social Security;

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 failure of pirfenidone to meet its primary endpoint and the PFS secondary endpoint in the CAPACITY 1 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;

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;

our development activities may proceed faster than planned and we may decide to invest more in our research and development initiatives than initially planned;

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

clinical trial participation may reduce product sales.

 

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. The market price of our common stock, as well as the general level of interest rates and our credit quality, will likely significantly affect the trading price of the notes.

 

We previously identified a material weakness in our internal control over financial reporting and we recently remediated this material weakness in the first quarter of 2013. If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and investors’ views of us and could have a material adverse effect on our common stock price and the trading price of our outstanding notes.

 

Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the Securities and Exchange Commission, or the Commission, require an annual management assessment of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm attesting to the effectiveness of our internal control over financial reporting at the end of the fiscal year.

 

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012 and based on our assessment using criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework, management concluded that our internal control over financial reporting was not effective as of December 31, 2012. In connection with our sale of Actimmune in June 2012, we failed to correctly record an intraperiod tax allocation, which resulted in the restatement of our financial results for the three and six month periods ended June 30, 2012 and 2011 and the three and nine month periods ended September 30, 2012 and 2011. As a result, we identified a control deficiency relating to a failure to completely review the tax consequences of complex and infrequent transactions. In the first quarter of 2013, we strengthened our disclosure controls and internal control over financial reporting to remediate the deficiencies that gave rise to the material weakness.

 

42


Despite the execution of our remediation plan, we cannot assure you that a similar material weakness will not recur, nor that we will able to 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 Commission. If we cannot in the future favorably assess, or our independent registered public accounting firm is unable to provide an unqualified attestation report on, 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 and the trading price of our notes.

 

Future sales of our common stock in the public market or the issuance of securities senior to our common stock could adversely affect the market price of our common stock and, in turn, the trading price of the notes.

 

Sales by us or our stockholders of a substantial number of shares of our common stock in the public markets, including shares issued upon the exercise of outstanding options or conversions of our outstanding notes, or the perception that these sales might occur, could cause the market price of our common stock to decline and, in turn, the trading price of our notes may decline, or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity or equity-related securities. In addition, the market price of our common stock also could be affected by possible sales of our common stock by investors who view such notes as a more attractive means of equity participation in our company and by hedging or arbitrage trading activity that we expect to develop involving our common stock by holders of such notes. The hedging or arbitrage could, in turn, affect the trading price of the notes and/or the market price of any shares of our common stock that holders of the notes receive upon conversion of their notes.

 

We may issue shares of our common stock or equity securities senior to our common stock in the future for a number of reasons, including to finance our operations and business strategy, to adjust our ratio of debt-to-equity, to satisfy our obligations upon the exercise of options, upon conversion of our existing notes or for other reasons. No prediction can be made as to the effect, if any, that future sales or issuance of shares of our common stock or other equity securities, or the availability of shares of our common stock or such other equity securities for future sale or issuance, will have on the market price of our common stock.

 

We have filed registration statements covering the approximately 12.8 million shares of common stock that are either issuable upon the exercise or vesting of outstanding options or awards reserved for future issuance pursuant to our stock plans as of January 31, 2014.

 

The issuance of shares of our common stock issued in connection with the exercise of stock options, restricted stock units, under convertible or derivative instruments or otherwise would dilute the notional percentage ownership held by our security holders. In addition, we may issue a substantial number of shares of our common stock upon conversion of our outstanding notes.

 

At times, the market price of our common stock has fluctuated significantly, and as a result an investment in our stock could decline in value.

 

The market price of our common stock has been and is likely to continue to be extremely volatile. During the twelve-month period ended December 31, 2013, the closing price of our common stock on The NASDAQ Global Select Market ranged from a high of $15.89 in August 2013 to a low of $8.39 in February 2013. The market price of our common stock could be subject to wide fluctuations in response to a variety of factors, many of which we cannot control, including:

general economic and political conditions and specific conditions in the biotechnology industry;

changes in expectations as to our future financial performance, including financial estimates or publication of research reports by securities analysts;

strategic actions taken by us or our competitors, such as acquisitions or restructurings;

announcements of new products or technical innovations by us or our competitors;

actions taken by institutional stockholders; and

speculation in the press or investment community.

 

In addition, the stock market in general, and the stock price of companies listed on NASDAQ, 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 stockholder derivative litigation against that company. This type of litigation can result in substantial costs and a diversion of management’s attention and resources.

 

There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock and the trading price of the notes.

 

43


Provisions of Delaware law, our charter documents and the indentures governing our outstanding notes may impede or discourage a takeover, which could cause the market price of our common stock to decline.

 

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.

 

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.

 

The repurchase rights in our outstanding notes triggered by the occurrence of a fundamental change and the additional shares of our common stock by which the conversion rates are increased in connection with certain make-whole fundamental change transactions could also discourage a potential acquirer.

 

We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.

 

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. As a result, purchasers of our common stock and holders who convert their notes and receive shares of our common stock, if any, will not realize a return on their investment unless the market price of our common stock appreciates, which we cannot assure.

 

ITEM 1B.   UNRESOLVED STAFF COMMENTS

 

We have received no written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of our fiscal year 2013 that remain unresolved.

 

ITEM 2.   PROPERTIES

 

Our headquarters are located at 3280 Bayshore Boulevard, Brisbane, California and consist of approximately 56,000 square feet. In 2006, in order to expand our existing office and laboratory space, we entered into an amendment to our existing lease to include approximately 15,000 square feet on the first floor of 3260 Bayshore Boulevard, Brisbane, California.

 

Our European headquarters are located in Muttenz, Switzerland. We have leased additional facilities in Berlin, Germany; Milan, Italy; Paris, France; London, England; Madrid, Spain; Stockholm, Sweden; Vienna, Austria; Utrecht, the Netherlands; and Ontario, Canada and expect to enter into future lease agreements where and when we have established additional subsidiaries. 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 facilities, if necessary, or to accommodate expansion of our operations.

44


 

ITEM 3.   LEGAL PROCEEDINGS

 

Indemnity Agreement

 

On or about March 22, 2000, we entered into an Indemnity Agreement with W. Scott Harkonen M.D., who served as the Company’s chief executive officer until September 30, 2003. The Indemnity Agreement obligates us to hold harmless and indemnify Dr. Harkonen against expenses (including attorneys’ fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts Dr. Harkonen becomes legally obligated to pay because of any claim or claims made against him in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, to which Dr. Harkonen is a party by reason of the fact that he was a director, officer, employee or other agent of the Company. The Indemnity Agreement establishes exceptions to our indemnification obligation, including but not limited to claims “on account of Dr. Harkonen’s conduct that is established by a final judgment as knowingly fraudulent or deliberately dishonest or that constituted willful misconduct,” claims “on account of Dr. Harkonen’s conduct that is established by a final judgment as constituting a breach of Dr. Harkonen’s duty of loyalty to the Company or resulting in any personal profit or advantage to which Dr. Harkonen was not legally entitled,” and claims “for which payment is actually made to Dr. Harkonen under a valid and collectible insurance policy.” The Indemnity Agreement, however, obligates us to advance all expenses, including attorneys’ fees, incurred by Dr. Harkonen in connection with such proceedings, subject to an undertaking by Dr. Harkonen to repay said amounts if it shall be determined ultimately that he is not entitled to be indemnified by the Company.

 

Dr. Harkonen was named as a defendant in certain civil action lawsuits instituted against us where the various complaints alleged that we fraudulently misrepresented the medical benefits of Actimmune for the treatment of IPF and promoted Actimmune for IPF. Ultimately, these complaints were dismissed. However, Dr. Harkonen also became the target of the investigation by the U.S. Department of Justice regarding the promotion and marketing of Actimmune. On March 18, 2008, a federal grand jury indicted Dr. Harkonen on two felony counts related to alleged improper promotion and marketing of Actimmune during the time Dr. Harkonen was employed by us (the “Criminal Action”). The trial in the criminal case resulted in a jury verdict on September 29, 2009, finding Dr. Harkonen guilty of one count of wire fraud related to a press release issued on August 28, 2002, and acquitting him of a second count of a misbranding charge brought under the Federal Food, Drug, and Cosmetic Act. On April 13, 2011, the Court denied Dr. Harkonen’s post-trial motions and sentenced Dr. Harkonen to three years of probation, including six months of home detention, 200 hours of community service and a fine of $20,000. The Court’s Judgment was filed on April 18, 2011. Dr. Harkonen appealed his conviction and sentence and the government cross-appealed his sentence. On March 4, 2013, the Ninth Circuit Court of Appeals issued an unpublished opinion affirming both the conviction and the sentence. Dr. Harkonen filed a petition for rehearing en banc which was denied by the Ninth Circuit Court of Appeals on May 7, 2013. On August 5, 2013, Dr. Harkonen filed a petition for a writ of certiorari seeking review by the United States Supreme Court. The U.S. Supreme Court denied Dr. Harkonen’s petition on December 16, 2013.

 

Prior to December 2008, insurers that issued directors & officers (“D&O”) liability insurance to the Company had advanced all of Dr. Harkonen’s expenses, including attorneys’ fees, incurred in the civil action lawsuits and Criminal Action. Those insurers included National Union Fire Insurance Company of Pittsburgh, PA (“AIG”), Underwriters at Lloyd’s, London (“Lloyd’s”), and Continental Casualty Company (“CNA”). On November 19, 2008, however, the insurer that issued a $5.0 million D&O insurance policy providing coverage excess of the monetary limits of coverage provided by AIG, Lloyd’s and CNA, Arch Specialty Insurance Company (“Arch”), advised the Company that the limits of the underlying coverage were expected to be depleted by approximately December 15, 2008; that Arch “disclaimed coverage” based on misstatements and misrepresentations allegedly made by Dr. Harkonen in documents provided in the application for the Arch policy and the underlying Lloyd’s policy; and that, based on that disclaimer, Arch would not be advancing any of Dr. Harkonen’s expenses, including attorneys’ fees, incurred in the civil action lawsuits and Criminal Action.

 

As a result of Arch’s disclaimer of coverage and refusal to advance expenses, including attorneys’ fees, the Company had, as of approximately December 15, 2008, become obligated to advance such expenses incurred by Dr. Harkonen in the civil action lawsuits and Criminal Action.

 

On January 13, 2009, we submitted to the American Arbitration Association (“AAA”) a Demand for Arbitration, InterMune, Inc. v. Arch Specialty Insurance Co., No. 74 194 01128 08 JEMO. Dr. Harkonen also is a party to the Arbitration. The Demand for Arbitration sought an award compelling Arch to advance Dr. Harkonen’s legal fees and costs incurred in the civil action lawsuits and the Criminal Action, and to advance other former officers’ legal fees and costs incurred in relation to the Department of Justice investigation.

 

45


The matter was heard by the arbitration panel and on May 29, 2009, the arbitration panel issued an Interim Arbitration Award granting our request for a partial award requiring Arch to advance Dr. Harkonen’s legal fees and costs incurred in the civil action lawsuits and Criminal Action. Arch subsequently advanced such fees and costs, including fees and costs previously paid by the Company. The question whether Arch ultimately will be required to cover the advanced fees and costs or, instead, may recoup those fees and costs as not covered by its policy, has not been determined. Unless and until the arbitration panel rules that such fees and costs are not covered, Arch remains obligated to advance such fees and costs.

 

In late 2009, Arch advised us that Arch had exhausted the $5.0 million limit of liability of the Arch D&O insurance policy, and that defense cost invoices submitted to Arch collectively exceed the Arch policy’s limit. The Company therefore advised the insurer that issued a $5.0 million D&O insurance policy providing coverage for the excess of the monetary limits of coverage provided by Arch, Old Republic Insurance Company (“Old Republic”), that the limits of the underlying coverage had been depleted, and we submitted invoices for legal services rendered on behalf of Dr. Harkonen and other individuals who were targets of the U.S. Department of Justice’s investigation to Old Republic for payment. Old Republic agreed to advance Dr. Harkonen’s legal fees and costs incurred in the civil action lawsuits and Criminal Action, but declined to reimburse us for payments made on behalf of other individuals who were targets of the U.S. Department of Justice’s investigation. In mid-2010, Old Republic advised us that Dr. Harkonen’s defense fees and costs had exhausted the $5.0 million limit of the Old Republic insurance policy as of the second quarter of 2010. There is no additional insurance coverage available to cover the cost of Dr. Harkonen’s defense. Defense fees and costs incurred over and above this final $5.0 million of insurance coverage therefore are, in the absence of any available insurance, to be advanced by us and have been advanced by us pursuant to the terms of the Indemnity Agreement.

 

Now that the United States Supreme Court has denied Dr. Harkonen’s petition for writ of certiorari, leaving the verdict and judgment against Dr. Harkonen intact, Arch has taken steps to resume the arbitration and seek to recoup all or some of the $5 million it advanced for Dr. Harkonen’s defense back from the Company and/or from Dr. Harkonen, contending that such fees and costs are not covered by its policy. The Company believes that the Arch policy does cover such fees and costs and will assert that position in the arbitration. At this time, we believe no change to the status of the application of the D&O liability insurance in general has occurred due to the judgment in the Criminal Action. Therefore, while it is reasonably possible that we may incur a loss associated with this matter, we are unable to determine the amount of a loss or range of losses and have not accrued for any such amounts in our financial statements associated with this matter.

 

ITEM 4.   MINE SAFETY DISCLOSURES

 

Not applicable.

 

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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 Select Market under the symbol “ITMN.”

 

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

 

Fiscal Year 2013 Quarters Ended:

High

 

 

Low

 

March 31, 2013

$

10.82

 

 

$

8.21

 

June 30, 2013

 

10.55

 

 

 

8.61

 

September 30, 2013

 

16.00

 

 

 

9.60

 

December 31, 2013

 

15.88

 

 

 

11.62

 

 

 

 

 

 

 

 

 

Fiscal Year 2012 Quarters Ended:

High

 

 

Low

 

March 31, 2012

$

17.37

 

 

$

12.25

 

June 30, 2012

 

15.52

 

 

 

9.66

 

September 30, 2012

 

12.77

 

 

 

7.21

 

December 31, 2012

 

10.40

 

 

 

7.80

 

 

Holders of Record

 

As of January 31, 2014, there were approximately 61 stockholders of record of our common stock. 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.

47


 

Performance Graph

 

The following graph compares the 5-year cumulative total return to our stockholders on InterMune’s common stock relative to the cumulative total returns of the NASDAQ Composite and the AMEX Biotechnology Index during that same period. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in the company’s common stock and in each index on December 31, 2008 and its relative performance is tracked through December 31, 2013. The returns shown are based on historical results and are not intended to suggest future performance.

 

logo

 

 

 

 

Base Period December 31,

 

Years Ending December 31,

 

Company / Index

 

2008

 

2009

 

 

2010

 

 

2011

 

 

2012

 

 

2013

 

InterMune, Inc.

 

100

 

 

123.25

 

 

 

344.05

 

 

 

119.09

 

 

 

91.59

 

 

 

139.22

 

NASDAQ Composite

 

100

 

 

145.32

 

 

 

171.50

 

 

 

170.08

 

 

 

199.76

 

 

 

279.90

 

AMEX Biotechnology Index

 

100

 

 

145.58

 

 

 

200.51

 

 

 

168.64

 

 

 

239.05

 

 

 

360.10

 

 

The information under “Performance Graph” is not soliciting material, 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 filing date of this 10-K and irrespective of any general incorporation language in those filings.

 

ITEM 6.   SELECTED FINANCIAL DATA

 

The selected consolidated financial data that appears below 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 Annual Report, and with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report. The selected consolidated statement of operations data for each of the three years in the period ended December 31, 2013, 2012 and 2011 and the selected consolidated balance sheet data as of December 31, 2013 and 2012 are derived from the audited consolidated financial statements included elsewhere in this Annual Report. The selected consolidated statement of operations data for the year ended December 31, 2010 and 2009 and the selected consolidated balance sheet data as of December 31, 2011, 2010 and 2009 are derived from audited consolidated financial statements not included in this Annual Report.

 

On June 19, 2012, we completed the divestiture of our worldwide development and commercialization rights to the pharmaceutical product containing Interferon Gamma-1b sold by us under the trade name Actimmune® for $55.0 million in cash, plus certain conditional royalty payments for a period of two years following the closing. The operating results of our Actimmune activities have been reclassified as discontinued operations for all periods presented.


48


 

 

Year Ended December 31,

 

 

2013

 

 

2012

 

 

2011

 

 

2010

 

 

2009

 

 

(in thousands, except per share data)

 

Consolidated Statements of Operations Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Esbriet product sales

$

70,339

 

 

$

26,174

 

 

$

2,778

 

 

$

-

 

 

$

-

 

Collaboration revenue

 

-

 

 

 

-

 

 

 

2,629

 

 

 

239,251

 

 

 

23,272

 

Total revenue, net

 

70,339

 

 

 

26,174

 

 

 

5,407

 

 

 

239,251

 

 

 

23,272

 

Cost and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

10,406

 

 

 

8,916

 

 

 

1,406

 

 

 

-

 

 

 

-

 

Research and development

 

113,506

 

 

 

106,571

 

 

 

74,973

 

 

 

67,470

 

 

 

89,138

 

Acquired research and development and milestone payments(1)

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

15,250

 

Selling, general and administrative

 

145,051

 

 

 

105,295

 

 

 

89,463

 

 

 

55,024

 

 

 

37,039

 

Restructuring charges

 

-

 

 

 

-

 

 

 

-

 

 

 

1,300

 

 

 

697

 

Total costs and expenses

 

268,963

 

 

 

220,782

 

 

 

165,842

 

 

 

123,794

 

 

 

142,124

 

Income (loss) from operations

 

(198,624

)

 

 

(194,608

)

 

 

(160,435

)

 

 

115,457

 

 

 

(118,852

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

427

 

 

 

586

 

 

 

556

 

 

 

571

 

 

 

1,727

 

Interest expense

 

(14,602

)

 

 

(8,927

)

 

 

(6,408

)

 

 

(8,399

)

 

 

(10,129

)

Change in value of embedded conversion derivative

 

2,422

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Loss on extinguishment of notes

 

(7,900

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11,014

)

Other

 

(1,610

)

 

 

(373

)

 

 

(658

)

 

 

1,599

 

 

 

6,393

 

Income (loss) from continuing operations before income taxes

 

(219,887

)

 

 

(203,322

)

 

 

(166,945

)

 

 

109,228

 

 

 

(131,875

)

Income tax provision (benefit)

 

890

 

 

 

(18,633

)

 

 

(4,594

)

 

 

76

 

 

 

(4,824

)

Income (loss) from continuing operations, net of income taxes

 

(220,777

)

 

 

(184,689

)

 

 

(162,351

)

 

 

109,152

 

 

 

(127,051

)

Income from discontinued operations, net of income taxes(2)

 

1,209

 

 

 

34,608

 

 

 

7,577

 

 

 

13,222

 

 

 

11,031

 

Net income (loss)

$

(219,568

)

 

$

(150,081

)

 

$

(154,774

)

 

$

122,374

 

 

$

(116,020

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(2.71

)

 

$

(2.83

)

 

$

(2.70

)

 

$

2.02

 

 

$

(2.86

)

Discontinued operations

 

0.01

 

 

 

0.53

 

 

 

0.12

 

 

 

0.24

 

 

 

0.24

 

Net income (loss) per share

$

(2.70

)

 

$

(2.30

)

 

$

(2.58

)

 

$

2.26

 

 

$

(2.62

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing basic net loss per common share

 

81,391

 

 

 

65,184

 

 

 

60,100

 

 

 

54,202

 

 

 

44,347