Form 10-Q
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`Page 1 of 53
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`10-Q 1 d10q.htm FORM 10-Q
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`Table of Contents
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`UNITED STATES
`SECURITIES AND EXCHANGE COMMISSION
`Washington, D.C. 20549
`
`FORM 10-Q
`
`(cid:1) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
`EXCHANGE ACT OF 1934
`
`For the quarterly period ended June 30, 2011
`
`or
`
`(cid:2) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
`EXCHANGE ACT OF 1934
`
`Commission File Number: 0-21699
`
`VIROPHARMA INCORPORATED
`
`(Exact Name of Registrant as Specified in its Charter)
`
`Delaware
`(State or other jurisdiction of
`incorporation or organization)
`
`23-2789550
`(I.R.S. Employer
`Identification No.)
`
`730 Stockton Drive
`Exton, Pennsylvania 19341
`(Address of Principal Executive Offices and Zip Code)
`
`610-458-7300
`(Registrant’s Telephone Number, Including Area Code)
`
`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 (cid:1) No (cid:2)
`
`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 (§232.405 of this
`chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
`files). Yes (cid:1) No (cid:2)
`
`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”, “non-accelerated filer” and
`“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
`
`Large Accelerated Filer (cid:1)
`
`Non-accelerated Filer (cid:2)
`
`Accelerated Filer
`
`(cid:2)
`
`Smaller Reporting Company (cid:2)
`
`Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
`Act). Yes (cid:2) No (cid:1)
`
`Number of shares outstanding of the issuer’s Common Stock, par value $.002 per share, as of July 18, 2011: 75,944,185
`shares.
`
`https://www.sec.gov/Archives/edgar/data/946840/000119312511200830/d10q.htm
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`22.05.2017
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`CSL EXHIBIT 1079
`CSL v. Shire
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`Form 10-Q
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`Page 2 of 53
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`Table of Contents
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`VlROPI-IARMA INCORPORATED
`INDEX
`
`PART I FINANCIAL INFORMATION
`
`Item 1.
`
`Financial Statements
`
`Condensed Consolidated Balance Sheets (unaudited) at June 30. 2011 and December 31. 2010
`
`Consolidated Statements of Operations glmauditedl for the three and six months ended J1me 30. 2011
`and 2010
`
`Consolidated Statement of Stockholders’ Eguig (unaudited) for the six months ended June 30. 2011
`
`Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30I 2011 and
`M
`
`Notes to the Consolidated Financial Statements {unaudited}
`
`Item 2. Management‘s Discussion and Analysis of Financial Condition and Results of Ogerations
`
`Item 3.
`
`Item 4.
`
`Quantitative and Qualitative Disclosures About Market Risk
`
`Controls and Procedures
`
`PART 11 OTHER INFORMATION
`
`Legal Proceedings
`Item 1.
`Item 1A. Risk Factors
`
`Item 2.
`Item 6.
`
`Unregistered Sales of Eguigz Securities and Use of Proceeds
`Exhibits
`
`SIGNATURES
`
`2
`
`Page
`
`3
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`4
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`5
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`6
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`7
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`21
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`35
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`36
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`37
`38
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`42
`43
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`44
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`Form 10-Q
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`Page 3 of 53
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`Table of Contents
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`ViroPharma Incorporated
`
`Condensed Consolidated Balance Sheets
`
`(unaudited)
`
`(in thousands. except share and pa share data)
`Assets
`Current assets:
`
`Cash and cash equivalents
`Short-term investments
`Accounts receivable, net
`Invtory
`Prepaid expenses and other current assets
`Prepaid income taxes
`Deferred income taxes
`
`Total current assets
`Intangible assets. net
`Property, equipmt and building improvements, net
`Goodwill
`Debt issue costs, net
`Deferred income taxes
`Other assets
`
`Total assets
`
`Liabilities and Stockholders’ Equity
`Current liabilities:
`
`Accounts payable
`Contingent consideration
`Accrued expenses and other current liabilities
`Income taxes payable
`Total current liabilities
`Other non-current liabilities
`Deferred tax liability
`Long-term debt
`Total liabilities
`
`June 30,
`2011
`
`December 31,
`2010
`
`$ 426,732
`$ 390,395
`78,439
`127,845
`43,879
`68,676
`54,388
`61,283
`13,959
`7,998
`8,691
`2,000
`
`11.285
`13,744
`
`633,141
`676,173
`619,712
`611,476
`11,468
`12,998
`6,228
`6,448
`2,397
`2,203
`8,284
`4,252
`
`11.199
`10.376
`
`$1,328,781
`
`$1,287,574
`
`$
`
`13,521
`13,853
`62,703
`798
`90,875
`2,198
`173,567
`149,523
`416,163
`
`$
`
`10,215
`10,973
`48,990
`1,944
`72,122
`2,463
`176,111
`145,743
`396,439
`
`Stockholders’ equity:
`Preferred stock, par value $0.001 per share. 5,000,000 shares authorized; Series A convertible
`participating preferred stock; no shares issued and outstanding
`
`Common stock, par value $0.002 per share. 175,000,000 shares authorized; issued and
`outstanding 75,893.066 shares at June 30, 2011 and 78,141,491 shares at December 31,
`2010
`
`—
`
`157
`
`Treasury shares, at cost. 2,668,744 shares at June 30, 2011 and 0 shares at December 31, 2010
`
`(50,000)
`
`—
`
`156
`
`—
`
`Additional paid-in capital
`Accumulated other comprehensive income (loss)
`Retained earnings
`Total stockholders’ equity
`Total liabilities and stockholders’ equity
`
`728,616
`741
`233,104
`912,618
`$1,328,781
`
`717,375
`(258)
`173,862
`891,135
`$1,287,574
`
`See accompanying notes to unaudited consolidated financial statements.
`
`3
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`Form 10-Q
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`Table of Contents
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`ViroPharma Incorporated
`
`Consolidated Statements of Operations
`
`(unaudited)
`
`(in thousands, except per share data)
`Revenues:
`
`Net product sales
`
`Costs and Expenses:
`Cost of sales (excluding amortization of product lights)
`Research and development
`Selling, general and administrative
`Intangible amortization
`Other operating expenses
`Total costs and expenses
`Operating income
`
`Other Income (Expense):
`Interest income
`
`Interest expense
`Other income (expense), net
`Income before income tax expense
`
`Income tax expense
`Net income
`
`Net income per share:
`Basic
`Diluted
`
`Shares used in computing net income per share:
`Basic
`Diluted
`
`Three Months Ended
`June 30,
`
`Six Months Ended
`June 30,
`
`201]
`
`2010
`
`2011
`
`2010
`
`$128,808
`
`$108,961
`
`$255,843
`
`$199,609
`
`21,309
`20,417
`32,090
`7,156
`5,528
`86,500
`42,308
`
`13,641
`9,224
`25,419
`7,620
`—
`55,904
`53,057
`
`40,179
`30,843
`60,376
`16,053
`6,026
`153,477
`102,366
`
`27,598
`18,965
`46,339
`
`15,195
`
`108,097
`91,512
`
`189
`
`87
`
`394
`
`118
`
`(5,741)
`(6,023)
`(2,902)
`(3,066)
`(3,804)
`3.353
`(3,281)
`259
`39,690
`46,961
`100.090
`82,085
`
`16,894
`18,440
`40,848
`32,283
`$ 22,796
`$ 28,521
`$ 59,242
`$ 49,802
`
`$
`$
`
`0.30
`0.28
`
`$
`$
`
`0.37
`0.34
`
`$
`$
`
`0.77
`0.70
`
`$
`$
`
`0.64
`0.59
`
`76,000
`89,459
`
`77,825
`90,002
`
`76,919
`90,240
`
`77,666
`89,830
`
`See accompanying notes to unaudited consolidated financial statements.
`
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`Form 10-Q
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`Table of Contents
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`ViroPharma Incorporated
`
`Consolidated Statements of Stockholders’ Equity
`
`(unaudited)
`
`M Mm Accumulated
`Total
`Number
`Number
`Number
`Additional
`other
`stockholders’
`Retained
`of
`of
`of
`paid-in
`comprehensive
`(inmm‘is) mmflflflflflmmfl—
`Balance.
`December 31,2010 — $ — 78,141 $ 156 — $ — $717,375 $
`Exercise of
`common
`
`(258) $173,862 $ 891,135
`
`stock options —
`Employee stock
`purchase plan —
`Share-based
`
`compensation —
`Unrealized gains
`on available
`for sale
`securities, net
`Cumulative
`translation
`
`
`
`—
`
`—
`
`—
`
`399
`
`l —
`
`21 —
`
`—
`
`—
`
`—
`
`—
`
`—
`
`—
`
`—
`
`2,857
`
`194
`
`7,163
`
`—
`
`—
`
`—
`
`—
`
`—
`
`—
`
`2,858
`
`194
`
`7,163
`
`—
`
`—
`
`—
`
`—
`
`—
`
`— (2,668) — 2,668
`
`(50,000)
`
`—
`
`—
`
`—
`
`—
`—
`
`—
`—
`
`—
`—
`
`—
`—
`
`—
`—
`
`1,027
`—
`
`48
`
`—
`
`48
`
`951
`
`—
`
`—
`—
`
`—
`
`—
`
`951
`
`(50,000)
`
`—
`59,242
`
`1,027
`59,242
`
`adjustmt,
`net
`
`Repurchase of
`shares
`Stock option tax
`benefits
`Net income
`Balance, June 30,
`2011
`
`—
`
`—
`
`—
`—
`
`
`
`— $ — 75,893 $ 157
`
`
`2.668 $(50,000) $728,616 $
`741 $233,104 S 912,618
`
`See accompanying notes to unaudited consolidated financial statements.
`
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`Table of Contents
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`ViroPharma Incorporated
`
`Consolidated Statements of Cash Flows
`
`(unaudited)
`
`(in thousands)
`Cash flows from operating activities:
`Net income
`Adjustmts to reconcile net income to net cash provided by operating activities:
`Non-cash share-based compensation expense
`Non-cash interest expense
`Non-cash charge for contingent consideration
`Deferred tax provision
`Depreciation and amortization expense
`Other, net
`Changes in assets and liabilities:
`Accounts receivable
`Inventory
`Prepaid expses and other current assets
`Prepaid income taxes and taxes payable
`Other assets
`Accounts payable
`Accrued expenses and other current liabilities
`Other non-cmrent liabilities
`
`Six Months Ended
`June 30,
`
`2011
`
`2010
`
`3 59,242
`
`$ 49,802
`
`7,163
`3,974
`2,524
`(3,898)
`17,208
`569
`
`(24,3 83)
`(4,916)
`3,185
`(7,844)
`(240)
`2,646
`13,501
`265
`
`5,408
`3,688
`—
`10,638
`16,126
`3,464
`
`(6,947)
`2,097
`(414)
`2,763
`(2,774)
`4,723
`3,890
`222
`
`Net cash provided by operating activities
`
`68,466
`
`92,242
`
`Cash flows from investing activities:
`Purchase of Auralis, net of cash acquired
`Purchase of Vancocin assets
`Purchase of property, equipment and building improvents
`Purchase of short-term investments
`Maturities of short-term investments
`
`Net cash used in investing activities
`
`Cash flows from financing activities:
`Payment for treasury shares acquired
`Repayment of debt
`Net proceeds from issuance of common stock
`Excess tax befits fiom share-based payment arrangents
`Net cash (used in) provided by financing activities
`
`Effect of exchange rate changes on cash
`
`Net (decrease) increase in cash and cash equivalents
`
`Cash and cash equivalents at beginning of period
`Cash and cash equivalents at end of period
`
`—
`(7,000)
`(2,646)
`(94,975)
`45,058
`
`(59,563)
`
`(50,000)
`—
`3,051
`1,027
`(45,922)
`
`682
`
`(13,152)
`(3,764)
`(1,246)
`(53,659)
`—
`
`(71,821)
`
`—
`(1,575)
`1,458
`1,237
`1,120
`
`(755)
`
`(36,337)
`
`20,786
`
`426,732
`$390,395
`
`331,672
`$352,458
`
`See accompanying notes to unaudited consolidated financial statements.
`
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`Table of Contents
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`ViroPharma Incorporated
`Notes to the Unaudited Consolidated Financial Statents
`
`Note 1. Organization and Business Activities
`
`ViroPharma Incorporated and subsidiaries is a global biotechnology company dedicated to the development and
`commercialization of products that address serious diseases, with a focus on products used by physician specialists or in
`hospital settings. We intend to grow through sales of our marketed products. through continued development of our product
`pipeline, expansion of sales into additional territories outside the United States and through potential acquisition or licsing
`of products or acquisition of companies. We expect future growth to be driven by sales of Cinryze. both domestically and
`internationally. and by our primary development programs, including Cl esterase inhibitor and a non-toxigenic strain of C.
`dlflicile (VP20621).
`
`We market and sell Cinryze in the United States for routine prophylaxis against angioedema attacks in adolesct and adult
`patients with hereditary angioedema (HAE). Cinryze is a Cl esterase inhibitor therapy for routine prophylaxis against HAE,
`also known as Cl inhibitor (Cl-lNH) deficiency, a rare. severely debilitating, life-threatening genetic disorder. Cinryze was
`acquired in October 2008 and, in January 2010, we acquired expanded rights to commercialize Cinryze and future C l-INH
`derived products in certain European countries and other territories throughout the world as well as rights to develop future
`Cl-INH derived products for additional indications. In June 2011, the European Commission granted us Centralized
`Marketing Authorization for CinryzeO in adults and adolescents with HAE for routine prevention, pre-procedure prevention
`and acute treatment of angioedema attacks. The approval also includes a self administration option for appropriately trained
`patients. We have begun to commercialize Cinryze in Europe and continue to evaluate our commercialization plans in
`countries where we have distribution rights.
`
`We also market and sell Vancocin HCl capsules, the oral capsule formulation of vancomycin hydrochloride, in the US. and
`its territories. Vancocin is a potent antibiotic approved by the US. Food and Drug Administration, or FDA, to treat
`antibiotic-associated pseudombranous colitis caused by Clostridium dificile infection (CD1). or C. dlflicile, and
`terocolitis caused by Staphylococcus aureus, including methicillin-resistant strains.
`
`Our product development portfolio is primarily focused on two programs, Cl esterase inhibitor [human] and VP20621. We
`are working on developing fin'ther therapeutic uses, potential additional indications in other C1 mediated diseases, and
`alternative modes of administration for C1 esterase inhibitor.
`
`We are currently undertaking studies on the viability of subcutaneous administration of Cinryze. We intend to conduct
`ViroPharma sponsored studies and investigator-initiated studies (HS) to identify further therapeutic uses and potentially
`expand the labeled indication for Cinryze to include other Cl mediated diseases, such as Antibody-Mediated Rejection
`(AMR) and Delayed Grafi Function (DGF). Additionally, in May 2011, Halozyme Therapeutics (Halozyme) granted us an
`exclusive worldwide license to use Halozyme’s proprietary Enhanzen‘ technology. a proprietary drug delivery platform
`using Halozyme’s recombinant human hyaluronidase enzyme (rHuPH20) technology in combination with a C1 esterase
`inhibitor. We intend to apply rHuPH20 initially to develop an alternative subcutaneous formulation of Cinryze for routine
`prophylaxis against attacks of HAE.
`
`We are also developing VP20621 for the treatment and prevention of CD1. In May 2011, we initiated a Phase 2 dose-ranging
`clinical study to evaluate the safety, tolerability, and efficacy of VP 20621 for prevention of recurrence of CD1 in adults
`previously treated for CD1. In May 2010, we acquired Auralis Limited, a UK based specialty pharmaceutical company. The
`acquisition of Auralis provides us with the opportunity to accelerate our European commercial systems for potential future
`product lalmches and additional business development acquisitions. In connection with the Auralis acquisition we acquired
`Buccolam® (Oromucosal Solution, Midazolam [as hydrochloride]), for which we are seeking a pediatric-use marketing
`authorization (PUMA) for treatment of pediatric epilepsy in Europe. In June of 2011, the Committee for Medicinal Products
`for Human Use (CHMP) of the European Medicines Agency (EMA) has adopted a positive opinion recommending approval
`of a PUMA for Buccolam. The acquisition also provided us revenue from sales of Diamorphine (Diamorphine
`Hydrochloride BP Injection) for palliative care and acute pain relief in the United Kingdom.
`
`In addition to these programs, we have several other assets that we may make additional investments in. These investments
`will be limited and dependent on our assessment of the potential future commercial success of or benefits from the asset.
`These assets include maribavir for CMV and other compounds, including those acquired from Amalis.
`
`Basis of Presentation
`
`The consolidated financial information at June 30, 2011 and for the three and six months ended June 30, 2011 and 2010, is
`unaudited but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of
`managt, are necessary to state fairly the consolidated financial information set forth therein in accordance with
`accounting principles generally accepted in the United States of America. The interim results are not necessarily indicative
`of results to be expected for the full fiscal year. These unaudited consolidated financial statents should be read in
`conjunction with the audited consolidated financial statements for the
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`Form 10-Q
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`Fom1 lO-Q
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`Page 9 of 53
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`Table of Contents
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`ViroPharma Incorporated
`Notes to the Unaudited Consolidated Financial Statents
`
`year ded Decber 31, 2010 included in the Company’s Annual Report on Form 10-K filed with the Securities and
`Exchange Commission. We have evaluated all subsequent events through the date the financial statents were issued, and
`have not identified any such events.
`
`Use of Estimates
`
`The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally
`accepted in the United States of America requires management to make estimates and assumptions that afi‘ect the amounts
`reported in the consolidated financial statements and accompanying notes. Actual results could difi'er from those estimates.
`
`Adoption of Standards
`
`In September 2009, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving
`Disclosures about Fair Value Measurents. This ASU amends certain disclosure requirements of Topic 820 to provide for
`additional disclosures for transfers in and out of Levels 1 and 2 and for activity in Level 3. The ASU also clarifies certain
`other disclosure requirements including level of disaggregation and disclosures around inputs and valuation techniques. We
`adopted this ASU on January 1, 2010. The new disclosures about the purchases, sales, issuances and settlements in the roll
`forward activity for Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010 and
`we adopted this provision on January 1, 2011. The adoption of this disclosure provision did not have a material impact on
`our results of operations, cash flows, and financial position.
`
`In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, or ASU 2009-13,
`formerly EITF Issue No. 08-1. ASU 2009-13, amends existing revue recognition accotmting pronotmcements that are
`currently within the scope of FASB ASC Topic 605 and provides accounting principles and application guidance on how the
`arrangement should be separated, and the consideration allocated. This guidance changes how to determine the fair value of
`undelivered products and services for separate revenue recognition. Allocation of consideration is now based on
`management’s estimate of the selling price for an undelivered item where there is no other means to determine the fair value
`of that undelivered item This new approach is effective prospectively for revenue arrangements entered into or materially
`modified in fiscal years beginning on or after J1me 15, 2010. We adopted this ASU January 1, 2011. The adoption of the
`provisions of this guidance did not have a material impact on our results of operations, cash flows, and financial position.
`
`In March 2010, the FASB ratified EITF Issue No. 08-9, Milestone Method of Revue Recognition, and as a result of this
`ratification the FASB issued ASU 2010- 17 in April 2010, which states that the milestone method is a valid application of the
`proportional performance model for revenue recognition if the milestones are substantive and there is substantive
`uncertainty about whether the milestones will be achieved. The Task Force agreed that whether a milestone is substantive is
`a judgment that should be made at the inception of the arrangement. To meet the definition of a substantive milestone, the
`consideration earned by achieving the milestone (1) would have to be commensurate with either the level of efi'ort required
`to achieve the milestone or the enhancemt in the value of the item delivered, (2) would have to relate solely to past
`performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation
`of an individual milestone is allowed and there can be more than one milestone in an arrangement. The new guidance is
`effective for interim and annual periods beginning on or after June 15, 2010. We adopted this ASU January 1, 2011. The
`adoption of this guidance did not have a material impact on our results of operations. cash flows, and financial position.
`
`In December 2010, the FASB issued ASU 2010-27, Fees Paid to the Federal Government by Pharmaceutical Manufactures
`(EITF Issue 10-D; ASC 720), which addresses how pharmaceutical manufacturers should recognize and classify in the
`income statement fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care
`Education Reconciliation Act. The ASU specifies that the liability for the fee be estimated and recorded in full upon the first
`qualifying sale with a corresponding deferred cost that is amortized to operating expense using a straight-line method of
`allocation unless another method better allocates the fee over the calendar year. The new guidance is effective for calendar
`years beginning after December 31, 2010. We adopted this ASU January 1, 2011. The adoption of this guidance does not
`have a material impact on our results of operations, cash flows, and financial position.
`
`On May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common
`Fair Value Measurement and Disclosure Requirents in U.S. GAAP and IFRSs. and the IASB issued IFRS 13, Fair Value
`Measurement. The new guidance results in a consistent definition of fair value and common requirents for measmement
`of and disclosure about fair value between U.S. GAAP and IFRS. The ASU is efl‘ective for interim and annual periods
`beginning on or after December 15, 2011, with early adoption prohibited The new guidance changes certain fair value
`measurement principles and disclosure requirements. We do not expect the amendments to U.S. GAAP to have a material
`impact on our results of operations, cash flows, and financial position.
`
`8
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`Page 10 of 53
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`
`ViroPharma Incorporated
`Notes to the Unaudited Consolidated Financial Statents
`
`On June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (Topic 220). This standard
`eliminates the current option to report other comprehensive income and its componts in the statement of changes in
`equity. The standard is intended to enhance comparability between entities that report under US GAAP and those that report
`under IFRS, and to provide a more consistent method of presenting non-owner transactions that afi'ect an entity’s equity.
`Under the ASU, an entity can elect to present items of net income and other comprehensive income in one continuous
`statement, referred to as the statent of comprehensive income, or in two separate, but consecutive, statements. Each
`component of net income and each component of other comprehensive income, together with totals for comprehensive
`income and its two parts, net income and other comprehensive income, would need to be displayed under either alternative.
`The statement(s) would need to be presented with equal prominence as the other primary financial statements. The ASU
`does not change items that constitute net income and other comprehensive income, when an item of other comprehensive
`income must be reclassified to net income or the earnings-per-share computation (which will continue to be based on net
`income). The new US GAAP requiremts are effective for public entities as of the beginning of a fiscal year that begins
`after December 15, 2011 and interim and annual periods thereafter. Early adoption is permitted, but full retrospective
`application is required lmder the accounting standard. We do not expect the amdments to U.S. GAAP to have a material
`impact on our results of operations. cash flows, and financial position.
`
`Note 2. Short—Term Investments
`
`Short-term investments consist of fixed income securities with remaining maturities of greater than three months at the date
`of purchase, debt securities and equity securities. At June 30, 2011, all of our short-term investmts are classified as
`available for sale investments and measured as level 1 instruments of the fair value measurements standard.
`
`The following summarizes the Company’s available for sale investments at J1me 30, 2011:
`
`(in thousands)
`
`June 30, 2011
`Debt securities:
`
`U.S. Treasury
`Corporate
`
`Mannities of investments were as follows:
`
`Less than one year
`Greater than one year
`Total
`
`Gross
`unrealized
`ga_n|'s
`
`Gross
`unrealized
`losses
`
`$
`
`$
`
`$
`
`52
`28
`80
`
`73
`7
`80
`
`$ —
`
`5
`5
`
`2
`3
`5
`
`$
`
`$
`
`Cost
`
`$ 83,595
`44,175
`$127,770
`
`94,689
`33,081
`$127,770
`
`fair value
`
`$ 83,647
`44,198
`$127,845
`
`94,760
`33,085
`$127,845
`
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`Table of Contents
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`ViroPharma Incorporated
`Notes to the Unaudited Consolidated Financial Statents — (Continued)
`
`Note 3. Inventory
`
`Inventory is stated at the lower of cost or market using actual cost.
`
`$
`
`December 31,
`2010
`37,994
`10,570
`5,824
`54,388
`
`$
`
`June 30,
`
`2011
`$49,017
`8,055
`4,21 1
`$61,283
`
`
`
`(in thousands)
`Raw Materials
`Work In Process
`Finished Goods
`Total
`
`Note 4. Intangible Assets
`
`The following represents the balance of the intangible assets at June 30, 2011:
`
`(in thousands)
`Cinryze Product rights
`Vancocin Intangibles
`Auralis Contract rights
`Auralis IPR&D(1)
`Total
`
`(1) non-amortizing
`
`Gross
`Intangible
`Assets
`$521,000
`168,099
`12,802
`11,589
`$713,490
`
`Accumulated
`Amortization
`3
`56,134
`44,724
`1,156
`—
`$ 102,014
`
`Net
`Intangible
`Assets
`$464,866
`123,375
`11,646
`11,589
`$611,476
`
`The following represts the balance of the intangible assets at December 31, 2010:
`Net
`Gross
`Intangflrle
`Accumulated
`Intangible
`AS_S°‘S Am &
`$521,000
`$
`45.714
`$475,286
`161,099
`39,629
`121,470
`12,365
`601
`11,764
`11,192
`—
`11,192
`$705,656
`85,944
`$619,712
`
`0- d“ma-"5)
`Cinryze Product rights
`Vancocin Intangibles
`Auralis Contract rights
`Auralis IPR&D (1)
`Total
`
`$
`
`(1) non-amortin'ng
`
`In December 2008. FDA changed OGD’s 2006 bioequivalence recommendation, which we have opposed since its original
`proposal in March 2006, by issuing drafi guidance for establishing bioequivalence to Vancocin which would require generic
`products that have the same inactive ingredits in the same quantities as Vancocin (“Q1 and Q2 the same”) to donstrate
`bioequivalence through comparative in-vitro dissolution testing. Under this latest proposed method, any generic product that
`is not Q1 and Q2 the same as Vancocin would need to conduct an in-vivo study with clinical endpoints to demonstrate
`bioequivalence with Vancocin.
`
`On August 4, 2009 the FDA’s Pharmaceutical Science and Clinical Pharmacology Advisory Committee voted in favor of
`the component of OGD’s 2008 drafi guidance on bioequivalence for Vancocin that permits bioequivalence to be
`demonstrated through comparable in vitro dissolution for potential vancomycin HCl capsule generic products that contain
`the same active and inactive ingredients in the same amounts as Vancocin, among other requirents. IfFDA’s proposed
`bioequivalence method for Vancocin becomes effective, the time period in which a generic competitor could be approved
`would be reduced and multiple gerics may ter the market, which would materially impact our operating results, cash
`flows and possibly intangible asset valuations. This could also result in a reduction to the useful life of the Vancocin-related
`intangible assets. Management currently believes there are no indicators that would require a change in useful life as
`managt believes that Vancocin will continue to be utilized along with generics that may enter the market, and the
`number of generics and the timing of their market entry is unknown.
`
`10
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`Page 12 of 53
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`Table of Contents
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`ViroPharma Incorporated
`Notes to the Unaudited Consolidated Financial Statents — (Continued)
`
`A reduction in the useful life. as well as the timing and number of gerics, will impact our cash flow assumptions and
`estimate of fair value, perhaps to a level that could result in an impairmt charge. We will continue to monitor the actions
`of the OGD and consider the effects of our opposition actions and the announcements by generic competitors or other
`adverse events for additional impairment indicators. We will reevaluate the expected cash flows and fair value of our
`Vancocin-related assets at such time as a triggering event occurs.
`
`We were obligated to pay Eli Lilly and Company (Lilly) additional purchase price consideration based on net sales of
`Vancocin within a calendar year through 2011. We accounted for these additional payments as additional purchase price
`which requires that the additional purchase price consideration is recorded as an increase to the intangible asset of Vancocin
`and is amortized over the remaining estimated useful life of the intangible asset. In addition, at the time of recording the
`additional intangible assets, a cumulative adjustment is recorded to accumulated intangible amortization, in addition to
`ordinary amortization expense, in order to reflect amortization as if the additional purchase price had been paid in November
`2004.
`
`As of June 30, 2011, we have paid an aggregate of $51.1 million to Lilly in additional purchase price consideration, as our
`net sales of Vancocin surpassed the maximum obligation level of $65 million in 2005 through 2011. As of lime 30, 2011,
`we have satisfied our obligations to Lilly to make additional purchase price consideration payments under the purchase
`agreement.
`
`On May 28, 2010 we acquired Auralis Limited, a UK based specialty pharmaceutical company. With the acquisition of
`Auralis we have added one marketed product and several development assets to our portfolio. We recognized an intangible
`asset related to certain supply agreements for the marketed product and one of the development assets. Additionally, we
`have recognized in-process research and development (IPR&D) assets related to the development assets which are currently
`not approved. We determined that these assets meet the criterion for separate recognition as intangible assets and the fair
`value of these assets have been determined based upon discomted cash flow models. The supply agreements will be
`amortized over their useful life of 12 years. The IPR&D assets used in research and development activities are classified as
`indefinite-lived and will be subject to periodic impairmt testing. The IPR&D assets will remain as indefinite-lived
`intangible assets until the projects are completed or abandoned. Upon completion of the projects, we will make a separate
`determination of the useful life of the asset and begin amortization.
`
`Note 5. Long-Term Debt
`
`Long-term debt as of June 30, 2011 and December 31, 2010 is summarized in the following table:
`
`(in thousands)
`Senior convertible notes
`less: current portion
`Total debt principal
`
`June 30,
`2011
`$149,523
`—
`$149,523
`
`December 31,
`2010
`$ 145,743
`—
`$ 145.743
`
`As of June 30, 2011 senior convertible notes representing $205.0 million of principal debt are outstanding with a carrying
`value of $149.5 million.
`
`On March 26, 2007, we issued $2 50.0 million of 2% senior convertible notes due March 2017 (senior convertible notes) in a
`public offering. Net proceeds from the issuance of the senior convertible notes were $241.8 million. The senior convertible
`notes are unsecured unsubordinated obligations and rank equally with any other unsecured and unsubordinated
`indebtedness. The senior convertible notes bear interest at a rate of 2% per annum, payable semi-annually in arrears on
`March 15 and September 15 of each year commencing on Septber 15, 2007.
`
`The debt and equity components of our senior convertible debt secmities are bifurcated and accounted for separately based
`on the value and related interest rate of a non-convertible debt security with the same terms. The fair value of a non-
`convertible debt instrument at the original issuance date was determined to be $148.1 million. The equity (conversion
`options) component of our conve