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.
`
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`CSL EXHIBIT 1079
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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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`VIROPIIARMA 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 (unaudited) for the three and six months ended June 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 30 201 1 and
`m
`
`Notes to the Consolidated Financial Statements (unaudited)
`
`Item 2. Management‘s Discussion and Analysis of Financial Condition and Results of 02erations
`
`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 Eguig Securities and Use of Proceeds
`Exhibits
`
`SIGNATURES
`
`2
`
`Page
`
`3
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`4
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`5
`6
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`7
`
`21
`
`35
`36
`
`37
`38
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`42
`43
`
`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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`ViroPharm Incorporated
`
`Condensed Consolidated Balance Sheets
`
`(unaudited)
`
`June 30,
`2011
`
`December 31,
`2010
`
`$ 390,395
`127,845
`68,676
`61,283
`7,998
`8,691
`11,285
`676,173
`611,476
`12,998
`6,448
`2,203
`8,284
`1 l , 199
`$1,328,781
`
`$
`
`13,521
`13,853
`62,703
`798
`90,875
`2,198
`173,567
`149.523
`416,163
`
`—
`
`157
`
`S 426.732
`78.439
`43.879
`54.388
`13,959
`2,000
`13,744
`633,141
`619,712
`11,468
`6.228
`2.397
`4.252
`10,376
`$1,287,574
`
`S
`
`10,215
`10,973
`48,990
`1,944
`72.122
`2.463
`176.111
`145.743
`396,439
`
`—
`
`156
`
`—
`
`(in thousands. except share and per share data)
`Assets
`Current assets:
`
`Cash and cash equivalents
`Short-term investments
`Accounts receivable, net
`Inventory
`Prepaid expenses and other current assets
`Prepaid income taxes
`Deferred income taxes
`Total current assets
`Intangible assets, net
`Property, equipment 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-tenn debt
`Total liabilities
`
`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
`
`Treasury shares. at cost. 2,668,744 shares at June 30, 2011 and 0 shares at December 31, 2010
`
`(50,000)
`
`Additional paid-in capital
`Accumulated other comprehensive income (loss)
`Retained earnm'gs
`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
`$1,287,574
`
`See accompanying notes to lmaudited consolidated financial statements.
`3
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`Table of Contents
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`ViroPharIna Incorporated
`
`Consolidated Statements of Operations
`
`(unaudited)
`
`(in thousands. except per share data)
`Revenues:
`
`Net product sales
`
`Costs and Expenses:
`Cost of sales (excluding amortization of product rights)
`Research and development
`Selling. general and administrative
`Intangible amortization
`Other operating expenses
`Total costs and expenses
`Operating income
`
`Other Income (Expense):
`Interest income
`Interest expense
`Other income (expense), net
`Income before income tax expense
`
`Income tax expense
`Net income
`
`Net income per share:
`Basic
`Diluted
`
`Shares used in computing net income per share:
`Basic
`Diluted
`
`Three Months Ended
`June 30,
`
`Six Months Ended
`June 30,
`
`2011
`
`2010
`
`2011
`
`2010
`
`$ 128,808
`
`$ 108.961
`
`$255,843
`
`$199,609
`
`21.309
`20.417
`32.090
`7.156
`5.528
`86.500
`42,308
`
`189
`(3.066)
`259
`39,690
`
`13.641
`9.224
`25.419
`7.620
`—
`55.904
`53.057
`
`40,179
`30.843
`60.3 76
`16.053
`6.026
`153,477
`102,366
`
`27.598
`18.965
`46.339
`
`15,195
`
`108,097
`91.512
`
`87
`(2,902)
`(3,281)
`46.961
`
`394
`(6.023)
`3,353
`100,090
`
`1 18
`(5,741)
`(3.804)
`82,085
`
`16.894
`5 22.796
`
`18.440
`$ 28,521
`
`40.848
`$ 59.242
`
`32.283
`3 49,802
`
`3
`S
`
`0.30
`0.28
`
`$
`$
`
`0.37
`0.34
`
`s
`$
`
`0.77
`0.70
`
`$
`S
`
`0.64
`0.59
`
`76.000
`89.459
`
`77,825
`90,002
`
`76.919
`90,240
`
`77.666
`89,830
`
`See accompanying notes to lmaudited consolidated financial statements.
`
`4
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`Form 10-Q
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`Page 5 of 53
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`Table of Contents
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`ViroPharma Incorporated
`
`Consolidated Statements of Stockholders’ Equity
`
`(unaudited)
`
`Preferred Smock
`Number
`of
`shares Amount
`
`(in thousands)
`Balance.
`December 31. 2010 — $ — 78.14]
`Exercise of
`common
`
`Common Stock
`Number
`of
`shares
`
`Amount
`
`Treasurv Shares
`Number
`of
`shares
`
`Amount
`
`Additional
`paid-in
`capital
`
`Accumulated
`other
`comprehensive
`income floss!
`
`Retained
`Earning
`
`Total
`stockholders’
`suit:
`
`$ 156 — $ — $717,375 $
`
`(258) 3173.862 $ 891,135
`
`—
`
`—
`
`—
`
`399
`
`l —
`
`21 —
`
`—
`
`—
`
`—
`
`—
`
`—
`
`—
`
`—
`
`2.857
`
`194
`
`7.163
`
`—
`
`—
`
`—
`
`—
`
`—
`
`—
`
`2.858
`
`194
`
`7,163
`
`stock options —
`Employee stock
`purchase plan —
`Share-based
`
`compensation —
`Unrealized gains
`on available
`for sale
`securities, net
`Cumulative
`translation
`
`
`
`adjustment.
`net
`
`Repurchase of
`shares
`Stock option tax
`b-efits
`Net income
`Balance. June 30.
`
`
`
`—
`
`—
`—
`
`— (2.668) — 2,668
`
`(50,000)
`
`—
`
`—
`—
`
`—
`—
`
`—
`—
`
`—
`—
`
`—
`—
`
`1.027
`—
`
`48
`
`—
`
`48
`
`951
`
`—
`
`—
`—
`
`—
`
`—
`
`951
`
`(50,000)
`
`—
`59,242
`
`1,027
`59,242
`
`2011
`
`— $ — 75.893 $ 157
`
`2,668 $950000) $728,616 $
`
`741 3233.104 $ 912,618
`
`See accompanying notes to unaudited consolidated financial statements.
`
`5
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`I T
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`able of Contents
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`ViroPliarIna Incorporated
`
`Consolidated Statements of Cash Flows
`
`(unaudited)
`
`(in thousands)
`Cash flows from operating activities:
`Net income
`Adjustments 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 expenses and other current assets
`Prepaid income taxes and taxes payable
`Other assets
`Accounts payable
`Accrued expenses and other current liabilities
`Other non-current liabilities
`
`Six Months Ended
`June 30,
`
`2011
`
`2010
`
`$ 59,242
`
`$ 49,802
`
`7.163
`3.974
`2.524
`(3.898)
`17.208
`569
`
`(24.383)
`(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 improvements
`Purchase of short-term investments
`Matrn'ities 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 benefits from share-based payment arrangements
`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 ofperiod
`
`—
`(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
`$3 52,458
`
`See accompanying notes to unaudited consolidated financial statements.
`
`6
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`Form 10-Q
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`Page 7 of 53
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`Table of Contents
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`ViroPlrarIna Incorporated
`Notes to the Unaudited Consolidated Financial Statements
`
`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 licensing
`of products or acquisition of companies. We expect firture 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.
`drflicile ('VP20621).
`
`We market and sell Cinryze in the United States for routine prophylaxis against angioedema attacks in adolescent and adult
`patients with hereditary angioedema (HAE). Cinryze is a C1 esterase inhibitor therapy for routine prophylaxis against HAE,
`also known as Cl inhibitor (Cl-INH) 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 Cl-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 Cinryzea 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 ofvancomycin hydrochloride, in the U.S. and
`its territories. Vancocin is a potent antibiotic approved by the U.S. Food and Drug Administration, or FDA, to treat
`antibiotic-associated pseudome-branous colitis caused by Clostridium difiicile infection (CD1), or C. dififi'ile, and
`enterocolitis 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 C 1 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 (115) 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 Enhanze'm 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 Em'opean commercial systems for potential future
`product launches 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 201 1, the Committee for Medicinal Products
`for Human Use (CI-1MP) 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 Auralis.
`
`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
`management, 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 statements should be read in
`conjunction with the audited consolidated financial statements for the
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`Form 10-Q
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`Page 8 of 53
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`Form 10-Q
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`Page 9 of 53
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`Table of Contents
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`ViroPlrarIna Incorporated
`Notes to the Unaudited Consolidated Financial Statements
`
`year ended December 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 statements 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 afiect the amounts
`reported in the consolidated financial state-ems and accompanying notes. Actual results could difi'er fi'om 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 Measurements. 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
`orn' 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 revenue recognition accounting pronouncements 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 firir 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 lmdelivered ite- 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 June 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 Revenue 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 efl'ort required
`to achieve the milestone or the enhancement 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
`efl'ective for interim and annual periods beginning on or afier J1me 15, 2010. We adopted this ASU January 1, 201 l. 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 lO—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 afler 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 Requirements 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 requirements for measurement
`of and disclosure about fair value between U.S. GAAP and IFRS. The ASU is effective for interim and annual periods
`beginning on or afier December 15, 2011. with early adoption prohibited The new guidance changes certain fair value
`measure-ent principles and disclosrn'e 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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`Table of Contents
`
`ViroPlranna Incorporated
`Notes to the Unaudited Consolidated Financial Statements
`
`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 components 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 affect 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 statement 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 stat-ent(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 it- 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 requirements are effective for public entities as of the beginning of a fiscal year that begins
`afier December 15. 2011 and interim and annual periods thereafter. Early adoption is permitted, but full retrospective
`application is required under the accounting standard. We do not expect the amendments to US. 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 secrnities and equity securities. At June 30, 2011, all of our short-term investments 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 ere 30, 2011:
`Cross
`unrealized
`gag
`
`(in thousands)
`
`Cost
`
`Cross
`unrealized
`losses
`
`Fu'r value
`
`June 30, 2011
`Debt securities:
`
`US. Treasury
`Corporate
`
`Maturities of investments were as follows:
`
`Less than one year
`Greater than one year
`Total
`
`$ 83,595
`44,175
`3127.770
`
`$
`
`S
`
`52
`28
`80
`
`$ —
`
`5
`5
`
`$
`
`$ 83.647
`44,198
`$127,845
`
`94,689
`33,081
`$127,770
`
`2
`73
`7
`3
`
`$
`80
`$
`5
`
`94,760
`33,085
`$127,845
`
`9
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`Table of Contents
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`ViroPlrarma Incorporated
`Notes to the Unaudited Consolidated Financial Statements — (Continued)
`
`Note 3. Inventory
`
`Inventory is stated at the lower of cost or market using actual cost.
`
`(in thousands)
`Raw Materials
`Work In Process
`Finished Goods
`
`Total
`
`Note 4. Intangible Assets
`
`3
`
`June 30,
`
`2011
`$49,017
`8.055
`4,21 1
`
`$61,283 w
`
`December 31,
`2010
`37,994
`10.570
`5,824
`
`The following represents the balance of the intangible assets at June 30, 2011:
`Gross
`Intangible
`Assets
`$521,000
`168,099
`12,802
`11,589
`$713,490
`
`(in thousands)
`Cinryze Product rights
`Vancocin Intangibles
`Auralis Contract rights
`Auralis IPR&D (1)
`Total
`
`Accumulated
`Amortization
`$
`56,134
`44,724
`1,156
`—
`$ 102,014
`
`Net
`Intangible
`Assets
`$464,866
`123,375
`11,646
`11,589
`3611.476
`
`(1) non-amortizing
`
`The following represents the balance of the intangible assets at December 31, 2010:
`Net
`Gross
`Intangible
`Accumulated
`Intangible
`3—“ AM &
`$521,000
`$
`45.714
`$475286
`161,099
`39,629
`121.470
`12,365
`601
`11.764
`11,192
`—
`11,192
`$ $619,712 85,944
`$705,656
`
`
`(‘1 des)
`Cinryze Product rights
`Vancocin Intangibles
`Auralis Contract rights
`Auralis IPR&D (1)
`Total
`
`
`
`(l) non-amortizing
`
`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 ingredients in the same quantifies as Vancocin (“Q1 and Q2 the same”) to demonstrate
`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 draft 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 requirements. 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 generics may enter 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
`management 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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`Form 10-Q
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`Page 12 of 53
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`Table of Contents
`
`ViroPlrarm Incorporated
`Notes to the Unaudited Consolidated Financial Statements — (Continued)
`
`A reduction in the useful life, as well as the timing and number of generics, will impact our cash flow assumptions and
`estimate of fair value. perhaps to a level that could result in an impairment 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 Jlme 30. 2011,
`we have satisfied our obligations to Lilly to make additional purchase price consideration payments lmder the purchase
`agreement.
`
`On May 28. 2010 we acquired Amalis 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 discounted 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 impairment 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-tenn debt as of Jlme 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 $250.0 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 imsubordinated 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 September 15. 2007.
`
`The debt and equity components of our senior convertible debt securities are bifurcated and accounted for separately based
`on the value and related interest rate of a non-convertible debt secm'ity with the same terms. The fair v