Company Announcements
SHIRE PLC - ViroPharma financial accounts year end 31 Dec. 2013
Related Companies
PR Newswire
London, August 21
Press Release
www.shire.com
August 21, 2014 - Shire plc (the "Company") (LSE: SHP, NASDAQ: SHPG) is today
publishing the audited consolidated financial statements for ViroPharma
Incorporated, dated April 29, 2014, for the year ending December 31, 2013.
For further information please contact:
Investor Relations Jeff Poulton (jpoulton@shire.com) +1 781 482 0945
Sarah Elton-Farr (seltonfarr@shire.com) +44 1256 894 157
Media Stephanie Fagan (sfagan@shire.com) +1 781 482 0460
Gwen Fisher (gfisher@shire.com) +1 484 595 9836
Notes to editors
Shire enables people with life-altering conditions to lead better lives.
Our strategy is to focus on developing and marketing innovative specialty
medicines to meet significant unmet patient needs.
We focus on providing treatments in Neuroscience, Rare Diseases,
Gastrointestinal, and Internal Medicine and we are developing treatments for
symptomatic conditions treated by specialist physicians in other targeted
therapeutic areas, such as Ophthalmology.
www.shire.com
VIROPHARMA INCORPORATED
Consolidated Financial Statements
December 31, 2013, 2012 and 2011
(With Independent Auditors' Report Thereon)
VIROPHARMA INCORPORATED
Table of Contents
Page
Independent Auditors' Report 1
Consolidated Balance Sheets at December 31, 2013 and 2012 2
Consolidated Statements of Operations for the years ended
December 31, 2013, 2012 and 2011 3
Consolidated Statements of Comprehensive Income (Loss) for
the years ended December 31, 2013, 2012 and 2011 4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2013, 2012 and 2011 5
Consolidated Statements of Cash Flows for the years ended
December 31, 2013, 2012 and 2011 6
Notes to the Consolidated Financial Statements 7
Independent Auditors' Report
The Board of Directors
Shire plc:
We have audited the accompanying consolidated financial statements of
ViroPharma Incorporated and its subsidiaries, which comprise the consolidated
balance sheets as of December 31, 2013 and 2012, and the related consolidated
statements of operations, comprehensive income (loss), stockholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 2013, and the related notes to the consolidated financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these
consolidated financial statements in accordance with U.S. generally accepted
accounting principles; this includes the design, implementation, and
maintenance of internal control relevant to the preparation and fair
presentation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance with
auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the consolidated financial statements. The
procedures selected depend on the auditors' judgment, including the assessment
of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity's preparation and fair
presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the entity's internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of
significant accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the financial position of ViroPharma
Incorporated and its subsidiaries as of December 31, 2013 and 2012, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2013, in accordance with U.S. generally
accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
April 29, 2014
ViroPharma Incorporated
Consolidated Balance Sheets
December 31, 2013 and 2012
(In thousands, except share and per share data)
2013 2012
Assets
Current assets:
Cash and cash equivalents $ 207,816 $ 175,518
Short-term investments 66,094 71,338
Accounts receivable 68,868 74,396
Inventory 97,323 64,384
Prepaid expenses and other current assets 30,658 25,361
Prepaid income taxes 30,785 29,097
Deferred income taxes, net 9,717 13,324
Total current assets 511,261 453,418
Intangible assets, net 479,055 617,539
Property, equipment and building improvements, 17,059 10,848
net
Goodwill 96,912 96,759
Debt issuance costs, net 1,614 2,551
Deferred income taxes 11,713 17,988
Other assets 18,507 20,849
Total assets $ 1,136,121 $ 1,219,952
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 12,664 $ 21,254
Contingent consideration - 8,367
Accrued expenses and other current liabilities 78,216 83,503
Income taxes payable - 904
Total current liabilities 90,880 114,028
Other noncurrent liabilities 1,467 1,898
Financing obligation 5,476 -
Contingent consideration 28,742 17,710
Deferred tax liability 105,974 167,484
Long-term debt 170,797 161,793
Total liabilities 403,336 462,913
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; outstanding 165 163
66,657,896 shares at December 31, 2013 and
65,113,880 shares at December 31, 2012
Treasury shares, at cost. 16,042,202 shares at (350,000) (350,000)
December 31, 2013 and December 31, 2012
Additional paid-in capital 829,896 789,719
Accumulated other comprehensive loss (2,951) (2,975)
Retained earnings 255,675 320,132
Total stockholders' equity 732,785 757,039
Total liabilities and stockholders' equity $ 1,136,121 $ 1,219,952
See accompanying notes to consolidated financial statements.
ViroPharma Incorporated
Consolidated Statements of Operations
Years ended December 31, 2013. 2012 and 2011
(In thousands)
2013 2012 2011
Revenues:
Net product sales $ 440,573 $ 427,933 $ 544,374
Costs and Expenses:
Cost of sales (excluding amortization of 119,662 108,547 79,976
product rights)
Research and development 71,588 67,709 66,477
Selling, general and administrative 186,114 174,315 127,775
Intangible amortization 31,984 35,301 31,035
Impairment loss 106,911 - 8,495
Other operating expenses 8,131 8,718 8,488
Total costs and expenses 524,390 394,590 322,246
Operating income (loss) (83,817) 33,343 222,128
Other Income (Expense):
Interest income 633 594 655
(14,805)
Interest expense (14,093) (12,640)
Other (expense) income, net (2,350) (823) (2,136)
Income (loss) before income tax (100,339) 19,021 208,007
expense (benefit)
Income tax expense (benefit) (35,882) 13,410 67,348
Net income (loss) $ (64,457) $ 5,611 $ 140,659
See accompanying notes to consolidated financial statements.
ViroPharma Incorporated
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 2013, 2012 and 2011
(In thousands)
2013 2012 2011
Net income (loss) $ (64,457) $ 5,611 $ 140,659
Other comprehensive income (loss), before
tax:
Foreign currency translations
adjustments 20 427 (3,145)
Unrealized gain (loss) on available for
sale securities:
Unrealized holding gain (loss) arising
during period 7 23 (16)
Less: Reclassification adjustment for
gains included in net income (loss),
net of tax expense 2 3 -
Income tax expense (benefit) 1 8 (5)
Unrealized gain (loss) on available for
sale securities, net of tax 4 12 (11)
Other comprehensive income (loss), net of
tax 24 439 (3,156)
Comprehensive income (loss) $ (64,433) $ 6,050 $ 137,503
See accompanying notes to consolidated financial statements
ViroPharma Incorporated
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2013, 2012 and 2011
(In thousands)
Preferred stock Common stock Treasury shares
Accumulated
Number Number Number Additional other Total
of of of paid-in comprehensive Retained stockholders'
shares Amount shares Amount shares Amount capital income (loss) earnings equity
Balance,
December - $ - 78,141 $ 156 - $ - $ 717,375 $ (258) $ 173,862 $ 891,135
31, 2010
Exercise
of - - 1,548 3 - - 14,239 - - 14,242
common
stock
options
Employee - - 38 - - - 452 - - 452
stock
purchase
plan
Share- - - - - - - 14,242 - - 14,242
based
compensation
Stock - - - - - - 3,211 - - 3,211
option
tax
benefits
Cumulative - - - - - - - (3,145) - (3,145)
translation
adjustment,
net
Unrealized
losses on - - - - - - - (11) - (11)
available
for sale
securities,
net
Repurchase
of shares - - (9,159) - 9,159 (169,661) - - - (169,661)
Net income. - - - - - - - - 140,659 140,659
Balance,
December
31, 2011 - - 70,568 159 9,159 (169,661) 749,519 (3,414) 314,521 891,124
Exercise
of - - 1,375 4 - - 11,446 - - 11,450
common
stock
options
Restricted - - 27 - - - - - - -
stock
vested
Employee - - 27 - - - 505 - - 505
stock
purchase
plan
Share- - - - - - - 21,132 - - 21,132
based
compensation
Other - - - - - - - 439 - 439
compre-
hensive
income
Repurchase - - (6,883) - 6,883 (180,339) - - - (180,339)
of shares
Stock - - - - - - 7,117 - - 7,117
option
tax
benefits
Net - - - - - - - - 5,611 5,611
income
Balance,
December - - 65,114 163 16,042 (350,000) 789,719 (2,975) 320,132 757,039
31, 2012
Exercise
of - - 2,013 2 - - 12,801 - - 12,803
common
stock
options
Shares
withheld - - (569) - - - (17,254) - - (17,254)
for
minimum
tax
obligation
Conversion - - 1 - - - 20 - - 20
of senior
convertible
notes
Restricted - - 34 - - - - - - -
stock
vested
Employee - - 64 - - - 1,377 - - 1,377
stock
purchase
plan
Share- - - - - - - 26,592 - - 26,592
based
compen-
sation
Other - - - - - - - 24 - 24
compre-
hensive
income
Stock - - - - - - 16,641 - - 16,641
option
tax
benefits
Net loss - - - - - - - - (64,457) (64,457)
Balance,
December - $ - 66,657 $ 165 16,042 $ (350,000) $ 829,896 $ (2,951) $ 255,675 $ 732,785
31, 2013
See accompanying notes to consolidated financial statements.
ViroPharma Incorporated
Consolidated Statements of Cash Flows
Years ended December 31, 2013, 2012 and 2011
(In thousands)
2013 2012 2011
Cash flows from operating activities:
Net income (loss) $ (64,457) $ 5,611 $ 140,659
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Noncash share-based compensation 26,592 21,132 14,242
expense
Noncash asset impairments 106,911 - 8,495
Noncash interest expense 9,958 9,277 8,268
Noncash charge for contingent 2,537 4,477 4,664
consideration
Noncash charge for loan loss 2,495 - -
allowance
Noncash charge for option 5,073 3,825 -
amortization
Noncash investment premium 1,004 - -
amortization
Deferred tax provision (51,057) (20,707) (19,440)
Depreciation and amortization 35,020 37,818 33,467
expense
Other, net (5,854) (3,568) 5,514
Changes in assets and liabilities,
net of businesses acquired:
Accounts receivable 6,317 4,214 (34,864)
Inventory (29,781) (3,248) (6,939)
Prepaid expenses and other (4,134) (5,241) (1,801)
current assets
Prepaid income taxes and income (3,156) (14,197) (8,034)
taxes payable
Other assets (4,852) (12,657) 6,616
Accounts payable (9,145) 9,297 (159)
Accrued expenses and other (9,488) 4,139 26,554
current liabilities
Payment of contingent - - (6,019)
consideration
Other non-current liabilities 2,710 2,843 (497)
Net cash provided by operating 16,693 43,015 170,726
activities
Cash flows from investing activities:
Purchase of Lev Pharmaceuticals, - (92,274) -
Inc.
Purchase of DuoCort Pharma AB, net
of cash acquired - - (32,041)
Payment for option purchase right - - (7,500)
Purchase of Vancocin assets - - (7,000)
Purchase of property, equipment and (3,733) (1,332) (3,007)
building improvements
Purchase of short-term investments (51,352) (107,177) (152,557)
Maturities and sales of short-term 55,601 162,734 101,058
investments
Net cash provided by (used in) 516 (38,049) (101,047)
investing activities
Cash flows from financing activities:
Payment for treasury shares - (180,339) (169,661)
acquired
Repayment of debt - - (292)
Payment of financing costs - - (1,357)
Shares withheld for minimum tax (17,254) - -
obligation
Payment of contingent consideration - - (9,809)
Proceeds from issuance of common 14,180 11,955 14,694
stock
Excess tax benefits from 16,641 7,117 3,211
share-based payment arrangements
Net cash provided by (used in) 13,567 (161,267) (163,214)
financing activities
Effect of exchange rate changes on 1,522 467 (1,845)
cash
Net increase (decrease) in cash and 32,298 (95,380)
cash equivalents (155,834)
Cash and cash equivalents at 175,518 331,352 426,732
beginning of year
Cash and cash equivalents at end of $ 207,816 $ 175,518 $ 331,352
year
Supplemental disclosure of cash flow $ 207,816 $ 175,518 $ 331,352
information:
Cash paid for interest
Cash paid for income taxes 4,808 4,814 4,141
Supplemental disclosure of non-cash 992 40,629 93,648
transactions:
Non-cash increase in construction in 5,476 - -
progress and financing obligations
Unrealized gain (loss) on available 4 13 (11)
for sale securities, net of tax
See accompanying notes to consolidated financial statements.
Organization and Business Activities
ViroPharma Incorporated is an international biotechnology company dedicated to
the development and commercialization of novel solutions for physician
specialists to address unmet medical needs of patients living with serious
diseases that have few if any clinical therapeutic options, including
therapeutics for rare and orphan diseases. On January 24, 2014, ViroPharma
Incorporated became an indirect wholly-owned subsidiary of Shire plc. On
March 11, 2014, the Company's name was changed to Shire ViroPharma Incorporated
(see note 18). 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, through potential acquisition
or licensing of products and product candidates and the acquisition of
companies. We expect future growth to be driven by sales of Cinryze for
hereditary angioedema (HAE), both domestically and internationally, sales of
Plenadren for treatment of adrenal insufficiency (AI) and Buccolam in Europe
for treatment of paediatric seizures, and by our development programs,
including C1 esterase inhibitor [human], maribavir for cytomegalovirus (CMV)
infection and VP20629 for the treatment of Friedreich's Ataxia (FA).
We market and sell Cinryze in the United States for routine prophylaxis against
angioedema attacks in adolescent and adult patients with HAE. Cinryze is a C1
esterase inhibitor therapy for routine prophylaxis against HAE, also known as
C1 inhibitor (C1-INH) deficiency, a rare, severely debilitating, life-
threatening genetic disorder. We acquired rights to Cinryze for the United
States in October 2008 and in January 2010, we acquired expanded rights to
commercialize Cinryze and future C1-INH derived products in certain European
countries and other territories throughout the world as well as rights to
develop future C1-INH derived products for additional indications. In
June 2011, the European Commission (EC) granted us Centralized Marketing
Authorization for Cinryze 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 opportunities in countries where we have
distribution rights.
On August 6, 2012, the U.S. Food and Drug Administration (FDA) approved our
supplement to the Cinryze Biologics License Application (BLA) for industrial
scale manufacturing which increases our manufacturing capacity of Cinryze.
On August 29, 2013, Sanquin Plasma Products and C.A.F. - D.C.F. (Sanquin), our
contract manufacturers of Cinryze, received a Warning Letter from the FDA
regarding compliance with current Good Manufacturing Practices (cGMP) at
facilities located in Amsterdam and Brussels. The Warning Letter follows FDA
inspections of these facilities which concluded on June 4, 2013. At the
conclusion of these inspections, the FDA issued Form 483 Inspectional
Observations, to which responses were provided in June 2013. Based on our
review with Sanquin of the issues in the Warning Letter, we believe that the
supply of Cinryze to patients will not be interrupted. We also believe that the
Warning Letter does not restrict production or shipment of Cinryze. Sanquin
continues to manufacture products, including Cinryze, in these facilities. The
Warning Letter relates to certain observations that the FDA believes were
inadequately addressed by the responses to the Form 483. The Warning Letter
involves various cGMP deficiencies, including but not limited to inadequate
investigations, production and process controls, laboratory controls, and
cleaning procedures. We believe that, since our initial response to the FDA, we
have addressed certain of the Form 483 observations and activities are underway
to address the remaining Form 483 observations and issues raised in the Warning
Letter. We are working with Sanquin and FDA to provide comprehensive responses
to the concerns discussed in the Warning Letter.
We acquired Buccolam® (Oromucosal Solution, Midazolam [as hydrochloride]) in
May 2010. In September 2011, the EC granted a Centralized Pediatric Use
Marketing Authorization (PUMA) for Buccolam, for treatment of prolonged, acute,
convulsive seizures in infants, toddlers, children and adolescents, from 3
months to less than 18 years of age. We have begun to commercialize Buccolam in
Europe.
On November 15, 2011, we acquired rights to Plenadren® (hydrocortisone,
modified release tablet) for treatment of AI. The acquisition of Plenadren
further expands our orphan disease commercial product portfolio. On November 3,
2011, the EC granted European Marketing Authorization for Plenadren, an orphan
drug for treatment of AI in adults, which will bring these patients their first
pharmaceutical innovation in over 50 years. We are in the process of launching
Plenadren in the various countries in Europe and a named patient program is
available to patients in countries in which we have not launched Plenadren
commercially. We are currently conducting an open label trial with Plenadren in
Sweden and have initiated a registry study as a condition of approval in
Europe.
In April 2013, the Food and Drug Administration (FDA) provided us responses to
questions related to the regulatory and development path for Plenadren. The FDA
has indicated the data filed in the European Union (EU) and approved by the
European Medicines Agency (EMA) related to use of Plenadren for treatment of
adrenal insufficiency in adults are not sufficient for assessment of benefit/
risk in a marketing authorization submission in the United States and that
additional clinical data would be required. We are currently reviewing the FDA
feedback and our decision whether to pursue regulatory approval for Plenadren
in the United States will be dependent upon, among other things, additional
feedback from the FDA regarding potential Phase 3 study design and the
availability of orphan drug exclusivity. We also are currently exploring
commercialization opportunities in additional geographies.
We also sell branded and authorized generic Vancocin HCl capsules, the oral
capsule formulation of vancomycin hydrochloride, in the U.S. and its
territories. Vancocin is indicated for the treatment of C. difficile-associated
diarrhea (CDAD). Vancocin capsules are also used for the treatment of
enterocolitis caused by Staphylococcus aureus, including methicillin-resistant
strains.
On April 9, 2012, the FDA denied the citizen petition we filed on March 17,
2006 related to the FDA's proposed in vitro method for determining
bioequivalence of generic versions of Vancocin (vancomycin hydrochloride, USP)
capsules. The FDA also informed us in the same correspondence that the recent
supplemental new drug application (sNDA) for Vancocin which was approved on
December 14, 2011 would not qualify for three additional years of exclusivity,
as the agency interpreted Section 505(v) of the FD&C Act to require a showing
of a significant new use (such as a new indication) for an old antibiotic such
as Vancocin in order for such old antibiotic to be eligible for a grant of
exclusivity. FDA also indicated that it approved three abbreviated new drug
applications (ANDAs) for generic vancomycin capsules and the companies holding
these ANDA approvals indicated that they began shipping generic vancomycin
hydrochloride, USP. In June 2012, the FDA approved a fourth ANDA for generic
vancomycin capsules.
We granted a third party a license under our NDA for Vancocin® (vancomycin
hydrochloride capsules, USP) to distribute and sell vancomycin hydrochloride
capsules as an authorized generic product. We are also obligated to pay Genzyme
royalties of 10%, 10% and 16% of our net sales of Vancocin for the three year
period following the approval of the sNDA as well as a lower royalty on sales
of our authorized generic version of Vancocin in connection with our purchase
of exclusive rights to two studies of Vancocin.
Currently our product development portfolio is primarily focused on the
following programs: C1 esterase inhibitor [human], maribavir for
cytomegalovirus (CMV) infection and VP20629 (treatment of Friedreich's Ataxia).
We are currently undertaking studies on the viability of subcutaneous
administration of Cinryze. In May 2011, Halozyme Therapeutics Inc. (Halozyme)
granted us an exclusive worldwide license to use Halozyme's proprietary Enhanze
™ technology, a proprietary drug delivery platform using Halozyme's recombinant
human hyaluronidase enzyme (rHuPH20) technology, in combination with a C1
esterase inhibitor which we intend to apply initially to develop a subcutaneous
formulation of Cinryze for routine prophylaxis against attacks of HAE. In the
first quarter of 2012, we completed a Phase 2 study to evaluate the safety, and
pharmacokinetics and pharmacodynamics of subcutaneous administration of Cinryze
in combination with rHuPH20 and announced the presentation of positive data. In
December 2012, we initiated a Phase 2b double blind, multicenter, dose ranging
study to evaluate the safety and efficacy of subcutaneous administration of
Cinryze® (C1 esterase inhibitor [human]) in combination with rHuPH20 in
adolescents and adults with HAE for prevention of HAE attacks. On August 1,
2013, we announced that after discussion with representatives of the Center for
Biologics Evaluation and Research (CBER) division of the U.S. Food and Drug
Administration, we discontinued our Phase 2 study. The discontinuation of the
study was a precaution related to the emergence of anti-rHuPH20 nonneutralizing
antibodies in study patients. We are investigating an alternative optimized,
low volume standalone formulation of C1esterase inhibitor for subcutaneous
administration. We plan to evaluate potential future plans involving rHuPH20;
however, there can be no assurance that we will be able to conduct additional
studies with the combination of Cinryze and rHuPH20. We are also investigating
recombinant forms of C1-INH.
We are investigating potential new uses for our C1 esterase inhibitor product
with a goal of pursuing additional indications in patient populations with
other C1 INH mediated diseases. To that end, we are supporting investigator-
initiated studies (IISs) evaluating C1 INH as a treatment for patients with
Neuromyelitis Optica (NMO) and Autoimmune Hemolytic Anemia (AIHA); both of
these studies were initiated in 2012. We've also completed enrollment into a
clinical trial in Antibody-Mediated Rejection (AMR) post renal transplantation
and are also evaluating the potential effect of C1-INH in Refractory Paroxysmal
Nocturnal Hemoglobinuria (PNH). ViroPharma plans to continue to conduct both
clinical and nonclinical studies to evaluate additional therapeutic uses for
its C1 INH product in the future.
We are currently enrolling patients into a Phase 2 program to evaluate
maribavir for the treatment of CMV infections in transplant recipients. The
program consists of two independent Phase 2 clinical studies that include
subjects who have asymptomatic CMV in one trial, and those who have failed
therapy with other anti-CMV agents in another trial. Interim data from these
studies was presented in June of 2013. We expect to complete enrollment into
both studies in mid 2014. CMV is a common virus, but in immune compromised
individuals, including transplant recipients, it can lead to serious illness or
death. The U.S. Food and Drug Administration (FDA) and the European Commission
have granted orphan drug designation to maribavir for treatment of clinically
significant cytomegalovirus viremia and disease in at-risk patients, and the
prevention and treatment of cytomegalovirus disease in patients with impaired
cell mediated immunity, respectively.
We have also been developing VP20621 for the prevention of C. difficile-
associated diarrhea (CDAD). In May 2011, we initiated a Phase 2 dose-ranging
clinical study to evaluate the safety, tolerability, and efficacy of VP20621
for prevention of recurrence of CDAD in adults previously treated for CDAD. We
completed enrollment of patients in December 2012 and disclosed the results of
this study in April 2013. We will complete the evaluation of these Phase 2 data
however, we are seeking a partner to complete the development and
commercialization of the asset as it is not considered core to our strategy.
Our decision whether to pursue further development of VP20621 will be dependent
upon, among other things, our ability to find a partner, our final assessment
of the results of the Phase 2 data set and the cost of future clinical studies.
In September 2011, we entered in to a licensing agreement for the worldwide
rights to develop VP20629, or indole-3-propionic acid for the treatment of FA,
a rare, hereditary, progressive neurodegenerative disease. We initiated a
single and multiple oral dose safety and tolerability study in patients in
2013. We anticipate completion of enrollment in the first half of 2014.
In December 2011, we entered into an exclusive development and option agreement
with Meritage Pharma, Inc. (Meritage), a private company based in San Diego,
California focused on developing oral budesonide suspension (OBS) as a
treatment for eosinophilic esophagitis (EoE). EoE is a newly recognized chronic
disease that is increasingly being diagnosed in children and adults. It is
characterized by inflammation and accumulation of a specific type of immune
cell, called an eosinophil, in the esophagus. EoE patients may have persistent
or relapsing symptoms, which include dysphagia (difficulty in swallowing),
nausea, stomach pain, chest pain, heartburn, loss of weight and food impaction.
We intend to continue to evaluate in-licensing or other opportunities to
acquire products in development, or those that are currently on the market. We
plan to seek products that treat serious or life threatening illnesses with a
high unmet medical need, require limited commercial infrastructure to market,
and which we believe will provide both revenue and earnings growth over time.
Basis of Presentation
Principles of Consolidation
The consolidated financial statements include the accounts of ViroPharma and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
We consider the following policies and estimates to be the most critical in
understanding the more complex judgments that are involved in preparing our
consolidated financial statements and that could impact our results of
operations, financial position, and cash flows, as more fully described below:
Product Sales
Impairment of Long-lived Assets
Impairment of Goodwill and Indefinite-lived Intangible Assets
Share-Based Payments
Income Taxes
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three
months or less when purchased to be cash equivalents.
Concentration of Credit Risk
We invest our excess cash and short-term investments in accordance with a
policy objective that seeks to ensure both liquidity and safety of principal.
The policy limits investments to certain types of instruments issued by the
U.S. government and institutions with strong investment grade credit ratings
and places restrictions in their terms and concentrations by type and issuer to
reduce our credit risk.
We have an exposure to credit risk in trade accounts receivable from sales of
product. In the U.S., Vancocin is distributed through wholesalers that sell the
product to pharmacies and hospitals. We also granted a third party a license
under our NDA for Vancocin® (vancomycin hydrochloride capsules, USP) to
distribute and sell vancomycin hydrochloride capsules as an authorized generic
product. In the US, we sell Cinryze to specialty pharmacy/specialty
distributors (SP/SD's) who then distribute to physicians, hospitals and
patients, among others.
We sell Diamorphine in the UK, primarily to hospitals, through approved
wholesalers. We began commercial sales of Cinryze and Buccolam in Europe during
the fourth quarter of 2011, primarily through approved wholesalers, and
launched Plenadren commercially through approved wholesalers and named patient
program in Europe during the third quarter of 2012. The revenues and operating
income from these sales are not material to our consolidated revenues and
operating income for 2013 or 2012.
Five customers represent approximately 68% of our trade accounts receivable at
December 31, 2013 and three customers represent approximately 98% of our 2013
net product sales.
We, in connection with the issuance of the senior convertible senior notes,
have entered into privately negotiated transactions with two counterparties
(the counterparties), comprised of purchased call options and warrants sold.
These transactions will reduce the potential equity dilution of our common
stock upon conversion of the senior convertible notes. These transactions
expose the Company to counterparty credit risk for nonperformance. The Company
manages its exposure to counterparty credit risk through specific minimum
credit standards, and diversification of counterparties.
Single Source Supplier
We currently outsource all manufacturing of our products to single source
manufacturers. A change in these suppliers could cause a delay in manufacturing
and a possible loss of sales, which would affect operating results adversely.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount, net of related cash
discounts, rebates and estimated returns and do not bear interest. At
December 31, 2013 and 2012, there was no allowance for doubtful accounts as all
net amounts recorded are deemed collectible. We do not have any off-balance
sheet exposure related to our customers.
Inventories
Inventories are stated at the lower of cost or market using actual cost. At
December 31, 2013 and 2012, inventory consists of finished goods, work-in-
process (WIP) and certain raw materials required to produce inventory of
finished product.
Property, Equipment and Building Improvements
Property, equipment and building improvements are recorded at cost.
Depreciation and amortization are computed on a straight-line basis over the
useful lives of the assets or the lease term, whichever is shorter, ranging
from three to thirty years.
We lease certain of our equipment and facilities under operating leases.
Operating lease payments are charged to operations on a straight-lined basis
over the related period that such leased assets are utilized in service.
Expenditures for repairs and maintenance are expensed as incurred.
On August 29, 2012, we entered into an amended and restated lease to expand our
corporate headquarters. The lease arrangement involves the construction of
expanded office space where we are involved in the design and construction of
the expanded space and have the obligation to fund the tenant improvements to
the expanded structure and to lease the entire building following completion of
construction. This arrangement is referred to as build-to suit lease. We have
concluded that under the guidance of Accounting Standards Codification (ASC)
840, Leases, we are considered the owner of the construction project for
accounting purposes and must record a construction in progress asset (CIP) and
a corresponding financing obligation for the construction costs funded by the
landlord. We recorded a CIP asset and a corresponding financing obligation
during 2013 of approximately $5.5 million. Once the construction is complete we
will depreciate the core and shell asset over 30 years. A portion of the lease
payments will be reflected as principal and interest payments on the financing
obligation.
Goodwill and Intangible Assets
We review the carrying value of goodwill and indefinite-lived intangible
assets, to determine whether impairment may exist. In September 2011, the
Financial Accounting Standards Board issued Accounting Standards Update (ASU)
2011-08, Testing Goodwill for Impairment (the Update). The objective of this
Update is to simplify how entities test goodwill for impairment. The amendments
in the Update provide the option to first assess qualitative factors to
determine whether it is necessary to perform the current two-step test. If an
entity believes, as a result of its qualitative assessment, that it is more-
likely than-not (a likelihood of more than 50%) that the fair value of a
reporting unit is less than its carrying amount, the quantitative impairment
test is required. Otherwise, no further testing is required. The two-step
goodwill impairment test consists of the following steps. The first step
compares a reporting unit's fair value to its carrying amount to identify
potential goodwill impairment. If the carrying amount of a reporting unit
exceeds the reporting unit's fair value, the second step of the impairment test
must be completed to measure the amount of the reporting unit's goodwill
impairment loss, if any. Step two requires an assignment of the reporting
unit's fair value to the reporting unit's assets and liabilities to determine
the implied fair value of the reporting unit's goodwill. The implied fair value
of the reporting unit's goodwill is then compared with the carrying amount of
the reporting unit's goodwill to determine the goodwill impairment loss to be
recognized, if any.
We tested our goodwill during the fourth quarter of 2013 and there was no
impairment as a result of the test.
We test our long-lived fixed and intangible assets for recoverability whenever
events occur or changes in circumstances indicate that the carrying amount of
an asset or asset group may not be recoverable. The impairment test is a two-
step test. Under step one we assess the recoverability of an asset (or asset
group). The carrying amount of an asset (or asset group) is not recoverable if
it exceeds the sum of the undiscounted cash flows expected from the use and
eventual disposition of the asset (or asset group). The impairment loss is
measured in step two, if necessary, as the difference between the carrying
value of the asset (or asset group) and its fair value. Assumptions and
estimates used in the evaluation of impairment may affect the carrying value of
long-lived assets, which could result in impairment charges in future periods.
Such assumptions include projections of future cash flows and the timing and
number of generic/competitive entries into the market, affecting the
undiscounted cash flows, and if necessary, the fair value of the asset and
whether impairment exists. These assumptions are subjective and could result in
a material impact on operating results in the period of impairment.
On an ongoing periodic basis, we evaluate the useful life of our long-lived
assets and determine if any economic, governmental or regulatory event has
modified their estimated useful lives.
ASC 350-30-35 provides guidance on determining the finite useful life of a
recognized intangible asset wherein it defines the useful life of an intangible
asset is the period over which the asset is expected to contribute directly or
indirectly to the future cash flows of an entity.
It also states that the estimate of the useful life of an intangible asset to
an entity shall be based on an analysis of all pertinent factors, in
particular, all of the following factors with no one factor being more
presumptive than the other:
a. The expected use of the asset by the entity.
b. The expected useful life of another asset or a group of assets to which
the useful life of the intangible asset may relate.
c. Any legal, regulatory, or contractual provisions that may limit the
useful life. The cash flows and useful lives of intangible assets that are
based on legal rights are constrained by the duration of those legal rights.
Thus, the useful lives of such intangible assets cannot extend beyond the
length of their legal rights and may be shorter.
d. The entity's own historical experience in renewing or extending similar
arrangements, consistent with the intended use of the asset by the entity,
regardless of whether those arrangements have explicit renewal or extension
provisions. In the absence of that experience, the entity shall consider the
assumptions that market participants would use about renewal or extension
consistent with the highest and best use of the asset by market participants,
adjusted for entity-specific factors in this paragraph.
e. The effects of obsolescence, demand, competition, and other economic
factors (such as the stability of the industry, known technological advances,
legislative action that results in an uncertain or changing regulatory
environment, and expected changes in distribution channels).
f. The level of maintenance expenditures required to obtain the expected
future cash flows from the asset (for example, a material level of required
maintenance in relation to the carrying amount of the asset may suggest a very
limited useful life). As in determining the useful life of depreciable tangible
assets, regular maintenance may be assumed but enhancements may not.
Further, if an income approach is used to measure the fair value of an
intangible asset, in determining the useful life of the intangible asset for
amortization purposes, an entity shall consider the period of expected cash
flows used to measure the fair value of the intangible asset adjusted as
appropriate for the entity-specific factors noted.
Our most significant long-lived assets are our acquired intangible assets (see
note 6).
The contract rights acquired as part of the Auralis acquisition are being
amortized on a straight-line basis over their estimated useful lives of
12 years and the product rights acquired under the Auralis and DuoCort
acquisitions are being amortized on a straight-line basis over their estimated
useful lives of 10 years. We estimated the useful life of the assets by
considering competition by products prescribed for the same indication, the
likelihood and estimated future entry of nongeneric and generic competition
with the same or similar indication and other related factors. The factors that
drive the estimate of the life are often uncertain and are reviewed on a
periodic basis or when events occur that warrant review.
In September 2011, the EC granted a Centralized PUMA for Buccolam, for
treatment of prolonged, acute, convulsive seizures in infants, toddlers,
children and adolescents, from 3 months to less than 18 years of age. This
asset was previously classified as an indefinite-lived intangible asset. As a
result of this approval, we began to amortize this asset over its estimated
useful life of 10 years.
Due to the approval and launch of Buccolam, coupled with the approval and
launch of Cinryze in Europe, we decided to alter our development and
commercialization plans for the remaining Auralis IPR&D asset. The decision
resulted in the impairment of the IPR&D asset and the Auralis Contract rights.
Accordingly, we recorded a charge of approximately £5.4 million (approximately
$8.5 million) during 2011.
Revenue Recognition
Revenue is recognized when all four of the following criteria are met (1) the
Company has persuasive evidence an arrangement exists, (2) the price is fixed
and determinable, (3) title has passed, and (4) collection is reasonably
assured. The Company's credit and exchange policy includes provisions for
return of its product when it (1) has expired, or (2) was damaged in shipment.
Product revenue is generally recorded upon delivery to either our wholesalers
or distributors and when title has passed. Product demand from wholesalers
during a given period may not correlate with prescription demand for the
product in that period. As a result, the Company periodically estimates and
evaluates the wholesalers' inventory position and would defer recognition of
revenue on product that has been delivered if the Company believes that channel
inventory at a period end is in excess of ordinary business needs and if the
Company believes the value of potential returns is materially different than
the returns accrual.
Net sales consist of revenue from sales of Cinryze, Buccolam, Plenadren,
Vancocin branded and authorized generic product, and Diamorphine, less
estimates for chargebacks, rebates, distribution service fees, returns and
losses. We establish accruals for chargebacks and rebates, sales discounts and
product returns. These accruals are primarily based upon the history of
Vancocin and for Cinryze they are based on information on payee's obtained from
our SP/SD's and CinryzeSolutions. We also consider the volume and price of our
products in the channel, trends in wholesaler inventory, conditions that might
impact patient demand for our product (such as incidence of disease and the
threat of generics) and other factors.
Chargebacks and rebates are the most subjective sales related accruals. While
we currently have no contracts with private third party payors, such as HMO's,
we do have contractual arrangements with governmental agencies, including
Medicaid. We establish accruals for chargebacks and rebates related to these
contracts in the period in which we record the sale as revenue. These accruals
are based upon historical experience of government agencies' market share,
governmental contractual prices, our current pricing and then-current laws,
regulations and interpretations. We analyze the accrual at least quarterly and
adjust the balance as needed. These analyses have been adjusted to reflect the
U.S. healthcare reform acts and their effect on governmental contractual prices
and rebates.
Annually, as part of our process, we performed an analysis on the share of
Vancocin and Cinryze sales that ultimately go to Medicaid recipients and result
in a Medicaid rebate. As part of that analysis, we considered our actual
Medicaid historical rebates processed, total units sold and fluctuations in
channel inventory. We also consider our payee mix for Cinryze based on
information obtained at the time of prescription.
Product return accruals are estimated based on our history of damage and
product expiration returns and are recorded in the period in which we record
the product sales. There is a no returns policy with sales of generic Vancocin
to our distributor and Cinryze has a no returns policy. Returns of product for
our European sales depends on the country of sale in Europe. Where returns are
not mandated by laws or regulations, we generally have a no returns policy.
Where returns are required to be taken back, we defer revenue recognition until
we receive information from our distribution partners that the drug has been
consumed.
Under the Patient Protection and Affordable Care Act (PPACA), we are required
to fund 50% of the Medicare Part D insurance coverage gap for prescription
drugs sold to eligible patients staring on January 1, 2011. For Vancocin sales
subject to this discount, we recognize this cost using an effective rebate
percentage for all sales to Medicare patients throughout the year. For
applicable Cinryze sales, we recognize this cost at the time of sale for
product expected to be purchased by a Medicare Part D insured patient when we
estimate they are within the coverage gap.
Revenue from the launch of a new or significantly unique product may be
deferred until estimates can be made for chargebacks, rebates, returns and all
of the above conditions are met which is typically based on dispensed
prescription data and other information obtained during the period following
launch.
In April 2012, we began selling an authorized generic version of our
prescription Vancocin capsules under a supply agreement with a distributor. The
distributor has agreed to purchase all of its authorized generic product
requirements from us and pay a specified invoice supply price for such
products. We are also entitled to receive a percentage of the gross margin on
net sales of the authorized generic products sold by the distributor. We
recognize revenue from shipments to the distributor at the invoice supply price
along with our percentage of the gross margin on net sales of the authorized
generic products sold by the distributor when the distributor reports to us its
gross margin on net sales of the products and our portion thereof. Any
adjustments to the net sales previously reported to us related to the
distributor's estimated sales discounts and other deductions are recognized in
the period the distributor reports the adjustments to us. There is a no returns
policy with sales of generic Vancocin to our distributor.
Customers
We have principally sold our products directly to wholesale drug distributors
and specialty pharmacies/specialty distributors (SP/SD) in the United States
who then distribute the product to pharmacies, hospitals, patients, physicians
and long-term care facilities, among others. For Cinryze, our customers are SP/
SD's who will distribute the product to physicians, hospitals and patients. For
Vancocin, our customers are wholesalers who then distribute the product to
pharmacies, hospitals and long term care facilities, among others. In
April 2012, we began selling an authorized generic version of our prescription
Vancocin capsules under a supply agreement with a distributor.
In the fourth quarter of 2011, we began to sell product to drug distributors in
Europe, mainly wholesalers, who then distribute the product to pharmacies,
hospitals, and physicians.
Five wholesalers and/or SP/SD's represent the majority of our total
consolidated revenue, as approximated below:
Research and Development Expenses and Collaborations
Research and product development costs are expensed as incurred. Reimbursements
of research and development costs under cost sharing collaborations are
recorded as a reduction of research and development expenses. Research and
development costs include costs for discovery research, pre-clinical and
clinical trials, manufacture of drug supply, supplies and acquired services,
employee-related costs and allocated and direct facility expenses.
We evaluate our collaborative agreements for proper income statement
classification based on the nature of the underlying activity. If payments to
and from our collaborative partners are not within the scope of other
authoritative accounting literature, the income statement classification for
these payments is based on a reasonable, rational analogy to authoritative
accounting literature that is applied in a consistent manner. Amounts due to
our collaborative partners related to development activities are reflected as a
research and development expense.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
date.
A valuation allowance is provided when it is more likely than not that some
portion or all of a deferred tax asset will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income and the reversal of deferred tax liabilities during the period
in which the related temporary difference becomes deductible. The benefit of
tax positions taken or expected to be taken in the Company's income tax returns
are recognized in the consolidated financial statements if such positions are
more likely than not of being sustained.
Share-Based Payments
The Company measures the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award.
All grants under share-based payment programs are accounted for at fair value
and that cost is recognized over the period during which an employee is
required to provide service in exchange for the award - the requisite service
period (vesting period).
Compensation expense for options granted to nonemployees is determined as the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured. The fair value of
awards granted to nonemployees is re-measured each period until the related
service is complete.
Foreign Currency Translation
The financial statements of the Company's international subsidiaries are
translated into U.S. dollars using the exchange rate at each balance sheet date
for assets and liabilities, the historical exchange rate for stockholders'
equity and an average exchange rate for each period of revenues, expenses, and
gain and losses. The functional currency of the Company's non-U.S. subsidiaries
is the local currency. Adjustments resulting from the translation of financial
statements are reflected in accumulated other comprehensive income (loss).
Transaction gains and losses are recorded within operating results.
Subsequent Events
We have evaluated all subsequent events from the consolidated balance sheet
date through April 29, 2014 the date at which the consolidated financial
statements were available to be issued, and have not identified any such events
other than the Shire acquisition of ViroPharma, see note 18.
New Accounting Standards
In March 2013, the Financial Accounting Standards Board (FASB) issued ASU 2013-
05, Parent's Accounting for the Cumulative Translation Adjustment upon
Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign
Entity or of an Investment in a Foreign Entity ( Topic 830, EITF Issue 11-A),
which specifies that a cumulative translation adjustment (CTA) should be
released into earnings when an entity ceases to have a controlling financial
interest in a subsidiary or group of assets within a consolidated foreign
entity and the sale or transfer results in the complete or substantially
complete liquidation of the foreign entity. When an entity sells either a part
or all of its investment in a consolidated foreign entity, CTA would be
recognized in earnings only if the sale results in the parent no longer having
a controlling financial interest in the foreign entity. CTA would be recognized
in earnings in a business combination achieved in stages (i.e., a step
acquisition). The ASU does not change the requirement to release a pro rata
portion of the CTA of the foreign entity into earnings for a partial sale of an
equity method investment in a foreign entity. The ASU is effective for fiscal
years (and interim periods within those fiscal years) beginning on or after
December 15, 2013. Early adoption will be permitted for both public and
nonpublic entities. The ASU should be applied prospectively from the beginning
of the fiscal year of adoption. We do not anticipate the initial adoption of
the provisions of this guidance to have a material impact on our consolidated
results of operations, cash flows, and financial position.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income (Topic 220). The
standard requires that public and nonpublic companies present information about
reclassification adjustments from accumulated other comprehensive income in
their annual financial statements in a single note or on the face of the
financial statements. Public companies will also have to provide this
information in their interim financial statements. The standard requires that
companies present either in a single note or parenthetically on the face of the
financial statements, the effect of significant amounts reclassified from each
component of accumulated other comprehensive income based on its source and the
income statement line items affected by the reclassification. If a component is
not required to be reclassified to net income in its entirety, companies must
instead cross reference to the related footnote for additional information. The
standard allows companies to present the information either in the notes or
parenthetically on the face of the financial statements provided that all of
the required information is presented in a single location. The new disclosure
requirements are effective for fiscal years, and interim periods within those
years, beginning after December 15, 2012. The adoption of the provisions of
this guidance did not have a material impact on our consolidated results of
operations, cash flows, and financial position.
In July 2012, the FASB issued ASU 2012-02, Intangibles -Goodwill and Other
(Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment
(the revised standard). The objective of this ASU is to simplify how entities
test indefinite-lived intangible assets other than goodwill for impairment. The
amendments in the ASU provide the option to first assess qualitative factors to
determine whether, as a result of its qualitative assessment, that it is more-
likely than-not (a likelihood of more than 50%) the asset is impaired and it is
necessary to calculate the fair value of the asset in order to compare that
amount to the carrying value to determine the amount of the impairment, if any.
If an entity believes, as a result of its qualitative assessment, that it is
not more-likely than-not (a likelihood of more than 50%) that the fair value of
an asset is less than its carrying amount, no further testing is required. The
revised standard includes examples of events and circumstances that might
indicate that the indefinite-lived intangible asset is impaired. The approach
in the ASU is similar to the guidance for testing goodwill for impairment
contained in ASU 2011-08, Intangibles -Goodwill and Other (Topic 350): Testing
Goodwill for Impairment. The revised standard, which may be adopted early, is
effective for annual and interim impairment tests performed for fiscal years
beginning after September 15, 2012 and does not change existing guidance on
when to test indefinite-lived intangible assets for impairment. The adoption of
the provisions of this guidance did not have a material impact on our
consolidated results of operations, cash flows, and financial position.
Short-Term Investments
Short-term investments consist of fixed income and debt securities with
remaining maturities of greater than three months at the date of purchase. At
December 31, 2013, 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
December 31, 2013:
The following summarizes the Company's available for sale investments at
December 31, 2012:
Inventory
Inventory is stated at the lower of cost or market using actual cost. The
following represents the components of the inventory at December 31, 2013 and
2012:
Property, Equipment and Building Improvements
Property, equipment and building improvements consists of the following at
December 31, 2013 and 2012:
The depreciable lives for the major categories of property and equipment are
30 years for buildings, 3 to 5 years for computers and equipment and up to the
shorter of the respective lease term or the expected economic useful life for
building improvements, not to exceed 15 years.
On March 14, 2008, we entered into a lease for our corporate office building.
The lease agreement had a term of 7.5 years from the commencement date. On
August 29, 2012, we entered into an amended and restated lease (the Amended
Lease) to expand the corporate headquarters. The Amended Lease expires
fifteen years from the "commencement date", which will occur when the landlord
has substantially completed the expansion, including any tenant improvements.
We will continue to make the scheduled lease payments for the existing building
through commencement date. At December 31, 2013, our minimum lease payments
under the Amended Lease total approximately $39.4 million. Upon the
commencement date the lease payments will escalate annually based upon a
consumer price index specified in the lease.
We have the option to renew the lease for two consecutive terms for up to a
total of ten years at fair market value, subject to a minimum price per square
foot. The first renewal term may be for between three and seven years, at our
option, and the second renewal term may be for ten years less the length of the
first renewal term.
Under the terms of the Amended Lease, the Landlord is responsible for the cost
of construction of the core and shell of the expansion, as defined in the
lease, which it will "deliver" to us when complete. We will be responsible for
the "fit out" of the core and shell necessary for us to occupy the expanded
building.
ASC 840, Leases, is the authoritative literature related to accounting for
leases. Based on the results of the lease classification tests we have
concluded that the Amended Lease qualifies as an operating lease. However, the
lease arrangement involves the construction of expanded office space where we
are involved in the design and construction of the expanded space and have the
obligation to fund the tenant improvements to the expanded structure and to
lease the entire building following completion of construction. This
arrangement is referred to as build-to suit lease. We have concluded that under
the guidance of ASC 840-55-15, we are considered the owner of the construction
project for accounting purposes and must record a construction in progress
asset (CIP) and a corresponding financing obligation for the construction costs
funded by the landlord. We began recording the CIP asset and a corresponding
financing obligation during the first quarter of 2013 when construction
started. During the year ended December 31, 2013, we recorded approximately
$5.5 million of construction in progress related to the lease. Once the
construction is complete we will depreciate the core and shell asset over
30 years. A portion of the lease payments will be reflected as principal and
interest payments on the financing obligation.
Intangible Assets
The following represents the balance of the intangible assets at December 31,
2013:
The following represents the balance of the intangible assets at December 31,
2012:
Cinryze
In October 2008, Cinryze was approved by the FDA for routine prophylaxis
against angioedema attacks in adolescent and adult patients with HAE. Because
the treatment indication is directed at a small population in the United
States, orphan drug status was awarded by the FDA and orphan drug exclusivity
was granted on the date of approval. Orphan drug exclusivity awards market
exclusivity for seven years. These seven years of exclusivity prevents another
company from marketing a product with the same active ingredient as Cinryze for
routine prophylaxis against angioedema attacks in adolescent and adult patients
with HAE through October 2015. In addition, a biosimilar version of Cinryze
could not rely on Cinryze data for approval before 2020 as a result of data
protection provisions contained in the Affordable Health Care for America Act.
As of December 31, 2013, the carrying amount of this intangible asset is
approximately $412.8 million. We are amortizing this asset over its estimated
25-year useful life, through October 2033, or 18 years beyond the orphan
exclusivity period and 13 years beyond the data protection period for
biosimilar versions.
Our estimate of the useful life of Cinryze was based primarily on the following
four considerations: 1) the exclusivity period granted to Cinryze as a result
of marketing approval by the FDA with orphan drug status; 2) the landscape
subsequent to the exclusivity period and the ability of follow-on biologics
(FOB) entrants to compete with Cinryze; 3) the financial projections of Cinryze
for both the periods of exclusivity and periods following exclusivity; and 4)
barrier to entry for potentially competitive products.
When determining the post exclusivity landscape for Cinryze we concluded that
barriers to entry for competitors to Cinryze are greater than other traditional
biologics. They include, but are not limited to the following. Cinryze treats a
known population base of approximately 4,600 patients. HAE is generally thought
to affect approximately 10,000 people in the United States, many of whom have
not yet been diagnosed. Therefore the market upside for potential competitors
is limited. The capital investment for a potential competitor to construct a
manufacturing facility is prohibitive and would limit the number of
participants willing to enter the prophylactic HAE market. In order to qualify
for the abbreviated approval process for biosimilar versions of biologics
licensed under full BLAs (reference biologics) a biosimilar applicant generally
must submit analytical, animal, and clinical data showing that the proposed
product is "highly similar" to the reference product and has no "clinically
meaningful differences" from the reference product in terms of the safety,
purity, and potency, although FDA may waive some or all of these requirements.
FDA cannot license a biosimilar until 12 years after it first licensed the
reference biologic. It is therefore likely that a biosimilar would have to
conduct clinical trials to show that a FOB is highly similar to Cinryze and has
no clinically meaningful differences. To conduct these trials, one must produce
enough drug to sustain a trial and attract the required number of HAE patients
to prove safety and efficacy comparable to Cinryze. Patients on Cinryze are
those HAE patients who experience life threatening laryngeal attacks, or
frequent attacks that inhibit their quality of life and/or ability to work. To
obtain patients for a clinical trial, the FOB company will have to convince
patients to stop taking this life saving drug and test a new unproven product.
We believe that this would be met with great resistance from both patients and
doctors and would limit the ability of a FOB company to perform clinical
trials.
At present, one C1 inhibitor and several compounds have received approval from
FDA for the acute indication with de minimus impact on the prophylactic market,
primarily due to the payor environment. Though we might see competition at some
point in the future, we believe it would be limited.
Based on the expected cash flows and value generated in the years following
both the end of exclusivity and the potential entry of FOB competition, we
concluded that an estimated useful life of 25 years for the Cinryze product
rights was appropriate.
Vancocin
We acquired Vancocin from Lilly in November of 2004 and determined that the
identifiable intangible assets acquired had a 25 year useful life based
consideration of the various factors in ASC 350-30-35 described above.
Additionally, an income approach was used by an outside independent valuation
expert to determine the fair value of these assets and a 25 year period of
expected cash flows was used in this asset valuation process. As of
December 31, 2013, the carrying amount of the assets is approximately
$3.3 million with a remaining estimated useful life of approximately 3 years.
On April 9, 2012, the FDA denied the citizen petition we filed on March 17,
2006 related to the FDA's proposed in vitro method for determining
bioequivalence of generic versions of Vancocin (vancomycin hydrochloride, USP)
capsules. The FDA also informed us in the same correspondence that the recent
supplemental new drug application (sNDA) for Vancocin which was approved on
December 14, 2011 would not qualify for three additional years of exclusivity,
as the agency interpreted Section 505(v) of the FD&C Act to require a showing
of a significant new use (such as a new indication) for an old antibiotic such
as Vancocin in order for such old antibiotic to be eligible for a grant of
exclusivity. FDA also indicated that it approved three abbreviated new drug
applications (ANDAs) for generic vancomycin capsules and the companies holding
these ANDA approvals indicated that they began shipping generic vancomycin
hydrochloride, USP. In June 2012, the FDA approved a fourth ANDA for generic
vancomycin capsules.
As a result of the actions of FDA, we performed step one of the impairment test
in the first quarter of 2012 based on our current forecast (base case) of the
impact of generics on our Vancocin and vancomycin cash flows. The sum of the
undiscounted cash flows exceeded the carrying amount as of March 31, 2012 by
approximately $210 million. During the third quarter of 2012, we experienced
larger than anticipated erosion in the sales volume and net realizable price in
the Vancocin branded market and the entrance of a fourth generic competitor
which prompted us to determine it appropriate to perform the step one of the
impairment test again as of September 30, 2012. The sum of the undiscounted
cash flows exceeded the carrying amount as of September 30, 2012 by
approximately $34 million.
In March 2013, the net price at which our authorized generic distributor sold
generic vancomycin fell sharply due to pricing pressures in the generic
marketplace. This significant decline caused us to test the recoverability of
the Vancocin intangible asset. Step one of the impairment test failed and we
performed a step two analysis. Under step two, we are required to reduce the
carrying value of the intangible asset to its estimated fair value, and as a
result have recorded an impairment of approximately $104.2 million reducing the
carrying amount of the intangible assets to approximately $7.4 million at
March 31, 2013. The fair value of the intangible asset was estimated using an
income approach based on present value of the probability adjusted future cash
flows. In determining the probability adjusted cash flows, we took into
consideration the current and anticipated impact of the significant net price
reduction that has occurred in the generic marketplace on both net sales of our
authorized generic and sales of branded Vancocin. Based on the revised cash
flow projections, the useful life of the asset was also reduced to 3.75 years
from 16.75 years as of March 31, 2013 which represents the period over which we
expect to receive substantially all of the net present value of the adjusted
cash flows.
In December 2013, the net price at which our authorized generic distributor
sold generic vancomycin fell sharply from previously reported results which
prompted us to perform the step one of the impairment test again as of
December 31, 2013. We failed step one of the impairment test and performed a
step two analysis. Under step two, we reduced the carrying value of the
intangible asset to its estimated fair value, and as a result have recorded an
additional impairment of approximately $2.7 million at December 31, 2013.
Should future events occur that cause further reductions in revenue or
operating results we would incur an additional impairment charge, which would
be significant relative to the carrying value of the intangible assets.
Auralis and Buccolam
On May 28, 2010, we acquired Auralis, a UK based specialty pharmaceutical
company. With the acquisition of Auralis we 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 recognized in-process research and
development (IPR&D) assets related to the development assets which were
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. In 2011, the
European Commission granted a Centralized PUMA for Buccolam, for treatment of
prolonged, acute, convulsive seizures in infants, toddlers, children and
adolescents, from 3 months to less than 18 years of age. This asset was
previously classified as an IPR&D asset. As a result of this approval we began
to amortize this asset over its estimated useful life of 10 years. The contract
rights acquired are being amortized on a straight-line basis over their
estimated useful lives of 12 years.
Due to the approval and launch of Buccolam, coupled with the approval and
launch of Cinryze in Europe, we decided to alter our development and
commercialization plans for the remaining Auralis IPR&D asset. The decision
resulted in the impairment of the IPR&D asset and a portion of the Auralis
Contract rights. Accordingly, we recorded a charge of approximately £
5.4 million (approximately $8.5 million) during the third quarter of 2011.
Plenadren
On November 15, 2011, we acquired DuoCort, a company focused on improving
glucocorticoid replacement therapy for treatment of AI. The acquisition of
DuoCort further expands our orphan disease commercial product portfolio. On
November 3, 2011, the EC granted European Marketing Authorization for Plenadren
® (hydrocortisone, modified release tablet), an orphan drug for treatment of
adrenal insufficiency in adults, which will bring these patients their first
pharmaceutical innovation in over 50 years. We recognized an intangible asset
related to the Plenadren product rights. The product rights acquired are being
amortized on a straight-line basis over their estimated useful lives of
10 years.
Amortization expense for the years ended December 31, 2013, 2012 and 2011 was
approximately $32.0 million, $35.3 million and $31.0 million, respectively.
Goodwill
On October 21, 2008, we completed our acquisition of Lev Pharmaceuticals, Inc.
The terms of the merger agreement provided for a contingent value right (CVR)
to the former shareholders of $0.50 per share, or approximately $87.5 million,
if Cinryze reaches at least $600 million in cumulative net product sales by
October 2018. During the second quarter of 2012, we recognized cumulative sales
of Cinryze in excess of the $600 million threshold; accordingly, we recorded
the liability in the second quarter of 2012 with a corresponding increase to
goodwill. We made this CVR payment along with certain other contingent
acquisition related payments totaling approximately $92.3 million in the third
and fourth quarters of 2012. These payments, net of related tax benefits, are
reflected as an increase to goodwill of approximately $86.3 million, in
accordance with SFAS 141, Accounting for Business Combinations, which was
effective GAAP at the time of the acquisition.
On November 15, 2011, we acquired DuoCort, a company focused on improving
glucocorticoid replacement therapy for treatment of AI. As a result of this
acquisition we initially recorded goodwill of approximately $7.3 million.
During the third quarter of 2012, we obtained new information about certain
facts and circumstances that existed at the acquisition date related to
acquired deferred tax assets. Based on this new information, in the third
quarter of 2012 we released approximately SEK 22.8 million, or $3.5 million, of
valuation allowance related to the deferred tax assets with a corresponding
reduction of goodwill. All other changes in the carrying value of goodwill
since acquisition is attributable to foreign currency fluctuations.
In May 2010, we acquired a 100% ownership interest in Auralis Limited, a UK
based specialty pharmaceutical company. As a result of this acquisition, we
recorded initial goodwill of approximately $5.9 million. The change in the
carrying value of goodwill since the acquisition date is attributable to
foreign currency fluctuations.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at
December 31, 2013 and 2012:
Long-Term Debt
Long-term debt as of December 31, 2013 and 2012 is summarized in the following
table:
Senior Convertible Notes
On March 26, 2007, we issued $250.0 million of 2% senior convertible notes due
March 2017 (the 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
September 15, 2007.
The debt and equity components of our senior convertible debt securities were
bifurcated and accounted for separately based on the value and related interest
rate of a nonconvertible debt security with the same terms. The fair value of a
nonconvertible debt instrument at the original issuance date was determined to
be $148.1 million. The equity (conversion options) component of our convertible
debt securities is included in additional paid-in capital on our consolidated
balance sheet and, accordingly, the initial carrying value of the debt
securities was reduced by $101.9 million. Our net income for financial
reporting purposes is reduced by recognizing the accretion of the reduced
carrying values of our convertible debt securities to their face amount of
$250.0 million as additional noncash interest expense. Accordingly, the senior
convertible debt securities will recognize interest expense at effective rates
of 8.0% as they are accreted to par value.
The senior convertible notes are convertible into shares of our common stock at
an initial conversion price of $18.87 per share. The senior convertible notes
may only be converted: (i) anytime after December 15, 2016; (ii) during the
five business-day period after any five consecutive trading day period
(the measurement period) in which the price per note for each trading day of
that measurement period was less than 98% of the product of the last reported
sale price of our common stock and the conversion rate on each such day; (iii)
during any calendar quarter (and only during such quarter) after the calendar
quarter ending June 30, 2007, if the last reported sale price of our common
stock for 20 or more trading days in a period of 30 consecutive trading days
ending on the last trading day of the immediately preceding calendar quarter
exceeds 130% of the applicable conversion price in effect on the last trading
day of the immediately preceding calendar quarter; or (iv) upon the occurrence
of specified corporate events. Upon conversion, holders of the senior
convertible notes will receive shares of common stock, subject to ViroPharma's
option to irrevocably elect to settle all future conversions in cash up to the
principal amount of the senior convertible notes, and shares for any excess. We
can irrevocably elect this option at any time on or prior to the 35th scheduled
trading day prior to the maturity date of the senior convertible notes. The
senior convertible notes may be required to be repaid on the occurrence of
certain fundamental changes, as defined in the senior convertible notes.
Concurrent with the issuance of the senior convertible notes, we entered into
privately negotiated transactions, comprised of purchased call options and
warrants sold, to reduce the potential dilution of our common stock upon
conversion of the senior convertible notes. The transactions, taken together,
have the effect of increasing the initial conversion price to $24.92 per share.
The cost of the transactions was $23.3 million.
The call options allowed ViroPharma to receive up to approximately
13.25 million shares of its common stock at $18.87 per share from the call
option holders, equal to the number of shares of common stock that ViroPharma
would issue to the holders of the senior convertible notes upon conversion.
These call options will terminate upon the earlier of the maturity dates of the
related senior convertible notes or the first day all of the related senior
convertible notes are no longer outstanding due to conversion or otherwise.
Concurrently, we sold warrants to the warrant holders to receive shares of its
common stock at an exercise price of $24.92 per share. These warrants expire
ratably over a 60-day trading period beginning on June 13, 2017 and will be net
-share settled.
The purchased call options are expected to reduce the potential dilution upon
conversion of the senior convertible notes in the event that the market value
per share of ViroPharma common stock at the time of exercise is greater than
$18.87, which corresponds to the initial conversion price of the senior
convertible notes, but less than $24.92 (the warrant exercise price). The
warrant exercise price is 75.0% higher than the price per share of $14.24 of
our common stock on the pricing date. If the market price per share of
ViroPharma common stock at the time of conversion of any senior convertiblenotes is above the strike price of the
purchased call options ($18.87), the
purchased call options will entitle us to receive from the counterparties in
the aggregate the same number of shares of our common stock as we would be
required to issue to the holder of the converted senior convertible notes.
Additionally, if the market price of ViroPharma common stock at the time of
exercise of the sold warrants exceeds the strike price of the sold warrants
($24.92), we will owe the counterparties an aggregate of approximately
13.25 million shares of ViroPharma common stock. If we have insufficient shares
of common stock available for settlement of the warrants, we may issue shares
of a newly created series of preferred stock in lieu of our obligation to
deliver common stock. Any such preferred stock would be convertible into 10%
more shares of our common stock than the amount of common stock we would
otherwise have been obligated to deliver under the warrants.
Initially, the purchased call options and warrants sold with the terms
described above were based upon the $250.0 million offering, and the number of
shares we would purchase under the call option and the number of shares we
would sell under the warrants was 13.25 million, to correlate to the
$250.0 million principal amount. On March 24, 2009, we repurchased, in a
privately negotiated transaction, $45.0 million in principal amount of our
senior convertible notes due March 2017 for total consideration of
approximately $21.2 million. The repurchase represented 18% of our then
outstanding debt and was executed at a price equal to 47% of par value.
Additionally, in negotiated transactions, we sold approximately 2.38 million
call options for approximately $1.8 million and repurchased approximately
2.38 million warrants for approximately $1.5 million which terminated the call
options and warrants that were previously entered into by us in March 2007. We
recognized a $9.1 million gain in the first quarter of 2009 as a result of this
debt extinguishment. For tax purposes, the gain qualifies for deferral until
2014 in accordance with the provisions of the American Recovery and
Reinvestment Act.
As a result of the above negotiated sale and purchase transactions we are now
entitled to receive approximately 10.87 million shares of our common stock at
$18.87 from the call option holders and if the market price of ViroPharma
common stock at the time of exercise of the sold warrants exceeds the strike
price of the sold warrants ($24.92), will owe the counterparties an aggregate
of approximately 10.87 million shares of ViroPharma common stock, which
correlates to $205 million of convertible notes outstanding.
The purchased call options and sold warrants are separate transactions entered
into by us with the counterparties, are not part of the terms of the senior
convertible notes, and will not affect the holders' rights under the senior
convertible notes. Holders of the senior convertible notes will not have any
rights with respect to the purchased call options or the sold warrants. The
purchased call options and sold warrants meet the definition of derivatives.
These instruments have been determined to be indexed to our own stock and have
been recorded in stockholders' equity in our consolidated balance sheet. As
long as the instruments are classified in stockholders' equity they are not
subject to the mark to market provisions.
As of December 31, 2013, we have accrued $1.2 million in interest payable to
holders of the senior convertible notes. Debt issuance costs of $4.8 million
have been capitalized and are being amortized over the term of the senior
convertible notes, with an unamortized balance of $1.2 million at December 31,
2013.
The senior convertible notes were convertible into shares of our common stock
at times during 2013 and note holders converted notes with a face value of $20
thousand and we issued the holders 1,057 shares of our common stock.
As of December 31, 2013, senior convertible notes representing $205.0 million
of principal debt are outstanding with a carrying value of $170.8 million and a
fair value of approximately $547.1 million, based on the Level 2 valuation
hierarchy of the fair value measurements standard.
During the first quarter of 2014, we announced that in connection with the
acquisition by Shire (note 18) that we have commenced a tender offer to
repurchase, at the option of each holder, any and all of the outstanding
convertible notes.
In accordance with the terms of the convertible bonds, following a change of
control of ViroPharma, the convertible bond holders were entitled to convert
their bonds inclusive of a make-whole premium in the form of an increase in the
conversion rate, and the counterparties to the call options were accordingly
obligated to cash settle the call options.
Credit Facility
On September 9, 2011, we entered into a $200 million, three-year senior secured
revolving credit facility (the Credit Facility), the terms of which are set
forth in a Credit Agreement dated as of September 9, 2011 (the Credit
Agreement) with JPMorgan Chase Bank, N.A., as administrative agent, BMO Harris
Financing Inc., TD Bank, N.A. and Morgan Stanley Bank, NA as co-syndication
agents and certain other lenders.
The Credit Facility is available for working capital and general corporate
purposes, including acquisitions which comply with the terms of the Credit
Agreement. The Credit Agreement provides separate sub-limits for letters of
credit up to $20 million and swing line loans up to $10 million.
The Credit Agreement requires us to maintain (i) a maximum senior secured
leverage ratio of less than 2.00 to 1.00, (ii) a maximum total leverage ratio
of less than 3.50 to 1.00, (iii) a minimum interest coverage ratio of greater
than 3.50 to 1.00 and (iv) minimum liquidity equal to or greater than the sum
of $100 million plus the aggregate amount of certain contingent consideration
payments resulting from business acquisitions payable by us within a specified
time period. The Credit Agreement also contains certain other usual and
customary affirmative and negative covenants, including but not limited to,
limitations on capital expenditures, asset sales, mergers and acquisitions,
indebtedness, liens, dividends, investments and transactions with affiliates.
Our obligations under the Credit Facility are guaranteed by certain of our
domestic subsidiaries (the Subsidiary Guarantors) and are secured by
substantially all of our assets and the assets of the Subsidiary Guarantors.
Borrowings under the Credit Facility will bear interest at an amount equal to a
rate calculated based on the type of borrowing and our senior secured leverage
ratio (as defined in the Credit Agreement) from time to time. For loans (other
than swing line loans), we may elect to pay interest based on adjusted LIBOR
plus between 2.25% and 2.75% or an Alternate Base Rate (as defined in the
Credit Agreement) plus between 1.25% and 1.75%. We will also pay a commitment
fee of between 35 to 45 basis points, payable quarterly, on the average daily
unused amount of the Credit Facility based on our senior secured leverage ratio
from time to time.
We have not drawn any amounts under the Credit Facility and are in compliance
with our covenants. In March 2013, we entered into Amendment No. 3 to the
Credit Agreement (the Amendment). Pursuant to the Amendment, our lenders agreed
to waive compliance with a specified financial covenant (the Financial
Covenant) until we notify the lenders that we are in compliance with the
Financial Covenant. During this period, noncompliance with the Financial
Covenant shall not result in a default or event of default under the Credit
Agreement. Additionally, we are not permitted to request advances of funds or
letters of credit under the Credit Facility and the lenders shall have no
obligation to fund any Borrowing or to make any Loan or any other extension of
credit to the Company under the Credit Agreement during this period.
At December 31, 2013, $100.0 million of our cash and availability under the
credit agreement is subject to the minimum liquidity covenant (iv), described
above.
As of December 31, 2013, we have accrued $0.2 million in interest payable for
the revolver. Financing costs of approximately $1.7 million incurred to
establish the Credit Facility were deferred and are being amortized to interest
expense over the life of the Credit Facility, with an unamortized balance of
$0.4 million as of December 31, 2013.
During the first quarter of 2014, in connection with the acquisition by Shire
(note 18), we terminated the Credit Agreement. In connection with the
termination, we paid all fees and other amounts due under the Credit Agreement.
No early termination penalties were incurred by us.
Financing Obligation
On August 29, 2012, we entered into an amended and restated lease (the Amended
Lease) to expand our corporate headquarters. ASC 840, Leases, is the
authoritative literature related to accounting for leases. The lease
arrangement involves the construction of expanded office space in which we are
involved in the design and construction of the expanded space and have the
obligation to fund the tenant improvements to the expanded structure and to
lease the entire building following completion of construction. This
arrangement is referred to as build-to suit lease. We have concluded that under
the guidance we are considered the owner of the construction project for
accounting purposes and must record a noncash construction in progress asset
(CIP) and a corresponding noncash financing obligation for the construction
costs funded by the Landlord. We began recording the CIP asset and a
corresponding financing obligation during the first quarter of 2013 when
construction started. During the year ended December 31, 2013, we recorded CIP
of approximately $5.5 million with a corresponding financing obligation. Once
the construction is complete we will depreciate the core and shell asset and
will begin to apply a portion of the lease payments as a reduction in the
principal of the obligation and a portion of the lease payments will be
reflected as interest expense on the financing obligation.
Acquisitions, License and Research Agreements
DuoCort Pharma AB Acquisition
On November 15, 2011, we acquired a 100% ownership interest in DuoCort, a
private company based in Helsingborg, Sweden focused on improving
glucocorticoid replacement therapy for treatment of adrenal insufficiency (AI).
We paid approximately 213 million Swedish Krona (SEK) or approximately
$32.1 million in upfront consideration. We have also agreed to make additional
payments ranging from SEK 240 million up to SEK 860 million or approximately
$37 million to $133 million, contingent on the achievement of certain
milestones. Up to SEK 160 million or approximately $25 million of the
contingent payments relate to specific regulatory milestones; and up to SEK
700 million or approximately $108 million of the contingent payments are
related to commercial milestones based on the success of the product.
The following tables summarize the consideration transferred to acquire DuoCort
and the amounts of identified assets acquired and liabilities assumed at the
acquisition date.
The consideration transferred was as follows (in thousands):
The total consideration was allocated to the net assets acquired and
liabilities assumed as follows (in thousands):
The DuoCort contingent consideration consists of three separate contingent
payments. The first will be payable upon the regulatory approval to manufacture
bulk product in the EU. The second contingent payment is based on the
attainment of specified revenue targets and the third contingent payment is
payable upon regulatory approval of the product in the United States.
The fair value of the first and third contingent consideration payments
recognized on the acquisition date was estimated by applying a risk adjusted
discount rate to the probability adjusted contingent payments and the expected
approval dates. The fair value of the second contingent consideration payment
recognized on the acquisition date was estimated by applying a risk adjusted
discount rate to the potential payments resulting from probability weighted
revenue projections and expected revenue target attainment dates.
These fair values are based on significant inputs not observable in the market,
which are referred to in the guidance as Level 3 inputs. The contingent
considerations are classified as liabilities and are subject to the recognition
of subsequent changes in fair value through our results of operations.
The fair value of the product rights asset has been determined using an income
approach based upon a discounted cash flow model. That measure is based on
significant inputs not observable in the market, which are referred to in the
guidance as Level 3 inputs. Key assumptions include a discount rate of 20.5%,
the weighted average cost of capital implied by DuoCort's business enterprise
value, and probability weighted cash flows.
The fair value of inventory represents net realizable value for finished goods
less a normal profit on selling efforts. The fair value of the remaining assets
and liabilities acquired are based on the price that would be received on the
sale of the asset or the price paid to transfer the liability to a market
participant and approximates it carrying value on the measurement date.
As a result of the transaction, we recognized $7.3 million of goodwill which is
not deductible for tax purposes.
The DuoCort results of operations have been included in the consolidated
statement of operations beginning November 15, 2011.
The results of operations of DuoCort since the acquisition date and had the
acquisition occurred on January 1, 2011 are immaterial to our consolidated
results of operation. We incurred approximately $1.4 million of transaction
cost as part of this acquisition.
Meritage Pharma, Inc.
In December 2011, we entered into an exclusive development and option agreement
with Meritage Pharma, Inc. (Meritage), a private development-stage company
based in San Diego, CA focused on developing oral budesonide suspension (OBS)
as a treatment for eosinophilic esophagitis (EoE). EoE is a chronic disease
that is increasingly being diagnosed in children and adults. It is
characterized by inflammation and accumulation of a specific type of immune
cell, called an eosinophil, in the esophagus. EoE patients may have persistent
or relapsing symptoms, which include dysphagia (difficulty in swallowing),
nausea, stomach pain, chest pain, heartburn, loss of weight and food impaction.
As consideration for the agreement, we made an initial $7.5 million
nonrefundable payment to Meritage. Meritage will utilize the funding to conduct
additional Phase 2 clinical assessment of OBS. We have an exclusive option to
acquire Meritage, at our sole discretion, by providing written notice at any
time during the period from December 22, 2011 to and including the date that is
the earlier of (a) the date that is 30 business days after the later of (i) the
receipt of the final study data for the Phase 2 study and (ii) identification
of an acceptable clinical end point definition for a pivotal induction study
agreed to by the FDA. If we exercise this option, we have agreed to pay
$69.9 million for all of the outstanding capital stock of Meritage. Meritage
stockholders could also receive additional payments of up to $175 million, upon
the achievement of certain clinical and regulatory milestones.
We have determined that Meritage is a variable interest entity (VIE), however
because we do not have the power to direct the activities of Meritage that most
significantly impact its economic performance we are not the primary
beneficiary of this VIE at this time. Further, we have no oversight of the day-
to-day operations of Meritage, nor do we have sufficient rights or any voting
representation to influence the operating or financial decisions of Meritage,
nor do we participate on any steering or oversight committees. Therefore, we
are not required to consolidate Meritage into our consolidated financial
statements. This consolidation status could change in the future if the option
agreement is exercised, or if other changes occur in the relationship between
Meritage and us.
We valued the nonrefundable $7.5 million upfront payment using the cost method.
In June 2012, Meritage completed the delivery of all the documents and
notifications needed to satisfy the conditions of the First Option Milestone,
as defined in the agreement. As a result of achieving this milestone we made a
$5.0 million milestone payment in the third quarter of 2012 and increased the
carrying value of our cost method investment. In July 2013, Meritage enrolled
fifty percent (50%) of subjects planned for the Phase 2 study enrollment thus
satisfying the condition of the Second Option Milestone and accordingly we made
a $2.5 million milestone payment in July 2013 and increased the carrying value
of our cost method investment in July 2013. We have the option to provide
Meritage up to an additional $5.0 million for the development of OBS.
Under the cost method, the fair value of the investment is not estimated if
there are no identified events or changes in circumstances that may have a
significant adverse effect on the fair value of the investment. As of
December 31, 2013, we were not aware of any such adverse effects, as such no
fair value estimate has been prepared. The asset is recorded as an other long-
term asset on our consolidated balance sheets and is amortized through other
income (expense) in our results of operations over the expected term of the
option agreement which is expected to be December 2014. We recognized
approximately $5.1 million and $3.8 million of amortization expense related to
this asset during the years ended December 31, 2013 and 2012, respectively.
Intellect Neurosciences, Inc. License Agreement
In September 2011, we entered into a license agreement for the worldwide rights
of Intellect Neurosciences, Inc. (INS) to its clinical stage drug candidate,
VP20629, being developed for the treatment of Friedreich's Ataxia (FA), a rare,
hereditary, progressive neurodegenerative disease. We initiated a single and
multiple oral dose safety and tolerability study in patients in 2013. The
company anticipates completion of enrollment in the first half of 2014.
Following completion of the phase 2 study, a phase 3 study is planned. We
intend to file for Orphan Drug Designation upon review of the Phase 2 proof of
concept data. Under the terms of the agreement, we have exclusive worldwide
rights to develop and commercialize VP20629 for the treatment, management or
prevention of any disease or condition covered by INS's patents. We paid INS a
$6.5 million up-front licensing fee and may pay additional milestones up to
$120 million based upon defined events. We will also pay a tiered royalty of up
to a maximum percentage of low teens, based on annual net sales.
Halozyme Therapeutics License Agreement
In May 2011, Halozyme Therapeutics Inc. (Halozyme) granted us an exclusive
worldwide license to use Halozyme's proprietary Enhanze™ 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 a novel subcutaneous
formulation of Cinryze for routine prophylaxis against attacks. Under the terms
of the license agreement, we paid Halozyme an initial upfront payment of
$9 million. In the fourth quarter of 2011, we made a milestone payment of
$3 million related to the initiation of a Phase 2 study begun in September 2011
to evaluate the safety, and pharmacokinetics and pharmacodynamics of
subcutaneous administration of Cinryze in combination with rHuPH20. Pending
successful completion of an additional series of clinical and regulatory
milestones we may make further milestone payments to Halozyme which could reach
up to an additional $41 million related to HAE and up to $30 million of
additional milestone payments for three additional indications. Additionally,
we will pay an annual maintenance fee of $1 million to Halozyme until specified
events have occurred. Upon regulatory approval, Halozyme will receive up to a
10% royalty on net sales of the combination product utilizing Cinryze and
rHuPH20, depending on the existence of a valid patent claim in the country of
sale. On August 1, 2013, we announced that after discussion with
representatives of the Center for Biologics Evaluation and Research (CBER)
division of the U.S. Food and Drug Administration, we discontinued our Phase 2
study of rHuPH20 technology in combination with a C1 esterase inhibitor.
Sanquin Rest of World (ROW) Agreement
On January 8, 2010, we obtained the exclusive rights to research, develop,
import, use, sell and offer for sale C1-INH derived products (other than Cetor)
worldwide, other than the Excluded Territory (as defined below) for all
potential indications pursuant to a Manufacturing and Distribution Agreement
(Europe and ROW) between our European subsidiary, ViroPharma SPRL (VP SPRL) and
Sanquin (the ROW Agreement). The Excluded Territory includes (i) certain
countries with existing distributors of Cinryze, Cetor and Cetor NF namely
France, Ireland, the United Kingdom, Egypt, Iran, Israel, Indonesia, Turkey,
Argentina and Brazil (the Third Party Distributors) and (ii) countries in which
Sanquin has historically operated namely, Belgium, Finland, Luxemburg and The
Netherlands (including the Dutch Overseas Territories) (the Precedent Countries
and collectively, the Excluded Territory). In the event that any agreement with
a third party distributor in the Excluded Territory is terminated, we have a
right of first refusal to obtain the foregoing exclusive licenses to the C1-INH
derived products with respect to such terminated country.
On December 6, 2012, we entered into a first amendment to ROW Agreement. The
first amendment to the ROW Agreement (the First Amendment) expands our
territory to worldwide, with the exception of all countries in North America
and South America (other than the Dutch Overseas Territories, Argentina and
Brazil) and Israel, which remain the subject of the Restated US Agreement. The
First Amendment also grants Sanquin the license to commercialize Cinryze in
certain countries in which Sanquin has pre-existing marketing arrangements,
including Belgium, Luxembourg, The Netherlands, Finland, Turkey, Indonesia, and
Egypt (the Sanquin Licensed Territories). In the event that the marketing
arrangements in the Sanquin Licensed Territories expire or are terminated, VP
SPRL has a right of first refusal to include such country in its territory and/
or to exclude such country from the countries covered by its license to
Sanquin. As a result of the First Amendment, we have worldwide rights to
commercialize C1-INH products other than in the Sanquin Licensed Territories.
In connection with the First Amendment, we made a payment of $1.3 million to
Sanquin, reflected as research and development expense in our consolidated
statement of operations.
Additionally, under the First Amendment, Sanquin agreed to withdraw its Cetor
and Cebitor product from certain markets in which it is currently being sold in
order to transition to Cinryze and its future forms and formulations. The
transition will be on a country by country basis and on a schedule agreed by VP
SPRL and Sanquin to avoid supply interruptions to patients using Sanquin's
Cetor and/or Cebitor products. The First Amendment also provides that in the
countries in which Sanquin is licensed to commercialize VP SPRL C1-INH product,
Sanquin shall have the right to liaise with regulators to set the reimbursement
price, unless regulators require VP SPRL to do so.
We and Sanquin also agreed to certain provisions restricting the sale of
competitive products relating to C1-INH without the other's consent. We may not
directly or indirectly commercially exploit competitive products in our
territory without Sanquin's consent. On a country by country basis, following
the applicable transition date in each country, Sanquin agrees not to directly
or indirectly commercially exploit competitive products to any person anywhere
in the world. The First Amendment provides Sanquin with the right to sell and
supply Cetor and/or Cebitor before the transition date and VP SPRL's C1-INH
product thereafter to a named manufacturer provided that the named manufacturer
uses the products solely in connection with the manufacturer's manufacture of
certain plasma products under its own marketing authorization and corporate
brand.
Other Agreements
The Company has entered into various other licensing, research and other
agreements. Under these other agreements, the Company is working in
collaboration with various other parties. Should any discoveries be made under
such arrangements, the Company would be required to negotiate the licensing of
the technology for the development of the respective discoveries. There are no
significant funding commitments under these other agreements.
Stockholder's Equity
Preferred Stock
The Company's Board of Directors has the authority, without action by the
holders of common stock, to issue up to 5,000,000 shares of preferred stock
from time to time in such series and with such preference and rights as it may
designate.
Share Repurchase Program
On March 9, 2011, the Company's Board of Directors authorized the use of up to
$150 million to repurchase shares of our common stock and/or our 2% senior
convertible notes due 2017. On September 14, 2011, the Company's Board of
Directors authorized the use of up to an additional $200 million to repurchase
shares of our common stock and/or our 2% senior convertible notes due 2017. On
September 7, 2012, the Company's Board of Directors authorized the use of up to
an additional $200 million to repurchase shares of our common stock and/or our
2% Senior Convertible Notes due 2017. Purchases may be made by means of open
market transactions, block transactions, privately negotiated purchase
transactions or other techniques from time to time.
During 2012, through open market purchases, we reacquired approximately
6.9 million shares at a cost of approximately $180.3 million or an average
price of $26.20 per share and during 2011, we reacquired approximately
9.2 million shares at a cost of approximately $169.7 million or an average
price of $18.52 per share.
There were no share repurchases during 2013.
Share-Based Compensation
Our stock-based compensation program consists of a combination of: time vesting
stock options with graduated vesting over a four year period; performance and
market vesting common stock units, or PSUs, tied to the achievement of pre-
established company performance metrics and market based goals over a three-
year performance period; and, time vesting restricted stock awards, or RSUs,
granted to our nonemployee directors vesting over a one year period. Grants
under our former stock based compensation program consisted only of time
vesting stock options.
The fair values of our share-based awards are determined as follows:
Stock option grants are estimated as of the date of grant using a Black-Scholes
option valuation model and compensation expense is recognized over the
applicable vesting period;
PSUs subject to company specific performance metrics, which include both
performance and service conditions, are based on the market value of our stock
on the date of grant. Compensation expense is based upon the number of shares
expected to vest after assessing the probability that the performance criteria
will be met. Compensation expense is recognized over the vesting period,
adjusted for any changes in our probability assessment;
PSUs subject to our total shareholder return, or TSR, market metric relative to
a peer group of companies, which includes both market and service conditions,
are estimated using a Monte Carlo simulation. Compensation expense is based
upon the number and value of shares expected to vest. Compensation expense is
recognized over the applicable vesting period. All compensation cost for the
award will be recognized if the requisite service period is fulfilled, even if
the market condition is never satisfied; and,
Time vesting RSUs are based on the market value of our stock on the date of
grant. Compensation expense for time vesting RSUs is recognized over the
vesting period.
The vesting period for our stock awards is the requisite service period
associated with each grant.
Share-based compensation expense consisted of the following for the years ended
December 31, 2013, 2012 and 2011:
Our share-based compensation expense is recorded as follows:
We currently have three option plans in place: a 1995 Stock Option and
Restricted Share Plan (1995 Plan), a 2001 Equity Incentive Plan (2001 Plan) and
a 2005 Stock Option and Restricted Share Plan (2005 Plan) (collectively,
the Plans). In September 2005, the 1995 Plan expired and no additional grants
will be issued from this plan. The Plans were adopted by the Company's Board of
Directors to provide eligible individuals with an opportunity to acquire or
increase an equity interest in the Company and to encourage such individuals to
continue in the employment of the Company.
In May 2008, the 2005 Plan was amended and an additional 5,000,000 shares of
common stock was reserved for issuance upon the exercise of stock options or
the grant of restricted shares or restricted share units. This amendment was
approved by stockholders at our Annual Meeting of Stockholders in May of 2010.
In April 2012, the 2005 Plan was amended and an additional 2,500,000 shares of
common stock was reserved for issuance upon the exercise of stock options or
the grant of restricted shares or restricted share units. This amendment was
approved by stockholders at our Annual Meeting of Stockholders in May of 2012.
As of December 31, 2013, there were 2,441,859 shares available for grant under
the Plans.
The following table lists information about these equity plans at December 31,
2013:
Employee Stock Option Plans
Stock options granted under the 2005 Plan must be granted at an exercise price
not less than the fair value of the Company's common stock on the date of
grant. Stock options granted under the 2001 Plan can be granted at an exercise
price that is less than the fair value of the Company's common stock at the
time of grant. Stock options granted under the 1995 Plan were granted at an
exercise price not less than the fair value of the Company's common stock on
the date of grant. Stock options granted from the Plans are exercisable for a
period not to exceed ten years from the date of grant.
Vesting schedules for the stock options vary, but generally vest 25% per year,
over four years. Shares issued under the Plans are new shares. The Plans
provide for the delegation of certain administrative powers to a committee
comprised of company officers.
Options granted during 2013, 2012 and 2011 had weighted average fair values of
$14.34, $14.08 and $11.41 per option. The grant date fair value of each option
grant was estimated throughout the year using the Black-Scholes option-pricing
model using the following assumptions for the Plans:
The risk free interest rate is based on the U.S. Treasury yield curve in effect
at the time of grant. Volatility is based on the Company's historical stock
price using the expected life of the grant.
We estimate forfeiture rates for all share-based awards and monitor stock
options exercises and employee termination patterns in estimating the
forfeiture rate.
The following table lists option grant activity for the three-year period ended
December 31, 2013:
The total intrinsic value of share options exercised during the year ended
December 31, 2013, 2012 and 2011 was approximately $62.4 million, $27.3 million
and $18.2 million, respectively.
We have 8,763,816 option grants outstanding at December 31, 2013 with exercise
prices ranging from $1.84 per share to $40.45 per share and a weighted average
remaining contractual life of 6.75 years. The following table lists the
outstanding and exercisable option grants as of December 31, 2013:
As of December 31, 2013, there was $42.8 million of total unrecognized
compensation cost related to unvested share options granted under the Plans.
The total grant-date fair value of shares vested during the year ended
December 31, 2013 was $17.4 million.
In connection with the acquisition by Shire, all unvested option grants vested
and became exercisable (see note 18).
Performance Awards
Employees receive annual grants of performance award units, or PSUs, in
addition to stock options which give the recipient the right to receive common
stock that is contingent upon achievement of specified pre-established company
performance goals over a three year performance period. The performance goals
for the PSUs granted, which are accounted for as equity awards, are based upon
the following performance measures: (i) our revenue growth over the performance
period, (ii) our adjusted net income as a percent of sales at the end of the
performance period, and (iii) our relative total shareholder return, or TSR,
compared to a peer group of companies at the end of the performance period.
In 2013, approximately 253,000 PSUs subject to company specific performance
metrics were granted with weighted average grant date fair value of $23.37 per
share and approximately 28,000 PSUs subject to the TSR metric were granted with
weighted average grant date fair value of $32.63 per share. In 2012 and 2011,
approximately 186,000 and 155,000 PSUs subject to Company specific performance
metrics were granted with weighted average grant date fair values of $28.16 and
$17.84 per share, respectively. In 2012 and 2011, approximately 21,000 and
17,000 PSUs subject to the TSR metric were granted with weighted average grant
date fair values of $45.37 and $24.38 per share, respectively. The number of
PSUs reflected as granted represents the target number of shares that are
eligible to vest subject to the attainment of the performance goals. Depending
on the outcome of these performance goals, a recipient may ultimately earn a
number of shares greater or less than their target number of shares granted,
ranging from 0% to 200% of the PSUs granted. Shares of our common stock are
issued on a one-for-one basis for each PSU earned. Participants vest in their
PSUs at the end of the performance period.
The fair value of the PSUs subject to Company specific performance metrics is
equal to the closing price of our common stock on the grant date.
The fair value of the market condition PSUs was determined using a Monte Carlo
simulation and utilized the following inputs and assumptions:
The performance period starting price is measured as the average closing price
over the last 30 trading days prior to the performance period start. The Monte
Carlo simulation model also assumed correlations of returns of the prices of
our common stock and the common stocks of the comparator group of companies and
stock price volatilities of the comparator group of companies.
At December 31, 2013, there was approximately $5.5 million of unrecognized
compensation cost related to all PSUs.
The following summarizes select information regarding our PSU awards as of
December 31, 2013:
In connection with the acquisition by Shire, all outstanding PSU grants vested
and became exercisable (see note 18).
Restricted Stock Awards
We also grant our nonemployee directors restricted stock awards that generally
vest after one year of service. In 2013, 31,500 RSUs were granted with weighted
average grant date fair values of $25.25 per share. In 2012 and 2011, 37,750
and 27,000 RSUs were granted with weighted average grant date fair values of
$31.12 and $17.30 per share, respectively. The fair value of a restricted stock
award is equal to the closing price of our common stock on the grant date.
The following summarizes select information regarding our restricted stock
awards as of December 31, 2013:
As of December 31, 2013, there was approximately $0.2 million of unrecognized
compensation cost related to RSUs.
In connection with the acquisition by Shire, all unvested RSU grants vested and
became exercisable (see note 18).
Employee Stock Purchase Plan
In 2000, the stockholders of the Company approved an employee stock purchase
plan. A total of 300,000 shares originally were available under this plan.
Since inception of the plan, the stockholders of the Company have approved
amendments to the plan to increase the number of shares available for issuance
under the plan by 600,000 shares. Under this plan, 50,873, 29,927 and
29,982 shares were sold to employees during 2013, 2012 and 2011. As of
December 31, 2013, 319,278 shares were available for issuance under this plan.
Under this plan, employees may purchase common stock through payroll deductions
in semi-annual offerings at a price equal to the lower of 85% of the closing
price on the applicable offering commencement date or 85% of the closing price
on the applicable offering termination date. Since the total payroll deductions
from the plan period are used to purchase shares at the end of the offering
period, the number of shares ultimately purchased by the participants is
variable based upon the purchase price. Shares issued under the employee stock
purchase plan are new shares. The plan qualifies under Section 423 of the
Internal Revenue Code.
In November 2012, the plan was amended to revise Plan Period One to May 1
through October 31 and to revise Plan period Two to November 1 through April 30
along with minor administrative changes. The plan amendments are effective
January 1, 2013 and provide an Initial Offering Period from January 1, 2013
through April 30, 2013.
The fair value of shares issued under the plan during 2013 was approximately
$231,700. The fair value was estimated using the Type B model, with the
following assumptions:
For the Initial Offering Period in 2013, the fair value of $60,700 was
estimated using the Type B model with a risk free interest rate of 0.04%,
volatility of 29.6% and an expected option life of 0.33 years. This fair value
was amortized over the four month period ending April 30, 2013.
For Plan Period One in 2013, the fair value of $97,500 was estimated using the
Type B model with a risk free interest rate of 0.08%, volatility of 28.00% and
an expected option life of 0.50 years. This fair value was amortized over the
six month period ending October 31, 2013.
For Plan Period Two in 2013, no shares were sold to employees. The fair value
of approximately $73,500 was estimated using the Type B model with a risk free
interest rate of 0.08%, volatility of 44.6% and an expected option life of 0.50
years. This fair value is being amortized over the six month period ending
April 30, 2014.
In connection with the Shire acquisition, all outstanding employee share
purchases were settled during the first quarter of 2014 (see note 18).
Income Taxes
For the years ended December 31, 2013, 2012 and 2011, the following table
summarizes the components of income (loss) before income taxes and the
provision for income taxes:
For the years ended December 31, 2013, 2012 and 2011, the following table
reconciles the federal statutory income tax rate to the effective income tax
rate:
In 2013, 2012 and 2011, respectively, $16.6 million, $7.1 million and
$3.2 million related to current stock option tax benefits were allocated
directly to stockholders' equity.
The following table summarizes the components of deferred income tax assets and
liabilities:
At December 31, 2013 and 2012, deferred tax assets and liabilities were
classified on the Company's consolidated balance sheets as follows:
The following table summarizes the change in the valuation allowance:
Due to uncertainty regarding the ability to realize the benefit of deferred tax
assets relating to certain net operating loss carryforwards, valuation
allowances had been established in prior years to reduce deferred tax assets to
a level that was more likely than not to be realized. Because of a change in
state tax law, it is now more likely than not that the net operating loss
carryforward will be realized and the valuation allowance has been removed. The
realization of certain state contribution carryforwards, however, is not more
likely than not and valuation allowances have been established for such
carryforwards. Realization of the remaining net deferred tax assets will depend
on the generation of sufficient taxable income in the appropriate jurisdiction,
the reversal of deferred tax liabilities, tax planning strategies and other
factors prior to the expiration date of the carryforwards. A change in the
estimates used to make this determination could require a reduction in deferred
tax assets if they are no longer considered realizable.
As of December 31, 2013, our foreign subsidiaries have incurred cumulative
losses and consequently no deferred tax liability has been established for any
future distribution of funds from foreign subsidiaries.
The following table summarizes carryforwards of net operating losses and
charitable contributions as of December 31, 2013.
At December 31, 2013 and 2012, the Company had no gross unrecognized tax
benefits. The Company does not expect any material increase in its gross
unrecognized tax benefits during the next twelve months.
The Company and its domestic subsidiaries file consolidated income tax returns
in the U.S. and certain states. In addition, separate income tax returns are
filed in other states. The Company's foreign subsidiaries file separate income
tax returns in the foreign jurisdictions in which they are located.
Our policy is to record interest and penalties related to tax matters in income
tax expense. Our last U.S. tax examination for 2008 concluded in the first
quarter of 2011 with no material adjustments. We are currently under
examination in a foreign tax jurisdiction and various state income tax returns
are also currently under examination. At this time, we do not believe that the
results of these examinations will have a material impact on our consolidated
financial statements.
Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in the components of accumulated other
comprehensive income (loss):
Amounts are net of tax.
Fair Value Measurement
Valuation Hierarchy - GAAP establishes a valuation hierarchy for disclosure of
the inputs to valuation used to measure fair value. This hierarchy prioritizes
the inputs into three broad levels as follows. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities. Level 2
inputs are quoted prices for similar assets and liabilities in active markets
or inputs that are observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the full term of the
financial instrument. Level 3 inputs are unobservable inputs based on our own
assumptions used to measure assets and liabilities at fair value. A financial
asset or liability's classification within the hierarchy is determined based on
the lowest level input that is significant to the fair value measurement.
The following tables provide the assets and liabilities carried at fair value
measured on a recurring basis as of December 31, 2013 and 2012:
The following table provides a rollforward of liabilities measured using
Level 3 inputs (in thousands):
Valuation Techniques - Cash and cash equivalents and short-term investments are
measured at fair value using quoted market prices and are classified within
Level 1 of the valuation hierarchy. There were no changes in valuation
techniques during the year ended December 31, 2013.
In the fourth quarter of 2011, we recognized contingent consideration
liabilities related to our acquisition of DuoCort. The fair values of the
contingent consideration is measured using significant inputs not observable in
the market, which are referred to in the guidance as Level 3 inputs. The
contingent consideration payments are classified as liabilities and are subject
to the recognition of subsequent changes in fair value through our results of
operations in other operating expenses.
The fair value of the contingent consideration payments related to regulatory
approvals, is estimated by applying risk adjusted discount rates, 13% and
20.3%, to the probability adjusted contingent payments and the expected
approval dates. The fair value of the contingent consideration payment related
to the attainment of future revenue targets is estimated by applying a risk
adjusted discount rate, 16%, to the potential payments resulting from
probability weighted revenue projections and expected revenue target attainment
dates. These fair value estimates are most sensitive to changes in the
probability of regulatory approvals or the probability of the achievement of
the revenue targets.
There were no changes in the valuation techniques during the period and there
were no transfers into or out of Levels 1 and 2.
Our 2% senior convertible notes due March 2017 are measured at amortized cost
in our consolidated balance sheets and not fair value. The principal balance
outstanding as of December 31, 2013 is $205.0 million with a carrying value of
$170.8 million and a fair value of approximately $547.1 million, based on the
Level 2 valuation hierarchy of the fair value measurements standard.
We believe that the fair values of our other financial instruments approximate
their reported carrying amounts.
401(k) Employee Savings Plan
The Company's 401(k) Employee Savings Plan (the 401(k) Plan) is available to
all employees meeting certain eligibility criteria. The 401(k) Plan permits
participants to contribute up to 92% of their compensation not to exceed the
limits established by the Internal Revenue Code. Participants are always fully
vested in their contributions. The Company matches 50% of the first 6% of
participating employee contributions. The Company contributed approximately
$2.5 million, $2.0 million and $0.9 million to the 401(k) Plan in each of the
years ended December 31, 2013, 2012 and 2011, respectively. The Company's
contributions are made in cash. The Company's common stock is not an investment
option available to participants in the 401(k) Plan.
In connection with the Shire acquisition (note 18), the Employee Savings Plan
was terminated in the first quarter of 2014.
Commitments and Contingencies
We have committed to purchase up to 400,000 liters of plasma in 2014 and up to
505,000 liters of plasma per year in 2015 through 2017 from our suppliers which
equates to commitments in the range of approximately $65 million to $95 million
per year. Additionally, we are required to purchase a minimum number of units
that total approximately $38 million per year from our third party toll
manufacturers during 2014 and 2015.
Our future minimum contractual obligations and commercial commitments at
December 31, 2013 are as follows (in thousands):
We have severance agreements for certain employees and change of control
agreements for executive officers and certain other employees. Under the
severance agreements, certain employees may be provided separation benefits
from us if they are involuntarily separated from employment. Under our change
of control agreements, certain employees are provided separation benefits if
they are either terminated or resign for good reason from ViroPharma within
12 months from a change of control. We also have a general change of control
severance plan covering our remaining employees that provide for severance
benefits based on length of service and age if they are terminated or resign
for good reason within 24 months from a change of control. These agreements
were invoked with consummation of the acquisition of ViroPharma by Shire in
2014 (note 18).
In November 2011, we acquired a 100% ownership interest in DuoCort Pharma AB, a
private company based in Helsingborg, Sweden focused on improving
glucocorticoid replacement therapy for treatment of AI. We paid approximately
213 million Swedish Krona (SEK) or approximately $32.1 million in upfront
consideration. In connection with the acquisition, we have also agreed to make
additional payments ranging from SEK 240 million up to SEK 860 million or
approximately $37 million to $133 million, contingent on the achievement of
certain milestones. Up to SEK 160 million or approximately $25 million of the
contingent payments relate to specific regulatory milestones; and up to SEK
700 million or approximately $109 million of the contingent payments are
related to commercial milestones based on the success of the product.
Meritage Pharma, Inc.
In December 2011, we entered into an exclusive development and option agreement
with Meritage Pharma, Inc. (Meritage), a private development-stage company
based in San Diego, CA focused on developing OBS as a treatment for
eosinophilic esophagitis (EoE). EoE is a chronic disease that is increasingly
being diagnosed in children and adults. It is characterized by inflammation and
accumulation of a specific type of immune cell, called an eosinophil, in the
esophagus. EoE patients may have persistent or relapsing symptoms, which
include dysphagia (difficulty in swallowing), nausea, stomach pain, chest pain,
heartburn, loss of weight and food impaction.
As consideration for the agreement, we made an initial $7.5 million
nonrefundable payment to Meritage. Meritage will utilize the funding to conduct
additional Phase 2 clinical assessment of OBS. In connection with the
development and option agreement, we have an exclusive option to acquire
Meritage, at our sole discretion. If we exercise this option, we have agreed to
pay $69.9 million for all of the outstanding capital stock of Meritage.
Meritage stockholders could also receive additional payments of up to
$175 million, upon the achievement of certain clinical and regulatory
milestones.
Intellect Neurosciences, Inc. License Agreement
In September 2011, we entered into a license agreement for the worldwide rights
of Intellect Neurosciences, Inc. (INS) to its clinical stage drug candidate,
VP20629, being developed for the treatment of FA, a rare, hereditary,
progressive neurodegenerative disease. We paid INS a $6.5 million up-front
licensing fee. In connection with the license agreement, we may pay additional
milestones up to $120 million based upon defined events. We will also pay a
tiered royalty of up to a maximum percentage of low teens, based on annual net
sales.
Halozyme Therapeutics License Agreement
In May 2011, Halozyme granted us an exclusive worldwide license to use
Halozyme's proprietary Enhanze™ technology, a proprietary drug delivery
platform using Halozyme's recombinant human hyaluronidase enzyme (rHuPH20)
technology in combination with a C1 esterase inhibitor. Under the terms of the
license agreement, we paid Halozyme an initial upfront payment of $9 million.
In the fourth quarter of 2011, we made a milestone payment of $3 million
related to the initiation of a Phase 2 study begun in September 2011 to
evaluate the safety, and pharmacokinetics and pharmacodynamics of subcutaneous
administration of Cinryze in combination with rHuPH20. In connection with the
license agreement, we may make further milestone payments to Halozyme which
could reach up to an additional $41 million related to HAE and up to
$30 million of additional milestone payments for three additional indications.
Additionally, we will pay an annual maintenance fee of $1 million to Halozyme
until specified events have occurred. Upon regulatory approval, Halozyme will
receive up to a 10% royalty on net sales of the combination product utilizing
Cinryze and rHuPH20, depending on the existence of a valid patent claim in the
country of sale. On August 1, 2013, we announced that after discussion with
representatives of the Center for Biologics Evaluation and Research (CBER)
division of the U.S. Food and Drug Administration, we are going to discontinue
our Phase 2 study of rHuPH20 technology in combination with a C1 esterase
inhibitor.
Other Agreements
The Company has entered into various other licensing, research and other
agreements. Under these other agreements, the Company is working in
collaboration with various other parties. Should any discoveries be made under
such arrangements, the Company would be required to negotiate the licensing of
the technology for the development of the respective discoveries. There are no
significant funding commitments under these other agreements.
Litigation and Claims
On May 17, 2012, a class action complaint was filed in the United States
District Court for the Eastern District of Pennsylvania naming as defendants
ViroPharma Incorporated and Vincent J. Milano, who resigned as ViroPharma
Incorporated's President and Chief Executive Officer upon completion of the
Shire acquisition of ViroPharma (see note 18). The complaint alleges, among
other things, possible securities laws violations by the defendants in
connection with certain statements made by the defendants related to the
Company's Vancocin product. On October 19, 2012, the complaint was amended to
include additional officers of the Company as named defendants and allege
additional information as the basis for the claim. The Company has moved to
dismiss the complaint and an oral argument was held on June 10, 2013, but no
decision has been issued. The defendants believe that the allegations in the
class action complaint are without merit and intend to defend the lawsuit
vigorously; however, there can be no assurance regarding the ultimate outcome
of this lawsuit.
On April 6, 2012, we received a notification that the Federal Trade Commission
(FTC) is conducting an investigation into whether we engaged in unfair methods
of competition with respect to Vancocin. On August 3, 2012, we received a Civil
Investigative Demand from the FTC requesting additional information related to
this matter. The existence of an investigation does not indicate that the FTC
has concluded that we have violated the law, and we do not believe that we have
engaged in unfair methods of competition with respect to Vancocin. We intend to
continue to cooperate with the FTC investigation; however, at this time we
cannot assess potential outcomes of this investigation.
From time to time we are a party to litigation in the ordinary course of our
business and may become a party to additional litigation in the future as
several law firms have issued press releases indicating that they are
commencing investigations concerning whether the Company and certain of its
officers and directors have violated laws. We do not believe these matters,
even if adversely adjudicated or settled, would have a material adverse effect
on our financial condition, results of operations or cash flows.
Subsequent Events
On November 11, 2013, Shire plc and ViroPharma Incorporated announced that
their Boards of Directors had unanimously approved, and the companies entered
into, a merger agreement pursuant to which Shire would acquire all the
outstanding shares of ViroPharma for $50 per share in cash, for a total
consideration of approximately $4.2 billion.
On January 24, 2014, Shire plc announced the successful completion of the
tender offer for all of the outstanding shares of ViroPharma.
Upon closing of the acquisition, all ViroPharma share-based compensation awards
vested and became exercisable and ViroPharma paid advisors approximately
$40.5 million in success and legal fees of which approximately $5.2 million is
recorded in 2013.
In March 2014, during a routine inspection by the Medicines and Healthcare
Products Regulatory Agency (MHRA) a potential risk of cross-contamination of
Buccolam with another drug was observed at our contract manufacturer. Buccolam
is our drug product for the treatment of prolonged, acute convulsive seizures
in infants, toddlers, children and adolescents (from 3 months to < 18 years).
Buccolam is available in 11 European countries, including the United Kingdom
(UK), Ireland, France, Spain, Germany, Italy, Israel, Finland, Denmark, Sweden
and Norway. Based on this MHRA observation, manufacturing activities at the
contract manufacturer were suspended and a comprehensive risk assessment to
assess the potential risk of cross-contamination was conducted. The outcome of
that risk assessment was that the risk of contamination of Buccolam with the
other drug in question was considered to be very low. A patient safety
assessment by ViroPharma's medical group has determined that based on the
manufacturer's risk assessment, the information reviewed and data collected,
the risk of patient safety is also very low and no contamination was found. In
the near term, the plan is to have Buccolam manufactured at a different site of
the contract manufacturer, where no other products are manufactured.
As of April 29, 2014, continued supply of Buccolam in the UK, Ireland ,Sweden
and Denmark is allowed based on their assessment that Buccolam is a critical
medicine. Certain countries continue to evaluate whether a recall of Buccolam
is necessary. As of April 29, 2014, Italy, France, Germany and Spain have
initiated recalls of the product. For the year ended December 31, 2013, Net
Sales of Buccolam in Italy, France, Germany and Spain totaled approximately
$4.1 million. Total Net Sales of Buccolam for the year ended December 31, 2013
were $13.3 million. Currently, it is expected that pharmacies returning
product as a result of the recall will receive credit notes equal to the value
they paid at the time of order. The financial statement impact of the recall
in the countries who have initiated the recall process (Italy, France, Germany
and Spain) will be in an amount less than 2013 net sales, as product included
in sales for the year ended December 31, 2013 have been consumed by patients
and recalls in these countries extend only to product held by parties other
than patients. Buccolam inventory included in the consolidated Balance Sheet
as of December 31, 2013 totaled approximately $4 million. Management continues
to evaluate inventory on hand as of December 31, 2013, and expects to be able
to use a material portion of the inventory in countries who are not undergoing
a recall.
The financial statement impact of the recall is not expected to be material to
the consolidated financial position, results of operations or operating cash
flows of ViroPharma Inc.
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