ViroPharma financial accounts year end 31 Dec. 2013

Press Release www.shire.com August 21, 2014 - Shire plc (the "Company") (LSE: SHP, NASDAQ: SHPG) is todaypublishing the audited consolidated financial statements for ViroPharmaIncorporated, dated April 29, 2014, for the year ending December 31, 2013. For further information please contact: Investor Relations Jeff Poulton ([email protected]) +1 781 482 0945 Sarah Elton-Farr ([email protected]) +44 1256 894 157 Media Stephanie Fagan ([email protected]) +1 781 482 0460 Gwen Fisher ([email protected]) +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 specialtymedicines to meet significant unmet patient needs. We focus on providing treatments in Neuroscience, Rare Diseases,Gastrointestinal, and Internal Medicine and we are developing treatments forsymptomatic conditions treated by specialist physicians in other targetedtherapeutic 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 endedDecember 31, 2013, 2012 and 2011 3 Consolidated Statements of Comprehensive Income (Loss) forthe years ended December 31, 2013, 2012 and 2011 4 Consolidated Statements of Stockholders' Equity for theyears ended December 31, 2013, 2012 and 2011 5 Consolidated Statements of Cash Flows for the years endedDecember 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 ofViroPharma Incorporated and its subsidiaries, which comprise the consolidatedbalance sheets as of December 31, 2013 and 2012, and the related consolidatedstatements of operations, comprehensive income (loss), stockholders' equity,and cash flows for each of the years in the three-year period ended December31, 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 theseconsolidated financial statements in accordance with U.S. generally acceptedaccounting principles; this includes the design, implementation, andmaintenance of internal control relevant to the preparation and fairpresentation of consolidated financial statements that are free from materialmisstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financialstatements based on our audits. We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free frommaterial misstatement. An audit involves performing procedures to obtain audit evidence about theamounts and disclosures in the consolidated financial statements. Theprocedures selected depend on the auditors' judgment, including the assessmentof the risks of material misstatement of the consolidated financial statements,whether due to fraud or error. In making those risk assessments, the auditorconsiders internal control relevant to the entity's preparation and fairpresentation of the consolidated financial statements in order to design auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the entity's internal control.Accordingly, we express no such opinion. An audit also includes evaluating theappropriateness of accounting policies used and the reasonableness ofsignificant accounting estimates made by management, as well as evaluating theoverall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient andappropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above presentfairly in all material respects, the financial position of ViroPharmaIncorporated and its subsidiaries as of December 31, 2013 and 2012, and theresults of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2013, in accordance with U.S. generallyaccepted accounting principles. /s/ KPMG LLP Philadelphia, PennsylvaniaApril 29, 2014 ViroPharma Incorporated Consolidated Balance Sheets December 31, 2013 and 2012 (In thousands, except share and per share data) 2013 2012Assets 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 10,848net 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 issuedand outstanding Common stock, par value $0.002 per share.175,000,000 shares authorized; outstanding 165 16366,657,896 shares at December 31, 2013 and65,113,880 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 2011Revenues: 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), beforetax: Foreign currency translationsadjustments 20 427 (3,145) Unrealized gain (loss) on available forsale 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 forsale securities, net of tax 4 12 (11) Other comprehensive income (loss), net oftax 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 Exerciseof - - 1,548 3 - - 14,239 - - 14,242 commonstockoptions Employee - - 38 - - - 452 - - 452 stockpurchaseplan Share- - - - - - - 14,242 - - 14,242 basedcompensation Stock - - - - - - 3,211 - - 3,211 optiontaxbenefits Cumulative - - - - - - - (3,145) - (3,145) translationadjustment,net Unrealizedlosses on - - - - - - - (11) - (11) availablefor salesecurities,net Repurchaseof shares - - (9,159) - 9,159 (169,661) - - - (169,661) Net income. - - - - - - - - 140,659 140,659 Balance,December31, 2011 - - 70,568 159 9,159 (169,661) 749,519 (3,414) 314,521 891,124 Exerciseof - - 1,375 4 - - 11,446 - - 11,450 commonstockoptions Restricted - - 27 - - - - - - - stock vested Employee - - 27 - - - 505 - - 505 stockpurchaseplan Share- - - - - - - 21,132 - - 21,132 basedcompensation Other - - - - - - - 439 - 439 compre-hensiveincome Repurchase - - (6,883) - 6,883 (180,339) - - - (180,339) of shares Stock - - - - - - 7,117 - - 7,117 optiontaxbenefits 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 Exerciseof - - 2,013 2 - - 12,801 - - 12,803 commonstockoptions Shareswithheld - - (569) - - - (17,254) - - (17,254) forminimumtaxobligation Conversion - - 1 - - - 20 - - 20 of seniorconvertiblenotes Restricted - - 34 - - - - - - - stockvested Employee - - 64 - - - 1,377 - - 1,377 stockpurchaseplan Share- - - - - - - 26,592 - - 26,592 basedcompen-sation Other - - - - - - - 24 - 24 compre-hensiveincome Stock - - - - - - 16,641 - - 16,641 optiontaxbenefits 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 2011Cash 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 43,015 170,726activities 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 175,518 331,352 426,732beginning of year Cash and cash equivalents at end of $ 207,816 $ 175,518 $ 331,352year Supplemental disclosure of cash flow $ 207,816 $ 175,518 $ 331,352information: Cash paid for interest Cash paid for income taxes 4,808 4,814 4,141 Supplemental disclosure of non-cash 992 40,629 93,648transactions: 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 tothe development and commercialization of novel solutions for physicianspecialists to address unmet medical needs of patients living with seriousdiseases that have few if any clinical therapeutic options, includingtherapeutics for rare and orphan diseases. On January 24, 2014, ViroPharmaIncorporated became an indirect wholly-owned subsidiary of Shire plc. OnMarch 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 intoadditional territories outside the United States, through potential acquisitionor licensing of products and product candidates and the acquisition ofcompanies. We expect future growth to be driven by sales of Cinryze forhereditary angioedema (HAE), both domestically and internationally, sales ofPlenadren for treatment of adrenal insufficiency (AI) and Buccolam in Europefor 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 againstangioedema attacks in adolescent and adult patients with HAE. Cinryze is a C1esterase inhibitor therapy for routine prophylaxis against HAE, also known asC1 inhibitor (C1-INH) deficiency, a rare, severely debilitating, life-threatening genetic disorder. We acquired rights to Cinryze for the UnitedStates in October 2008 and in January 2010, we acquired expanded rights tocommercialize Cinryze and future C1-INH derived products in certain Europeancountries and other territories throughout the world as well as rights todevelop future C1-INH derived products for additional indications. InJune 2011, the European Commission (EC) granted us Centralized MarketingAuthorization for Cinryze in adults and adolescents with HAE for routineprevention, pre-procedure prevention and acute treatment of angioedema attacks.The approval also includes a self administration option for appropriatelytrained patients. We have begun to commercialize Cinryze in Europe and continueto evaluate our commercialization opportunities in countries where we havedistribution rights. On August 6, 2012, the U.S. Food and Drug Administration (FDA) approved oursupplement to the Cinryze Biologics License Application (BLA) for industrialscale manufacturing which increases our manufacturing capacity of Cinryze. On August 29, 2013, Sanquin Plasma Products and C.A.F. - D.C.F. (Sanquin), ourcontract manufacturers of Cinryze, received a Warning Letter from the FDAregarding compliance with current Good Manufacturing Practices (cGMP) atfacilities located in Amsterdam and Brussels. The Warning Letter follows FDAinspections of these facilities which concluded on June 4, 2013. At theconclusion of these inspections, the FDA issued Form 483 InspectionalObservations, to which responses were provided in June 2013. Based on ourreview with Sanquin of the issues in the Warning Letter, we believe that thesupply of Cinryze to patients will not be interrupted. We also believe that theWarning Letter does not restrict production or shipment of Cinryze. Sanquincontinues to manufacture products, including Cinryze, in these facilities. TheWarning Letter relates to certain observations that the FDA believes wereinadequately addressed by the responses to the Form 483. The Warning Letterinvolves various cGMP deficiencies, including but not limited to inadequateinvestigations, production and process controls, laboratory controls, andcleaning procedures. We believe that, since our initial response to the FDA, wehave addressed certain of the Form 483 observations and activities are underwayto address the remaining Form 483 observations and issues raised in the WarningLetter. We are working with Sanquin and FDA to provide comprehensive responsesto the concerns discussed in the Warning Letter. We acquired Buccolam® (Oromucosal Solution, Midazolam [as hydrochloride]) inMay 2010. In September 2011, the EC granted a Centralized Pediatric UseMarketing Authorization (PUMA) for Buccolam, for treatment of prolonged, acute,convulsive seizures in infants, toddlers, children and adolescents, from 3months to less than 18 years of age. We have begun to commercialize Buccolam inEurope. On November 15, 2011, we acquired rights to Plenadren® (hydrocortisone,modified release tablet) for treatment of AI. The acquisition of Plenadrenfurther expands our orphan disease commercial product portfolio. On November 3,2011, the EC granted European Marketing Authorization for Plenadren, an orphandrug for treatment of AI in adults, which will bring these patients their firstpharmaceutical innovation in over 50 years. We are in the process of launchingPlenadren in the various countries in Europe and a named patient program isavailable to patients in countries in which we have not launched Plenadrencommercially. We are currently conducting an open label trial with Plenadren inSweden and have initiated a registry study as a condition of approval inEurope. In April 2013, the Food and Drug Administration (FDA) provided us responses toquestions related to the regulatory and development path for Plenadren. The FDAhas indicated the data filed in the European Union (EU) and approved by theEuropean Medicines Agency (EMA) related to use of Plenadren for treatment ofadrenal insufficiency in adults are not sufficient for assessment of benefit/risk in a marketing authorization submission in the United States and thatadditional clinical data would be required. We are currently reviewing the FDAfeedback and our decision whether to pursue regulatory approval for Plenadrenin the United States will be dependent upon, among other things, additionalfeedback from the FDA regarding potential Phase 3 study design and theavailability of orphan drug exclusivity. We also are currently exploringcommercialization opportunities in additional geographies. We also sell branded and authorized generic Vancocin HCl capsules, the oralcapsule formulation of vancomycin hydrochloride, in the U.S. and itsterritories. Vancocin is indicated for the treatment of C. difficile-associateddiarrhea (CDAD). Vancocin capsules are also used for the treatment ofenterocolitis caused by Staphylococcus aureus, including methicillin-resistantstrains. 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 determiningbioequivalence of generic versions of Vancocin (vancomycin hydrochloride, USP)capsules. The FDA also informed us in the same correspondence that the recentsupplemental new drug application (sNDA) for Vancocin which was approved onDecember 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 showingof a significant new use (such as a new indication) for an old antibiotic suchas Vancocin in order for such old antibiotic to be eligible for a grant ofexclusivity. FDA also indicated that it approved three abbreviated new drugapplications (ANDAs) for generic vancomycin capsules and the companies holdingthese ANDA approvals indicated that they began shipping generic vancomycinhydrochloride, USP. In June 2012, the FDA approved a fourth ANDA for genericvancomycin capsules. We granted a third party a license under our NDA for Vancocin® (vancomycinhydrochloride capsules, USP) to distribute and sell vancomycin hydrochloridecapsules as an authorized generic product. We are also obligated to pay Genzymeroyalties of 10%, 10% and 16% of our net sales of Vancocin for the three yearperiod following the approval of the sNDA as well as a lower royalty on salesof our authorized generic version of Vancocin in connection with our purchaseof exclusive rights to two studies of Vancocin. Currently our product development portfolio is primarily focused on thefollowing programs: C1 esterase inhibitor [human], maribavir forcytomegalovirus (CMV) infection and VP20629 (treatment of Friedreich's Ataxia). We are currently undertaking studies on the viability of subcutaneousadministration 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 recombinanthuman hyaluronidase enzyme (rHuPH20) technology, in combination with a C1esterase inhibitor which we intend to apply initially to develop a subcutaneousformulation of Cinryze for routine prophylaxis against attacks of HAE. In thefirst quarter of 2012, we completed a Phase 2 study to evaluate the safety, andpharmacokinetics and pharmacodynamics of subcutaneous administration of Cinryzein combination with rHuPH20 and announced the presentation of positive data. InDecember 2012, we initiated a Phase 2b double blind, multicenter, dose rangingstudy to evaluate the safety and efficacy of subcutaneous administration ofCinryze® (C1 esterase inhibitor [human]) in combination with rHuPH20 inadolescents and adults with HAE for prevention of HAE attacks. On August 1,2013, we announced that after discussion with representatives of the Center forBiologics Evaluation and Research (CBER) division of the U.S. Food and DrugAdministration, we discontinued our Phase 2 study. The discontinuation of thestudy was a precaution related to the emergence of anti-rHuPH20 nonneutralizingantibodies in study patients. We are investigating an alternative optimized,low volume standalone formulation of C1esterase inhibitor for subcutaneousadministration. We plan to evaluate potential future plans involving rHuPH20;however, there can be no assurance that we will be able to conduct additionalstudies with the combination of Cinryze and rHuPH20. We are also investigatingrecombinant forms of C1-INH. We are investigating potential new uses for our C1 esterase inhibitor productwith a goal of pursuing additional indications in patient populations withother C1 INH mediated diseases. To that end, we are supporting investigator-initiated studies (IISs) evaluating C1 INH as a treatment for patients withNeuromyelitis Optica (NMO) and Autoimmune Hemolytic Anemia (AIHA); both ofthese studies were initiated in 2012. We've also completed enrollment into aclinical trial in Antibody-Mediated Rejection (AMR) post renal transplantationand are also evaluating the potential effect of C1-INH in Refractory ParoxysmalNocturnal Hemoglobinuria (PNH). ViroPharma plans to continue to conduct bothclinical and nonclinical studies to evaluate additional therapeutic uses forits C1 INH product in the future. We are currently enrolling patients into a Phase 2 program to evaluatemaribavir for the treatment of CMV infections in transplant recipients. Theprogram consists of two independent Phase 2 clinical studies that includesubjects who have asymptomatic CMV in one trial, and those who have failedtherapy with other anti-CMV agents in another trial. Interim data from thesestudies was presented in June of 2013. We expect to complete enrollment intoboth studies in mid 2014. CMV is a common virus, but in immune compromisedindividuals, including transplant recipients, it can lead to serious illness ordeath. The U.S. Food and Drug Administration (FDA) and the European Commissionhave granted orphan drug designation to maribavir for treatment of clinicallysignificant cytomegalovirus viremia and disease in at-risk patients, and theprevention and treatment of cytomegalovirus disease in patients with impairedcell 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-rangingclinical study to evaluate the safety, tolerability, and efficacy of VP20621for prevention of recurrence of CDAD in adults previously treated for CDAD. Wecompleted enrollment of patients in December 2012 and disclosed the results ofthis study in April 2013. We will complete the evaluation of these Phase 2 datahowever, we are seeking a partner to complete the development andcommercialization of the asset as it is not considered core to our strategy.Our decision whether to pursue further development of VP20621 will be dependentupon, among other things, our ability to find a partner, our final assessmentof 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 worldwiderights to develop VP20629, or indole-3-propionic acid for the treatment of FA,a rare, hereditary, progressive neurodegenerative disease. We initiated asingle and multiple oral dose safety and tolerability study in patients in2013. We anticipate completion of enrollment in the first half of 2014. In December 2011, we entered into an exclusive development and option agreementwith Meritage Pharma, Inc. (Meritage), a private company based in San Diego,California focused on developing oral budesonide suspension (OBS) as atreatment for eosinophilic esophagitis (EoE). EoE is a newly recognized chronicdisease that is increasingly being diagnosed in children and adults. It ischaracterized by inflammation and accumulation of a specific type of immunecell, called an eosinophil, in the esophagus. EoE patients may have persistentor 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 toacquire products in development, or those that are currently on the market. Weplan to seek products that treat serious or life threatening illnesses with ahigh 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 andits wholly owned subsidiaries. All intercompany accounts and transactions havebeen eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity withU.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates. We consider the following policies and estimates to be the most critical inunderstanding the more complex judgments that are involved in preparing ourconsolidated financial statements and that could impact our results ofoperations, 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 threemonths or less when purchased to be cash equivalents. Concentration of Credit Risk We invest our excess cash and short-term investments in accordance with apolicy objective that seeks to ensure both liquidity and safety of principal.The policy limits investments to certain types of instruments issued by theU.S. government and institutions with strong investment grade credit ratingsand places restrictions in their terms and concentrations by type and issuer toreduce our credit risk. We have an exposure to credit risk in trade accounts receivable from sales ofproduct. In the U.S., Vancocin is distributed through wholesalers that sell theproduct to pharmacies and hospitals. We also granted a third party a licenseunder our NDA for Vancocin® (vancomycin hydrochloride capsules, USP) todistribute and sell vancomycin hydrochloride capsules as an authorized genericproduct. In the US, we sell Cinryze to specialty pharmacy/specialtydistributors (SP/SD's) who then distribute to physicians, hospitals andpatients, among others. We sell Diamorphine in the UK, primarily to hospitals, through approvedwholesalers. We began commercial sales of Cinryze and Buccolam in Europe duringthe fourth quarter of 2011, primarily through approved wholesalers, andlaunched Plenadren commercially through approved wholesalers and named patientprogram in Europe during the third quarter of 2012. The revenues and operatingincome from these sales are not material to our consolidated revenues andoperating income for 2013 or 2012. Five customers represent approximately 68% of our trade accounts receivable atDecember 31, 2013 and three customers represent approximately 98% of our 2013net 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 commonstock upon conversion of the senior convertible notes. These transactionsexpose the Company to counterparty credit risk for nonperformance. The Companymanages its exposure to counterparty credit risk through specific minimumcredit standards, and diversification of counterparties. Single Source Supplier We currently outsource all manufacturing of our products to single sourcemanufacturers. A change in these suppliers could cause a delay in manufacturingand a possible loss of sales, which would affect operating results adversely. Accounts Receivable Accounts receivable are recorded at the invoiced amount, net of related cashdiscounts, rebates and estimated returns and do not bear interest. AtDecember 31, 2013 and 2012, there was no allowance for doubtful accounts as allnet amounts recorded are deemed collectible. We do not have any off-balancesheet exposure related to our customers. Inventories Inventories are stated at the lower of cost or market using actual cost. AtDecember 31, 2013 and 2012, inventory consists of finished goods, work-in-process (WIP) and certain raw materials required to produce inventory offinished 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 theuseful lives of the assets or the lease term, whichever is shorter, rangingfrom 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 basisover 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 ourcorporate headquarters. The lease arrangement involves the construction ofexpanded office space where we are involved in the design and construction ofthe expanded space and have the obligation to fund the tenant improvements tothe expanded structure and to lease the entire building following completion ofconstruction. This arrangement is referred to as build-to suit lease. We haveconcluded that under the guidance of Accounting Standards Codification (ASC)840, Leases, we are considered the owner of the construction project foraccounting purposes and must record a construction in progress asset (CIP) anda corresponding financing obligation for the construction costs funded by thelandlord. We recorded a CIP asset and a corresponding financing obligationduring 2013 of approximately $5.5 million. Once the construction is complete wewill depreciate the core and shell asset over 30 years. A portion of the leasepayments will be reflected as principal and interest payments on the financingobligation. Goodwill and Intangible Assets We review the carrying value of goodwill and indefinite-lived intangibleassets, to determine whether impairment may exist. In September 2011, theFinancial Accounting Standards Board issued Accounting Standards Update (ASU)2011-08, Testing Goodwill for Impairment (the Update). The objective of thisUpdate is to simplify how entities test goodwill for impairment. The amendmentsin the Update provide the option to first assess qualitative factors todetermine whether it is necessary to perform the current two-step test. If anentity 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 areporting unit is less than its carrying amount, the quantitative impairmenttest is required. Otherwise, no further testing is required. The two-stepgoodwill impairment test consists of the following steps. The first stepcompares a reporting unit's fair value to its carrying amount to identifypotential goodwill impairment. If the carrying amount of a reporting unitexceeds the reporting unit's fair value, the second step of the impairment testmust be completed to measure the amount of the reporting unit's goodwillimpairment loss, if any. Step two requires an assignment of the reportingunit's fair value to the reporting unit's assets and liabilities to determinethe implied fair value of the reporting unit's goodwill. The implied fair valueof the reporting unit's goodwill is then compared with the carrying amount ofthe reporting unit's goodwill to determine the goodwill impairment loss to berecognized, if any. We tested our goodwill during the fourth quarter of 2013 and there was noimpairment as a result of the test. We test our long-lived fixed and intangible assets for recoverability wheneverevents occur or changes in circumstances indicate that the carrying amount ofan 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 assetgroup). The carrying amount of an asset (or asset group) is not recoverable ifit exceeds the sum of the undiscounted cash flows expected from the use andeventual disposition of the asset (or asset group). The impairment loss ismeasured in step two, if necessary, as the difference between the carryingvalue of the asset (or asset group) and its fair value. Assumptions andestimates used in the evaluation of impairment may affect the carrying value oflong-lived assets, which could result in impairment charges in future periods.Such assumptions include projections of future cash flows and the timing andnumber of generic/competitive entries into the market, affecting theundiscounted cash flows, and if necessary, the fair value of the asset andwhether impairment exists. These assumptions are subjective and could result ina material impact on operating results in the period of impairment. On an ongoing periodic basis, we evaluate the useful life of our long-livedassets and determine if any economic, governmental or regulatory event hasmodified their estimated useful lives. ASC 35035 provides guidance on determining the finite useful life of arecognized intangible asset wherein it defines the useful life of an intangibleasset is the period over which the asset is expected to contribute directly orindirectly to the future cash flows of an entity. It also states that the estimate of the useful life of an intangible asset toan entity shall be based on an analysis of all pertinent factors, inparticular, all of the following factors with no one factor being morepresumptive 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 whichthe useful life of the intangible asset may relate. c. Any legal, regulatory, or contractual provisions that may limit theuseful life. The cash flows and useful lives of intangible assets that arebased on legal rights are constrained by the duration of those legal rights.Thus, the useful lives of such intangible assets cannot extend beyond thelength of their legal rights and may be shorter. d. The entity's own historical experience in renewing or extending similararrangements, consistent with the intended use of the asset by the entity,regardless of whether those arrangements have explicit renewal or extensionprovisions. In the absence of that experience, the entity shall consider theassumptions that market participants would use about renewal or extensionconsistent 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 economicfactors (such as the stability of the industry, known technological advances,legislative action that results in an uncertain or changing regulatoryenvironment, and expected changes in distribution channels). f. The level of maintenance expenditures required to obtain the expectedfuture cash flows from the asset (for example, a material level of requiredmaintenance in relation to the carrying amount of the asset may suggest a verylimited useful life). As in determining the useful life of depreciable tangibleassets, regular maintenance may be assumed but enhancements may not. Further, if an income approach is used to measure the fair value of anintangible asset, in determining the useful life of the intangible asset foramortization purposes, an entity shall consider the period of expected cashflows used to measure the fair value of the intangible asset adjusted asappropriate for the entity-specific factors noted. Our most significant long-lived assets are our acquired intangible assets (seenote 6). The contract rights acquired as part of the Auralis acquisition are beingamortized on a straight-line basis over their estimated useful lives of12 years and the product rights acquired under the Auralis and DuoCortacquisitions are being amortized on a straight-line basis over their estimateduseful lives of 10 years. We estimated the useful life of the assets byconsidering competition by products prescribed for the same indication, thelikelihood and estimated future entry of nongeneric and generic competitionwith the same or similar indication and other related factors. The factors thatdrive the estimate of the life are often uncertain and are reviewed on aperiodic basis or when events occur that warrant review. In September 2011, the EC granted a Centralized PUMA for Buccolam, fortreatment of prolonged, acute, convulsive seizures in infants, toddlers,children and adolescents, from 3 months to less than 18 years of age. Thisasset was previously classified as an indefinite-lived intangible asset. As aresult of this approval, we began to amortize this asset over its estimateduseful life of 10 years. Due to the approval and launch of Buccolam, coupled with the approval andlaunch of Cinryze in Europe, we decided to alter our development andcommercialization plans for the remaining Auralis IPR&D asset. The decisionresulted 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) theCompany has persuasive evidence an arrangement exists, (2) the price is fixedand determinable, (3) title has passed, and (4) collection is reasonablyassured. The Company's credit and exchange policy includes provisions forreturn of its product when it (1) has expired, or (2) was damaged in shipment. Product revenue is generally recorded upon delivery to either our wholesalersor distributors and when title has passed. Product demand from wholesalersduring a given period may not correlate with prescription demand for theproduct in that period. As a result, the Company periodically estimates andevaluates the wholesalers' inventory position and would defer recognition ofrevenue on product that has been delivered if the Company believes that channelinventory at a period end is in excess of ordinary business needs and if theCompany believes the value of potential returns is materially different thanthe returns accrual. Net sales consist of revenue from sales of Cinryze, Buccolam, Plenadren,Vancocin branded and authorized generic product, and Diamorphine, lessestimates for chargebacks, rebates, distribution service fees, returns andlosses. We establish accruals for chargebacks and rebates, sales discounts andproduct returns. These accruals are primarily based upon the history ofVancocin and for Cinryze they are based on information on payee's obtained fromour SP/SD's and CinryzeSolutions. We also consider the volume and price of ourproducts in the channel, trends in wholesaler inventory, conditions that mightimpact patient demand for our product (such as incidence of disease and thethreat of generics) and other factors. Chargebacks and rebates are the most subjective sales related accruals. Whilewe currently have no contracts with private third party payors, such as HMO's,we do have contractual arrangements with governmental agencies, includingMedicaid. We establish accruals for chargebacks and rebates related to thesecontracts in the period in which we record the sale as revenue. These accrualsare 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 andadjust the balance as needed. These analyses have been adjusted to reflect theU.S. healthcare reform acts and their effect on governmental contractual pricesand rebates. Annually, as part of our process, we performed an analysis on the share ofVancocin and Cinryze sales that ultimately go to Medicaid recipients and resultin a Medicaid rebate. As part of that analysis, we considered our actualMedicaid historical rebates processed, total units sold and fluctuations inchannel inventory. We also consider our payee mix for Cinryze based oninformation obtained at the time of prescription. Product return accruals are estimated based on our history of damage andproduct expiration returns and are recorded in the period in which we recordthe product sales. There is a no returns policy with sales of generic Vancocinto our distributor and Cinryze has a no returns policy. Returns of product forour European sales depends on the country of sale in Europe. Where returns arenot mandated by laws or regulations, we generally have a no returns policy.Where returns are required to be taken back, we defer revenue recognition untilwe receive information from our distribution partners that the drug has beenconsumed. Under the Patient Protection and Affordable Care Act (PPACA), we are requiredto fund 50% of the Medicare Part D insurance coverage gap for prescriptiondrugs sold to eligible patients staring on January 1, 2011. For Vancocin salessubject to this discount, we recognize this cost using an effective rebatepercentage for all sales to Medicare patients throughout the year. Forapplicable Cinryze sales, we recognize this cost at the time of sale forproduct expected to be purchased by a Medicare Part D insured patient when weestimate they are within the coverage gap. Revenue from the launch of a new or significantly unique product may bedeferred until estimates can be made for chargebacks, rebates, returns and allof the above conditions are met which is typically based on dispensedprescription data and other information obtained during the period followinglaunch. In April 2012, we began selling an authorized generic version of ourprescription Vancocin capsules under a supply agreement with a distributor. Thedistributor has agreed to purchase all of its authorized generic productrequirements from us and pay a specified invoice supply price for suchproducts. We are also entitled to receive a percentage of the gross margin onnet sales of the authorized generic products sold by the distributor. Werecognize revenue from shipments to the distributor at the invoice supply pricealong with our percentage of the gross margin on net sales of the authorizedgeneric products sold by the distributor when the distributor reports to us itsgross margin on net sales of the products and our portion thereof. Anyadjustments to the net sales previously reported to us related to thedistributor's estimated sales discounts and other deductions are recognized inthe period the distributor reports the adjustments to us. There is a no returnspolicy with sales of generic Vancocin to our distributor. Customers We have principally sold our products directly to wholesale drug distributorsand specialty pharmacies/specialty distributors (SP/SD) in the United Stateswho then distribute the product to pharmacies, hospitals, patients, physiciansand long-term care facilities, among others. For Cinryze, our customers are SP/SD's who will distribute the product to physicians, hospitals and patients. ForVancocin, our customers are wholesalers who then distribute the product topharmacies, hospitals and long term care facilities, among others. InApril 2012, we began selling an authorized generic version of our prescriptionVancocin capsules under a supply agreement with a distributor. In the fourth quarter of 2011, we began to sell product to drug distributors inEurope, mainly wholesalers, who then distribute the product to pharmacies,hospitals, and physicians. Five wholesalers and/or SP/SD's represent the majority of our totalconsolidated revenue, as approximated below: Research and Development Expenses and Collaborations Research and product development costs are expensed as incurred. Reimbursementsof research and development costs under cost sharing collaborations arerecorded as a reduction of research and development expenses. Research anddevelopment costs include costs for discovery research, pre-clinical andclinical 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 statementclassification based on the nature of the underlying activity. If payments toand from our collaborative partners are not within the scope of otherauthoritative accounting literature, the income statement classification forthese payments is based on a reasonable, rational analogy to authoritativeaccounting literature that is applied in a consistent manner. Amounts due toour collaborative partners related to development activities are reflected as aresearch and development expense. Income Taxes Income taxes are accounted for under the asset and liability method. Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and operatingloss and tax credit carryforwards. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in operations in the period that includes the enactmentdate. A valuation allowance is provided when it is more likely than not that someportion or all of a deferred tax asset will not be realized. The ultimaterealization of deferred tax assets is dependent upon the generation of futuretaxable income and the reversal of deferred tax liabilities during the periodin which the related temporary difference becomes deductible. The benefit oftax positions taken or expected to be taken in the Company's income tax returnsare recognized in the consolidated financial statements if such positions aremore likely than not of being sustained. Share-Based Payments The Company measures the cost of employee services received in exchange for anaward 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 valueand that cost is recognized over the period during which an employee isrequired to provide service in exchange for the award - the requisite serviceperiod (vesting period). Compensation expense for options granted to nonemployees is determined as thefair value of the consideration received or the fair value of the equityinstruments issued, whichever is more reliably measured. The fair value ofawards granted to nonemployees is re-measured each period until the relatedservice is complete. Foreign Currency Translation The financial statements of the Company's international subsidiaries aretranslated into U.S. dollars using the exchange rate at each balance sheet datefor assets and liabilities, the historical exchange rate for stockholders'equity and an average exchange rate for each period of revenues, expenses, andgain and losses. The functional currency of the Company's non-U.S. subsidiariesis the local currency. Adjustments resulting from the translation of financialstatements 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 sheetdate through April 29, 2014 the date at which the consolidated financialstatements were available to be issued, and have not identified any such eventsother 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 uponDerecognition of Certain Subsidiaries or Groups of Assets within a ForeignEntity or of an Investment in a Foreign Entity ( Topic 830, EITF Issue 11-A),which specifies that a cumulative translation adjustment (CTA) should bereleased into earnings when an entity ceases to have a controlling financialinterest in a subsidiary or group of assets within a consolidated foreignentity and the sale or transfer results in the complete or substantiallycomplete liquidation of the foreign entity. When an entity sells either a partor all of its investment in a consolidated foreign entity, CTA would berecognized in earnings only if the sale results in the parent no longer havinga controlling financial interest in the foreign entity. CTA would be recognizedin earnings in a business combination achieved in stages (i.e., a stepacquisition). The ASU does not change the requirement to release a pro rataportion of the CTA of the foreign entity into earnings for a partial sale of anequity method investment in a foreign entity. The ASU is effective for fiscalyears (and interim periods within those fiscal years) beginning on or afterDecember 15, 2013. Early adoption will be permitted for both public andnonpublic entities. The ASU should be applied prospectively from the beginningof the fiscal year of adoption. We do not anticipate the initial adoption ofthe provisions of this guidance to have a material impact on our consolidatedresults of operations, cash flows, and financial position. In February 2013, the FASB issued ASU 2013-02, Reporting of AmountsReclassified Out of Accumulated Other Comprehensive Income (Topic 220). Thestandard requires that public and nonpublic companies present information aboutreclassification adjustments from accumulated other comprehensive income intheir annual financial statements in a single note or on the face of thefinancial statements. Public companies will also have to provide thisinformation in their interim financial statements. The standard requires thatcompanies present either in a single note or parenthetically on the face of thefinancial statements, the effect of significant amounts reclassified from eachcomponent of accumulated other comprehensive income based on its source and theincome statement line items affected by the reclassification. If a component isnot required to be reclassified to net income in its entirety, companies mustinstead cross reference to the related footnote for additional information. Thestandard allows companies to present the information either in the notes orparenthetically on the face of the financial statements provided that all ofthe required information is presented in a single location. The new disclosurerequirements are effective for fiscal years, and interim periods within thoseyears, beginning after December 15, 2012. The adoption of the provisions ofthis guidance did not have a material impact on our consolidated results ofoperations, 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 entitiestest indefinite-lived intangible assets other than goodwill for impairment. Theamendments in the ASU provide the option to first assess qualitative factors todetermine 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 isnecessary to calculate the fair value of the asset in order to compare thatamount 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 isnot more-likely than-not (a likelihood of more than 50%) that the fair value ofan asset is less than its carrying amount, no further testing is required. Therevised standard includes examples of events and circumstances that mightindicate that the indefinite-lived intangible asset is impaired. The approachin the ASU is similar to the guidance for testing goodwill for impairmentcontained in ASU 2011-08, Intangibles -Goodwill and Other (Topic 350): TestingGoodwill for Impairment. The revised standard, which may be adopted early, iseffective for annual and interim impairment tests performed for fiscal yearsbeginning after September 15, 2012 and does not change existing guidance onwhen to test indefinite-lived intangible assets for impairment. The adoption ofthe provisions of this guidance did not have a material impact on ourconsolidated results of operations, cash flows, and financial position. Short-Term Investments Short-term investments consist of fixed income and debt securities withremaining maturities of greater than three months at the date of purchase. AtDecember 31, 2013, all of our short-term investments are classified asavailable for sale investments and measured as Level 1 instruments of the fairvalue measurements standard. The following summarizes the Company's available for sale investments atDecember 31, 2013: The following summarizes the Company's available for sale investments atDecember 31, 2012: Inventory Inventory is stated at the lower of cost or market using actual cost. Thefollowing represents the components of the inventory at December 31, 2013 and2012: Property, Equipment and Building Improvements Property, equipment and building improvements consists of the following atDecember 31, 2013 and 2012: The depreciable lives for the major categories of property and equipment are30 years for buildings, 3 to 5 years for computers and equipment and up to theshorter of the respective lease term or the expected economic useful life forbuilding 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. OnAugust 29, 2012, we entered into an amended and restated lease (the AmendedLease) to expand the corporate headquarters. The Amended Lease expiresfifteen years from the "commencement date", which will occur when the landlordhas substantially completed the expansion, including any tenant improvements.We will continue to make the scheduled lease payments for the existing buildingthrough commencement date. At December 31, 2013, our minimum lease paymentsunder the Amended Lease total approximately $39.4 million. Upon thecommencement date the lease payments will escalate annually based upon aconsumer price index specified in the lease. We have the option to renew the lease for two consecutive terms for up to atotal of ten years at fair market value, subject to a minimum price per squarefoot. The first renewal term may be for between three and seven years, at ouroption, and the second renewal term may be for ten years less the length of thefirst renewal term. Under the terms of the Amended Lease, the Landlord is responsible for the costof construction of the core and shell of the expansion, as defined in thelease, which it will "deliver" to us when complete. We will be responsible forthe "fit out" of the core and shell necessary for us to occupy the expandedbuilding. ASC 840, Leases, is the authoritative literature related to accounting forleases. Based on the results of the lease classification tests we haveconcluded that the Amended Lease qualifies as an operating lease. However, thelease arrangement involves the construction of expanded office space where weare involved in the design and construction of the expanded space and have theobligation to fund the tenant improvements to the expanded structure and tolease the entire building following completion of construction. Thisarrangement is referred to as build-to suit lease. We have concluded that underthe guidance of ASC 840-55-15, we are considered the owner of the constructionproject for accounting purposes and must record a construction in progressasset (CIP) and a corresponding financing obligation for the construction costsfunded by the landlord. We began recording the CIP asset and a correspondingfinancing obligation during the first quarter of 2013 when constructionstarted. During the year ended December 31, 2013, we recorded approximately$5.5 million of construction in progress related to the lease. Once theconstruction is complete we will depreciate the core and shell asset over30 years. A portion of the lease payments will be reflected as principal andinterest 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 prophylaxisagainst angioedema attacks in adolescent and adult patients with HAE. Becausethe treatment indication is directed at a small population in the UnitedStates, orphan drug status was awarded by the FDA and orphan drug exclusivitywas granted on the date of approval. Orphan drug exclusivity awards marketexclusivity for seven years. These seven years of exclusivity prevents anothercompany from marketing a product with the same active ingredient as Cinryze forroutine prophylaxis against angioedema attacks in adolescent and adult patientswith HAE through October 2015. In addition, a biosimilar version of Cinryzecould not rely on Cinryze data for approval before 2020 as a result of dataprotection provisions contained in the Affordable Health Care for America Act. As of December 31, 2013, the carrying amount of this intangible asset isapproximately $412.8 million. We are amortizing this asset over its estimated25-year useful life, through October 2033, or 18 years beyond the orphanexclusivity period and 13 years beyond the data protection period forbiosimilar versions. Our estimate of the useful life of Cinryze was based primarily on the followingfour considerations: 1) the exclusivity period granted to Cinryze as a resultof marketing approval by the FDA with orphan drug status; 2) the landscapesubsequent to the exclusivity period and the ability of follow-on biologics(FOB) entrants to compete with Cinryze; 3) the financial projections of Cinryzefor 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 thatbarriers to entry for competitors to Cinryze are greater than other traditionalbiologics. They include, but are not limited to the following. Cinryze treats aknown population base of approximately 4,600 patients. HAE is generally thoughtto affect approximately 10,000 people in the United States, many of whom havenot yet been diagnosed. Therefore the market upside for potential competitorsis limited. The capital investment for a potential competitor to construct amanufacturing facility is prohibitive and would limit the number ofparticipants willing to enter the prophylactic HAE market. In order to qualifyfor the abbreviated approval process for biosimilar versions of biologicslicensed under full BLAs (reference biologics) a biosimilar applicant generallymust submit analytical, animal, and clinical data showing that the proposedproduct is "highly similar" to the reference product and has no "clinicallymeaningful 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 thereference biologic. It is therefore likely that a biosimilar would have toconduct clinical trials to show that a FOB is highly similar to Cinryze and hasno clinically meaningful differences. To conduct these trials, one must produceenough drug to sustain a trial and attract the required number of HAE patientsto prove safety and efficacy comparable to Cinryze. Patients on Cinryze arethose HAE patients who experience life threatening laryngeal attacks, orfrequent attacks that inhibit their quality of life and/or ability to work. Toobtain patients for a clinical trial, the FOB company will have to convincepatients 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 anddoctors and would limit the ability of a FOB company to perform clinicaltrials. At present, one C1 inhibitor and several compounds have received approval fromFDA for the acute indication with de minimus impact on the prophylactic market,primarily due to the payor environment. Though we might see competition at somepoint in the future, we believe it would be limited. Based on the expected cash flows and value generated in the years followingboth the end of exclusivity and the potential entry of FOB competition, weconcluded that an estimated useful life of 25 years for the Cinryze productrights was appropriate. Vancocin We acquired Vancocin from Lilly in November of 2004 and determined that theidentifiable intangible assets acquired had a 25 year useful life basedconsideration of the various factors in ASC 35035 described above.Additionally, an income approach was used by an outside independent valuationexpert to determine the fair value of these assets and a 25 year period ofexpected cash flows was used in this asset valuation process. As ofDecember 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 determiningbioequivalence of generic versions of Vancocin (vancomycin hydrochloride, USP)capsules. The FDA also informed us in the same correspondence that the recentsupplemental new drug application (sNDA) for Vancocin which was approved onDecember 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 showingof a significant new use (such as a new indication) for an old antibiotic suchas Vancocin in order for such old antibiotic to be eligible for a grant ofexclusivity. FDA also indicated that it approved three abbreviated new drugapplications (ANDAs) for generic vancomycin capsules and the companies holdingthese ANDA approvals indicated that they began shipping generic vancomycinhydrochloride, USP. In June 2012, the FDA approved a fourth ANDA for genericvancomycin capsules. As a result of the actions of FDA, we performed step one of the impairment testin the first quarter of 2012 based on our current forecast (base case) of theimpact of generics on our Vancocin and vancomycin cash flows. The sum of theundiscounted cash flows exceeded the carrying amount as of March 31, 2012 byapproximately $210 million. During the third quarter of 2012, we experiencedlarger than anticipated erosion in the sales volume and net realizable price inthe Vancocin branded market and the entrance of a fourth generic competitorwhich prompted us to determine it appropriate to perform the step one of theimpairment test again as of September 30, 2012. The sum of the undiscountedcash flows exceeded the carrying amount as of September 30, 2012 byapproximately $34 million. In March 2013, the net price at which our authorized generic distributor soldgeneric vancomycin fell sharply due to pricing pressures in the genericmarketplace. This significant decline caused us to test the recoverability ofthe Vancocin intangible asset. Step one of the impairment test failed and weperformed a step two analysis. Under step two, we are required to reduce thecarrying value of the intangible asset to its estimated fair value, and as aresult have recorded an impairment of approximately $104.2 million reducing thecarrying amount of the intangible assets to approximately $7.4 million atMarch 31, 2013. The fair value of the intangible asset was estimated using anincome approach based on present value of the probability adjusted future cashflows. In determining the probability adjusted cash flows, we took intoconsideration the current and anticipated impact of the significant net pricereduction that has occurred in the generic marketplace on both net sales of ourauthorized generic and sales of branded Vancocin. Based on the revised cashflow projections, the useful life of the asset was also reduced to 3.75 yearsfrom 16.75 years as of March 31, 2013 which represents the period over which weexpect to receive substantially all of the net present value of the adjustedcash flows. In December 2013, the net price at which our authorized generic distributorsold generic vancomycin fell sharply from previously reported results whichprompted us to perform the step one of the impairment test again as ofDecember 31, 2013. We failed step one of the impairment test and performed astep two analysis. Under step two, we reduced the carrying value of theintangible asset to its estimated fair value, and as a result have recorded anadditional impairment of approximately $2.7 million at December 31, 2013. Should future events occur that cause further reductions in revenue oroperating results we would incur an additional impairment charge, which wouldbe significant relative to the carrying value of the intangible assets. Auralis and Buccolam On May 28, 2010, we acquired Auralis, a UK based specialty pharmaceuticalcompany. With the acquisition of Auralis we added one marketed product andseveral development assets to our portfolio. We recognized an intangible assetrelated to certain supply agreements for the marketed product and one of thedevelopment assets. Additionally, we recognized in-process research anddevelopment (IPR&D) assets related to the development assets which werecurrently not approved. We determined that these assets meet the criterion forseparate recognition as intangible assets and the fair value of these assetshave been determined based upon discounted cash flow models. In 2011, theEuropean Commission granted a Centralized PUMA for Buccolam, for treatment ofprolonged, acute, convulsive seizures in infants, toddlers, children andadolescents, from 3 months to less than 18 years of age. This asset waspreviously classified as an IPR&D asset. As a result of this approval we beganto amortize this asset over its estimated useful life of 10 years. The contractrights acquired are being amortized on a straight-line basis over theirestimated useful lives of 12 years. Due to the approval and launch of Buccolam, coupled with the approval andlaunch of Cinryze in Europe, we decided to alter our development andcommercialization plans for the remaining Auralis IPR&D asset. The decisionresulted in the impairment of the IPR&D asset and a portion of the AuralisContract 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 improvingglucocorticoid replacement therapy for treatment of AI. The acquisition ofDuoCort further expands our orphan disease commercial product portfolio. OnNovember 3, 2011, the EC granted European Marketing Authorization for Plenadren® (hydrocortisone, modified release tablet), an orphan drug for treatment ofadrenal insufficiency in adults, which will bring these patients their firstpharmaceutical innovation in over 50 years. We recognized an intangible assetrelated to the Plenadren product rights. The product rights acquired are beingamortized on a straight-line basis over their estimated useful lives of10 years. Amortization expense for the years ended December 31, 2013, 2012 and 2011 wasapproximately $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 byOctober 2018. During the second quarter of 2012, we recognized cumulative salesof Cinryze in excess of the $600 million threshold; accordingly, we recordedthe liability in the second quarter of 2012 with a corresponding increase togoodwill. We made this CVR payment along with certain other contingentacquisition related payments totaling approximately $92.3 million in the thirdand fourth quarters of 2012. These payments, net of related tax benefits, arereflected as an increase to goodwill of approximately $86.3 million, inaccordance with SFAS 141, Accounting for Business Combinations, which waseffective GAAP at the time of the acquisition. On November 15, 2011, we acquired DuoCort, a company focused on improvingglucocorticoid replacement therapy for treatment of AI. As a result of thisacquisition we initially recorded goodwill of approximately $7.3 million.During the third quarter of 2012, we obtained new information about certainfacts and circumstances that existed at the acquisition date related toacquired deferred tax assets. Based on this new information, in the thirdquarter of 2012 we released approximately SEK 22.8 million, or $3.5 million, ofvaluation allowance related to the deferred tax assets with a correspondingreduction of goodwill. All other changes in the carrying value of goodwillsince acquisition is attributable to foreign currency fluctuations. In May 2010, we acquired a 100% ownership interest in Auralis Limited, a UKbased specialty pharmaceutical company. As a result of this acquisition, werecorded initial goodwill of approximately $5.9 million. The change in thecarrying value of goodwill since the acquisition date is attributable toforeign currency fluctuations. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following atDecember 31, 2013 and 2012: Long-Term Debt Long-term debt as of December 31, 2013 and 2012 is summarized in the followingtable: Senior Convertible Notes On March 26, 2007, we issued $250.0 million of 2% senior convertible notes dueMarch 2017 (the senior convertible notes) in a public offering. Net proceedsfrom the issuance of the senior convertible notes were $241.8 million. Thesenior convertible notes are unsecured unsubordinated obligations and rankequally with any other unsecured and unsubordinated indebtedness. The seniorconvertible 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 onSeptember 15, 2007. The debt and equity components of our senior convertible debt securities werebifurcated and accounted for separately based on the value and related interestrate of a nonconvertible debt security with the same terms. The fair value of anonconvertible debt instrument at the original issuance date was determined tobe $148.1 million. The equity (conversion options) component of our convertibledebt securities is included in additional paid-in capital on our consolidatedbalance sheet and, accordingly, the initial carrying value of the debtsecurities was reduced by $101.9 million. Our net income for financialreporting purposes is reduced by recognizing the accretion of the reducedcarrying values of our convertible debt securities to their face amount of$250.0 million as additional noncash interest expense. Accordingly, the seniorconvertible debt securities will recognize interest expense at effective ratesof 8.0% as they are accreted to par value. The senior convertible notes are convertible into shares of our common stock atan initial conversion price of $18.87 per share. The senior convertible notesmay only be converted: (i) anytime after December 15, 2016; (ii) during thefive business-day period after any five consecutive trading day period(the measurement period) in which the price per note for each trading day ofthat measurement period was less than 98% of the product of the last reportedsale 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 calendarquarter ending June 30, 2007, if the last reported sale price of our commonstock for 20 or more trading days in a period of 30 consecutive trading daysending on the last trading day of the immediately preceding calendar quarterexceeds 130% of the applicable conversion price in effect on the last tradingday of the immediately preceding calendar quarter; or (iv) upon the occurrenceof specified corporate events. Upon conversion, holders of the seniorconvertible notes will receive shares of common stock, subject to ViroPharma'soption to irrevocably elect to settle all future conversions in cash up to theprincipal amount of the senior convertible notes, and shares for any excess. Wecan irrevocably elect this option at any time on or prior to the 35th scheduledtrading day prior to the maturity date of the senior convertible notes. Thesenior convertible notes may be required to be repaid on the occurrence ofcertain fundamental changes, as defined in the senior convertible notes. Concurrent with the issuance of the senior convertible notes, we entered intoprivately negotiated transactions, comprised of purchased call options andwarrants sold, to reduce the potential dilution of our common stock uponconversion 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 approximately13.25 million shares of its common stock at $18.87 per share from the calloption holders, equal to the number of shares of common stock that ViroPharmawould issue to the holders of the senior convertible notes upon conversion.These call options will terminate upon the earlier of the maturity dates of therelated senior convertible notes or the first day all of the related seniorconvertible notes are no longer outstanding due to conversion or otherwise.Concurrently, we sold warrants to the warrant holders to receive shares of itscommon stock at an exercise price of $24.92 per share. These warrants expireratably 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 uponconversion of the senior convertible notes in the event that the market valueper share of ViroPharma common stock at the time of exercise is greater than$18.87, which corresponds to the initial conversion price of the seniorconvertible notes, but less than $24.92 (the warrant exercise price). Thewarrant exercise price is 75.0% higher than the price per share of $14.24 ofour common stock on the pricing date. If the market price per share ofViroPharma common stock at the time of conversion of any senior convertiblenotes is above the strike price of thepurchased call options ($18.87), thepurchased call options will entitle us to receive from the counterparties inthe aggregate the same number of shares of our common stock as we would berequired to issue to the holder of the converted senior convertible notes.Additionally, if the market price of ViroPharma common stock at the time ofexercise of the sold warrants exceeds the strike price of the sold warrants($24.92), we will owe the counterparties an aggregate of approximately13.25 million shares of ViroPharma common stock. If we have insufficient sharesof common stock available for settlement of the warrants, we may issue sharesof a newly created series of preferred stock in lieu of our obligation todeliver common stock. Any such preferred stock would be convertible into 10%more shares of our common stock than the amount of common stock we wouldotherwise have been obligated to deliver under the warrants. Initially, the purchased call options and warrants sold with the termsdescribed above were based upon the $250.0 million offering, and the number ofshares we would purchase under the call option and the number of shares wewould sell under the warrants was 13.25 million, to correlate to the$250.0 million principal amount. On March 24, 2009, we repurchased, in aprivately negotiated transaction, $45.0 million in principal amount of oursenior convertible notes due March 2017 for total consideration ofapproximately $21.2 million. The repurchase represented 18% of our thenoutstanding debt and was executed at a price equal to 47% of par value.Additionally, in negotiated transactions, we sold approximately 2.38 millioncall options for approximately $1.8 million and repurchased approximately2.38 million warrants for approximately $1.5 million which terminated the calloptions and warrants that were previously entered into by us in March 2007. Werecognized a $9.1 million gain in the first quarter of 2009 as a result of thisdebt extinguishment. For tax purposes, the gain qualifies for deferral until2014 in accordance with the provisions of the American Recovery andReinvestment Act. As a result of the above negotiated sale and purchase transactions we are nowentitled 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 ViroPharmacommon stock at the time of exercise of the sold warrants exceeds the strikeprice of the sold warrants ($24.92), will owe the counterparties an aggregateof approximately 10.87 million shares of ViroPharma common stock, whichcorrelates to $205 million of convertible notes outstanding. The purchased call options and sold warrants are separate transactions enteredinto by us with the counterparties, are not part of the terms of the seniorconvertible notes, and will not affect the holders' rights under the seniorconvertible notes. Holders of the senior convertible notes will not have anyrights with respect to the purchased call options or the sold warrants. Thepurchased call options and sold warrants meet the definition of derivatives.These instruments have been determined to be indexed to our own stock and havebeen recorded in stockholders' equity in our consolidated balance sheet. Aslong as the instruments are classified in stockholders' equity they are notsubject to the mark to market provisions. As of December 31, 2013, we have accrued $1.2 million in interest payable toholders of the senior convertible notes. Debt issuance costs of $4.8 millionhave been capitalized and are being amortized over the term of the seniorconvertible notes, with an unamortized balance of $1.2 million at December 31,2013. The senior convertible notes were convertible into shares of our common stockat times during 2013 and note holders converted notes with a face value of $20thousand and we issued the holders 1,057 shares of our common stock. As of December 31, 2013, senior convertible notes representing $205.0 millionof principal debt are outstanding with a carrying value of $170.8 million and afair value of approximately $547.1 million, based on the Level 2 valuationhierarchy of the fair value measurements standard. During the first quarter of 2014, we announced that in connection with theacquisition by Shire (note 18) that we have commenced a tender offer torepurchase, at the option of each holder, any and all of the outstandingconvertible notes. In accordance with the terms of the convertible bonds, following a change ofcontrol of ViroPharma, the convertible bond holders were entitled to converttheir bonds inclusive of a make-whole premium in the form of an increase in theconversion rate, and the counterparties to the call options were accordinglyobligated to cash settle the call options. Credit Facility On September 9, 2011, we entered into a $200 million, three-year senior securedrevolving credit facility (the Credit Facility), the terms of which are setforth in a Credit Agreement dated as of September 9, 2011 (the CreditAgreement) with JPMorgan Chase Bank, N.A., as administrative agent, BMO HarrisFinancing Inc., TD Bank, N.A. and Morgan Stanley Bank, NA as co-syndicationagents and certain other lenders. The Credit Facility is available for working capital and general corporatepurposes, including acquisitions which comply with the terms of the CreditAgreement. The Credit Agreement provides separate sub-limits for letters ofcredit up to $20 million and swing line loans up to $10 million. The Credit Agreement requires us to maintain (i) a maximum senior securedleverage ratio of less than 2.00 to 1.00, (ii) a maximum total leverage ratioof less than 3.50 to 1.00, (iii) a minimum interest coverage ratio of greaterthan 3.50 to 1.00 and (iv) minimum liquidity equal to or greater than the sumof $100 million plus the aggregate amount of certain contingent considerationpayments resulting from business acquisitions payable by us within a specifiedtime period. The Credit Agreement also contains certain other usual andcustomary 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 ourdomestic subsidiaries (the Subsidiary Guarantors) and are secured bysubstantially all of our assets and the assets of the Subsidiary Guarantors.Borrowings under the Credit Facility will bear interest at an amount equal to arate calculated based on the type of borrowing and our senior secured leverageratio (as defined in the Credit Agreement) from time to time. For loans (otherthan swing line loans), we may elect to pay interest based on adjusted LIBORplus between 2.25% and 2.75% or an Alternate Base Rate (as defined in theCredit Agreement) plus between 1.25% and 1.75%. We will also pay a commitmentfee of between 35 to 45 basis points, payable quarterly, on the average dailyunused amount of the Credit Facility based on our senior secured leverage ratiofrom time to time. We have not drawn any amounts under the Credit Facility and are in compliancewith our covenants. In March 2013, we entered into Amendment No. 3 to theCredit Agreement (the Amendment). Pursuant to the Amendment, our lenders agreedto waive compliance with a specified financial covenant (the FinancialCovenant) until we notify the lenders that we are in compliance with theFinancial Covenant. During this period, noncompliance with the FinancialCovenant shall not result in a default or event of default under the CreditAgreement. Additionally, we are not permitted to request advances of funds orletters of credit under the Credit Facility and the lenders shall have noobligation to fund any Borrowing or to make any Loan or any other extension ofcredit to the Company under the Credit Agreement during this period. At December 31, 2013, $100.0 million of our cash and availability under thecredit agreement is subject to the minimum liquidity covenant (iv), describedabove. As of December 31, 2013, we have accrued $0.2 million in interest payable forthe revolver. Financing costs of approximately $1.7 million incurred toestablish the Credit Facility were deferred and are being amortized to interestexpense 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 thetermination, 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 AmendedLease) to expand our corporate headquarters. ASC 840, Leases, is theauthoritative literature related to accounting for leases. The leasearrangement involves the construction of expanded office space in which we areinvolved in the design and construction of the expanded space and have theobligation to fund the tenant improvements to the expanded structure and tolease the entire building following completion of construction. Thisarrangement is referred to as build-to suit lease. We have concluded that underthe guidance we are considered the owner of the construction project foraccounting purposes and must record a noncash construction in progress asset(CIP) and a corresponding noncash financing obligation for the constructioncosts funded by the Landlord. We began recording the CIP asset and acorresponding financing obligation during the first quarter of 2013 whenconstruction started. During the year ended December 31, 2013, we recorded CIPof approximately $5.5 million with a corresponding financing obligation. Oncethe construction is complete we will depreciate the core and shell asset andwill begin to apply a portion of the lease payments as a reduction in theprincipal of the obligation and a portion of the lease payments will bereflected 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, aprivate company based in Helsingborg, Sweden focused on improvingglucocorticoid 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 additionalpayments ranging from SEK 240 million up to SEK 860 million or approximately$37 million to $133 million, contingent on the achievement of certainmilestones. Up to SEK 160 million or approximately $25 million of thecontingent payments relate to specific regulatory milestones; and up to SEK700 million or approximately $108 million of the contingent payments arerelated to commercial milestones based on the success of the product. The following tables summarize the consideration transferred to acquire DuoCortand the amounts of identified assets acquired and liabilities assumed at theacquisition date. The consideration transferred was as follows (in thousands): The total consideration was allocated to the net assets acquired andliabilities assumed as follows (in thousands): The DuoCort contingent consideration consists of three separate contingentpayments. The first will be payable upon the regulatory approval to manufacturebulk product in the EU. The second contingent payment is based on theattainment of specified revenue targets and the third contingent payment ispayable upon regulatory approval of the product in the United States. The fair value of the first and third contingent consideration paymentsrecognized on the acquisition date was estimated by applying a risk adjusteddiscount rate to the probability adjusted contingent payments and the expectedapproval dates. The fair value of the second contingent consideration paymentrecognized on the acquisition date was estimated by applying a risk adjusteddiscount rate to the potential payments resulting from probability weightedrevenue 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 contingentconsiderations are classified as liabilities and are subject to the recognitionof subsequent changes in fair value through our results of operations. The fair value of the product rights asset has been determined using an incomeapproach based upon a discounted cash flow model. That measure is based onsignificant inputs not observable in the market, which are referred to in theguidance as Level 3 inputs. Key assumptions include a discount rate of 20.5%,the weighted average cost of capital implied by DuoCort's business enterprisevalue, and probability weighted cash flows. The fair value of inventory represents net realizable value for finished goodsless a normal profit on selling efforts. The fair value of the remaining assetsand liabilities acquired are based on the price that would be received on thesale of the asset or the price paid to transfer the liability to a marketparticipant and approximates it carrying value on the measurement date. As a result of the transaction, we recognized $7.3 million of goodwill which isnot deductible for tax purposes. The DuoCort results of operations have been included in the consolidatedstatement of operations beginning November 15, 2011. The results of operations of DuoCort since the acquisition date and had theacquisition occurred on January 1, 2011 are immaterial to our consolidatedresults of operation. We incurred approximately $1.4 million of transactioncost as part of this acquisition. Meritage Pharma, Inc. In December 2011, we entered into an exclusive development and option agreementwith Meritage Pharma, Inc. (Meritage), a private development-stage companybased in San Diego, CA focused on developing oral budesonide suspension (OBS)as a treatment for eosinophilic esophagitis (EoE). EoE is a chronic diseasethat is increasingly being diagnosed in children and adults. It ischaracterized by inflammation and accumulation of a specific type of immunecell, called an eosinophil, in the esophagus. EoE patients may have persistentor 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 millionnonrefundable payment to Meritage. Meritage will utilize the funding to conductadditional Phase 2 clinical assessment of OBS. We have an exclusive option toacquire Meritage, at our sole discretion, by providing written notice at anytime during the period from December 22, 2011 to and including the date that isthe earlier of (a) the date that is 30 business days after the later of (i) thereceipt of the final study data for the Phase 2 study and (ii) identificationof an acceptable clinical end point definition for a pivotal induction studyagreed 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. Meritagestockholders could also receive additional payments of up to $175 million, uponthe achievement of certain clinical and regulatory milestones. We have determined that Meritage is a variable interest entity (VIE), howeverbecause we do not have the power to direct the activities of Meritage that mostsignificantly impact its economic performance we are not the primarybeneficiary 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 votingrepresentation to influence the operating or financial decisions of Meritage,nor do we participate on any steering or oversight committees. Therefore, weare not required to consolidate Meritage into our consolidated financialstatements. This consolidation status could change in the future if the optionagreement is exercised, or if other changes occur in the relationship betweenMeritage 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 andnotifications 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 thecarrying value of our cost method investment. In July 2013, Meritage enrolledfifty percent (50%) of subjects planned for the Phase 2 study enrollment thussatisfying the condition of the Second Option Milestone and accordingly we madea $2.5 million milestone payment in July 2013 and increased the carrying valueof our cost method investment in July 2013. We have the option to provideMeritage 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 ifthere are no identified events or changes in circumstances that may have asignificant adverse effect on the fair value of the investment. As ofDecember 31, 2013, we were not aware of any such adverse effects, as such nofair value estimate has been prepared. The asset is recorded as an other long-term asset on our consolidated balance sheets and is amortized through otherincome (expense) in our results of operations over the expected term of theoption agreement which is expected to be December 2014. We recognizedapproximately $5.1 million and $3.8 million of amortization expense related tothis 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 rightsof 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 andmultiple oral dose safety and tolerability study in patients in 2013. Thecompany anticipates completion of enrollment in the first half of 2014.Following completion of the phase 2 study, a phase 3 study is planned. Weintend to file for Orphan Drug Designation upon review of the Phase 2 proof ofconcept data. Under the terms of the agreement, we have exclusive worldwiderights to develop and commercialize VP20629 for the treatment, management orprevention 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 upto 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 exclusiveworldwide license to use Halozyme's proprietary Enhanze™ technology, aproprietary drug delivery platform using Halozyme's recombinant humanhyaluronidase enzyme (rHuPH20) technology in combination with a C1 esteraseinhibitor. We intend to apply rHuPH20 initially to develop a novel subcutaneousformulation of Cinryze for routine prophylaxis against attacks. Under the termsof 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 2011to evaluate the safety, and pharmacokinetics and pharmacodynamics ofsubcutaneous administration of Cinryze in combination with rHuPH20. Pendingsuccessful completion of an additional series of clinical and regulatorymilestones we may make further milestone payments to Halozyme which could reachup to an additional $41 million related to HAE and up to $30 million ofadditional milestone payments for three additional indications. Additionally,we will pay an annual maintenance fee of $1 million to Halozyme until specifiedevents have occurred. Upon regulatory approval, Halozyme will receive up to a10% royalty on net sales of the combination product utilizing Cinryze andrHuPH20, depending on the existence of a valid patent claim in the country ofsale. On August 1, 2013, we announced that after discussion withrepresentatives of the Center for Biologics Evaluation and Research (CBER)division of the U.S. Food and Drug Administration, we discontinued our Phase 2study 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 allpotential indications pursuant to a Manufacturing and Distribution Agreement(Europe and ROW) between our European subsidiary, ViroPharma SPRL (VP SPRL) andSanquin (the ROW Agreement). The Excluded Territory includes (i) certaincountries with existing distributors of Cinryze, Cetor and Cetor NF namelyFrance, Ireland, the United Kingdom, Egypt, Iran, Israel, Indonesia, Turkey,Argentina and Brazil (the Third Party Distributors) and (ii) countries in whichSanquin has historically operated namely, Belgium, Finland, Luxemburg and TheNetherlands (including the Dutch Overseas Territories) (the Precedent Countriesand collectively, the Excluded Territory). In the event that any agreement witha third party distributor in the Excluded Territory is terminated, we have aright of first refusal to obtain the foregoing exclusive licenses to the C1-INHderived products with respect to such terminated country. On December 6, 2012, we entered into a first amendment to ROW Agreement. Thefirst amendment to the ROW Agreement (the First Amendment) expands ourterritory to worldwide, with the exception of all countries in North Americaand South America (other than the Dutch Overseas Territories, Argentina andBrazil) and Israel, which remain the subject of the Restated US Agreement. TheFirst Amendment also grants Sanquin the license to commercialize Cinryze incertain countries in which Sanquin has pre-existing marketing arrangements,including Belgium, Luxembourg, The Netherlands, Finland, Turkey, Indonesia, andEgypt (the Sanquin Licensed Territories). In the event that the marketingarrangements in the Sanquin Licensed Territories expire or are terminated, VPSPRL 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 toSanquin. As a result of the First Amendment, we have worldwide rights tocommercialize C1-INH products other than in the Sanquin Licensed Territories.In connection with the First Amendment, we made a payment of $1.3 million toSanquin, reflected as research and development expense in our consolidatedstatement of operations. Additionally, under the First Amendment, Sanquin agreed to withdraw its Cetorand Cebitor product from certain markets in which it is currently being sold inorder to transition to Cinryze and its future forms and formulations. Thetransition will be on a country by country basis and on a schedule agreed by VPSPRL and Sanquin to avoid supply interruptions to patients using Sanquin'sCetor and/or Cebitor products. The First Amendment also provides that in thecountries in which Sanquin is licensed to commercialize VP SPRL C1-INH product,Sanquin shall have the right to liaise with regulators to set the reimbursementprice, unless regulators require VP SPRL to do so. We and Sanquin also agreed to certain provisions restricting the sale ofcompetitive products relating to C1-INH without the other's consent. We may notdirectly or indirectly commercially exploit competitive products in ourterritory without Sanquin's consent. On a country by country basis, followingthe applicable transition date in each country, Sanquin agrees not to directlyor indirectly commercially exploit competitive products to any person anywherein the world. The First Amendment provides Sanquin with the right to sell andsupply Cetor and/or Cebitor before the transition date and VP SPRL's C1-INHproduct thereafter to a named manufacturer provided that the named manufactureruses the products solely in connection with the manufacturer's manufacture ofcertain plasma products under its own marketing authorization and corporatebrand. Other Agreements The Company has entered into various other licensing, research and otheragreements. Under these other agreements, the Company is working incollaboration with various other parties. Should any discoveries be made undersuch arrangements, the Company would be required to negotiate the licensing ofthe technology for the development of the respective discoveries. There are nosignificant funding commitments under these other agreements. Stockholder's Equity Preferred Stock The Company's Board of Directors has the authority, without action by theholders of common stock, to issue up to 5,000,000 shares of preferred stockfrom time to time in such series and with such preference and rights as it maydesignate. 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% seniorconvertible notes due 2017. On September 14, 2011, the Company's Board ofDirectors authorized the use of up to an additional $200 million to repurchaseshares of our common stock and/or our 2% senior convertible notes due 2017. OnSeptember 7, 2012, the Company's Board of Directors authorized the use of up toan additional $200 million to repurchase shares of our common stock and/or our2% Senior Convertible Notes due 2017. Purchases may be made by means of openmarket transactions, block transactions, privately negotiated purchasetransactions or other techniques from time to time. During 2012, through open market purchases, we reacquired approximately6.9 million shares at a cost of approximately $180.3 million or an averageprice of $26.20 per share and during 2011, we reacquired approximately9.2 million shares at a cost of approximately $169.7 million or an averageprice 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 vestingstock options with graduated vesting over a four year period; performance andmarket 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. Grantsunder our former stock based compensation program consisted only of timevesting 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-Scholesoption valuation model and compensation expense is recognized over theapplicable vesting period; PSUs subject to company specific performance metrics, which include bothperformance and service conditions, are based on the market value of our stockon the date of grant. Compensation expense is based upon the number of sharesexpected to vest after assessing the probability that the performance criteriawill 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 toa peer group of companies, which includes both market and service conditions,are estimated using a Monte Carlo simulation. Compensation expense is basedupon the number and value of shares expected to vest. Compensation expense isrecognized over the applicable vesting period. All compensation cost for theaward will be recognized if the requisite service period is fulfilled, even ifthe market condition is never satisfied; and, Time vesting RSUs are based on the market value of our stock on the date ofgrant. Compensation expense for time vesting RSUs is recognized over thevesting period. The vesting period for our stock awards is the requisite service periodassociated with each grant. Share-based compensation expense consisted of the following for the years endedDecember 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 andRestricted Share Plan (1995 Plan), a 2001 Equity Incentive Plan (2001 Plan) anda 2005 Stock Option and Restricted Share Plan (2005 Plan) (collectively,the Plans). In September 2005, the 1995 Plan expired and no additional grantswill be issued from this plan. The Plans were adopted by the Company's Board ofDirectors to provide eligible individuals with an opportunity to acquire orincrease an equity interest in the Company and to encourage such individuals tocontinue in the employment of the Company. In May 2008, the 2005 Plan was amended and an additional 5,000,000 shares ofcommon stock was reserved for issuance upon the exercise of stock options orthe grant of restricted shares or restricted share units. This amendment wasapproved 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 ofcommon stock was reserved for issuance upon the exercise of stock options orthe grant of restricted shares or restricted share units. This amendment wasapproved 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 underthe 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 pricenot less than the fair value of the Company's common stock on the date ofgrant. Stock options granted under the 2001 Plan can be granted at an exerciseprice that is less than the fair value of the Company's common stock at thetime of grant. Stock options granted under the 1995 Plan were granted at anexercise price not less than the fair value of the Company's common stock onthe date of grant. Stock options granted from the Plans are exercisable for aperiod 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 Plansprovide for the delegation of certain administrative powers to a committeecomprised 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 optiongrant was estimated throughout the year using the Black-Scholes option-pricingmodel using the following assumptions for the Plans: The risk free interest rate is based on the U.S. Treasury yield curve in effectat the time of grant. Volatility is based on the Company's historical stockprice using the expected life of the grant. We estimate forfeiture rates for all share-based awards and monitor stockoptions exercises and employee termination patterns in estimating theforfeiture rate. The following table lists option grant activity for the three-year period endedDecember 31, 2013: The total intrinsic value of share options exercised during the year endedDecember 31, 2013, 2012 and 2011 was approximately $62.4 million, $27.3 millionand $18.2 million, respectively. We have 8,763,816 option grants outstanding at December 31, 2013 with exerciseprices ranging from $1.84 per share to $40.45 per share and a weighted averageremaining contractual life of 6.75 years. The following table lists theoutstanding and exercisable option grants as of December 31, 2013: As of December 31, 2013, there was $42.8 million of total unrecognizedcompensation cost related to unvested share options granted under the Plans.The total grant-date fair value of shares vested during the year endedDecember 31, 2013 was $17.4 million. In connection with the acquisition by Shire, all unvested option grants vestedand became exercisable (see note 18). Performance Awards Employees receive annual grants of performance award units, or PSUs, inaddition to stock options which give the recipient the right to receive commonstock that is contingent upon achievement of specified pre-established companyperformance goals over a three year performance period. The performance goalsfor the PSUs granted, which are accounted for as equity awards, are based uponthe following performance measures: (i) our revenue growth over the performanceperiod, (ii) our adjusted net income as a percent of sales at the end of theperformance 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 performancemetrics were granted with weighted average grant date fair value of $23.37 pershare and approximately 28,000 PSUs subject to the TSR metric were granted withweighted 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 performancemetrics 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 and17,000 PSUs subject to the TSR metric were granted with weighted average grantdate fair values of $45.37 and $24.38 per share, respectively. The number ofPSUs reflected as granted represents the target number of shares that areeligible to vest subject to the attainment of the performance goals. Dependingon the outcome of these performance goals, a recipient may ultimately earn anumber 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 areissued on a one-for-one basis for each PSU earned. Participants vest in theirPSUs at the end of the performance period. The fair value of the PSUs subject to Company specific performance metrics isequal 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 Carlosimulation and utilized the following inputs and assumptions: The performance period starting price is measured as the average closing priceover the last 30 trading days prior to the performance period start. The MonteCarlo simulation model also assumed correlations of returns of the prices ofour common stock and the common stocks of the comparator group of companies andstock price volatilities of the comparator group of companies. At December 31, 2013, there was approximately $5.5 million of unrecognizedcompensation cost related to all PSUs. The following summarizes select information regarding our PSU awards as ofDecember 31, 2013: In connection with the acquisition by Shire, all outstanding PSU grants vestedand became exercisable (see note 18). Restricted Stock Awards We also grant our nonemployee directors restricted stock awards that generallyvest after one year of service. In 2013, 31,500 RSUs were granted with weightedaverage grant date fair values of $25.25 per share. In 2012 and 2011, 37,750and 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 stockaward is equal to the closing price of our common stock on the grant date. The following summarizes select information regarding our restricted stockawards as of December 31, 2013: As of December 31, 2013, there was approximately $0.2 million of unrecognizedcompensation cost related to RSUs. In connection with the acquisition by Shire, all unvested RSU grants vested andbecame exercisable (see note 18). Employee Stock Purchase Plan In 2000, the stockholders of the Company approved an employee stock purchaseplan. A total of 300,000 shares originally were available under this plan.Since inception of the plan, the stockholders of the Company have approvedamendments to the plan to increase the number of shares available for issuanceunder the plan by 600,000 shares. Under this plan, 50,873, 29,927 and29,982 shares were sold to employees during 2013, 2012 and 2011. As ofDecember 31, 2013, 319,278 shares were available for issuance under this plan. Under this plan, employees may purchase common stock through payroll deductionsin semi-annual offerings at a price equal to the lower of 85% of the closingprice on the applicable offering commencement date or 85% of the closing priceon the applicable offering termination date. Since the total payroll deductionsfrom the plan period are used to purchase shares at the end of the offeringperiod, the number of shares ultimately purchased by the participants isvariable based upon the purchase price. Shares issued under the employee stockpurchase plan are new shares. The plan qualifies under Section 423 of theInternal Revenue Code. In November 2012, the plan was amended to revise Plan Period One to May 1through October 31 and to revise Plan period Two to November 1 through April 30along with minor administrative changes. The plan amendments are effectiveJanuary 1, 2013 and provide an Initial Offering Period from January 1, 2013through 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 thefollowing assumptions: For the Initial Offering Period in 2013, the fair value of $60,700 wasestimated 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 valuewas 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 theType B model with a risk free interest rate of 0.08%, volatility of 28.00% andan expected option life of 0.50 years. This fair value was amortized over thesix month period ending October 31, 2013. For Plan Period Two in 2013, no shares were sold to employees. The fair valueof approximately $73,500 was estimated using the Type B model with a risk freeinterest rate of 0.08%, volatility of 44.6% and an expected option life of 0.50years. This fair value is being amortized over the six month period endingApril 30, 2014. In connection with the Shire acquisition, all outstanding employee sharepurchases 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 tablesummarizes the components of income (loss) before income taxes and theprovision for income taxes: For the years ended December 31, 2013, 2012 and 2011, the following tablereconciles the federal statutory income tax rate to the effective income taxrate: In 2013, 2012 and 2011, respectively, $16.6 million, $7.1 million and$3.2 million related to current stock option tax benefits were allocateddirectly to stockholders' equity. The following table summarizes the components of deferred income tax assets andliabilities: At December 31, 2013 and 2012, deferred tax assets and liabilities wereclassified 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 taxassets relating to certain net operating loss carryforwards, valuationallowances had been established in prior years to reduce deferred tax assets toa level that was more likely than not to be realized. Because of a change instate tax law, it is now more likely than not that the net operating losscarryforward will be realized and the valuation allowance has been removed. Therealization of certain state contribution carryforwards, however, is not morelikely than not and valuation allowances have been established for suchcarryforwards. Realization of the remaining net deferred tax assets will dependon the generation of sufficient taxable income in the appropriate jurisdiction,the reversal of deferred tax liabilities, tax planning strategies and otherfactors prior to the expiration date of the carryforwards. A change in theestimates used to make this determination could require a reduction in deferredtax assets if they are no longer considered realizable. As of December 31, 2013, our foreign subsidiaries have incurred cumulativelosses and consequently no deferred tax liability has been established for anyfuture distribution of funds from foreign subsidiaries. The following table summarizes carryforwards of net operating losses andcharitable contributions as of December 31, 2013. At December 31, 2013 and 2012, the Company had no gross unrecognized taxbenefits. The Company does not expect any material increase in its grossunrecognized tax benefits during the next twelve months. The Company and its domestic subsidiaries file consolidated income tax returnsin the U.S. and certain states. In addition, separate income tax returns arefiled in other states. The Company's foreign subsidiaries file separate incometax returns in the foreign jurisdictions in which they are located. Our policy is to record interest and penalties related to tax matters in incometax expense. Our last U.S. tax examination for 2008 concluded in the firstquarter of 2011 with no material adjustments. We are currently underexamination in a foreign tax jurisdiction and various state income tax returnsare also currently under examination. At this time, we do not believe that theresults of these examinations will have a material impact on our consolidatedfinancial statements. Accumulated Other Comprehensive Income (Loss) The following table presents the changes in the components of accumulated othercomprehensive income (loss): Amounts are net of tax. Fair Value Measurement Valuation Hierarchy - GAAP establishes a valuation hierarchy for disclosure ofthe inputs to valuation used to measure fair value. This hierarchy prioritizesthe inputs into three broad levels as follows. Level 1 inputs are quoted prices(unadjusted) in active markets for identical assets or liabilities. Level 2inputs are quoted prices for similar assets and liabilities in active marketsor inputs that are observable for the asset or liability, either directly orindirectly through market corroboration, for substantially the full term of thefinancial instrument. Level 3 inputs are unobservable inputs based on our ownassumptions used to measure assets and liabilities at fair value. A financialasset or liability's classification within the hierarchy is determined based onthe lowest level input that is significant to the fair value measurement. The following tables provide the assets and liabilities carried at fair valuemeasured on a recurring basis as of December 31, 2013 and 2012: The following table provides a rollforward of liabilities measured usingLevel 3 inputs (in thousands): Valuation Techniques - Cash and cash equivalents and short-term investments aremeasured at fair value using quoted market prices and are classified withinLevel 1 of the valuation hierarchy. There were no changes in valuationtechniques during the year ended December 31, 2013. In the fourth quarter of 2011, we recognized contingent considerationliabilities related to our acquisition of DuoCort. The fair values of thecontingent consideration is measured using significant inputs not observable inthe market, which are referred to in the guidance as Level 3 inputs. Thecontingent consideration payments are classified as liabilities and are subjectto the recognition of subsequent changes in fair value through our results ofoperations in other operating expenses. The fair value of the contingent consideration payments related to regulatoryapprovals, is estimated by applying risk adjusted discount rates, 13% and20.3%, to the probability adjusted contingent payments and the expectedapproval dates. The fair value of the contingent consideration payment relatedto the attainment of future revenue targets is estimated by applying a riskadjusted discount rate, 16%, to the potential payments resulting fromprobability weighted revenue projections and expected revenue target attainmentdates. These fair value estimates are most sensitive to changes in theprobability of regulatory approvals or the probability of the achievement ofthe revenue targets. There were no changes in the valuation techniques during the period and therewere no transfers into or out of Levels 1 and 2. Our 2% senior convertible notes due March 2017 are measured at amortized costin our consolidated balance sheets and not fair value. The principal balanceoutstanding 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 theLevel 2 valuation hierarchy of the fair value measurements standard. We believe that the fair values of our other financial instruments approximatetheir reported carrying amounts. 401(k) Employee Savings Plan The Company's 401(k) Employee Savings Plan (the 401(k) Plan) is available toall employees meeting certain eligibility criteria. The 401(k) Plan permitsparticipants to contribute up to 92% of their compensation not to exceed thelimits established by the Internal Revenue Code. Participants are always fullyvested in their contributions. The Company matches 50% of the first 6% ofparticipating employee contributions. The Company contributed approximately$2.5 million, $2.0 million and $0.9 million to the 401(k) Plan in each of theyears ended December 31, 2013, 2012 and 2011, respectively. The Company'scontributions are made in cash. The Company's common stock is not an investmentoption available to participants in the 401(k) Plan. In connection with the Shire acquisition (note 18), the Employee Savings Planwas 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 to505,000 liters of plasma per year in 2015 through 2017 from our suppliers whichequates to commitments in the range of approximately $65 million to $95 millionper year. Additionally, we are required to purchase a minimum number of unitsthat total approximately $38 million per year from our third party tollmanufacturers during 2014 and 2015. Our future minimum contractual obligations and commercial commitments atDecember 31, 2013 are as follows (in thousands): We have severance agreements for certain employees and change of controlagreements for executive officers and certain other employees. Under theseverance agreements, certain employees may be provided separation benefitsfrom us if they are involuntarily separated from employment. Under our changeof control agreements, certain employees are provided separation benefits ifthey are either terminated or resign for good reason from ViroPharma within12 months from a change of control. We also have a general change of controlseverance plan covering our remaining employees that provide for severancebenefits based on length of service and age if they are terminated or resignfor good reason within 24 months from a change of control. These agreementswere invoked with consummation of the acquisition of ViroPharma by Shire in2014 (note 18). In November 2011, we acquired a 100% ownership interest in DuoCort Pharma AB, aprivate company based in Helsingborg, Sweden focused on improvingglucocorticoid replacement therapy for treatment of AI. We paid approximately213 million Swedish Krona (SEK) or approximately $32.1 million in upfrontconsideration. In connection with the acquisition, we have also agreed to makeadditional payments ranging from SEK 240 million up to SEK 860 million orapproximately $37 million to $133 million, contingent on the achievement ofcertain milestones. Up to SEK 160 million or approximately $25 million of thecontingent payments relate to specific regulatory milestones; and up to SEK700 million or approximately $109 million of the contingent payments arerelated to commercial milestones based on the success of the product. Meritage Pharma, Inc. In December 2011, we entered into an exclusive development and option agreementwith Meritage Pharma, Inc. (Meritage), a private development-stage companybased in San Diego, CA focused on developing OBS as a treatment foreosinophilic esophagitis (EoE). EoE is a chronic disease that is increasinglybeing diagnosed in children and adults. It is characterized by inflammation andaccumulation of a specific type of immune cell, called an eosinophil, in theesophagus. EoE patients may have persistent or relapsing symptoms, whichinclude 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 millionnonrefundable payment to Meritage. Meritage will utilize the funding to conductadditional Phase 2 clinical assessment of OBS. In connection with thedevelopment and option agreement, we have an exclusive option to acquireMeritage, at our sole discretion. If we exercise this option, we have agreed topay $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 regulatorymilestones. Intellect Neurosciences, Inc. License Agreement In September 2011, we entered into a license agreement for the worldwide rightsof 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-frontlicensing fee. In connection with the license agreement, we may pay additionalmilestones up to $120 million based upon defined events. We will also pay atiered royalty of up to a maximum percentage of low teens, based on annual netsales. Halozyme Therapeutics License Agreement In May 2011, Halozyme granted us an exclusive worldwide license to useHalozyme's proprietary Enhanze™ technology, a proprietary drug deliveryplatform using Halozyme's recombinant human hyaluronidase enzyme (rHuPH20)technology in combination with a C1 esterase inhibitor. Under the terms of thelicense agreement, we paid Halozyme an initial upfront payment of $9 million.In the fourth quarter of 2011, we made a milestone payment of $3 millionrelated to the initiation of a Phase 2 study begun in September 2011 toevaluate the safety, and pharmacokinetics and pharmacodynamics of subcutaneousadministration of Cinryze in combination with rHuPH20. In connection with thelicense agreement, we may make further milestone payments to Halozyme whichcould 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 Halozymeuntil specified events have occurred. Upon regulatory approval, Halozyme willreceive up to a 10% royalty on net sales of the combination product utilizingCinryze and rHuPH20, depending on the existence of a valid patent claim in thecountry of sale. On August 1, 2013, we announced that after discussion withrepresentatives of the Center for Biologics Evaluation and Research (CBER)division of the U.S. Food and Drug Administration, we are going to discontinueour Phase 2 study of rHuPH20 technology in combination with a C1 esteraseinhibitor. Other Agreements The Company has entered into various other licensing, research and otheragreements. Under these other agreements, the Company is working incollaboration with various other parties. Should any discoveries be made undersuch arrangements, the Company would be required to negotiate the licensing ofthe technology for the development of the respective discoveries. There are nosignificant funding commitments under these other agreements. Litigation and Claims On May 17, 2012, a class action complaint was filed in the United StatesDistrict Court for the Eastern District of Pennsylvania naming as defendantsViroPharma Incorporated and Vincent J. Milano, who resigned as ViroPharmaIncorporated's President and Chief Executive Officer upon completion of theShire acquisition of ViroPharma (see note 18). The complaint alleges, amongother things, possible securities laws violations by the defendants inconnection with certain statements made by the defendants related to theCompany's Vancocin product. On October 19, 2012, the complaint was amended toinclude additional officers of the Company as named defendants and allegeadditional information as the basis for the claim. The Company has moved todismiss the complaint and an oral argument was held on June 10, 2013, but nodecision has been issued. The defendants believe that the allegations in theclass action complaint are without merit and intend to defend the lawsuitvigorously; however, there can be no assurance regarding the ultimate outcomeof 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 methodsof competition with respect to Vancocin. On August 3, 2012, we received a CivilInvestigative Demand from the FTC requesting additional information related tothis matter. The existence of an investigation does not indicate that the FTChas concluded that we have violated the law, and we do not believe that we haveengaged in unfair methods of competition with respect to Vancocin. We intend tocontinue to cooperate with the FTC investigation; however, at this time wecannot assess potential outcomes of this investigation. From time to time we are a party to litigation in the ordinary course of ourbusiness and may become a party to additional litigation in the future asseveral law firms have issued press releases indicating that they arecommencing investigations concerning whether the Company and certain of itsofficers and directors have violated laws. We do not believe these matters,even if adversely adjudicated or settled, would have a material adverse effecton our financial condition, results of operations or cash flows. Subsequent Events On November 11, 2013, Shire plc and ViroPharma Incorporated announced thattheir Boards of Directors had unanimously approved, and the companies enteredinto, a merger agreement pursuant to which Shire would acquire all theoutstanding shares of ViroPharma for $50 per share in cash, for a totalconsideration of approximately $4.2 billion. On January 24, 2014, Shire plc announced the successful completion of thetender offer for all of the outstanding shares of ViroPharma. Upon closing of the acquisition, all ViroPharma share-based compensation awardsvested and became exercisable and ViroPharma paid advisors approximately$40.5 million in success and legal fees of which approximately $5.2 million isrecorded in 2013. In March 2014, during a routine inspection by the Medicines and HealthcareProducts Regulatory Agency (MHRA) a potential risk of cross-contamination ofBuccolam with another drug was observed at our contract manufacturer. Buccolamis our drug product for the treatment of prolonged, acute convulsive seizuresin 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, Swedenand Norway. Based on this MHRA observation, manufacturing activities at thecontract manufacturer were suspended and a comprehensive risk assessment toassess the potential risk of cross-contamination was conducted. The outcome ofthat risk assessment was that the risk of contamination of Buccolam with theother drug in question was considered to be very low. A patient safetyassessment by ViroPharma's medical group has determined that based on themanufacturer's risk assessment, the information reviewed and data collected,the risk of patient safety is also very low and no contamination was found. Inthe near term, the plan is to have Buccolam manufactured at a different site ofthe contract manufacturer, where no other products are manufactured. As of April 29, 2014, continued supply of Buccolam in the UK, Ireland ,Swedenand Denmark is allowed based on their assessment that Buccolam is a criticalmedicine. Certain countries continue to evaluate whether a recall of Buccolamis necessary. As of April 29, 2014, Italy, France, Germany and Spain haveinitiated recalls of the product. For the year ended December 31, 2013, NetSales of Buccolam in Italy, France, Germany and Spain totaled approximately$4.1 million. Total Net Sales of Buccolam for the year ended December 31, 2013were $13.3 million. Currently, it is expected that pharmacies returningproduct as a result of the recall will receive credit notes equal to the valuethey paid at the time of order. The financial statement impact of the recallin the countries who have initiated the recall process (Italy, France, Germanyand Spain) will be in an amount less than 2013 net sales, as product includedin sales for the year ended December 31, 2013 have been consumed by patientsand recalls in these countries extend only to product held by parties otherthan patients. Buccolam inventory included in the consolidated Balance Sheetas of December 31, 2013 totaled approximately $4 million. Management continuesto evaluate inventory on hand as of December 31, 2013, and expects to be ableto use a material portion of the inventory in countries who are not undergoinga recall. The financial statement impact of the recall is not expected to be material tothe consolidated financial position, results of operations or operating cashflows of ViroPharma Inc.