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BIOTA PHARMACEUTICALS, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[September 30, 2014]

BIOTA PHARMACEUTICALS, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) You should read this discussion together with the audited financial statements, related notes and other financial information included elsewhere in this Form 10-K. The following discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under "Risk Factors," "Special Note on Forward-Looking Statements" and elsewhere in this Form 10-K. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements.



References to "we," "us," and "our" refer to Biota Pharmaceuticals, Inc. and its consolidated subsidiaries. References to "Notes" refer to the Notes to Consolidated Financial Statements included herein (refer to Item 8).

47 -------------------------------------------------------------------------------- Overview We are currently focused on developing oral, small molecule compounds to treat a number of respiratory-related viral infections. Our most advanced clinical-stage program is laninamivir octanoate, a long-acting neuraminidase inhibitor ("NI") that we are developing for the treatment of influenza A and B. On August 1, 2014 we reported top-line safety and efficacy results from a randomized, double-blind, placebo-controlled, parallel-arm Phase 2 clinical trial comparing the safety and efficacy of a 40 mg and 80 mg dose of laninamivir octanoate to placebo. We refer to this trial as IGLOO. As compared to placebo, neither the 40 mg nor the 80 mg cohort achieved a statistically significant reduction in the median time to alleviation of influenza symptoms, the primary endpoint, as measured by the Flu-iiQTM patient-recorded outcome questionnaire. Certain important secondary endpoints, including quantitative viral shedding, and secondary bacterial infections, as well as the time to alleviation of influenza symptoms for a number of subcomponents, did achieve statistically significant results for laninamivir octanoate treated cohorts compared to placebo. We have not received the full data set from this trial and anticipate continuing to assess this additional safety and efficacy data when received.


We are also developing BTA-798, also known as vapendavir, which is in Phase 2 for the treatment of human rhinovirus ("HRV") infections in patients with moderate to severe asthma. We have successfully completed two Phase 2 trials of vapendavir to-date and recently completed additional Phase 1bioavailability and drug-drug interaction studies in healthy volunteers that support its continued development.

In addition to these Phase 2 clinical-stage development programs, we are also developing orally bioavailable F and non-F protein compounds for the treatment of RSV infections in children, the elderly and immune-compromised patients. We are currently conducting IND-enabling studies with BTA-C585, the lead compound from our F-protein inhibitor program.

We previously developed zanamivir, a NI that is marketed worldwide by GSK as Relenza®, for the prevention and treatment of influenza A and B. GSK markets Relenza® pursuant to a royalty-bearing research and license agreement we entered into with it in 1990. In 2003, we entered into a collaboration and license agreement with Daiichi Sankyo, under which each party cross-licensed its intellectual property related to second-generation, long-acting NI's, including FLUNET and laninamivir octanoate. In 2009, we entered into a commercialization agreement with Daiichi Sankyo that provided it with an exclusive license to commercialize laninamivir octanoate in Japan and entitled us to a royalty on those net sales. Laninamivir octanoate, which is marketed in Japan by Daiichi Sankyo as Inavir®, was approved for sale by the Japanese Ministry of Health and Welfare for the treatment of influenza A and B in adults and children in September 2010 and for the prevention of influenza A and B in December 2013, respectively. In 2009, we filed an Investigational New Drug application ("IND") with the United States Food and Drug Administration ("FDA") to develop laninamivir octanoate in the U.S.

In March 2011, we were awarded a contract from U.S. Office of Biomedical Advanced Research and Development Authority ("BARDA") designed to provide up to $231 million in support of the development of and submission for a New Drug Application ("NDA") of laninamivir octanoate for the treatment of influenza A and B infections in the U.S. On April 23, 2014 the U.S. Department of Health and Human Services ("HHS") office of the Assistant Secretary for Preparedness and Response ("ASPR") and BARDA issued us a Stop Work Order, indicating that we should discontinue work on a number of activities under the contract pending a decision regarding the outcome of an In-Process Review ("IPR") of the contract.

On May 7, 2014 ASPR/BARDA further notified us of its decision to terminate this contract for the convenience of the U.S. Government. We continue to work with ASPR/BARDA to close out this contract, which involves completing several clinical trials, finalizing invoices and billings, determining the nature and extent of any equitable adjustments, and negotiating a final termination settlement.

Although several of our influenza product candidates have been successfully developed and commercialized to-date by other larger pharmaceutical companies under license, collaboration or commercialization agreements with us, we have not independently developed or received regulatory approval for any product candidate, and we do not currently have any sales, marketing or commercial capabilities. Therefore, it is possible that we may not successfully derive any significant product revenues from any product candidates that we are developing now, or may develop in the future. We expect to incur losses for the foreseeable future as we intend to support the clinical and preclinical development of our product candidates. Also, due to the recent termination of our contract with BARDA, we anticipate that our revenue from service and cost of revenue will decline substantially in the future as compared to recent historical levels.

48-------------------------------------------------------------------------------- We plan to continue to finance our operations with (i) our existing cash, cash equivalents, and short-term and long-term investments (ii) proceeds from existing or potential future royalty-bearing licenses, government contracts, or collaborative research and development arrangements, (iii) future equity and/or debt financings, or (iv) other financing arrangements. Our ability to continue to support our operations is dependent, in the near-term, upon our successful management of our cash resources, our continuing to receive royalty revenue under our existing licenses, our ability to negotiate appropriate reimbursements from BARDA for costs incurred under our prior contract with it and for final termination settlement, our ability to enter into future collaboration, license or commercialization agreements, the successful development of our product candidates, our ability to execute future financings, if needed, and ultimately, upon the approval of our products for sale and achievement of positive cash flows from operations on a consistent basis. There can be no assurance that additional capital or funds will be available on terms acceptable to us, if at all, or that we will be able to enter into collaboration, license or commercialization agreements in the future, or that we will ever generate significant product revenue and become operationally profitable on a consistent basis.

Recent Corporate Developments Changes to the Company's Board and Management - On September 26, 2014, we announced a number of changes to our board of directors and management structure. The board has appointed Joseph M. Patti, PhD to the position of President and Chief Executive Officer, replacing Russell H. Plumb, who has been appointed Executive Chairman of the Board of Directors and will continue to have certain ongoing responsibilities with the Company. James Fox is resigning as Chairman of the Board of Directors, but will remain on the board as its Lead Director. These changes will become effective as of October 1, 2014.

Corporate Strategy - On September 26, 2014 we announced that, based on a strategic review of the Company, our assets and our prospects, our Board of Directors has adopted a near-term strategic and operating plan, summarized as follows: (i) align internal overhead costs with anticipated royalty revenues; (ii) support the development of the our vapendavir and RSV programs (iii) proactively consider a range of corporate development or other strategic transactions that can complement our pipeline and enhance the creation of shareholder value, and (iv) discuss the Phase 2 IGLOO trial results with the FDA and work in concert with Daiichi Sankyo, our partner on LANI, to out-license the rights to the LANI program outside of Japan.

Relenza® - On September 26, 2014, we announced that GSK has verified that we will continue to receive royalties on the net sales of Relenza® in the U.S.

beyond December 2014 to the extent that U.S. Patent Application No. 08/737,141 remains pending. On August 25, 2014 GSK filed an appeal to the United States Patent Trial Appeal Board in relation to this patent application. At this time, we cannot determine the duration or the outcome of this appeal process or how long this patent application will remain pending. If patent claims are ultimately issued, we expect that we would be eligible to receive royalties from net sales of Relenza® in the U.S. for an additional 17 years from the date of allowance.

Respiratory Syncytial Virus ("RSV") Program - On September 8, 2014, we presented preclinical data on BTA-C585, an oral small molecule F-protein inhibitor, at the 54th Interscience Conference on Antimicrobial Agents and Chemotherapy ("ICAAC") Meeting in Washington, DC. Data presented at ICAAC included the results from a number of in vivo studies designed to assess the antiviral activity of BTA-C585 prior to and during experimental RSV infection in a cotton rat model, which demonstrated a dose-dependent decrease in virus titers in lung tissue.

Similarly, a highly significant dose-dependent decrease in RSV mRNA in lung tissue was also observed in the cotton rat model. Further, preliminary, non-clinical oral, single and multiple-dose data from several animal toxicology studies indicated that BTA-C585 was highly bioavailable and well tolerated. We have initiated IND-enabling studies with BTA-C585 and subject to the successful completion of these studies, we believe we can be in position to file an IND and initiate Phase 1 clinical trials in mid-2015.

Vapendavir - On September 26, 2014 we announced that we have completed enrollment in a bioavailability study designed to establish the systemic exposure profile of a single dose of a vapendavir free-base tablet formulation compared to a single dose of an existing capsule phosphate salt formulation, which was the formulation used in previous clinical trials of vapendavir. We plan to conduct additional formulation activities on a free-base formulation to further improve its characteristics. We filed a patent application for this free-base formulation in 2014 and if issued, this patent would expire in 2034, without extensions. We have also recently completed enrollment in a drug-drug interaction study in 24 healthy volunteers to assess the effect of vapendavir on the pharmacokinetic profile of midazolam, a CYP3A4 substrate. The results of the study confirmed both vapendavir's pharmacokinetic profile established in prior studies, and that vapendavir is a weak to moderate inducer of CYP3A4, which suggests that vapendavir can be used to treat asthma and COPD patients receiving multiple background medications. In both of these Phase 1 studies vapendavir was well tolerated and there were no untoward safety trends.

49 -------------------------------------------------------------------------------- We plan to initiate a randomized, double-blind, placebo-controlled dose-ranging Phase 2 trial of vapendavir in moderate and severe asthmatic patients at risk of loss of asthma control due to presumptive HRV infection in the first quarter of 2015. The planned Phase 2 trial is expected be conducted at approximately 60 sites across six to eight countries in North America and Central Europe, with anticipated enrollment being targeted at approximately 375 randomized patients.

The planned primary endpoint is the Least Square ("LS") mean change from baseline to Study Day 14 in ACQ-6 total score. Planned secondary endpoints include the measurement of asthma exacerbations, changes in lung function, virology outcomes and effects on symptoms of HRV infection. ACQ-6 is a validated tool designed to assess asthma control and utilizes both patient reported outcomes and forced expiratory volume in 1 second (FEV1). The primary efficacy analysis population will be the ITT-infected population, defined as all subjects with confirmed HRV infection who receive a study treatment. We are also considering a Phase 2a HRV challenge study with vapendavir in patients with chronic obstructive pulmonary disease ("COPD").

Laninamivir Octanoate - On August 1, 2014, we announced top-line data from a randomized, double-blind, placebo-controlled, parallel-arm Phase 2 clinical trial comparing the safety and efficacy of 40 mg and 80 mg doses of laninamivir octanoate ("LANI") with placebo. We refer to this trial as "IGLOO". The primary endpoint of IGLOO was the difference in the median time to alleviation (reported to be mild or absent for greater than 24 hours) of all seven influenza symptoms (headache, feeling feverish, body aches and pains, fatigue, cough, sore throat and nasal congestion) plus fever. Symptom data were collected through the influenza intensity domain of the influenza intensity and impact Flu-iiQTM questionnaire. As compared to placebo, neither the 40 mg nor the 80 mg cohort achieved a statistically significant difference in the median time to alleviation of all seven influenza symptoms plus fever. The median time to alleviation of the seven influenza symptoms plus fever was 102.3 hours for the 40 mg cohort and 103.2 hours for the 80 mg cohort, as compared to 104.1 hours for the placebo cohort.

Although the 40 mg or 80 mg LANI cohorts did not achieve a statistically significant difference for the primary endpoint, notable effects were seen in individual symptoms, the sub-set of systemic symptoms (headache, feeling feverish, body aches and pains, and fatigue) and a number of secondary endpoints. Subjects in the 40 mg cohort reported alleviation of all four systemic symptoms significantly earlier than placebo (median time 58 hours and 72 hours, respectively, p=0.007). Patients in the 40 mg cohort also reported a significant reduction in the number of days in which all seven symptoms were severe (p=0.02) and in the number of secondary bacterial infections (p=0.013) as compared to placebo. A statistically significant proportion of patients in both the 40 mg (p=0.002) and 80 mg (p=0.02) cohorts were influenza culture negative on Day 3 of the study as compared to placebo. In addition, patients in the 40 mg (p<0.001) cohort also demonstrated a significant reduction in viral shedding on Day 3 of the study compared to placebo as quantified by qRT-PCR. The nature and extent of adverse events were similar in the three cohorts, with diarrhea (3.1% vs. 0.9%), headache (1.4% vs. 0.5%), gastritis (1.4% vs. 0%), urinary tract infection (1.4% vs. 0%), and sinusitis (1.2% vs. 0.9%) being the most common adverse events that occurred more frequently in the LANI treatment cohorts as compared to placebo. The incidence of serious adverse events was low and balanced across the three cohorts.

We are in the process of completing an analysis of the full safety, pharmacokinetic, and Flu-iiQTM data from this trial. We intend to complete these analyses and discuss the results of this trial with the FDA to determine the appropriate primary endpoint for, and which patient reported outcome tools would be acceptable for use in, prospective registration trials of laninamivir octanoate to treat uncomplicated influenza.

Restructuring of Operations - On June 2, 2014, we announced that following the termination of our contract with BARDA and the completion of an operational review, our Board of Directors adopted a plan to restructure our operations.

Specifically, we plan to reduce our workforce to approximately 20 employees by March 2015 and close our Melbourne, Australia facility by June 30, 2015. We anticipate recording an estimated total charge of approximately $5.0 to $5.5 million related to this restructuring plan, a portion of which was recorded in fiscal 2014. Upon our completion of this plan, we anticipate that our ongoing internal research and development and general and administrative overhead costs, excluding the direct external costs to advance the development of its pipeline, will be approximately $9-$10 million per year.

BARDA- On April 23, 2014, we announced that we were notified by the HHS office of ASPR and BARDA that pending a decision regarding the outcome of an IPR of our contract for the development of LANI, ASPR/BARDA had issued a Stop-Work Order notifying us to discontinue work on a number of activities that would no longer be reimbursed under the contract. On May 7, 2014, and based upon the results of the IPR, HHS/ASPR/BARDA notified us of its decision to terminate the contract for the convenience of the U.S. Government. Certain ongoing activities at the time of termination were excluded from the termination-for-convenience notice.

50-------------------------------------------------------------------------------- We have been and continue to work with ASPR/BARDA to close out this contract, which involves completing several clinical trials, finalizing separate invoices and billings for those activities undertaken prior to and after the termination date, determining the nature and extent of any equitable adjustments for costs incurred after the termination date, and negotiating a final termination settlement. As of June 30, 2014, we had $17.8 million in accounts receivable due from BARDA, which does not include $3.7 million of contract service revenue and accounts receivable related to amounts that we believe we are entitled to be reimbursed for under our terminated contract with BARDA and pursuant to applicable government regulations, but for which we potentially may not be fully reimbursed. At this time we cannot determine when and to what extent our invoices will be approved and reimbursed by, or when a final termination settlement may be finalized with, BARDA, or what the final financial outcome may be.

Financial Operations Overview Revenue. We have historically generated revenue primarily from royalty payments, license fees, milestone payments, payments for services performed pursuant to contracts, such as the recently terminated BARDA contract, and certain early-stage research and development activities pursuant to collaborations with other entities. Revenues are earned when the underlying service is rendered and all contingencies have been satisfied. Revenue for royalties is recognized when the net sales of the underlying product by the relevant third party, including actual or estimated returns within the royalty period based on agreement, are determinable. In 2015, we anticipate revenue from services to decrease substantially due to the termination of our contract with BARDA for the clinical advancement of laninamivir octanoate, and we expect our royalty revenues will be lower than in 2014, excluding any potential stockpiling orders. Further, the Relenza® patents are scheduled to expire in the U.S. in December 2014 and in Australia in May 2015. However, GSK has recently verified that we will continue to be eligible to receive royalties on the net sales of Relenza® in the U.S.

beyond December 2014 to the extent that U.S. Patent Application No. 08/737,141 remains pending. On August 25, 2014, GSK filed an appeal to the United States Patent Trial Appeal Board in relation to this patent application. We are unable at this time to determine the duration or the outcome of this appeal process, or how long this patent application will remain pending, but anticipate that there is a reasonable likelihood that we will continue to receive royalty revenue from net sales of Relenza® in the U.S. during our 2015 fiscal year.

Cost of Revenue. Cost of revenue represents expenses incurred by us in performing services and activities pursuant to government contracts or grants for which we record related revenue and expense on the gross basis of accounting. Cost of revenue expense, the vast majority of which relates to the BARDA contract, includes, but is not limited to, the cost of third-party service providers incurred in connection with conducting external preclinical studies and treating patients enrolled in clinical trials and monitoring, accumulating and evaluating the related clinical data; salaries and personnel-related expenses for our internal staff allocated to a contract or grant, including benefits; and, the cost to develop, formulate and manufacture product candidates directly allocated to the specific contract. cost of Revenue expenses are expensed as incurred. In 2015, we expect our cost of revenue to decrease from 2014 levels due to the termination of our contract with BARDA for the clinical advancement of laninamivir octanoate.

Research and Development Expense. Research and development expense generally includes the cost of activities associated with the discovery, preclinical development, and clinical development of our product candidates other than those captured under Cost of revenue. These costs include, but are not limited to, fees paid to third-party service providers in connection with conducting external preclinical studies and treating patients enrolled in clinical trials and monitoring, accumulating and evaluating the related clinical data; salaries and personnel-related expenses for our internal staff, including benefits and share-based compensation; the cost to develop, formulate and manufacture product candidates; legal fees associated with patents and intellectual property related to our product candidates; research consulting fees; license expenses and sponsored research fees paid to third parties; and specialized information systems, depreciation and laboratory facility costs. Research and development expenses are expensed as incurred.

We anticipate that our research and development expense will increase in 2015, as compared to 2014, based on our plans to advance the clinical development of vapendavir into a Phase 2 clinical trial in patients with moderate and severe asthma with a presumptive HRV infection, and the advancement of our RSV compound, BTA-C585 into IND-enabling preclinical studies. Due to the early stage nature of our programs, our future research and development expense may be highly variable in future periods depending on the results of these activities.

From time-to-time, we will make determinations as to how much funding or resources to direct to these programs in response to their scientific, clinical and regulatory status, anticipated market opportunity and the availability of capital to fund our programs.

51-------------------------------------------------------------------------------- A discussion of the risks and uncertainties associated with the development of our existing or future product candidates, is set forth in the "Risk Factors" section of this Form 10-K.

General and Administrative Expense. General and administrative expense reflects the costs incurred to manage and support our research and development activities, operations, contracts and grants, and status as a publicly-traded company. General and administrative expense consists primarily of salaries and personnel-related expenses, including share-based compensation for personnel in executive, finance, accounting, information technology, business development and human resources functions. Other significant costs include professional fees for legal, auditing, tax, and consulting services, insurance premiums, other expenses incurred as a result of being a company that is publicly traded, and depreciation and facility expenses. In 2015, we expect our general and administrative expense to decrease from our 2014 levels as result of our restructuring plan, which includes a significant reduction in personnel, the consolidation of all corporate functions into our U.S. head office, and the closure of our Melbourne, Australia facility.

Foreign Exchange (Gain) or Loss. Foreign exchange (gain) or loss primarily relates to remeasurement of transactions denominated in a currency other than the functional currency that the financial records are maintained per ASC 830, Foreign Currency Matters.

Other Income (Expense). Other income (expense) has historically consisted of the proceeds from the gain or loss on the disposal of equipment, research and development tax grants and interest income. Interest income consists of interest earned on our cash, cash equivalents, and short-term and long-term investments.

Critical Accounting Policies and Estimates This discussion and analysis of our current financial condition and historical results of operations are based on our audited financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP"). The preparation of our financial statements requires us to make estimates and judgments with respect to the selection and application of accounting policies that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities.

We believe the following critical accounting policies are important in understanding our financial statements and operating results.

Use of Estimates. The preparation of our financial statements in conformance with GAAP requires us to make estimates and judgments with respect to the selection and application of accounting policies that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. We base our estimates on historical experience, current economic and industry conditions, and various other factors that we believe to be reasonable at the time, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. Actual future results may differ from these estimates under different assumptions or conditions.

Revenue Recognition. We recognize revenue as we perform services or fulfill contractual obligations under licensing and other collaborative research and development agreements. Revenue from royalties is recognized when the net sales of the underlying product by the relevant third-party licensee, including actual or estimated returns within the royalty period based on agreement, are determinable. Revenue from services performed pursuant to a contract or grant is generally recognized as revenue when earned, typically when the underlying services or activities are rendered. Revenue from collaborative research and development activities typically consists of fees for services, or payments when specific milestones are met and match underlying activities occurring during the term of the arrangement. When circumstances arise where collection of the underlying services is uncertain, recognition of the revenue is delayed until such time as collection is reasonably assured.

Accrued Expenses. The preparation of our financial statements requires us to estimate expenses that we believe have been incurred but for which we have not yet received invoices from our vendors, and for employee services that we have not yet made payment. This process primarily involves identifying services and activities that have been performed by third-party vendors on our behalf and estimating the level to which they have been performed and the associated cost incurred for such service as of each balance sheet date. Examples of expenses for which we generally accrue based on estimates include fees for services, such as those provided by clinical research and data management organizations and investigators in conjunction with the conduct of our clinical trials, research organizations that perform preclinical studies, and fees owed to contract manufacturers in connection with the formulation or manufacture of materials for our preclinical studies and clinical trials. In order to estimate costs incurred to-date and evaluate the adequacy of a related accrued liability, we monitor and analyze the progress and related activities, the terms of the underlying contract or agreement, any invoices received and the budgeted costs. We make these estimates based upon the facts and circumstances known to us at the time and in accordance with GAAP.

52-------------------------------------------------------------------------------- Share-Based Compensation We use the Black-Scholes method to estimate the value of stock options granted to employees and directors. Our forfeiture rate is based on historical experience as well as anticipated turnover and other qualitative and quantitative factors, which may change over time. There may be adjustments to future periods if actual forfeitures differ from current estimates. Our time-based awards are issued with graded vesting. The compensation cost of these graded vesting awards is recognized using the straight-line method.

Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board issued authoritative accounting guidance related to revenue from contracts with customers. This guidance is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The Company will adopt this guidance on July 1, 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt this guidance. The Company is evaluating which transition approach to use and its impact, if any, on its consolidated financial statements.

Results of Operations Fiscal Years Ended June 30, 2014 and 2013 Summary. For the year ended June 30, 2014, we reported a net loss of $11.0 million, as compared to $8.9 million in 2013. The $2.1 million increase in net loss in 2014 was the result of a $31.4 million increase in cost of revenue, a $3.3 change from a foreign exchange gain to a loss, non-recurring other income of $12.0 million that we recorded in 2013 as a result of a gain on merger and a research and development tax credit, and a $1.1 million decrease in interest income, offset largely by a $29.6 million increase in revenue from services and other revenue, a $5.5 million increase in revenue from royalties and milestones, a $7.8 million decrease in general and administrative expense, a $2.4 million decrease in research and development expense and a $0.4 million increase in income tax benefit. Basic and diluted net loss per share were $0.35 for the year ended June 30, 2014, as compared to a basic and diluted net loss per share of $0.32 in 2013.

We expect to incur losses for the foreseeable future as we intend to support the clinical and preclinical development of our product candidates. Also, due to the recent termination of our contract with BARDA, we anticipate that our revenue from service and cost of revenue will decline substantially in the future as compared to recent historical levels.

Revenue. Revenue increased to $68.7 million for the year ended June 30, 2014 from $33.6 million in 2013. The following table summarizes the key components of our revenue for the years ended June 30, 2014 and 2013: (in millions) Twelve Months Ended June 30, 2014 2013 Royalty revenue - Relenza® $ 10.6 $ 2.6 - Inavir® 4.5 4.2 Commercial milestone - Inavir® - 2.8 Revenue from contract services, grants and collaborations 53.6 24.0 Total revenue $ 68.7 $ 33.6 Royalty revenue from net sales of Relenza® increased in 2014 primarily due to a stockpiling order in Japan, and higher net commercial sales of Relenza®. Royalty revenue from Inavir® increased due to higher commercial sales. A non-recurring commercial milestone was earned in 2013 due to the net sales of Inavir® reaching a certain threshold. Revenue from contract services, grants and collaborations increased primarily due to the increased reimbursements received from BARDA as a result of the clinical and manufacturing advancements of the laninamivir octanoate program under our recently terminated BARDA contract, offset by a slight decrease in other grant revenue. For the three month period ended June 30, 2014, we did not recognize $3.7 million of contract service revenue relating to amounts we believe we are entitled to be reimbursed for under our terminated contract with BARDA and pursuant to applicable government regulations, but for which we potentially may not be fully reimbursed 53 --------------------------------------------------------------------------------Cost of Revenue. Cost of revenue increased to $51.1 million in 2014 from $19.7 million in 2013, representing an increase of $31.4 million. The following table summarizes the components of our cost of revenue in 2014 and 2013.

June 30, 2014 2013 (in millions)Direct preclinical, clinical and product development expense $ 44.6 $ 14.5 Salaries, benefits and share-based compensation expense 5.9 4.5 Other expense 0.6 0.7 Total cost of revenue expense $ 51.1 $ 19.7 Direct preclinical, clinical and product development expense increased in 2014 primarily due to the Phase 2 IGLOO trial and three other Phase 1 and Phase 2 trials of laninamivir octanoate conducted during 2014, as well as related manufacturing activities under the recently terminated BARDA contract. Salaries, benefits and share-based compensation expense increased in 2014 principally due to severance benefits of $1.6 million being recorded as a result of the termination of the BARDA contract in May 2014. Other expenses decreased due to lower administrative expenses as a result of the termination of the BARDA contract in May 2014.

Research and Development Expense. Research and development expense decreased to $17.5 million in 2014 from $19.9 million in 2013, representing a decrease of $2.4 million. The following table summarizes the components of our research and development expense for 2014 and 2013.

June 30, 2014 2013 (in millions)Direct preclinical, clinical and product development expense $ 5.1 $ 3.7 Salaries, benefits and share-based compensation expense 7.1 9.3 Other expense 2.0 3.3 Depreciation and facility related expense 3.3 3.6 Total research and development expense $ 17.5 $ 19.9 Direct preclinical, clinical and product development expense increased in 2014 due largely to a $3.1 million increase in direct clinical expenses associated with the advancement of our vapendavir and RSV programs in 2014, offset in part by $1.7 million decrease in other research and development activities. Salaries, benefits and share-based compensation expense decreased in 2014 due to a reduction of $4.6 million in ongoing compensation expenses, offset in part by $2.4 million of severance benefits recorded in relation to several restructurings that occurred during 2014. Other expenses decreased due to fewer research programs in 2014 than 2013. Depreciation and facility expense decreased to a reduction in research facilities.

General and Administrative Expense. General and administrative expense decreased to $10.2 million in 2014 from $18.0 million in 2013, representing a decrease of $7.8 million. The following table summarizes the components of our general and administrative expense in 2014 and 2013.

June 30, 2014 2013 (in millions)Salaries, benefits and share-based compensation expense $ 5.3 $ 9.8 Professional and legal fees expense 1.6 3.8 Other expense 3.3 4.4 Total general and administrative expense $ 10.2 $ 18.0 Salaries, benefits and share-based compensation expense decreased in 2014 largely due to a $1.5 million reduction in ongoing compensation expenses as result of integration of the Company's administrative functions, as well as a charge for severance benefits and merger expenses of $3.0 million that occurred in 2013. Professional and legal fees expense decreased in 2014 primarily due to non-recurring merger-related expenses of $1.4 million that were incurred in 2013, as well as lower ongoing professional fees as result of integration of the Company's administrative functions. Other expenses decreased in 2014 due to lower administrative expenses as a result of the Company's integration efforts.

54-------------------------------------------------------------------------------- Foreign Exchange Loss, (Gain). Foreign exchange change from a gain to a loss for $3.3 million in 2014 due to an increase in the volatility of the exchange rate of the U.S. dollar to the Australian dollar during the year, which resulted in a decrease in the value of the U.S. dollar as compared to the Australian dollar and the related translation of foreign currency transactions in our subsidiaries that have a different functional currency than the reporting currency on our statement of operations. We also translate all of our assets and liabilities of our non-U.S. subsidiaries at the period-end exchange rate and the net effect of these translation adjustments is shown on our condensed consolidated balance sheet as a component of stockholders' equity.

Other Income (Expense). Other income decreased by $13.1 million in 2014 primarily due to non-recurring gains recorded in 2013 of $7.6 million related to a gain on a merger and the receipt of $4.4 million with respect to an Australian research and development tax credit in 2013, as well as a $1.1 million decrease in interest income in 2014 due to lower available interest rates, and higher amount of U.S. dollar cash balances as compared to 2013.

Fiscal Years Ended June 30, 2013 and 2012 Summary. For the year ended June 30, 2013, we reported a net loss of $8.9 million, as compared to $19.2 million in 2012. The $10.3 million decrease in net loss in 2013 was the result of a $13.2 million increase in revenue, a $7.6 million gain recorded in November 2012 pursuant to the merger, and an increase of $4.4 million in research and development tax credits received in 2013, offset in part by a $12.4 million increase in operating expenses that included a $1.8 million reduction from a foreign exchange gain, a $1.9 million decrease in interest and other income, and $0.6 million decrease in income tax benefit.

Basic and diluted net loss per share were $0.32 for the year ended June 30, 2013, as compared to a basic and diluted net loss per share of $0.85 in 2012.

Revenue. Revenue increased to $33.6 million for the year ended June 30, 2013 from $20.4 million in 2012. The following table summarizes the key components of our revenue for the years ended June 30, 2013 and 2012: (in millions) Twelve Months Ended June 30, 2013 2012 Royalty revenue - Relenza® $ 2.6 $ 4.4 - Inavir® 4.2 4.5 Commercial milestone - Inavir® 2.8 - Revenue from services, grants and collaborations 24.0 11.5 Total revenue $ 33.6 $ 20.4 Royalty revenue from net sales of Relenza® decreased in 2013 due to lower gross sales and an increase in the amount of returns of Relenza® to GSK. Royalty revenue from Inavir® decreased due to a decrease in the value of the Japanese yen relative to the U.S. dollar in 2013. A commercial milestone was earned in 2013 due to the net sales of Inavir® reaching a certain threshold. Revenue from services increased by $12.8 million primarily due to the increased reimbursements received as a result of the clinical advancement of the laninamivir octanoate program into the Phase 2 IGLOO clinical trial under the BARDA contract, offset by a $0.3 million decrease in other grant revenue.

Cost of Revenue. Cost of revenue increased to $19.7 million in 2013 from $9.9 million in 2012, representing an increase of $9.8 million. The following table summarizes the components of our cost of revenue in 2013 and 2012.

June 30, 2013 2012 (in millions)Direct preclinical, clinical and product development expense $ 14.5 $ 6.5 Salaries, benefits and share-based compensation expense 4.5 3.2 Other expense 0.7 0.2 Total cost of revenue expense $ 19.7 $ 9.9 55-------------------------------------------------------------------------------- Direct preclinical, clinical and product development expense increased in 2013 due largely to the advancement of our laninamivir octanoate program into the Phase 2 IGLOO clinical trial under the BARDA contract. Salaries, benefits and share-based compensation expense increased in 2013 principally due to more research and development resources being deployed on the laninamivir octanoate program under the BARDA contract in 2013 than in 2012. Other expenses increased due to the more activities occurring under the BARDA contract.

Research and Development Expense. Research and development expense decreased to $19.9 million in 2013 from $24.1 million in 2012, representing a decrease of $4.2 million. The following table summarizes the components of our research and development expense for 2013 and 2012.

June 30, 2013 2012 (in millions)Direct preclinical, clinical and product development expense $ 3.7 $ 7.3 Salaries, benefits and share-based compensation expense 9.3 10.0 Other expense 3.3 3.3 Depreciation and facility related expense 3.6 3.5 Total research and development expense $ 19.9 $ 24.1 Direct preclinical, clinical and product development expense decreased in 2013 due largely to a $3.1 million decrease in clinical expenses associated with the completion of the Phase 2 clinical trial of vapendavir in 2012 and lower preclinical and chemistry expenses of $0.5 million associated with a decrease in the number of preclinical programs. Salaries, benefits and share-based compensation decreased in 2013 due to a $1.8 million decrease in personnel costs as a result of more resources being deployed on the laninamivir octanoate program under the BARDA contract, offset in part by a charge for severance benefits of $1.1 million that was recorded in 2013.

General and Administrative Expense. General and administrative expense increased to $18.0 million in 2013 from $9.4 million in 2012, representing an increase of $8.6 million. The following table summarizes the components of our general and administrative expense in 2013 and 2012.

June 30, 2013 2012 (in millions)Salaries, benefits and share-based compensation expense $ 9.8 $ 4.5 Professional and legal fees expense 3.8 1.8 Other expense 4.4 3.1 Total general and administrative expense $ 18.0 $ 9.4 Salaries, benefits and share-based compensation expense increased in 2013 largely due to an increase in non-cash share-based compensation of $2.2 million as a result of the accelerated vesting of prior years' grants pursuant to the completion of the merger in 2013, a $1.6 million charge recorded for severance benefits in 2013 due to a reduction in our workforce, and a $1.5 million increase in personnel costs associated with adding corporate personnel in the U.S. Professional and legal fees expense increased in 2013 primarily due to non-recurring merger-related expenses of $1.4 million as well as other ongoing transition costs. Other expenses increased in 2013 due to an increase in corporate governance expenses of $1.1 million associated with our move to the NASDAQ exchange in the U.S. and increased depreciation and facility related expenses due to the inclusion of a U.S. headquarters.

Foreign Exchange Gain, net. Foreign exchange gain increased by $ 1.8 million in 2013 due to increased volatility related to the U.S. dollar as compared to the Australian dollar during the last fiscal quarter of 2013, which resulted in an increase in the value of the U.S. dollar as compared to the Australian dollar and the related translation of foreign currency transactions in our subsidiaries that have a different functional currency than the reporting currency on our statement of operations. We also translate all of the assets and liabilities of our non-U.S. subsidiaries at the period-end exchange rate and the net effect of these translation adjustments is shown on our condensed consolidated balance sheet as a component of stockholders' equity.

Other Income (Expense). Other income increased by $10.1 million in 2013 primarily due to a non-recurring $7.6 million gain on merger and the receipt of $4.4 million with respect to an Australian research and development tax credit in 2013. Interest income decreased by $1.9 million in 2013 due to lower available interest rates in 2013 as compared to 2012, as well as lower average cash balances held in 2013 compared to 2012.

56 --------------------------------------------------------------------------------Liquidity and Capital Resources Sources of Liquidity Since our inception in 1965 through June 30, 2014, we have funded our operations primarily with public offerings of equity securities and license fees, royalties, research agreements and grants. In March 2011, we were awarded a contract by BARDA for the late-stage development of laninamivir octanoate on a cost-plus-fixed-fee basis, the total of which is not to exceed $231.2 million.

On May 7, 2014 the HHS office of the ASPR and BARDA notified us of its decision to terminate the contract for the development of laninamivir octanoate for the convenience of the U.S. Government.

At June 30, 2014, our cash, cash equivalents and long-term investments were $91.7 million. Our cash and cash equivalents are generally held in a variety of interest-bearing short-term deposits with large U.S. and Australian banks, and our long-term investments have an average maturity of less than 2 years.

Cash Flows For the year ended June 30, 2014, cash and cash equivalents increased by $14.9 million, from $66.8 million to $81.7 million. This increase was primarily the result of $26.8 million in net cash proceeds we received upon the issuance of common stock, offset in part by cash used for operating activities and other investing activities during the period.

Net cash used in operating activities was $3.3 million in 2014, which reflected our net loss for the period of $11.0 million and an increase in net operating assets of $5.7 million, offset in part by non-cash charges for share-based compensation and depreciation and amortization of $4.1 million and by an increase in net operating liabilities of $9.3 million.

Our net loss resulted largely from our funding of research and development activities including basic research, conducting preclinical studies, manufacturing and formulation of our product candidates, and ongoing general and administrative activities, offset in part by revenue from services, royalties and other revenue from grants and collaborations. The net change in operating assets and liabilities reflects a $7.6 million increase in accounts receivable due largely to higher contract revenue billed or accrued under our recently terminated contract with BARDA, a decrease of $1.8 million in accrued severance obligations and a decrease of $0.3 million in deferred revenue, offset in part by a $1.5 million decrease in prepaid expenses, and a $12.0 million increase in accounts payable and other accrued expenses, excluding foreign currency translations of the underlying balances.

Net cash used in investing activities during 2014 was $10.1 million, which reflects us investments of $10.0 million in long-term investments and $0.1 million for the purchase of property and equipment.

Funding Requirements Our future funding requirements are difficult to determine and will depend on a number of factors, including: ? the variability of future royalty revenue we may receive from existing royalty-bearing license agreements; ? the reimbursements we ultimately receive under our recently terminated contract with BARDA; ? the development timelines and plans for our product candidates, including any changes to those timelines, plans or our strategy; ? the variability, timing and costs associated with conducting clinical trials for our product candidates, the rate of enrollment in such clinical trials, and the results of these clinical trials: ? the variability, timing and costs associated with conducting preclinical studies, and the results of these studies; ? the cost of scaling up, formulating and manufacturing preclinical and clinical trial materials to evaluate our product candidates; ? whether we receive regulatory approval to advance or begin the clinical development of our product candidates in a timely manner, if at all; ? the cost and time to obtain regulatory approvals required to advance the development of our product candidates; ? the scope and size of our research and development efforts; ? our pursuit, timing and the terms of any in-licensing, acquisition, co-development, and other similar collaborative clinical-stage development opportunities we may pursue in the future to better balance our pipeline; ? the size and cost of the general and administrative function we need to manage our operations, including the infrastructure to support being a publicly-traded company; and ? the cost of filing, prosecuting, and enforcing patent and other intellectual property claims.

57-------------------------------------------------------------------------------- Based on our current strategy and operating plan, and considering the potential costs associated with advancing the preclinical and clinical development of our product candidates, we believe that our existing cash, cash equivalents and long-term investments of approximately $92 million as of June 30, 2014, along with the anticipated proceeds from existing royalty-bearing licenses and expected reimbursements under the BARDA contract to finalize closeout activities, will enable us to operate for a period of at least 12 months from June 30, 2014.

We currently do not have any commitments for future funding, nor do we anticipate that we will generate significant revenue, aside from revenue from existing royalty-bearing arrangements. Therefore, in order to meet our anticipated liquidity needs beyond 12 months to support the development of our product candidates, or possibly sooner in the event we enter into other transactions or revise our strategy or development plans, we may need to raise or secure additional capital. If we do, we would expect to do so primarily through the sale of additional common stock or other equity securities, as well as through proceeds from future licensing agreements, strategic collaborations, forms of debt financing, or any other financing arrangement. Funds from these sources may not be available to us on acceptable terms, if at all, and our failure to raise such funds could have a material adverse impact on our future business strategy and plans, financial condition and results of operations. If adequate funds are not available to us on acceptable terms in the future, we may be required to delay, reduce the scope of, or eliminate one or more, if not all, of our research and development programs, or delay or curtail preclinical studies and clinical trials, or reduce our internal cost structure. If additional capital is not available to us on acceptable terms, we may need to obtain funds through license agreements, or collaborative or partner arrangements pursuant to which we will likely relinquish rights to certain product candidates that we might otherwise choose to develop or commercialize independently, or be forced to enter into such arrangements earlier than we would prefer, which would likely result in less favorable transaction terms.

Additional equity financings may be dilutive to holders of our common stock, and debt financing, if available, may involve significant payment obligations and restrictive covenants that restrict how we operate our business.

Off-Balance Sheet Arrangements At June 30, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Contractual Obligations and Commitments We have entered into an operating lease for an office and laboratory facility located in Melbourne, Australia through September 2015, as well as corporate offices in Alpharetta, Georgia through September, 2019. The total annual rent expense under these leases is approximately $0.6 million. As result of the termination of the BARDA contract in May, we have no open reimbursable purchase orders with third party vendors for goods and services as of June 30, 2014. As of June 30, 2014, future payments under these non-cancellable operating leases and purchase obligations are as follows (in millions): Payments Due By Period Less than After Total 1 year 1-3 Years 4-5 Years 5 Years Operating leases $ 1.2 $ 0.6 $ 0.5 $ 0.1 $ - Total contractual obligations $ 1.2 $ 0.6 $ 0.5 $ 0.1 $ - The above contractual obligations table does not include any amounts or payments related to development, regulatory, or commercialization milestones, as the payments are contingent on the achievement of these milestones, which has not occurred. As of June 30, 2014 there are no off balance sheet obligations.

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