Edgar Filing: VIROPHARMA INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-21699

VIROPHARMA INCORPORATED

(Exact Name of Registrant as Specified in its Charter)


Delaware		23-2789550

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

730 Stockton Drive

Exton, Pennsylvania 19341

(Address of Principal Executive Offices and Zip Code)

610-458-7300

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer x Accelerated Filer ¨ Non-accelerated filer ¨ Smaller Reporting Company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Number of shares outstanding of the issuer’s Common Stock, par value $.002 per share, as of April 18, 2011: 75,964,881 shares.

VIROPHARMA INCORPORATED

INDEX


PART I	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets (unaudited) at March 31, 2011 and December 31, 2010	2

	Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2011 and 2010	3

	Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended March 31, 2011	4

	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2011 and 2010	5

	Notes to the Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	33

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 6.	Exhibits	38

SIGNATURES		39

ViroPharma Incorporated

Condensed Consolidated Balance Sheets

(unaudited)


(in thousands, except share and per share data)	March 31, 2011			December 31, 2010
Assets
Current assets:
Cash and cash equivalents	$	391,388		$	426,732
Short-term investments		103,583			78,439
Accounts receivable, net		59,718			43,879
Inventory		66,608			54,388
Prepaid expenses and other current assets		11,928			13,959
Prepaid income taxes		1,575			2,000
Deferred income taxes		12,021			13,744

Total current assets		646,821			633,141
Intangible assets, net		618,648			619,712
Property, equipment and building improvements, net		12,799			11,468
Goodwill		6,454			6,228
Debt issue costs, net		2,300			2,397
Deferred income taxes		6,803			4,252
Other assets		10,257			10,376

Total assets	$	1,304,082		$	1,287,574


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	16,542		$	10,215
Contingent consideration		11,838			10,973
Accrued expenses and other current liabilities		53,903			48,990
Income taxes payable		13,952			1,944

Total current liabilities		96,235			72,122
Other non-current liabilities		2,371			2,463
Deferred tax liability		174,399			176,111
Long-term debt		147,602			145,743

Total liabilities		420,607			396,439


Stockholders’ equity:
Preferred stock, par value $0.001 per share. 5,000,000 shares authorized; Series A convertible participating preferred stock; no shares issued and outstanding		-			-

Common stock, par value $0.002 per share. 175,000,000 shares authorized; issued and outstanding 75,958,101 shares at March 31, 2011 and 78,141,491 shares at December 31, 2010		156			156

Treasury shares, at cost. 2,419,355 shares at March 31, 2011 and 0 shares at December 31, 2010		(45,000	)		-

Additional paid-in capital		718,211			717,375
Accumulated other comprehensive loss		(200	)		(258	)
Retained earnings		210,308			173,862

Total stockholders’ equity		883,475			891,135

Total liabilities and stockholders’ equity	$	1,304,082		$	1,287,574

See accompanying notes to unaudited consolidated financial statements.

ViroPharma Incorporated

Consolidated Statements of Operations

(unaudited)


	Three Months Ended March 31,
(in thousands, except per share data)	2011			2010
Revenues:

Net product sales	$	127,035		$	90,647

Costs and Expenses:
Cost of sales (excluding amortization of product rights)		18,869			13,958
Research and development		10,426			9,741
Selling, general and administrative		28,310			20,921
Intangible amortization		8,897			7,573
Other operating expenses		498			-

Total costs and expenses		67,000			52,193

Operating income		60,035			38,454

Other Income (Expense):

Interest income		204			31
Interest expense		(2,981	)		(2,838	)
Other income (expense), net		3,142			(522	)

Income before income tax expense		60,400			35,125

Income tax expense		23,954			13,843

Net income	$	36,446		$	21,282


Net income per share:
Basic	$	0.47		$	0.27
Diluted	$	0.40		$	0.26

Shares used in computing net income per share:
Basic		77,849			77,506
Diluted		95,973			89,668

See accompanying notes to unaudited consolidated financial statements.

ViroPharma Incorporated

Consolidated Statements of Stockholders’ Equity

(unaudited)


(in thousands)	Preferred Stock				Common Stock					Treasury Shares					Additional paid-in capital			Accumulated other comprehensive income (loss)			Retained Earnings		Total stockholders’ equity
(in thousands)	Number of shares		Amount		Number of shares			Amount		Number of shares		Amount			Additional paid-in capital			Accumulated other comprehensive income (loss)			Retained Earnings		Total stockholders’ equity
Balance, December 31, 2010		-	$	-		78,141		$	156		-	$	-		$	717,375		$	(258	)	$	173,862	$	891,135

Exercise of common stock options		-		-		215			-		-		-			1,915			-			-		1,915

Employee stock purchase plan		-		-		21			-		-		-			194			-			-		194

Share-based compensation		-		-		-			-		-		-			3,456			-			-		3,456

Unrealized losses on available for sale securities, net		-		-		-			-		-		-			-			(7	)		-		(7	)

Cumulative translation adjustment, net		-		-		-			-		-		-			-			65			-		65

Repurchase of shares		-		-		(2,419	)		-		2,419		(45,000	)		-			-			-		(45,000	)

Forward share purchase		-		-		-			-		-		-			(5,000	)		-			-		(5,000	)

Stock option tax benefits		-		-		-			-		-		-			271			-			-		271

Net income		-		-		-			-		-		-			-			-			36,446		36,446


Balance, March 31, 2011		-	$	-		75,958		$	156		2,419	$	(45,000	)	$	718,211		$	(200	)	$	210,308	$	883,475

See accompanying notes to unaudited consolidated financial statements.

ViroPharma Incorporated

Consolidated Statements of Cash Flows

(unaudited)


	Three Months Ended March 31,
(in thousands)	2011			2010
Cash flows from operating activities:
Net income	$	36,446		$	21,282
Adjustments to reconcile net income to net cash provided by operating activities:

Non-cash share-based compensation expense		3,456			2,661
Non-cash interest expense		1,956			1,816
Non-cash charge for contingent consideration		471			-
Deferred tax provision		(2,468	)		2,892
Depreciation and amortization expense		9,421			8,019
Other, net		(2,815	)		-
Changes in assets and liabilities:
Accounts receivable		(15,564	)		(6,236	)
Inventory		(10,764	)		497
Prepaid expenses and other current assets		2,344			260
Prepaid income taxes and income taxes payable		12,447			5,585
Other assets		553			(2,636	)
Accounts payable		5,947			5,244
Accrued expenses and other current liabilities		(2,278	)		(1,028	)
Other non-current liabilities		(93	)		(9	)

Net cash provided by operating activities		39,059			38,347

Cash flows from investing activities:
Purchase of property, equipment and building improvements		(1,827	)		(114	)
Purchase of short-term investments		(51,824	)		(17,577	)
Maturities of short-term investments		26,410			-

Net cash used in investing activities		(27,241	)		(17,691	)

Cash flows from financing activities:
Payment for treasury shares acquired		(45,000	)		-
Forward share purchase		(5,000	)		-
Net proceeds from issuance of common stock		2,109			1,075
Excess tax benefits from share-based payment arrangements		271			1,237

Net cash (used in) provided by financing activities		(47,620	)		2,312

Effect of exchange rate changes on cash		458			(397	)

Net (decrease) increase in cash and cash equivalents		(35,344	)		22,571

Cash and cash equivalents at beginning of period		426,732			331,672

Cash and cash equivalents at end of period	$	391,388		$	354,243

See accompanying notes to unaudited consolidated financial statements.

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements

Note 1. Organization and Business Activities

ViroPharma Incorporated and subsidiaries is a global biotechnology company dedicated to the development and commercialization of products that address serious diseases, with a focus on products used by physician specialists or in hospital settings. We intend to grow through sales of our marketed products, through continued development of our product pipeline, expansion of sales into additional territories outside the United States and through potential acquisition or licensing of products or acquisition of companies. We expect future growth to be driven by sales of Cinryze, both domestically and internationally, and by our primary development programs, including C1 esterase inhibitor and a non-toxigenic strain of C. difficile (VP20621).

We market and sell Cinryze in the United States for routine prophylaxis against angioedema attacks in adolescent and adult patients with hereditary angioedema (HAE). Cinryze is a C1 esterase inhibitor therapy for routine prophylaxis against HAE, also known as C1 inhibitor (C1-INH) deficiency, a rare, severely debilitating, life-threatening genetic disorder. Cinryze was obtained in October 2008, when we completed our acquisition of Lev Pharmaceuticals, Inc. (Lev). In January 2010, we acquired expanded rights to commercialize Cinryze and future C1-INH derived products in certain European countries and other territories throughout the world as well as rights to develop future C1-INH derived products for additional indications. In March 2010, our Marketing Authorization Application (MAA) for Cinryze for acute treatment and prophylaxis against HAE was accepted by the European Medicines Agency (EMA). We intend to seek to commercialize Cinryze in Europe in 2011 in countries where we have distribution rights. We are currently evaluating our commercialization plans in additional territories. We also intend to conduct ViroPharma sponsored studies and investigator-initiated studies (IIS) to identify further therapeutic uses and potentially expand the labeled indication for Cinryze to include other C1 mediated diseases, such as Antibody-Mediated Rejection (AMR) and Delayed Graft Function (DGF). Additionally, we are currently undertaking studies on the viability of subcutaneous administration of Cinryze.

We also market and sell Vancocin HCl capsules, the oral capsule formulation of vancomycin hydrochloride, in the U.S. and its territories. Vancocin is a potent antibiotic approved by the U.S. Food and Drug Administration, or FDA, to treat antibiotic-associated pseudomembranous colitis caused by Clostridium difficile infection (CDI), or C. difficile, and enterocolitis caused by Staphylococcus aureus, including methicillin-resistant strains.

Our product development portfolio is primarily focused on two programs, C1 esterase inhibitor [human] and VP20621. We are working on developing further therapeutic uses, potential additional indications in other C1 mediated diseases, and alternative modes of administration for C1 esterase inhibitor. We are also developing VP20621 for the treatment and prevention of CDI. We have successfully completed our Phase 1 clinical trial for VP20621 to determine the safety and tolerability of VP20621 dosed orally as a single and as repeat escalating doses in healthy young and older adults, filed an IND in December of 2010 and we intend to initiate a Phase 2 clinical trial during 2011.

On May 28, 2010 we acquired Auralis Limited, a UK based specialty pharmaceutical company. The acquisition of Auralis provides us with the opportunity to accelerate our European commercial systems for potential future product launches and additional business development acquisitions. In connection with the Auralis acquisition we acquired BUCCOLAM (Oromucosal Solution, Midazolam [as hydrochloride]), for which we are seeking a pediatric-use marketing authorization (PUMA) for treatment of pediatric epilepsy in Europe. The acquisition also provided us revenue from sales of Diamorphine (Diamorphine Hydrochloride BP Injection) for palliative care and acute pain relief in the United Kingdom.

In addition to these programs, we have several other assets that we may make additional investments in. These investments will be limited and dependent on our assessment of the potential future commercial success of or benefits from the asset. These assets include maribavir for CMV and other compounds, including those acquired from Auralis.

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements

Basis of Presentation

The consolidated financial information at March 31, 2011 and for the three months ended March 31, 2011 and 2010, is unaudited but includes all adjustments (consisting only of normal recurring adjustments), which in the opinion of management, are necessary to state fairly the consolidated financial information set forth therein in accordance with accounting principles generally accepted in the United States of America. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. We have evaluated all subsequent events through the date the financial statements were issued, and have not identified any such events.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Adoption of Standards

In September 2009, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU amends certain disclosure requirements of Topic 820 to provide for additional disclosures for transfers in and out of Levels 1 and 2 and for activity in Level 3. The ASU also clarifies certain other disclosure requirements including level of disaggregation and disclosures around inputs and valuation techniques. We adopted this ASU on January 1, 2010. The new disclosures about the purchases, sales, issuances and settlements in the roll forward activity for Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010 and we adopted this provision on January 1, 2011. The adoption of this disclosure provision did not have a material impact on our results of operations, cash flows, and financial position.

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, or ASU 2009-13, formerly EITF Issue No. 08-1. ASU 2009-13, amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB ASC Topic 605 and provides accounting principles and application guidance on how the arrangement should be separated, and the consideration allocated. This guidance changes how to determine the fair value of undelivered products and services for separate revenue recognition. Allocation of consideration is now based on management’s estimate of the selling price for an undelivered item where there is no other means to determine the fair value of that undelivered item. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We adopted this ASU January 1, 2011. The adoption of the provisions of this guidance did not have a material impact on our results of operations, cash flows, and financial position.

In March 2010, the FASB ratified EITF Issue No. 08-9, Milestone Method of Revenue Recognition, and as a result of this ratification the FASB issued ASU 2010-17 in April 2010, which states that the milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be achieved. The Task Force agreed that whether a milestone is substantive is a judgment that should be made at the inception of the arrangement. To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. The new guidance is effective for interim and annual periods beginning on or after June 15, 2010. We adopted this ASU January 1, 2011. The adoption of this guidance did not have a material impact on our results of operations, cash flows, and financial position.

In December 2010, the FASB issued ASU 2010-27, Fees Paid to the Federal Government by Pharmaceutical Manufactures (EITF Issue 10-D; ASC 720), which addresses how pharmaceutical manufacturers should recognize and classify in the income statement fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care Education Reconciliation Act. The ASU specifies that the liability for the fee be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to operating expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year. The new guidance is effective for calendar years beginning after December 31, 2010. We adopted this ASU January 1, 2011. The adoption of this guidance does not have a material impact on our results of operations, cash flows, and financial position.

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements – (Continued)

Note 2. Short-Term Investments

Short-term investments consist of fixed income securities with remaining maturities of greater than three months at the date of purchase, debt securities and equity securities. At March 31, 2011, all of our short-term investments are classified as available for sale investments and measured as level 1 instruments of the fair value measurements standard.

The following summarizes the Company’s available for sale investments at March 31, 2011:


(in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
March 31, 2011
Debt securities:
US Treasury	$	61,006	$	12	$	5	$	61,013
Corporate bonds		42,587		9		26		42,570

Total	$	103,593	$	21	$	31	$	103,583


Maturities of investments were as follows:
Less than one year	$	77,472	$	21	$	2	$	77,491
Longer than one year		26,121		-		29		26,092

	$	103,593	$	21	$	31	$	103,583

Note 3. Inventory

Inventory is stated at the lower of cost or market using actual cost.


(in thousands)	March 31, 2011		December 31, 2010
Raw Materials	$	49,542	$	37,994
Work In Process		5,655		10,570
Finished Goods		11,411		5,824

Total	$	66,608	$	54,388

Note 4. Intangible Assets

The following represents the balance of the intangible assets at March 31, 2011:


(in thousands)	Gross Intangible Assets		Accumulated Amortization		Net Intangible Assets
Cinryze Product rights	$	521,000	$	50,924	$	470,076
Vancocin Intangibles		168,099		43,050		125,049
Auralis Contract rights		12,813		890		11,923
Auralis IPR&D (1)		11,600		-		11,600

Total	$	713,512	$	94,864	$	618,648

(1) non-amortizing

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements – (Continued)

The following represents the balance of the intangible assets at December 31, 2010:


(in thousands)	Gross Intangible Assets		Accumulated Amortization		Net Intangible Assets
Cinryze Product rights	$	521,000	$	45,714	$	475,286
Vancocin Intangibles		161,099		39,629		121,470
Auralis Contract rights		12,365		601		11,764
Auralis IPR&D (1)		11,192		-		11,192

Total	$	705,656	$	85,944	$	619,712

(1) non-amortizing

In December 2008, FDA changed OGD’s 2006 bioequivalence recommendation, which we have opposed since its original proposal in March 2006, by issuing draft guidance for establishing bioequivalence to Vancocin which would permit generic products that have the same inactive ingredients in the same quantities as Vancocin (“Q1 and Q2 the same”), and that meet certain other conditions, to demonstrate bioequivalence through comparative in vitro dissolution testing. Under this latest proposed method, any generic product that is not Q1 and Q2 the same as Vancocin would need to conduct an in vivo study with clinical endpoints to demonstrate bioequivalence with Vancocin.

On August 4, 2009 the FDA’s Pharmaceutical Science and Clinical Pharmacology Advisory Committee voted in favor of the OGD’s 2008 draft guidelines on bioequivalence for Vancocin. If FDA’s proposed bioequivalence method for Vancocin becomes effective, the time period in which a generic competitor could be approved would be reduced and multiple generics may enter the market, which would materially impact our operating results, cash flows and possibly intangible asset valuations. This could also result in a reduction to the useful life of the Vancocin-related intangible assets. Management currently believes there are no indicators that would require a change in useful life as management believes that Vancocin will continue to be utilized along with generics that may enter the market, and the number of generics and the timing of their market entry is unknown.

A reduction in the useful life, as well as the timing and number of generics, will impact our cash flow assumptions and estimate of fair value, perhaps to a level that could result in an impairment charge. We will continue to monitor the actions of the OGD and consider the effects of our opposition actions and the announcements by generic competitors or other adverse events for additional impairment indicators. We will reevaluate the expected cash flows and fair value of our Vancocin-related assets at such time a triggering event occurs.

We are obligated to pay Eli Lilly and Company (Lilly) additional purchase price consideration based on net sales of Vancocin within a calendar year. The additional purchase price consideration is determined by the annual net sales of Vancocin, is paid quarterly and is due each year through 2011. We account for these additional payments as additional purchase price which requires that the additional purchase price consideration is recorded as an increase to the intangible asset of Vancocin and is amortized over the remaining estimated useful life of the intangible asset. In addition, at the time of recording the additional intangible assets, a cumulative adjustment is recorded to accumulated intangible amortization, in addition to ordinary amortization expense, in order to reflect amortization as if the additional purchase price had been paid in November 2004.

As of March 31, 2011, we have paid an aggregate of $44.1 million to Lilly in additional purchase price consideration, as our net sales of Vancocin surpassed the maximum annual obligation level of $65 million every year since 2005. We are obligated to pay Lilly an additional amount based on 35% of annual net sales between $45 and $65 million of Vancocin during 2011.

Based on net sales through the first quarter of 2011, $7.0 million is due to Lilly on net sales of Vancocin above the net sales threshold level described above.

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements – (Continued)

On May 28, 2010 we acquired Auralis Limited, a UK based specialty pharmaceutical company. With the acquisition of Auralis we have added one marketed product and several development assets to our portfolio. We recognized an intangible asset related to certain supply agreements for the marketed product and one of the development assets. Additionally, we have recognized in-process research and development (IPR&D) assets related to the development assets which are currently not approved. We determined that these assets meet the criterion for separate recognition as intangible assets and the fair value of these assets have been determined based upon discounted cash flow models. The supply agreements will be amortized over their useful life of 12 years. The IPR&D assets used in research and development activities are classified as indefinite-lived and will be subject to periodic impairment testing. The IPR&D assets will remain as indefinite-lived intangible assets until the projects are completed or abandoned. Upon completion of the projects, we will make a separate determination of the useful life of the asset and begin amortization. If a project is abandoned such amounts will be written off at that time.

Note 5. Long-Term Debt

Long-term debt as of March 31, 2011 and December 31, 2010 is summarized in the following table:


(in thousands)	March 31, 2011		December 31, 2010
Senior convertible notes	$	147,602	$	145,743
less: current portion		-		-

Total debt principal	$	147,602	$	145,743

As of March 31, 2011 senior convertible notes representing $205.0 million of principal debt are outstanding with a carrying value of $147.6 million.

On March 26, 2007, we issued $250.0 million of 2% senior convertible notes due March 2017 (senior convertible notes) in a public offering. Net proceeds from the issuance of the senior convertible notes were $241.8 million. The senior convertible notes are unsecured unsubordinated obligations and rank equally with any other unsecured and unsubordinated indebtedness. The senior convertible notes bear interest at a rate of 2% per annum, payable semi-annually in arrears on March 15 and September 15 of each year commencing on September 15, 2007.

The debt and equity components of our senior convertible debt securities are bifurcated and accounted for separately based on the value and related interest rate of a non-convertible debt security with the same terms. The fair value of a non-convertible debt instrument at the original issuance date was determined to be $148.1 million. The equity (conversion options) component of our convertible debt securities is included in Additional paid-in capital on our Condensed Consolidated Balance Sheets and, accordingly, the initial carrying value of the debt securities was reduced by $101.9 million. Our net income for financial reporting purposes is reduced by recognizing the accretion of the reduced carrying values of our convertible debt securities to their face amount of $250.0 million as additional non-cash interest expense. Accordingly, the senior convertible debt securities will recognize interest expense at effective rates of 8.0% as they are accreted to par value.

On March 24, 2009 we repurchased, in a privately negotiated transaction, $45.0 million in principal amount of our senior convertible notes due March 2017 for total consideration of approximately $21.2 million. The repurchase represented 18% of our then outstanding debt and was executed at a price equal to 47% of par value. Additionally, in negotiated transactions, we sold approximately 2.38 million call options for approximately $1.8 million and repurchased approximately 2.38 million warrants for approximately $1.5 million which terminated the call options and warrants that were previously entered into by us in March 2007. We recognized a $9.1 million gain in the first quarter of 2009 as a result of this debt extinguishment. For tax purposes, the gain qualifies for deferral until 2014 in accordance with the provisions of the American Recovery and Reinvestment Act.

As of March 31, 2011, the Company has accrued $0.2 million in interest payable to holders of the senior convertible notes. Debt issuance costs of $4.8 million have been capitalized and are being amortized over the term of the senior convertible notes, with the balance to be amortized as of March 31, 2011 being $2.3 million.

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements – (Continued)

The senior convertible notes are convertible into shares of our common stock at an initial conversion price of $18.87 per share. The senior convertible notes may only be converted: (i) anytime after December 15, 2016; (ii) during the five business-day period after any five consecutive trading day period (the “measurement period”) in which the price per note for each trading day of that measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; (iii) during any calendar quarter (and only during such quarter) after the calendar quarter ending June 30, 2007, if the last reported sale price of our common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; or (iv) upon the occurrence of specified corporate events. Upon conversion, holders of the senior convertible notes will receive shares of common stock, subject to ViroPharma’s option to irrevocably elect to settle all future conversions in cash up to the principal amount of the senior convertible notes, and shares for any excess. We can irrevocably elect this option at any time on or prior to the 35th scheduled trading day prior to the maturity date of the senior convertible notes. The senior convertible notes may be required to be repaid on the occurrence of certain fundamental changes, as defined in the senior convertible notes. As of March 31, 2011, the fair value of the principal of the $205.0 million convertible senior notes outstanding was approximately $259.9 million, based on the level 2 valuation hierarchy of the fair value measurements standard.

Concurrent with the issuance of the senior convertible notes, we entered into privately-negotiated transactions, comprised of purchased call options and warrants sold, to reduce the potential dilution of our common stock upon conversion of the senior convertible notes. The transactions, taken together, have the effect of increasing the initial conversion price to $24.92 per share. The net cost of the transactions was $23.3 million.

The call options allow ViroPharma to receive up to approximately 13.25 million shares of its common stock at $18.87 per share from the call option holders, equal to the number of shares of common stock that ViroPharma would issue to the holders of the senior convertible notes upon conversion. These call options will terminate upon the earlier of the maturity dates of the related senior convertible notes or the first day all of the related senior convertible notes are no longer outstanding due to conversion or otherwise. Concurrently, we sold warrants to the warrant holders to receive shares of its common stock at an exercise price of $24.92 per share. These warrants expire ratably over a 60-day trading period beginning on June 13, 2017 and will be net-share settled.

The purchased call options are expected to reduce the potential dilution upon conversion of the senior convertible notes in the event that the market value per share of ViroPharma common stock at the time of exercise is greater than $18.87, which corresponds to the initial conversion price of the senior convertible notes, but less than $24.92 (the warrant exercise price). The warrant exercise price is 75.0% higher than the price per share of $14.24 of our price on the pricing date. If the market price per share of ViroPharma common stock at the time of conversion of any senior convertible notes is above the strike price of the purchased call options ($18.87), the purchased call options will entitle us to receive from the counterparties in the aggregate the same number of shares of our common stock as we would be required to issue to the holder of the converted senior convertible notes. Additionally, if the market price of ViroPharma common stock at the time of exercise of the sold warrants exceeds the strike price of the sold warrants ($24.92), we will owe the counterparties an aggregate of approximately 13.25 million shares of ViroPharma common stock. If we have insufficient shares of common stock available for settlement of the warrants, we may issue shares of a newly created series of preferred stock in lieu of our obligation to deliver common stock. Any such preferred stock would be convertible into 10% more shares of our common stock than the amount of common stock we would otherwise have been obligated to deliver under the warrants. We are entitled to receive approximately 10.87 million shares of its common stock at $18.87 from the call option holders and if the market price of ViroPharma common stock at the time of exercise of the sold warrants exceeds the strike price of the sold warrants ($24.92), will owe the counterparties an aggregate of approximately 10.87 million shares of ViroPharma common stock.

The purchased call options and sold warrants are separate transactions entered into by us with the counterparties, are not part of the terms of the senior convertible notes, and will not affect the holders’ rights under the senior convertible notes. Holders of the senior convertible notes will not have any rights with respect to the purchased call options or the sold warrants. The purchased call options and sold warrants meet the definition of derivatives. These instruments have been determined to be indexed to our own stock and have been recorded in stockholders’ equity in our Condensed Consolidated Balance Sheets. As long as the instruments are classified in stockholders’ equity they are not subject to the mark to market provisions.

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements – (Continued)

Note 6. Stockholder’s Equity

Preferred Stock

The Company’s Board of Directors has the authority, without action by the holders of common stock, to issue up to 5,000,000 shares of preferred stock from time to time in such series and with such preference and rights as it may designate.

Share Repurchase Program

On March 9, 2011, our Board of Directors authorized the use of up to $150.0 million to repurchase shares of our common stock and/or our 2% Senior Convertible Notes due 2017. Purchases may be made by means of open market transactions, block transactions, privately negotiated purchase transactions or other techniques from time to time.

On March 14, 2011 we entered into an accelerated share repurchase (ASR) agreement with a large financial institution to repurchase $50.0 million of our common stock on an accelerated basis. We paid $50.0 million to the financial institution and received an initial delivery of 2.4 million shares of our common stock. The total number of shares to be delivered generally will be determined by applying an agreed discount to the average of the daily volume weighted average price of our common shares traded during the pricing period. The pricing period is scheduled to end June 15, 2011, but it may conclude sooner at the election of the financial institution. If the total number of shares to be delivered exceeds the number of shares initially delivered, we will receive the remaining balance of shares from the financial institution. Based on the current trading prices of our common stock, we expect to receive additional shares. If the total number of shares to be delivered is less than the number of shares initially delivered, we have the contractual right to deliver to the financial institution either shares of our common stock or cash equal to the value of those shares.

Note 7. Share-based Compensation

Beginning in 2011, our stock-based compensation program consisted of a combination of: time vesting stock options with graduated vesting over a four year period; performance and market vesting common stock units, or PSUs, tied to the achievement of pre-established company performance metrics and market based goals over a three-year performance period; and, time vesting restricted stock awards, or RSUs, granted to our non-employee directors vesting over a one year period. Grants under our former stock based compensation program consisted only of time vesting stock options.

The fair values of our share-based awards are determined as follows:

•

stock option grants are estimated as of the date of grant using a Black-Scholes option valuation model and compensation expense is recognized over the applicable vesting period;

•

PSUs subject to company specific performance metrics, which include both performance and service conditions, are based on the market value of our stock on the date of grant. Compensation expense is based upon the number of shares expected to vest after assessing the probability that the performance criteria will be met. Compensation expense is recognized over the vesting period, adjusted for any changes in our probability assessment;

•

PSUs subject to our total shareholder return, or TSR, market metric relative to a peer group of companies, which includes both market and service conditions, are estimated using a Monte Carlo simulation. Compensation expense is based upon the number and value of shares expected to vest. Compensation expense is recognized over the applicable vesting period. All compensation cost for the award will be recognized if the requisite service period is fulfilled, even if the market condition is never satisfied; and,

•

time vesting RSUs are based on the market value of our stock on the date of grant. Compensation expense for time vesting RSUs is recognized over the vesting period.

The vesting period for our stock awards is the requisite service period associated with each grant.

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements – (Continued)

Our share-based compensation expense is comprised of the following:


	Three Months Ended March 31,
(in thousands)	2011		2010
Stock options	$	2,961	$	2,601
Performance shares		406		-
Restricted shares		50		-
Employee Stock Purchase Plan		39		60

Total	$	3,456	$	2,661

Our share-based compensation expense is recorded as follows:


	Three Months Ended March 31,
(in thousands)	2011		2010
Research and development	$	987	$	815
Selling, general and administrative		2,469		1,846

Total	$	3,456	$	2,661

We currently have three shared-based award plans in place: a 1995 Stock Option and Restricted Share Plan (1995 Plan), a 2001 Equity Incentive Plan (2001 Plan) and a 2005 Stock Option and Restricted Share Plan (2005 Plan) (collectively, the “Plans”).

The following table information about these equity plans at March 31, 2011:


	1995 Plan		2001 Plan		2005 Plan		Combined
Shares authorized for issuance		4,500,000		500,000		12,850,000		17,850,000
Shares outstanding		4,500,000		440,041		8,119,987		13,060,028

Shares available for grant		-		59,959		4,730,013		4,789,972

Employee Stock Option Plans

We issued 864,735 stock options in the first three months of 2011. The weighted average fair value of the grants was estimated at $17.80 per share using the Black-Scholes option-pricing model using the following assumptions:


Expected dividend yield			-
Range of risk free interest rate	2.66	%	-	2.87	%
Weighted-average volatility			68.78%
Range of volatility	64.74	%	-	69.32	%
Range of expected option life (in years)	5.50		-	6.25

We have 9,150,287 option grants outstanding at March 31, 2011 with exercise prices ranging from $0.99 per share to $38.70 per share and a weighted average remaining contractual life of 6.89 years. The following table lists the outstanding and exercisable option grants as of March 31, 2011:


	Number of options		Weighted average exercise price		Weighted average remaining contractual term (years)		Aggregate intrinsic value
	Number of options		Weighted average exercise price		Weighted average remaining contractual term (years)		(in thousands)
Outstanding		9,150,287	$	11.12		6.89	$	80,805
Exercisable		5,030,477	$	10.54		5.51	$	47,905

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements – (Continued)

The following tables summarizes information regarding our stock option awards at March 31, 2011:


	Shares Under Option			Weighted Average Exercise Price
Balance at December 31, 2010		8,584,998		$	10.44
Granted		864,735		$	17.80
Exercised		(214,660	)	$	8.92
Forfeited and cancelled		(84,786	)	$	16.36

Balance at March 31, 2011		9,150,287		$	11.12

As of March 31, 2011, there was $26.0 million of total unrecognized compensation cost related to unvested share-based payments (including share options) granted under the Plans. That cost is expected to be recognized over a weighted-average period of 2.75 years.

Performance Awards

Beginning in 2011, employees receive annual grants of performance award units, or PSUs, in addition to stock options which give the recipient the right to receive common stock that is contingent upon achievement of specified pre-established company performance goals over a three year performance period. The performance goals for the PSUs granted in January 2011, which are accounted for as equity awards, are based upon the following performance measures: (i) our revenue growth over the performance period, (ii) our adjusted net income as a percent of sales at the end of the performance period, and (iii) our relative total shareholder return, or TSR, compared to a peer group of companies at the end of the performance period. Depending on the outcome of these performance goals, a recipient may ultimately earn a number of shares greater or less than their target number of shares granted, ranging from 0% to 200% of the PSUs granted. Shares of our common stock are issued on a one-for-one basis for each PSU earned. Participants vest in their PSUs at the end of the performance period.

The fair value of the market condition PSUs was determined using a Monte Carlo simulation and utilized the following inputs and assumptions:


	Three Months Ended March 31,
(in thousands)	2011
Closing stock price on grant date	$	17.84
Performance period starting price	$	16.85
Term of award (in years)		2.99
Volatility		69.75	%
Risk-free interest rate		1.19	%
Expected dividend yield		0.00	%
Fair value per TSR PSU	$	24.38

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements – (Continued)

The performance period starting price is measured as the average closing price over the last 30 trading days prior to the performance period start. The Monte Carlo simulation model also assumed correlations of returns of the prices of our common stock and the common stocks of the comparator group of companies and stock price volatilities of the comparator group of companies.

At March 31, 2011, for the purposes of determining stock based compensation we assumed 154,780 and 17,412 performance condition PSUs and TSR based PSUs outstanding, respectively, with weighted-average grant date fair values of $ 17.84 and $ 24.38, respectively.

At March 31, 2011, there was approximately $ 4.9 million of unrecognized compensation cost related to all PSUs that is expected to be recognized over a weighted-average period of approximately 2.77 years.

Restricted Stock Awards

Beginning in 2011, we also grant our non-employee directors restricted stock awards that vest after one year of service. The fair value of a restricted stock award is equal to the closing price of our common stock on the grant date. The following summarizes select information regarding our restricted stock awards as of March 31, 2011:


	Share Units (in thousands)		Weighted- average grant date fair value
Balance at December 31, 2010		-	$	-
Granted		27,000	$	17.30
Vested		-	$	-
Forfeited		-	$	-

Balance at March 31, 2011		27,000	$	17.30

As of March 31, 2011, there was approximately $ 0.42 million of unrecognized compensation cost related to RSUs which is expected to be recognized over a weighted average period of 0.90 years.

Employee Stock Purchase Plan

Under this plan, no shares were sold to employees during the first three months of 2011. During the year ended December 31, 2010, 48,909 shares were sold to employees. As of March 31, 2011 there are approximately 430,060 shares available for issuance under this plan.

Under this plan, there are two plan periods: January 1 through June 30 (Plan Period One) and July 1 through December 31 (Plan Period Two). For Plan Period One in 2011, the fair value of approximately $77,000 was estimated using the Type B model with a risk free interest rate of 0.19%, volatility of 37.8% and an expected option life of 0.5 years. This fair value is being amortized over the six month period ending June 30, 2011.

Note 8. Income Tax Expense

Our income tax expense was $24.0 million and $13.8 million for the quarters ended March 31, 2011 and 2010, respectively. Our income tax expense includes federal, state and foreign income taxes at statutory rates and the effects of various permanent differences.

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements – (Continued)

Our effective tax rates for the quarters ended March 31, 2011 and 2010 were 39.7% and 39.4%, respectively. Our effective tax rate is higher than the statutory U.S. tax rate in both quarters primarily due to state income taxes and certain share-based compensation that is not tax deductible.

During the three months ended March 31, 2011, we had no material changes to our liability for uncertain tax positions. The examination of our 2008 U.S. income tax return concluded during the quarter ended March 31, 2011 with no material adjustments. Various state income tax returns are currently under examination. At this time, we do not believe that the results of these examinations will have a material impact on our financial statements.

Note 9. Comprehensive Income

The following table reconciles net income to comprehensive income for the three months ended March 31, 2011 and 2010:


	Three Months Ended March 31,
(in thousands)	2011			2010

Net income	$	36,446		$	21,282

Other comprehensive:
Unrealized losses on available for sale securities, net		(7	)		(22	)

Currency translation adjustments, net		65			(1,615	)


Comprehensive income (loss)	$	36,504		$	19,645

The unrealized losses are reported net of federal and state income taxes.

Note 10. Earnings per share


	Three Months Ended March 31, 2011
(in thousands, except per share data)	2011		2010
Basic Earnings Per Share
Net income	$	36,446	$	21,282
Common stock outstanding (weighted average)		77,849		77,506

Basic net income per share	$	0.47	$	0.27


Diluted Earnings Per Share
Net income	$	36,446	$	21,282
Add: interest expense on senior convertible notes, net of income tax		1,845		1,761

Diluted net income	$	38,291	$	23,043

Common stock outstanding (weighted average)		77,849		77,506
Add: shares from senior convertible notes		10,864		10,864
Add: “in-the-money” stock options		6,926		1,298
Add: performance share awards		323		-
Add: restricted stock awards		11		-

Common stock assuming conversion and stock option exercises		95,973		89,668

Diluted net income per share	$	0.40	$	0.26

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements – (Continued)

The following common shares that are associated with stock options were excluded from the calculations as their effect would be anti-dilutive:


	Three Months Ended March 31, 2011
(in thousands)	2011		2010
“Out-of-the-money” stock options		1,352		5,557

Note 11. Fair Value Measurement

Valuation Hierarchy – GAAP establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2011:


				Fair Value Measurements at March 31, 2011
(in thousands)	Total Carrying Value at March 31, 2011			(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	391,388		$	391,388	$	-	$	-
Short term investments	$	103,583		$	103,583	$	-	$	-
Contingent consideration	$	(11,838	)	$	-	$	-	$	(11,838	)

Valuation Techniques – Cash, cash equivalents and short-term investments are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. There were no changes in valuation techniques during the quarter ended March 31, 2011.

The fair value of the Contingent consideration is measured using significant inputs not observable in the market, which are referred to in the guidance as Level 3 inputs. This fair value is estimated by applying a discount rate based on an implied rate of return from the acquisition to the risk probability weighted asset cash flows and the expected approval date to the probability adjusted payment amount. There were no changes in the valuation technique from the acquisition date. The contractual amount of contingent consideration related to the Auralis acquisition is £10.0 million (or approximately $16.0 million based on exchange rates at March 31, 2010). The fair value at acquisition was approximately £6.2 million or approximately $9.0 million. At March 31, 2011 the fair value is

ViroPharma Incorporated

Notes to the Unaudited Consolidated Financial Statements – (Continued)

approximately £7.4 million or approximately $11.8 million. Of the total change in the carrying value, approximately $0.5 million and $1.8 million is attributable to the change in the fair value from December 31, 2010 and from the acquisition date, respectively, with the balance attributable to the change in the GBP/$US exchange rate during those periods.

There were no transfers into or out of Levels 1 and 2 and there was no activity in Level 3.

We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts.

Note 12. Acquisitions

On May 28, 2010 we acquired a 100% ownership interest in Auralis Limited, a UK based specialty pharmaceutical company for approximately $14.5 million in upfront consideration for the acquisition of the company and its existing pharmaceutical licenses and products. We have also agreed to pay an additional payment of £10 million Pounds Sterling (approximately $16.0 million based on the March 31, 2011 exchange rate) upon the first regulatory approval of BUCCOLAM.

The acquisition provides us with the opportunity to accelerate our European commercial systems, which will be utilized in the commercial launch of Cinryze™ (C1 esterase inhibitor [human]) in Europe if approved, for future product launches and potential additional business development acquisitions. The acquisition also provides immediate revenue from sales of a marketed product in the UK.

The contingent consideration will be payable upon the first regulatory approval of BUCCOLAM. The fair value of the contingent consideration recognized on the acquisition date ($9.0 million) was estimated by applying a discount rate based on an implied rate of return from the acquisition to the risk probability weighted asset cash flows and the expected approval date. This fair value is based on significant inputs not observable in the market, which are referred to in the guidance as Level 3 inputs. The contingent consideration is classified as a liability and is subject to the recognition of subsequent changes in fair value.

The results of Auralis’s operations have been included in the Consolidated Statement of Operations beginning June 1, 2010.

Note 13. Supplemental Cash Flow Information


	Three Months Ended March 31,
(in thousands)	2011			2010
Supplemental disclosure of non-cash transactions:
Employee share-based compensation	$	3,456		$	2,661
Unrealized losses on available for sale securities		(7	)		(22	)
Non-cash increase in contingent consideration		471			-
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	13,714		$	4,098
Cash paid for interest		2,050			2,050
Cash received for stock option exercises		1,915			1,075
Cash received for employee stock purchase plan		117			66

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We market and sell Cinryze in the United States for routine prophylaxis against angioedema attacks in adolescent and adult patients with hereditary angioedema (HAE). Cinryze is a C1 esterase inhibitor therapy for routine prophylaxis against HAE, also known as C1 inhibitor (C1-INH) deficiency, a rare, severely debilitating, life-threatening genetic disorder. Cinryze was obtained in October 2008, when we completed our acquisition of Lev Pharmaceuticals, Inc. (Lev). In January 2010, we acquired expanded rights to commercialize Cinryze and future C1-INH derived products in certain European countries and other territories throughout the world as well as rights to develop future C1-INH derived products for additional indications. In March 2010, our Marketing Authorization Application (MAA) for Cinryze for acute treatment and prophylaxis against HAE was accepted by the European Medicines Agency (EMA). We intend to seek to commercialize Cinryze in Europe in 2011 in countries where we have distribution rights. We are currently evaluating our commercialization plans in additional territories. We also intend to conduct ViroPharma sponsored studies and support investigator-initiated studies (IIS) to identify further therapeutic uses and potentially expand the labeled indication for Cinryze to include other C1 mediated diseases, such as Antibody-Mediated Rejection (AMR) and Delayed Graft Function (DGF). Additionally, we are currently undertaking studies on the viability of subcutaneous administration of Cinryze.

Executive Summary

Since December 31, 2010, we experienced the following:

Business Activities

Cinryze:

•

Shipped approximately 14,000 doses of Cinryze to specialty pharmacy/specialty distributors (SP/SD’s);

•

Recently announced that the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) recommended the approval of Cinryze;

•

Initiated a Phase 2 clinical study to evaluate the safety and efficacy of C1 Esterase Inhibitor [Human] for the treatment of acute antibody-mediated rejection (AMR) in recipients of donor-specific cross-match positive kidney transplants and withdrew Cinryze from the register of orphan medicinal products of the EMA; and,

•

Announced the launch of “HAE and Me,” an online community that unites teens and adults with hereditary angioedema (HAE) through shared experiences to help them better manage their disease;

C. difficile infection (CDI):

•

Received clearance from the FDA to begin our Phase 2 study of VP20621 for recurrent C. difficile infections; and,

•

Vancocin scripts decreased 9.9% in the first quarter of 2011 as compared to the first quarter of 2010;

Financial Results

•

Increased net sales of Cinryze to $56.6 million as compared to $34.9 million in the first quarter of 2010;

•

Net sales of Vancocin increased to $69.3 million from $55.8 million in the first quarter of 2010; and

•

Reported net income of $36.4 million in the first quarter of 2011;

Liquidity

•

Generated net cash from operations of $39.1 million;

•

Entered into a $50.0 million arrangement for the repurchase of our common stock; and

•

Ended the first quarter of 2011 with working capital of $550.6 million, which includes cash and cash equivalents and short-term investments of $495.0 million.

During the remainder of 2011 and going forward, we expect to face a number of challenges, which include the following:

The commercial sale of approved pharmaceutical products is subject to risks and uncertainties. There can be no assurance that future Vancocin sales will meet or exceed the historical rate of sales for the product, for reasons that include, but are not limited to, generic and non-generic competition for Vancocin and/or changes in prescribing habits or disease incidence.

The FDA convened a meeting of its Advisory Committee for Pharmaceutical Science and Clinical Pharmacology to discuss bioequivalence recommendations for oral vancomycin hydrochloride capsule drug products on August 4, 2009. The Advisory Committee was asked if the proposed guidelines are sufficient for establishing bioequivalence for generic vancomycin oral capsules. The Advisory Committee voted unanimously in favor of the component of the proposed OGD recommendation that requires bioequivalence to be demonstrated through comparable dissolution in media of pH 1.2, 4.5 and 6.8 for potential vancomycin HCl capsule generic products that (a) contain the same active and inactive ingredients in the same amounts as Vancocin HCl capsules; (b) meet currently accepted standards for assay, potency, purity, and stability (equivalent to those in place for Vancocin HCl capsules); and (c) are manufactured according to cGMP. We have opposed both the substance of the FDA’s bioequivalence method and the manner in which it was developed. In the event the OGD’s revised bioequivalence recommendation for Vancocin remains in effect, the time period in which a generic competitor may enter the market would be reduced. There can be no assurance that the FDA will agree with the positions stated in our Vancocin related submissions or that our efforts to oppose the OGD’s March 2006 and December 2008 recommendation to determine bioequivalence to Vancocin through in-vitro dissolution testing will be successful. We cannot predict the timeframe in which the FDA will make a decision regarding either our citizen petition for Vancocin or the approval of generic versions of Vancocin. If we are unable to change the recommendation set forth by the OGD in March 2006 as revised in December 2008 and voted upon by the Advisory Committee for Pharmaceutical Science and Clinical Pharmacology, the threat of generic competition will be high.

The FDA approved Cinryze for routine prophylaxis against angioedema attacks in adolescent and adult patients with hereditary angioedema on October 10, 2008. Cinryze became commercially available for routine prophylaxis against HAE in December 2008. The commercial success of Cinryze depends on several factors, including: the number of patients with HAE that may be treated with Cinryze; acceptance by physicians and patients of Cinryze as a safe and effective treatment; our ability to effectively market and distribute Cinryze in the United States; cost effectiveness of HAE treatment using Cinryze; relative convenience and ease of administration of Cinryze; potential advantages of Cinryze over alternative treatments; the timing of the approval of competitive products including another C1 esterase inhibitor for the acute treatment of HAE; the market acceptance of competing approved products such as Berinert; patients’ ability to obtain sufficient coverage or reimbursement by third-party payors; variations in dosing arising from physician preferences and patient compliance; sufficient supply and reasonable pricing of raw materials necessary to manufacture Cinryze; manufacturing or supply interruptions and capacity which could impair our ability to acquire an adequate supply of Cinryze to meet demand for the product; and our ability to achieve expansion of manufacturing capabilities in the capacities and timeframes currently anticipated. In addition, our ability to develop life cycle management plans for Cinryze, including designing and commencing clinical studies for additional indications and pursuing regulatory approvals in additional indications or territories will impact our ability to generate future revenues from Cinryze. In Europe, we are seeking marketing approval of Cinryze and Buccolam and the commercial success of each of these products in Europe will depend on a number of factors, including our ability to achieve regulatory approvals in the timeframes we anticipate, the scope of regulatory protection afforded by the PUMA for BUCCOLAM, the impact of the loss of orphan designation on Cinryze, and market acceptance of the products.

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA), which was amended by the Health Care and Education Reconciliation Act of 2010. The PPACA, as amended, is a sweeping measure intended to expand

healthcare coverage within the United States, primarily through the imposition of health insurance mandates on employers and individuals and expansion of the Medicaid program. Several provisions of the new law, which have varying effective dates, will affect us. These include new requirements on private insurance companies that prohibit coverage denials because of a pre-existing condition; prohibit the application of annual and lifetime benefits limits on health insurance policies; and prohibit coverage rescissions (except for fraud) and health-based insurance rating. In addition, the PPACA, as amended, funds an interim high risk pool that states can draw on; following the expiration of this high risk pool funding, it provides for the creation of state-run “exchanges” that will allow people without employer-provided coverage, or who cannot afford their employer’s plan, to buy health insurance; and provides federal subsidies to those who cannot afford premiums. Collectively, these factors may increase the availability of reimbursement for patients seeking the products that ViroPharma commercializes. However, the Act, as amended, will likely increase certain of our costs as well. For example, an increase in the Medicaid rebate rate from 15.1% to 23.1% was effective as of January 1, 2010, and the volume of rebated drugs has been expanded to include beneficiaries in Medicaid managed care organizations, effective as of March 23, 2010. In 2011, the PPACA also imposes a manufacturer’s fee on the sale of branded Pharmaceuticals (excluding orphan drugs) to specified government programs, expands the 340B drug discount program (excluding orphan drugs), and includes a 50% discount on brand name drugs for Medicare Part D participants in the coverage gap, or “doughnut hole”. We have determined that the manufacturing fee is immaterial relative to our anticipated 2011 operating income and cash flow. We have also estimated that our incremental cost associated with the Medicare Part D coverage gap will be approximately $8.4 million during 2011. Our evaluation of PPACA, as amended, will continue to enable us to determine not only the immediate effects on our business, but also the trends and changes that may be encouraged by the legislation that may potentially impact on our business over time.

We will face intense competition in acquiring additional products to further expand our product portfolio. Many of the companies and institutions that we will compete with in acquiring additional products to further expand our product portfolio have substantially greater capital resources, research and development staffs and facilities than we have, and greater resources to conduct business development activities. We may need additional financing in order to acquire new products in connection with our plans as described in this report.

The outcome of our clinical development programs is subject to considerable uncertainties. We cannot be certain that we will be successful in developing and ultimately commercializing any of our product candidates, that the FDA or other regulatory authorities will not require additional or unanticipated studies or clinical trial outcomes before granting regulatory approval, or that we will be successful in obtaining regulatory approval of any of our product candidates in the timeframes that we expect, or at all.

We cannot assure you that our current cash and cash equivalents and investments or cash flows from product sales will be sufficient to fund all of our ongoing development and operational costs, as well as the interest payable on our outstanding senior convertible notes, over the next several years, that planned clinical trials can be initiated, or that planned or ongoing clinical trials can be successfully concluded or concluded in accordance with our anticipated schedule and costs. Moreover, the results of our business development efforts could require considerable investments.

Our actual results could differ materially from those results expressed in, or implied by, our expectations and assumptions described in this Quarterly Report on Form 10-Q. The risks described in this report, our Form 10-Q for the Quarter ended March 31, 2011, are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Please also see our discussion of the “Risk Factors” as described in our Form 10-K for the year ended December 31, 2010 in Item 1A, which describe other important matters relating to our business.

Results of Operations

Three Months Ended March 31, 2011 and 2010


(in thousands, except per share data)	Three Months Ended March 31,
	2011		2010

Net product sales	$	127,035	$	90,647

Cost of sales (excluding amortization of product rights)	$	18,869	$	13,958

Operating income	$	60,035	$	38,454

Net income	$	36,446	$	21,282

Net income per share:

Basic	$	0.47	$	0.27

Diluted	$	0.40	$	0.26

The $60.0 million in operating income for the three month period ended March 31, 2011 increased $21.6 million as compared to the same period in 2010. This increase is primarily the result of increased net sales ($36.4 million) partly offset by increased cost of sales ($4.9 million) mainly related to increased Cinryze volume, increased selling, general and administrative expenses ($7.4 million) primarily related to compensation, marketing expenses and medical education expense attributable to our European expansion efforts and increased amortization of intangible assets ($1.3 million).

Revenues

Revenues consisted of the following:


(in thousands)	Three Months Ended March 31,
	2011		2010
Net product sales
Vancocin	$	69,283	$	55,753
Cinryze		56,589		34,894
Other		1,163		-

Total revenues	$	127,035	$	90,647

Revenue—Vancocin and Cinryze product sales

We sell Vancocin only to wholesalers who then distribute the product to pharmacies, hospitals and long-term care facilities, among others. Our sales of Vancocin are influenced by wholesaler forecasts of prescription demand, wholesaler buying decisions related to their desired inventory levels, and, ultimately, end user prescriptions, all of which could be at different levels from period to period.

We sell Cinryze to specialty pharmacy/specialty distributors (SP/SD’s) who then distribute to physicians, hospitals and patients, among others. During 2010, we continued work to expand our manufacturing capacity to insure the availability of Cinryze to meet growing patient needs and believe our efforts will allow us to continue to meet this growing patient demand for the foreseeable future. In the second quarter of 2010, we introduced parallel chromatography produced Cinryze into the trade which increased our supply so that we were able to start new patients on Cinryze as needed without undue concern of any disruption of the availability of Cinryze to those already receiving it. In order to meet anticipated longer term demand, we submitted to the FDA a Prior Approval Supplement (PAS) in the second quarter of 2010. The PAS involves a larger scale manufacturing project to significantly increase the Cinryze production capabilities at Sanquin. In October 2010, the FDA issued a complete response letter regarding the Cinryze industrial scale manufacturing expansion activities. In the complete response letter the FDA has requested additional information related to observations from the pre-approval inspection and review of the technical processes. We anticipate filing a response to the complete response letter during 2011 and in parallel will continue advancing additional initiatives intended to increase our capacity.

During the three months ended March 31, 2011, net sales of Vancocin increased 24.3% compared to the same period in 2010 primarily due to the price increases during the second half of 2010 and the first quarter of 2011 along with higher sales volume. Also, during the quarter ended March 31, 2011 Vancocin net sales were reduced by approximately $2.1 million related to the Medicare Part D coverage gap discount enacted under the PPACA. We anticipate that this refund will reduce net sales by approximately $8.4 million during 2011. Based upon data reported by IMS Health Incorporated, prescriptions during the three months ended March 31, 2011 decreased from the same period in 2010 by 9.9% which we believe is due to a decrease in the severity of the disease state, improved aseptic technique and a suspected increase in compounding seen both in the hospital and long-term care marketplace. The units sold for the three months ended March 31, 2011 increased by approximately 4.6% compared to the same period in 2010. Our net sales of Cinryze during the three months ended March 31, 2011 increased 62.2% over the same period in the prior year due to the increase in the number of patients receiving commercial drug.

Vancocin product sales are driven by demand fluctuations in trade inventories which could be at different levels from period to period. Cinryze product sales are influenced by prescriptions and the rate at which new patients are placed on Cinryze. We receive inventory data from our three largest wholesalers through our fee for service agreements and our two SP/SD’s through service agreements. We do not independently verify this data. Based on this inventory data and our estimates, we believe that as of March 31, 2011, the wholesalers and SP/SD’s did not have excess channel inventory.

Cost of sales (excluding amortization of product rights)

Cost of sales increased over the same period in the prior year by $4.9 million due to the increased Cinryze volume, partly offset by the $1.5 million recorded in the first quarter of 2010 related to non-refundable start up costs paid to a new plasma supplier.

Vancocin and Cinryze cost of sales includes the cost of materials and distribution costs and excludes amortization of product rights. Since units are shipped based upon earliest expiration date, we would expect the cost of product sales of both Vancocin and Cinryze to fluctuate from quarter to quarter as we may experience fluctuations in quarterly manufacturing yields.

Research and development expenses

For each of our research and development programs, we incur both direct and indirect expenses. Direct expenses include third party costs related to these programs such as contract research, consulting, cost sharing payments or receipts and clinical and development costs. Indirect expenses include personnel, facility, stock compensation and other overhead costs. Due to advancements in our VP20621 clinical program, and our Cinryze life cycle management program as well as cost associated with our efforts to advance additional initiatives intended to increase our Cinryze capacity, we expect future costs in these programs to increase from historical levels.

Research and development expenses were divided between our research and development programs in the following manner:


(in thousands)	Three Months Ended March 31,
	2011		2010
*Direct – Core programs*
Non-toxigenic strains of C. difficle (VP20621)	$	1,900	$	2,234
Cinryze		2,221		1,778
Vancocin		2		297
*Direct – Other assets*
CMV		181		321
New Initiatives		481		32
Other assets		95		-
*Indirect*
Development		5,546		5,079

Total	$	10,426	$	9,741

Direct Expenses—Core Development Programs

The decrease in costs of VP20621 in the three months ended March 31, 2011 over the same period in 2010 relates to timing of costs associated with our Phase 1 clinical trial.

Our costs associated with our Cinryze program increased during the three months ended March 31, 2011, as we incurred costs related to the continuation of our Phase 4 clinical trial, development of our life cycle program and quality assurance efforts in conjunction with increasing our manufacturing capacity. In the same period in the prior year, we incurred costs related to the preparation of our Phase 4 clinical trial.

Direct Expenses—Other Assets

Our direct expenses related to our CMV program decreased in the three months ended March 31, 2011 as we wound down our stem cell and liver transplant studies during 2010. During 2011, we continue to evaluate any potential alternative development strategies for maribavir.

Our costs related to New Initiatives represent expenses associated with our evaluation of a recombinant C1-INH technology and spending under our collaboration agreement with Sanquin supporting their Early Stage Research Programs.

Anticipated fluctuations in future direct expenses are discussed under “Liquidity – Development Programs.”

Indirect Expenses

These costs primarily relate to the compensation of and overhead attributable to our development team.

Selling, general and administrative expenses

Selling, general and administrative expenses (SG&A) increased $7.4 million for the three months ended March 31, 2011 as compared to the same period in 2010. To an extent the overall increase in SG&A is driven by our European commercialization efforts. Specifically, we incurred increased cost in the following areas; compensation expense ($2.5 million), marketing activities ($0.8 million), medical education activities ($0.6 million), legal costs ($0.4 million) and an increased level of HAE patient support costs ($1.6 million). Included in SG&A are legal and consulting costs incurred related to our opposition to the attempt by the OGD regarding the conditions that must be met in order for a generic drug application to request a waiver of in-vivo bioequivalence testing for copies of Vancocin, which were $1.5 million and $1.2 million for the three months ended March 31, 2011 and 2010, respectively. We anticipate that these additional legal and consulting costs will continue at the current level, or possibly higher, in future periods as we continue this opposition. We anticipate continued increased spending in selling, general and administrative expenses in future periods as we continue to implement additional commercial programs related to Cinryze and continue our European initiatives.

Intangible amortization and acquisition of technology rights

Intangible amortization for the three months ended March 31, 2011 and 2010 was $8.9 million and $7.6 million, respectively. The year over year increase is primarily due to the amortization of the Auralis intangible assets acquired in May of 2010.

On an ongoing periodic basis, we evaluate the useful life of our intangible assets and determine if any economic, governmental or regulatory event has modified their estimated useful lives. This evaluation did not result in a change in the life of the intangible assets during the quarter ended March 31, 2011. We will continue to monitor the actions of the FDA and OGD surrounding the bioequivalence recommendation for Vancocin and consider the effects of our opposition efforts, any announcements by generic competitors or other adverse events for additional impairment indicators. We will reevaluate the expected cash flows and fair value of our Vancocin-related assets, as well as estimated useful lives, at such time.

Other operating expenses

The re-measurement of the fair value of the contingent consideration given for the acquisition of Auralis resulted in a charge to income during the period ended March 31, 2011 of $0.5 million. There was no such charge during the first quarter of 2010.

Other Income (Expense)

Interest Income

Interest income for three months ended March 31, 2011 and 2010 was $204,000 and $31,000, respectively.

Interest Expense


	Three Months Ended March 31,
(in thousands)	2011		2010
Interest expense on 2% senior convertible notes	$	1,025	$	1,022
Amortization of debt discount		1,859		1,719
Amortization of finance costs		97		97

Total interest expense	$	2,981	$	2,838

Interest expense and amortization of finance costs during the three months end March 31, 2011 and 2010 relates entirely to the senior convertible notes issued on March 26, 2007.

Other income (expense), net

Our other income (expense), net is primarily due to our foreign exchange gains and losses as well as the rental income attributable to our previous corporate headquarters.

Income Tax Expense

Our income tax expense was $24.0 million and $13.8 million for the three months ended March 31, 2011 and 2010, respectively. The effective tax rate in the first quarter of 2011 was 39.7% compared to 39.4% in the first quarter of 2010. The effective tax rate in both the first quarter of 2011 and 2010 exceeded the federal statutory tax rate due to state income taxes and certain share-based compensation that is not tax deductible.

Liquidity

We expect that our sources of revenue will continue to arise from Cinryze and Vancocin product sales. However, future sales of Vancocin will vary based on the number of generic competitors that could enter the market if approved by the FDA, the timing of entry into the market of those generic competitors and/or the sales we may generate from an authorized generic version of Vancocin. In addition, there are no assurances that demand for Cinryze will continue to grow or that demand for Vancocin will continue at historical or current levels.

Our ability to generate positive cash flow is also impacted by the timing of anticipated events in our Cinryze and VP20621 development programs, including the timing of our expansion as we intend to seek to commercialize Cinryze in Europe and certain other countries, the scope of the clinical trials required by regulatory authorities, results from clinical trials, the results of our product development efforts, and variations from our estimate of future direct and indirect expenses.

The cash flows we have used in operations historically have been applied to research and development activities, marketing and commercial efforts, business development activities, general and administrative expenses, debt service, and income tax payments. Bringing drugs from the preclinical research and development stage through phase 1, phase 2, and phase 3 clinical trials and FDA and/or EMA or regulatory approval is a time consuming and expensive process. Because we have product candidates that are currently in the clinical stage of development, there are a variety of events that could occur during the development process that will dictate the course we must take with our drug development efforts and the cost of these efforts. As a result, we cannot reasonably estimate the costs that we will incur through the commercialization of any product candidate. However, our future costs may exceed current costs as we anticipate we will continue to invest in our pipeline on our initiative to develop VP20621 (non-toxigenic strains of C. difficile), our phase 4 program for Cinryze, any additional studies to identify further therapeutic uses and expand the labeled indication for Cinryze to potentially include other C1 mediated diseases as well as new modes of administration for Cinryze. Also, we will incur additional costs as we intend to seek to commercialize Cinryze in Europe in countries where we have distribution rights and certain other countries beginning in 2011 as well as conduct studies to identify additional C1 mediated diseases, such as AMR and DGF, which may be of interest for further clinical development, and to evaluate new forms of administration for Cinryze. The most significant of our near-term operating development cash outflows are as described under “Development Programs” as set forth below.

We are required to pay contingent consideration to Lev shareholders upon achievement of a commercial milestone related to Cinryze sales, additional consideration to Lilly based on the net sales of Vancocin and additional consideration to Auralis shareholders upon achievement of a regulatory milestone. Additionally, our operating expenses will not decrease significantly if there is the introduction of a generic Vancocin.

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA). The PPACA, as amended, will likely increase certain of our costs as well. For example, an increase in the Medicaid rebate rate from 15.1% to 23.1% was effective as of January 1, 2010, and the volume of rebated drugs has been expanded to include beneficiaries in Medicaid managed care organizations, effective as of March 23, 2010. In 2011, the PPACA also imposes a manufacturer’s fee on the sale of branded Pharmaceuticals (excluding orphan drugs) to specified government programs, expands the 340B drug discount program (excluding orphan drugs), and includes a 50% discount on brand name drugs for Medicare Part D participants in the coverage gap, or “donut hole”. We have determined that the manufacturing fee is immaterial relative to our anticipated 2011 operating income and cash flow. We have also estimated that our incremental cost associated with the Medicare Part D coverage gap will be approximately $8.4 million during 2011. Our evaluation of PPACA, as amended, will continue to enable us to determine not only the immediate effects on our business, but also the trends and changes that may be encouraged by the legislation that may potentially impact on our business over time.

While we anticipate that cash flows from Cinryze and Vancocin, as well as our current cash, cash equivalents and short-term investments, should allow us to fund our ongoing development and operating costs, as well as the interest payments on our senior convertible notes, we may need additional financing in order to expand our product portfolio. At March 31, 2011, we had cash, cash equivalents and short-term investments of $495.0 million. Short-term investments consist of high quality fixed income securities with remaining maturities of greater than three months at the date of purchase and high quality debt securities or obligation of departments or agencies of the United States. At March 31, 2011, the annualized weighted average nominal interest rate on our short-term investments was 0.3% and the weighted average length to maturity was 8.7 months.

From time to time, we may seek approval from our board of directors to evaluate additional opportunities to repurchase our common stock or convertible notes, including through open market purchases or individually negotiated transactions.

Overall Cash Flows

During the three months ended March 31, 2011, we generated $39.1 million of net cash from operating activities, primarily from our net income after adjustments for non-cash items. We used $27.2 million of cash from investing activities mainly in the purchase of short-term investments, net of investment maturities. Our net cash used in financing activities for the three months ended March 31, 2011 was $47.6 million which relates to the common stock repurchase arrangement entered into during the quarter under our share repurchase program net of proceeds from stock option exercises. During the quarter ended March 31, 2010, we generated $38.3 million of net cash from operating activities, primarily from our net income plus non-cash items and the change in accounts payable. We used $17.7 million of cash from investing activities to purchase our short-term investments and our net cash provided by financing activities for the quarter ended March 31, 2010 was $2.3 million and relates to stock option exercises.

Development Programs

For each of our development programs, we incur both direct and indirect expenses. Direct expenses include third party costs related to these programs such as contract research, consulting, cost sharing payments or receipts, and preclinical and clinical development costs. Indirect expenses include personnel, facility and other overhead costs. Additionally, for some of our development programs, we have cash inflows and outflows upon achieving certain milestones.

Core Development Programs

Cinryze—We acquired Cinryze in October 2008 and through March 31, 2011 have spent approximately $21.6 million in direct research and development costs related to Cinryze since acquisition. During the remainder of 2011, we continue to expect research and development costs related to Cinryze to increase as we complete our Phase 4 commitment and initiate our Phase 2 study to evaluate Cinryze for treatment of acute HAE in children. Additionally, we will incur costs related to evaluating additional indications, formulations and territories as we develop our life cycle program related to Cinryze such as our efforts on sub-subcutaneous, AMR and DGF. We are solely responsible for the costs of Cinryze development.

VP20621—We acquired VP20621 in February 2006 and through March 31, 2011 have spent approximately $25.8 million in direct research and development costs. For the remainder of 2011, we expect our research and development activities related to VP20621 to increase as we continue our development program. We are solely responsible for the costs of VP20621 development.

Vancocin—We acquired Vancocin in November 2004 and through March 31, 2011 have spent approximately $2.8 million in direct research and development costs related to Vancocin activities since acquisition.

Other Assets

In addition to the programs described above, we have several other assets that we may make additional investments in. These investments will be dependent on our assessment of the potential future commercial success of or benefits from the asset. These assets include maribavir for CMV, and other compounds. We will continue to incur costs associated with our other development assets for direct research and development costs for medicinal products which will address unmet medical needs such as our current evaluation of a recombinant C1-INH technology which may be included in future clinical studies.

Business development activities

On October 21, 2008, we completed our acquisition under which ViroPharma acquired Lev Pharmaceuticals, Inc. (Lev). Lev is a biopharmaceutical company focused on developing and commercializing therapeutic products for the treatment of inflammatory

diseases. The terms of the merger agreement provided for the conversion of each share of Lev common stock into upfront consideration of $453.1 million, or $2.75 per Lev share, comprised of $2.25 per share in cash and $0.50 per share in ViroPharma common stock, and contingent consideration of up to $1.00 per share which may be paid on achievement of certain regulatory and commercial milestones. The target for the first CVR payment of $0.50 per share (or $87.5 million) will not be paid as a third party’s human C1 inhibitor product was approved for the acute treatment of HAE and granted orphan exclusivity. The second CVR payment of $0.50 per share ($87.5 million) becomes payable if Cinryze reaches at least $600 million in cumulative net product sales by October 2018 and we anticipate achieving this milestone in 2012.

We intend to continue to seek to acquire additional products or product candidates. The costs associated with evaluating or acquiring any additional product or product candidate can vary substantially based upon market size of the product, the commercial effort required for the product, the product’s current stage of development, and actual and potential generic and non-generic competition for the product, among other factors. Due to the variability of the cost of evaluating or acquiring business development candidates, it is not feasible to predict what our actual evaluation or acquisition costs would be, if any, however, the costs could be substantial.

Share Repurchase Program

On March 9, 2011 our Board of Directors authorized the use of up to $150.0 million to repurchase shares of our common stock and/or our 2% Senior Convertible Notes due 2017. Purchases may be made by means of open market transactions, block transactions, privately negotiated purchase transactions or other techniques from time to time. The sources of cash for this repurchase program are expected to be a combination of our available liquid assets and/or our anticipated cash flows from operations, and we anticipate executing under this authorization from time to time until fully utilized.

Senior Convertible Notes

As of January 1, 2009 we account for the debt and equity components of our convertible debt securities as bifurcated instruments which are accounted for separately. Accordingly, the convertible debt securities will recognize interest expense at effective rates of 8.0% as they are accreted to par value.

price of our common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; or (iv) upon the occurrence of specified corporate events. Upon conversion, holders of the senior convertible notes will receive shares of common stock, subject to ViroPharma’s option to irrevocably elect to settle all future conversions in cash up to the principal amount of the senior convertible notes, and shares for any excess. We can irrevocably elect this option at any time on or prior to the 35th scheduled trading day prior to the maturity date of the senior convertible notes. The senior convertible notes may be required to be repaid on the occurrence of certain fundamental changes, as defined in the senior convertible notes. As of March 31, 2011, the fair value of the principal of the $205.0 million convertible senior notes outstanding was approximately $259.9 million, based on the level 2 valuation hierarchy of the fair value measurements standard. The carrying value of the debt at March 31, 2011 is $147.6 million.

The call options allowed ViroPharma to receive up to approximately 13.25 million shares of its common stock at $18.87 per share from the call option holders, equal to the number of shares of common stock that ViroPharma would issue to the holders of the senior convertible notes upon conversion. These call options will terminate upon the earlier of the maturity dates of the related senior convertible notes or the first day all of the related senior convertible notes are no longer outstanding due to conversion or otherwise. Concurrently, we sold warrants to the warrant holders to receive shares of its common stock at an exercise price of $24.92 per share. These warrants expire ratably over a 60-day trading period beginning on June 13, 2017 and will be net-share settled.

The purchased call options are expected to reduce the potential dilution upon conversion of the senior convertible notes in the event that the market value per share of our common stock at the time of exercise is greater than $18.87, which corresponds to the initial conversion price of the senior convertible notes, but less than $24.92 (the warrant exercise price). The warrant exercise price is 75.0% higher than the price per share of $14.24 of our stock price on the pricing date. If the market price per share of our common stock at the time of conversion of any senior convertible notes is above the strike price of the purchased call options ($18.87), the purchased call options will entitle us to receive from the counterparties in the aggregate the same number of shares of our common stock as we would be required to issue to the holder of the converted senior convertible notes. Additionally, if the market price of our common stock at the time of exercise of the sold warrants exceeds the strike price of the sold warrants ($24.92), we will owe the counterparties an aggregate of approximately 13.25 million shares of our common stock. If we have insufficient shares of common stock available for settlement of the warrants, we may issue shares of a newly created series of preferred stock in lieu of our obligation to deliver common stock. Any such preferred stock would be convertible into 10% more shares of our common stock than the amount of common stock we would otherwise have been obligated to deliver under the warrants. We are entitled to receive approximately 10.87 million shares of its common stock at $18.87 from the call option holders and if the market price of our common stock at the time of exercise of the sold warrants exceeds the strike price of the sold warrants ($24.92), will owe the counterparties an aggregate of approximately 10.87 million shares of our common stock.

The purchased call options and sold warrants are separate transactions entered into by us with the counterparties, are not part of the terms of the senior convertible notes, and will not affect the holders’ rights under the senior convertible notes. Holders of the senior convertible notes will not have any rights with respect to the purchased call options or the sold warrants. The purchased call options and sold warrants meet the definition of derivatives. These instruments have been determined to be indexed to our own stock and have been recorded in stockholders’ equity in our unaudited Condensed Consolidated Balance Sheets. As long as the instruments are classified in stockholders’ equity they are not subject to the mark to market requirements of US GAAP.

Capital Resources

While we anticipate that cash flows from Cinryze and Vancocin, as well as our current cash, cash equivalents and short-term investments, should allow us to fund our ongoing development and operating costs, as well as the interest payments on our senior convertible notes, we may need additional financing in order to expand our product portfolio. At March 31, 2011, we had cash, cash equivalents and short-term investments of $495.0 million. Our investments consist of high quality fixed income securities and high quality debt securities or obligation of departments or agencies of the United States. We generally invest in financial instruments with maturities of less than one year. At March 31, 2011, the annualized weighted average nominal interest rate on our investment portfolio was 0.3% and the weighted average length to maturity was 8.7 months.

Should we need financing, we would seek to access the public or private equity or debt markets, enter into additional arrangements with corporate collaborators to whom we may issue equity or debt securities or enter into other alternative financing arrangements that may become available to us.

Financing

If we raise additional capital by issuing equity securities, the terms and prices for these financings may be much more favorable to the new investors than the terms obtained by our existing stockholders. These financings also may significantly dilute the ownership of existing stockholders.

If we raise additional capital by accessing debt markets, the terms and pricing for these financings may be much more favorable to the new lenders than the terms obtained from our prior lenders. These financings also may require liens on certain of our assets that may limit our flexibility.

Additional equity or debt financing, however, may not be available on acceptable terms from any source as a result of, among other factors, our operating results, our inability to achieve regulatory approval of any of our product candidates, and our inability to file, prosecute, defend and enforce patent claims and or other intellectual property rights. If sufficient additional financing is not available, we may need to delay, reduce or eliminate current development programs, or reduce or eliminate other aspects of our business.

We may seek additional authorization from our board of directors to evaluate additional opportunities to repurchase our common stock or convertible notes, including through open market purchases or individually negotiated transactions.

Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and contingent assets and liabilities. Actual results could differ from such estimates. These estimates and assumptions are affected by the application of our accounting policies. Critical policies and practices are both most important to the portrayal of a company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

Our summary of significant accounting policies is described in Note 2 to our Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2010. However, we consider the following policies and estimates to be the most critical in understanding the more complex judgments that are involved in preparing our consolidated financial statements and that could impact our results of operations, financial position, and cash flows:

•

Product Sales—Our net sales consist of revenue from sales of our products, Vancocin, Cinryze and Diamorphine, less estimates for chargebacks, rebates, distribution service fees, returns and losses. We recognize revenue for product sales when title and risk of loss has passed to the customer, which is typically upon delivery to the customer, when estimated provisions for chargebacks, rebates, distribution service fees, returns and losses are reasonably determinable, and when collectability is reasonably assured. Revenue from the launch of a new or significantly unique product may be deferred until estimates can be made for chargebacks, rebates and losses and all of the above conditions are met and when the product has achieved market acceptance, which is typically based on dispensed prescription data and other information obtained during the period following launch.

At the end of each reporting period we analyze our estimated channel inventory and we would defer recognition of revenue on product that has been delivered if we believe that channel inventory at a period end is in excess of ordinary business needs. Further, if we believe channel inventory levels are increasing without a reasonably correlating increase in prescription demand, we proactively delay the processing of wholesaler orders until these levels are reduced.

We establish accruals for chargebacks and rebates, sales discounts and product returns. These accruals are primarily based upon the history of Vancocin and for Cinryze they are based on information on payee’s obtained from our SP/SD’s and CinryzeSolutions. We also consider the volume and price of our products in the channel, trends in wholesaler inventory, conditions that might impact patient demand for our product (such as incidence of disease and the threat of generics) and other factors.

In addition to internal information, such as unit sales, we use information from external resources, which we do not verify, to estimate the Vancocin channel inventory. Our external resources include prescription data reported by IMS Health Incorporated and written and verbal information obtained from our three largest wholesaler customers with respect to their inventory levels. Based upon this information, we believe that inventory held at these warehouses are within normal levels.

Chargebacks and rebates are the most subjective sales related accruals. While we currently have no contracts with private third party payors, such as HMO’s, we do have contractual arrangements with governmental agencies, including Medicaid. We establish accruals for chargebacks and rebates related to these contracts in the period in which we record the sale as revenue. These accruals are based upon historical experience of government agencies’ market share, governmental contractual prices, our current pricing and then-current laws, regulations and interpretations. We analyze the accrual at least quarterly and adjust the balance as needed. These analyses have been adjusted to reflect the U.S. healthcare reform acts and their affect on governmental contractual prices and rebates. We believe that a 10% change in our estimate of the actual rate of sales subject to governmental rebates would affect our operating income and accruals by approximately $1.5 million in the period of correction, which we believe is immaterial.

Annually, as part of our process, we performed an analysis on the share of Vancocin and Cinryze sales that ultimately go to Medicaid recipients and result in a Medicaid rebate. As part of that analysis, we considered our actual Medicaid historical rebates processed, total units sold and fluctuations in channel inventory. We also consider our payee mix for Cinryze based on information obtained at the time of prescription.

Under the PPACA we are required to fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients staring on January 1, 2011. For Vancocin sales subject to this discount we recognize this cost using an effective rebate percentage for all sales to Medicare patients throughout the year. For applicable Cinryze sales we recognize this cost at the time of sale for product expected to be purchased by a Medicare Part D insured patient when we estimate they are within the coverage gap.

Product return accruals are estimated based on Vancocin’s history of damage and product expiration returns and are recorded in the period in which we record the sale of revenue. Cinryze has a no returns policy.

•

Impairment of Long-lived Assets—We review our fixed and long-lived intangible assets for possible impairment annually and whenever events occur or circumstances indicate that the carrying amount of an asset may not be recoverable. The impairment test is a two-step test. Under step one we assess the recoverability of an asset (or asset group). The carrying amount of an asset (or asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected from the use and eventual disposition of the asset (or asset group). The impairment loss is measured in step two as the difference between the carrying value of the asset (or asset group) and its fair value. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Such assumptions include, for example, projections of future cash flows and the timing and number of generic/competitive entries into the market, in determining the undiscounted cash flows, and if necessary, the fair value of the asset and whether impairment exists. These assumptions are subjective and could result in a material impact on operating results in the period of impairment.

On an ongoing periodic basis, we evaluate the useful life of intangible assets and determine if any economic, governmental or regulatory event has modified their estimated useful lives.

A reduction in the useful life, as well as the timing and number of generics, will impact our cash flow assumptions and estimate of fair value, perhaps to a level that could result in an impairment charge. We will continue to monitor the actions of the OGD and consider the effects of our opposition actions and any announcements by generic competitors or other adverse events for additional impairment indicators. We will reevaluate the expected cash flows and fair value of our Vancocin-related assets at such time a triggering event occurs.

•

Impairment of Goodwill and Indefinite-lived Intangible Assets – We review the carrying value of goodwill and indefinite-lived intangible assets, to determine whether impairment may exist. The goodwill impairment test consists of two steps. The first step compares a reporting unit’s fair value to its carrying amount to identify potential goodwill impairment. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the second step of the impairment test must be completed to measure the amount of the reporting unit’s goodwill impairment loss, if any. Step two requires an assignment of the reporting unit’s fair value to the reporting unit’s assets and liabilities to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of the reporting unit’s goodwill is then compared with the carrying amount of the reporting unit’s goodwill to determine the goodwill impairment loss to be recognized, if any. The

impairment test for indefinite-lived intangible assets is a one-step test, which compares the fair value of the intangible asset to its carrying value. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. Based on accounting standards, it is required that these assets be assessed annually for impairment unless a triggering event occurs between annual assessments which would then require an assessment in the period which a triggering event occurred.

•

Share-Based Payments - We record the estimated grant date fair value of awards granted as stock-based compensation expense in our consolidated statements of operations over the requisite service period, which is generally the vesting period.

•

Income Taxes—Our annual effective tax rate is based on projected pre-tax earnings, enacted statutory tax rates, limitations on the use of tax credits and net operating loss carryforwards, evaluation of qualified expenses related to the orphan drug credit and tax planning opportunities available in the jurisdictions in which we operate. Significant judgment is required in determining our annual effective tax rate.

We calculate our quarterly effective tax rate based on projected income, permanent differences and credits by jurisdiction, enacted statutory tax rates, and other items. Discrete tax impacts are recorded in the quarter in which they occur.

On a periodic basis, we evaluate the realizability of our deferred tax assets and will adjust such amounts in light of changing facts and circumstances, including but not limited to projections of future taxable income, the reversal of deferred tax liabilities, tax legislation, rulings by relevant tax authorities, tax planning strategies and the progress of ongoing tax examinations. As part of this evaluation, we consider whether it is more likely than not that all or some portion of the deferred tax asset will not be realized. The ultimate realization of a deferred tax asset is dependent upon the generation of future taxable income during the period in which the related temporary difference becomes deductible or the NOL and credit carryforwards can be utilized. With respect to the reversal of valuation allowances, we consider the level of past and future taxable income, the existence and nature of reversing deferred tax liabilities, the utilization of carryforwards and other factors. Revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period.

We recognize the benefit of tax positions that we have taken or expect to take on the income tax returns we file if such tax position is more likely than not of being sustained. Settlement of filing positions that may be challenged by tax authorities could impact our income tax expense in the year of resolution.

•

Acquisition Accounting — The application of the purchase accounting requires certain estimates and assumptions especially concerning the determination of the fair values of the acquired intangible assets and property, plant and equipment as well as the liabilities assumed at the date of the acquisition. Moreover, the useful lives of the acquired intangible assets, property, plant and equipment have to be determined.

The total purchase price of businesses acquired will be allocated to the net tangible assets and identifiable intangible assets based on their fair values as of the date of the acquisition and the fair value of any contingent consideration. Changes in the fair value of contingent consideration will be expensed in the period in which the change in fair value occurs. Additionally, acquired IPR&D projects will initially be capitalized and considered indefinite-lived assets subject to annual impairment reviews or more often upon the occurrence of certain events. For those compounds that reach commercialization, the assets are amortized over the expected useful lives.

Measurement of fair value and useful lives are based to a large extent on anticipated cash flows. If actual cash flows vary from those used in calculating fair values, this may significantly affect our future results of operations. In particular, the estimation of discounted cash flows of intangible assets of newly developed products is subject to assumptions closely related to the nature of the acquired products. Factors that may affect the assumptions regarding future cash flows:

•

long-term sales forecasts,

•

anticipation of selling price erosion after the end of orphan exclusivity due to follow-on biologic competition in the market,

•

behavior of competitors (launch of competing products, marketing initiatives etc.).

For significant acquisitions, the purchase price allocation is carried out with assistance from independent third-party valuation specialists. The valuations are based on information available at the acquisition date.

As our business evolves, we may face additional issues that will require increased levels of management estimation and complex judgments.

Recently Issued Accounting Pronouncements

In March 2010, the FASB ratified EITF Issue No. 08-9, Milestone Method of Revenue Recognition and as a result of this ratification the FASB issued ASU 2010-17 in April 2010, which states that the milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be achieved. The Task Force agreed that whether a milestone is substantive is a judgment that should be made at the inception of the arrangement. To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. The new guidance is effective for interim and annual periods beginning on or after June 15, 2010. We adopted this ASU January 1, 2011. The adoption of this guidance did not have a material impact on our results of operations, cash flows, and financial position.

In December 2010, the FASB issued ASU 2010-27, Fees Paid to the Federal Government by Pharmaceutical Manufactures (EITF Issue 10-D; ASC 720), which addresses how pharmaceutical manufacturers should recognize and classify in the income statements fees mandated by the patient protection and Affordable Care Act as amended by the Health Care Education Reconciliation Act. The ASU specifies that the liability for the fee be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to operating expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year. The new guidance is effective for calendar years beginning after December 31, 2010. We adopted this ASU January 1, 2011. The adoption of this guidance does not have a material impact on our results of operations, cash flows, and financial position.

Contractual Obligations

We have committed to purchase a minimum number of liters of plasma per year through 2015 from our supplier. Additionally, we are required to purchase a minimum number of units from our third party toll manufacturer. The total minimum purchase commitments for these continuing arrangements as of March 31, 2011 are approximately $349.3 million.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Our holdings of financial instruments are primarily comprised of money market funds holding only U.S. government securities and fixed income securities, including a mix of corporate debt and government securities. All such instruments are classified as securities available for sale. Our debt security portfolio represents funds held temporarily pending use in our business and operations. We manage these funds accordingly. Our primary investment objective is the preservation of principal, while at the same time optimizing the generation of investment income. We seek reasonable assuredness of the safety of principal and market liquidity by investing in cash equivalents (such as Treasury bills and money market funds) and fixed income securities (such as U.S. government and agency securities, municipal securities, taxable municipals, and corporate notes) while at the same time seeking to achieve a favorable rate of return. Our market risk exposure consists principally of exposure to changes in interest rates. Our holdings are also exposed to the risks of changes in the credit quality of issuers. We generally invest in financial instruments with maturities of less than one year. The

carrying amount, which approximates fair value based on the level 1 valuation hierarchy of the fair value measurement standard, and the annualized weighted average nominal interest rate of our investment portfolio at March 31, 2011, was approximately $103.6 million and 0.3%, respectively. The weighted average length to maturity was 8.7 months. A one percent change in the interest rate would have resulted in a $0.3 million impact to interest income for the quarter ended March 31, 2011.

At March 31, 2011, we had principal outstanding of $205.0 million of our senior convertible notes. The senior convertible notes bear interest at a rate of 2% per annum, payable semi-annually in arrears on March 15 and September 15 of each year commencing on September 15, 2007. The senior convertible notes are convertible into shares of our common stock at an initial conversion price of $18.87 per share. The senior convertible notes may only be converted: (i) anytime after December 15, 2016; (ii) during the five business-day period after any five consecutive trading day period (the “measurement period”) in which the price per note for each trading day of that measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; (iii) during any calendar quarter (and only during such quarter) after the calendar quarter ending June 30, 2007, if the last reported sale price of our common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; or (iv) upon the occurrence of specified corporate events. Upon conversion, holders of the senior convertible notes will receive shares of common stock, subject to our option to irrevocably elect to settle all future conversions in cash up to the principal amount of the senior convertible notes, and shares for any excess. We can irrevocably elect this option at any time on or prior to the 35th scheduled trading day prior to the maturity date of the senior convertible notes. The senior convertible notes may be required to be repaid on the occurrence of certain fundamental changes, as defined in the senior convertible notes. As of March 31, 2011, the fair value of the principal of the $205.0 million convertible senior notes outstanding was approximately $259.9 million, based on the level 2 valuation hierarchy of the fair value measurements standard. The carrying value of the debt at March 31, 2011 is $147.6 million.

In connection with the issuance of the senior convertible senior notes, we have entered into privately-negotiated transactions with two counterparties (the “counterparties”), comprised of purchased call options and warrants sold. These transactions are expected to generally reduce the potential equity dilution of our common stock upon conversion of the senior convertible notes. These transactions expose us to counterparty credit risk for nonperformance. We manage our exposure to counterparty credit risk through specific minimum credit standards, and diversification of counterparties.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and our Chief Financial Officer, or CFO, of the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 2011. Based on that evaluation, our management, including our CEO and CFO, concluded that as of March 31, 2011 our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to the Company’s management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the first quarter of 2011 there were no significant changes in our internal control over financial reporting identified in connection with the evaluation of such controls that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

On April 15, 2011, the United States District Court for the District of Columbia (the “Court”) granted a motion to dismiss an action brought by ViroPharma Incorporated (the “Company”) for declaratory relief (the “Complaint”) against the Food and Drug Administration, Margaret A. Hamburg, M.D., in her official capacity as Commissioner of Food and Drug Administration, the United States Department of Health and Human Services (“HHS”), and Kathleen Sebelius, in her official capacity as Secretary of HHS, (collectively “FDA”). Pursuant to the Complaint, ViroPharma sought review under the Administrative Procedure Act (“APA”) of the FDA’s decision to change its regulations to abandon its longstanding rule that applicants for an Abbreviated New Drug Application (“ANDA”) seeking a waiver of a demonstration of bioequivalence by in vivo evidence must satisfy one of the enumerated waiver criteria set forth in 21 C.F.R. § 320.22. ViroPharma had requested that the Court determine that (i) the plain reading of FDA’s regulations requires an ANDA applicant seeking a waiver of the in vivo bioequivalence testing requirement to first meet one of the criteria set forth in 21 C.F.R. § 320.22 and (ii) FDA’s amendment of its regulations governing waiver of submission of in vivo bioequivalence evidence, without engaging in notice-and-comment rulemaking, violates 5 U.S.C. § 553 of the APA and was therefore invalid. The Court did not address these arguments but instead granted the motion to dismiss brought by the defendants on a basis of a lack of standing. ViroPharma is considering its alternatives following this decision.

From time to time we are a party to litigation in the ordinary course of our business. We do not believe these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial condition, results of operations or cash flows.

ITEM 1A.

Risk Factors

We are providing the following information regarding changes that have occurred to previously disclosed risk factors from our Annual Report on Form 10-K for the year ended December 31, 2010. In addition to the other information set forth below and elsewhere in this report, you should carefully consider the factors discussed under the heading “Risk Factors” in our Form 10-K for the year ended December 31, 2010. The risks described in our Quarterly Report on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

If we are delayed in our ability to commercialize BUCCOLAM in Europe or are significantly limited in doing so, our business will be materially harmed.

We are in the process of seeking regulatory approval for BUCCOLAM in Europe and anticipate that our Pediatric Use Marketing Authorization (PUMA) could be approved by the EC in 2011. Our ability to commercialize BUCCOLAM may be delayed, impaired or prevented in the event the EMA or EC view the data regarding the use of BUCCOLAM for treatment of epilepsy we have submitted in the PUMA as insufficient or inconclusive, request additional data, require additional clinical studies, delay any decision past the time frames anticipated by us, limit any approved indications or deny approval of BUCCOLAM. The commercial success of BUCCOLAM will depend on several factors, including the following:

•

our ability to receive regulatory approvals to market BUCCOLAM in Europe for the scope and in the timeframes we anticipate;

•

the number of pediatric patients with epilepsy that may be treated with BUCCOLAM;

•

acceptance by physicians and patients of BUCCOLAM as a safe and effective treatment;

•

our ability to effectively market and distribute BUCCOLAM in Europe;

•

cost effectiveness of treatment of epilepsy using BUCCOLAM;

•

relative convenience and ease of administration of BUCCOLAM;

•

potential advantages of BUCCOLAM over alternative treatments;

•

the timing of the approval of competitive products for the treatment of epilepsy in pediatric patients;

•

The timing and levels of pricing approvals that are separately required in each country in Europe; and

•

manufacturing or supply interruptions which could impair our ability to acquire an adequate supply of BUCCOLAM to meet demand for the product including, without limitation, sufficient supply and reasonable pricing of raw materials necessary to manufacture BUCCOLAM.

If we are not able to continue to successfully commercialize BUCCOLAM in Europe, or are significantly delayed or limited in doing so, we could fail to achieve our estimates for peak year sales for BUCCOLAM and our financial condition, results of operations and liquidity could be materially adversely impacted.

We do not have patent protection for the composition of Cinryze or BUCCOLAM and we rely on regulatory exclusivity.

The Orphan Drug Act was created to encourage companies to develop therapies for rare diseases by providing incentives for drug development and commercialization. One of the incentives provided by the act is seven years of market exclusivity for the first product in a class licensed for the treatment of a rare disease. HAE is considered to be a rare disease under the Orphan Drug Act, and companies may obtain orphan drug status for therapies that are developed for this indication. The FDA granted Cinryze seven years of marketing exclusivity to Cinryze C1 inhibitor (human) for routine prophylaxis of HAE pursuant to the Orphan Drug Act. The FDA has granted marketing approval of CSL Behring’s product, Berinert^® C1-Esterase Inhibitor, Human, for the treatment of acute abdominal or facial attacks of hereditary angioedema and Berinert has received exclusivity pursuant to the Orphan Drug Act. In addition, in the first quarter of 2011, we withdrew our orphan designation in Europe and no longer maintain regulatory exclusivity for Cinryze in Europe.

While the marketing exclusivity of an orphan drug would prevent other sponsors from obtaining approval of the same drug compound for the same indication unless the subsequent sponsors could demonstrate clinical superiority or a market shortage occurs, it would not prevent other sponsors from obtaining approval of the same compound for other indications or the use of other types of drugs for the same use as the orphan drug. In the event we are unable to fill demand for Cinryze, it is possible that the FDA may view such unmet demand as a market shortage which could impact the market exclusivity provided by the Orphan Drug Act. Additionally, the United States Congress has considered, and may consider in the future, legislation that would restrict the duration or scope of the market exclusivity of an orphan drug and, thus, we cannot be sure that the benefits to us of the existing statute will remain in effect. We cannot predict when generic competition for Cinryze may arise, if at all, in Europe.

We are seeking a pediatric-use marketing authorization (PUMA) for Buccolam in Europe. The PUMA is a new type of marketing authorization which may be requested for a medicine which is already authorized, but no longer covered by intellectual property rights, and which will be exclusively developed for use in children. A PUMA will benefit from 10 years of market protection as a reward for the development in children. As a PUMA has not yet been granted, the EMA and EC may interpret the legislation in ways which restrict the duration or scope of the market exclusivity of a PUMA and, thus, we cannot be sure that the benefits to us of the existing statute will remain in effect.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

Below is a summary of stock repurchases for the first quarter ended March 31, 2011.


Month	Total Number of Shares Purchased⁽¹⁾		Average Price Paid per Share⁽²⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (in thousands)
March 1 – March 31		2,419,355	$	--		2,419,355	$	100,000,000

Total		2,419,355	$	--		2,419,355

(1)

In March 2011, our Board of Directors authorized up to $150.0 million in funds for repurchases of ViroPharma Incorporated’s outstanding shares of common stock and 2% senior convertible notes due 2017. The $150.0 million authorization excludes fees and expenses and authorizes management to repurchase shares opportunistically in the open market, in block transactions, in private transactions or other techniques from time to time, depending on market conditions. All shares repurchased in the first quarter of 2011 were purchased pursuant to an accelerated share repurchase agreement that we entered into on March 14, 2011 with a large financial institution, pursuant to which we paid $50.0 million to the financial institution and received an initial delivery of 2.4 million shares of our common stock, representing approximately 90% of the shares that could have been purchased, based on the closing price of our common stock on March 14, 2011. The total number of shares to be delivered generally will be determined by applying an agreed discount to the average of the daily volume weighted average price of shares of our common stock traded during the pricing period. The pricing period is scheduled to end June 15, 2011, but it may conclude sooner at the election of the financial institution. If the total number of shares to be delivered exceeds the number of shares initially delivered, we will receive the remaining balance of shares from the financial institution. If the total number of shares to be delivered is less than the number of shares initially delivered, we have the contractual right to deliver to the financial institution either shares of our common stock or cash equal to the value of those shares.

(2)	The Average Price Paid per Share is based on the price paid per share in the open market. The average price will be determined at the completion of the accelerated share repurchase agreement based on the volume weighted-average-price of our stock during the term of the agreement.

During the period covered by this report, we did not sell any of our equity shares that were not registered under the Securities Act of 1933, as amended.

ITEM 6. Exhibits

List of Exhibits:


		10.1		Form of Performance Stock Unit (Incorporated by reference to the Current Report on Form 8-K filed on January 7, 2011).

		10.2		Form of Amended and Restated Change of Control Agreement (Incorporated by reference to the Current Report on Form 8-K filed on January 7, 2011).

		31.1*		Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

		31.2*		Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

		32.1*		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		101		The following financial information from this Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Stockholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and, (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

*	Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	VIROPHARMA INCORPORATED

Date: April 28, 2011	By:	/s/ Vincent J. Milano
		Vincent J. Milano President and Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Charles A. Rowland, Jr.
		Charles A. Rowland, Jr. Vice President, Chief Financial Officer (Principal Financial Officer)

	By:	/s/ Richard S. Morris
		Richard S. Morris Vice President, Chief Accounting Officer (Principal Accounting Officer)

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