Exhibit 99.3

ViroPharma Incorporated and subsidiaries’ audited consolidated balance sheets as of December 31, 2012 and 2011, and audited consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for the years ended December 31, 2012, 2011 and 2010, and the notes related thereto

Index

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at December 31, 2012 and December 31, 2011

Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010

Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010

Consolidated Statements of Stockholders’ Equity  for the years ended December 31, 2012, 2011 and 2010

Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010

Notes to the Consolidated Financial Statements

1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

ViroPharma Incorporated:

We have audited the accompanying consolidated balance sheets of ViroPharma Incorporated and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ViroPharma Incorporated and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S generally accepted accounting principles.

/s/ KPMG LLP

Philadelphia, Pennsylvania

February 27, 2013

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ViroPharma Incorporated

Consolidated Balance Sheets

	December 31,			December 31,
(in thousands, except share and per share data)	2012			2011
Assets
Current assets:
Cash and cash equivalents	$	175,518		$	331,352
Short-term investments		71,338			128,478
Accounts receivable		74,396			78,534
Inventory		64,384			60,316
Prepaid expenses and other current assets		25,361			15,059
Prepaid income taxes		29,097			12,137
Deferred income taxes, net		13,324			10,055
Total current assets		453,418			635,931
Intangible assets, net		617,539			648,659
Property, equipment and building improvements, net		10,848			11,983
Goodwill		96,759			13,184
Debt issuance costs, net		2,551			3,488
Deferred income taxes		17,988			11,786
Other assets		20,849			11,766
Total assets	$	1,219,952		$	1,336,797
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	21,254		$	11,339
Contingent consideration		8,367			7,293
Accrued expenses and other current liabilities		83,503			75,983
Income taxes payable		904			4,036
Total current liabilities		114,028			98,651
Other non-current liabilities		1,898			1,967
Contingent consideration		17,710			12,896
Deferred tax liability		167,484			178,706
Long-term debt		161,793			153,453
Total liabilities		462,913			445,673
Stockholders’ equity:
Preferred stock, par value $0.001 per share. 5,000,000 shares authorized; Series A convertible participating preferred stock; no shares issued and outstanding		-			-
Common stock, par value $0.002 per share. 175,000,000 shares authorized; outstanding 65,113,880 shares at December 31, 2012 and 70,568,501 shares at December 31, 2011		163			159
Treasury shares, at cost.  16,042,202 shares at December 31, 2012 and 9,159,083 shares at December 31, 2011		(350,000	)		(169,661	)
Additional paid-in capital		789,719			749,519
Accumulated other comprehensive loss		(2,975	)		(3,414	)
Retained earnings		320,132			314,521
Total stockholders’ equity		757,039			891,124
Total liabilities and stockholders’ equity	$	1,219,952		$	1,336,797

See accompanying notes to consolidated financial statements.

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ViroPharma Incorporated

Consolidated Statements of Operations

	Years ended December 31,
(in thousands, except per share data)	2012			2011			2010
Revenues:
Net product sales	$	427,933		$	544,374		$	439,012
Costs and Expenses:
Cost of sales (excluding amortization of product rights)		108,547			79,976			61,288
Research and development		67,709			66,477			39,613
Selling, general and administrative		174,315			127,775			95,664
Intangible amortization		35,301			31,035			29,357
Impairment loss		-			8,495			-
Other operating expenses		8,718			8,488			1,390
Total costs and expenses		394,590			322,246			227,312
Operating income		33,343			222,128			211,700
Other Income (Expense):
Interest income		594			655			372
Interest expense		(14,093	)		(12,640	)		(11,616	)
Other (expense) income, net		(823	)		(2,136	)		430
Income before income tax expense		19,021			208,007			200,886
Income tax expense		13,410			67,348			75,278
Net income	$	5,611		$	140,659		$	125,608
Net income per share:
Basic	$	0.08		$	1.89		$	1.61
Diluted	$	0.08		$	1.68		$	1.47
Shares used in computing net income  per share:
Basic		68,214			74,517			77,820
Diluted		71,764			88,076			90,081

See accompanying notes to consolidated financial statements.

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ViroPharma Incorporated

Consolidated Statements of Comprehensive Income

	Years ended December 31,
(in thousands)	2012		2011			2010
Net income	$	5,611	$	140,659		$	125,608
Other comprehensive income (loss), before tax:
Foreign currency translations adjustments		427		(3,145	)		(1,172	)
Unrealized gain (loss) on available for sale securities
Unrealized holding gain (loss) arising during period		23		(16	)		-
Less: Reclassification adjustment for gains included in net income, net of tax expense		3		-			-
Income tax expense (benefit)		8		(5	)		-
Unrealized gain (loss) on available for sale securities, net of tax		12		(11	)		-
Other comprehensive income (loss), net of tax		439		(3,156	)		(1,172	)
Comprehensive income	$	6,050	$	137,503		$	124,436

See accompanying notes to consolidated financial statements

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ViroPharma Incorporated

Consolidated Statements of Stockholders’ Equity

	Preferred Stock				Common Stock					Treasury Shares
(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, 2009		-	$	-		77,443		$	156		-	$	-		$	701,063	$	914		$	48,254	$	750,387
Exercise of common stock options		-		-		633			-		-		-			3,342		-			-		3,342
Employee stock purchase plan		-		-		65			-		-		-			202		-			-		202
Share-based compensation		-		-		-			-		-		-			11,172		-			-		11,172
Stock option tax benefits		-		-		-			-		-		-			1,596		-			-		1,596
Cumulative translation adjustment, net		-		-		-			-		-		-			-		(1,172	)		-		(1,172	)
Net income.		-		-		-			-		-		-			-		-			125,608		125,608
Balance, December 31, 2010		-		-		78,141			156		-		-			717,375		(258	)		173,862		891,135
Exercise of common stock options		-		-		1,548			3		-		-			14,239		-			-		14,242
Employee stock purchase plan		-		-		38			-		-		-			452		-			-		452
Share-based compensation		-		-		-			-		-		-			14,242		-			-		14,242
Unrealized losses on available for sale securities, net		-		-		-			-		-		-			-		(11	)		-		(11	)
Cumulative translation adjustment, net		-		-		-			-		-		-			-		(3,145	)		-		(3,145	)
Repurchase of shares		-		-		(9,159	)		-		9,159		(169,661	)		-		-			-		(169,661	)
Stock option tax benefits		-		-		-			-		-		-			3,211		-			-		3,211
Net income		-		-		-			-		-		-			-		-			140,659		140,659
Balance, December 31, 2011		-		-		70,568			159		9,159		(169,661	)		749,519		(3,414	)		314,521		891,124
Exercise of common stock options		-		-		1,375			4		-		-			11,446		-			-		11,450
Restricted stock vested		-		-		27			-		-		-			-		-			-		-
Employee stock purchase plan		-		-		27			-		-		-			505		-			-		505
Share-based compensation		-		-		-			-		-		-			21,132		-			-		21,132
Other comprehensive income		-		-		-			-		-		-			-		439			-		439
Repurchase of shares		-		-		(6,883	)		-		6,883		(180,339	)		-		-			-		(180,339	)
Stock option tax benefits		-		-		-			-		-		-			7,117		-			-		7,117
Net income		-		-		-			-		-		-			-		-			5,611		5,611
Balance, December 31, 2012		-	$	-		65,114		$	163		16,042	$	(350,000	)	$	789,719	$	(2,975	)	$	320,132	$	757,039
See accompanying notes to consolidated financial statements.

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ViroPharma Incorporated

Consolidated Statements of Cash Flows

	Years ended December 31,
(in thousands)	2012			2011			2010
Cash flows from operating activities:
Net income	$	5,611		$	140,659		$	125,608
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash share-based compensation expense		21,132			14,242			11,176
Non-cash asset impairments		-			8,495			-
Non-cash interest expense		9,277			8,268			7,517
Non-cash charge for contingent consideration		4,477			4,664			1,390
Non-cash charge for option amortization		3,825			-			-
Deferred tax provision		(20,707	)		(19,440	)		19,211
Depreciation and amortization expense		37,818			33,467			31,206
Other, net		(3,568	)		5,514			(370	)
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable		4,214			(34,864	)		(2,099	)
Inventory		(3,248	)		(6,939	)		(12,320	)
Prepaid expenses and other current assets		(5,241	)		(1,801	)		(4,277	)
Prepaid income taxes and income taxes payable		(14,197	)		(8,034	)		1,451
Other assets		(12,657	)		6,616			(4,061	)
Accounts payable		9,297			(159	)		4,014
Accrued expenses and other current liabilities		4,139			26,554			15,565
Payment of contingent consideration		-			(6,019	)		-
Other non-current liabilities		2,843			(497	)		(494	)
Net cash provided by operating activities		43,015			170,726			193,517
Cash flows from investing activities:
Purchase of Lev Pharmaceuticals, Inc.		(92,274	)		-			-
Purchase of DuoCort Pharma AB, net of cash acquired		-			(32,041	)		-
Purchase of Auralis, net of cash acquired		-			-			(13,152	)
Payment for option purchase right		-			(7,500	)		-
Purchase of Vancocin assets		-			(7,000	)		(7,000	)
Purchase of property, equipment and building improvements		(1,332	)		(3,007	)		(2,807	)
Purchase of short-term investments		(107,177	)		(152,557	)		(86,975	)
Maturities and sales of short-term investments		162,734			101,058			8,000
Net cash used in investing activities		(38,049	)		(101,047	)		(101,934	)
Cash flows from financing activities:
Payment for treasury shares acquired		(180,339	)		(169,661	)		-
Repayment of debt		-			(292	)		(1,575	)
Payment of financing costs		-			(1,357	)		-
Payment of contingent consideration		-			(9,809	)		-
Net proceeds from issuance of common stock		11,955			14,694			3,544
Excess tax benefits from share-based payment arrangements		7,117			3,211			1,596
Net cash (used in) provided by financing activities		(161,267	)		(163,214	)		3,565
Effect of exchange rate changes on cash		467			(1,845	)		(88	)

7

Net (decrease) increase in cash and cash equivalents		(155,834	)		(95,380	)		95,060
Cash and cash equivalents at beginning of year		331,352			426,732			331,672
Cash and cash equivalents at end of year	$	175,518		$	331,352		$	426,732

See accompanying notes to consolidated financial statements.

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ViroPharma Incorporated

Notes to the Consolidated Financial Statements

Note 1.  Organization and Business Activities

ViroPharma Incorporated is an international biotechnology company dedicated to the development and commercialization of novel solutions for physician specialists to address unmet medical needs of patients living with diseases that have few if any clinical therapeutic options including therapeutics for rare and orphan diseases. We intend to grow through sales of our marketed products, through continued development of our product pipeline, through expansion of sales into additional territories outside the United States, through potential acquisition or licensing of products and product candidates and the acquisition of companies. We expect future growth to be driven by sales of Cinryze for hereditary angioedema (HAE), both domestically and internationally, sales of Plenadren for treatment of adrenal insufficiency (AI) and Buccolam in Europe for treatment of paediatric seizures, and by our  development programs, including C1 esterase inhibitor [human], maribavir for cytomegalovirus (CMV) infection, VP20621 for the prevention of recurrent C. difficile-associated diarrhea (CDAD) and VP20629  for the treatment of Friedreich’s Ataxia (FA). 

We market and sell Cinryze in the United States for routine prophylaxis against angioedema attacks in adolescent and adult patients with HAE.  Cinryze is a C1 esterase inhibitor therapy for routine prophylaxis against HAE, also known as C1 inhibitor (C1-INH) deficiency, a rare, severely debilitating, life-threatening genetic disorder. We acquired rights to Cinryze for the United States in October 2008 and in January 2010, we acquired expanded rights to commercialize Cinryze and future C1-INH derived products in certain European countries and other territories throughout the world as well as rights to develop future C1-INH derived products for additional indications. In June 2011, the European Commission (EC) granted us Centralized Marketing Authorization for Cinryze® in adults and adolescents with HAE for routine prevention, pre-procedure prevention and acute treatment of angioedema attacks.  The approval also includes a self administration option for appropriately trained patients.  We have begun to commercialize Cinryze in Europe and continue to evaluate our commercialization opportunities in countries where we have distribution rights.

On August 6, 2012, FDA approved our supplement to the Cinryze Biologics License Application (BLA) for industrial scale manufacturing which increases our manufacturing capacity of Cinryze.

We acquired Buccolam® (Oromucosal Solution, Midazolam [as hydrochloride]) in May 2010. In September 2011, the EC granted a Centralized Pediatric Use Marketing Authorization (PUMA) for Buccolam, for treatment of prolonged, acute, convulsive seizures in infants, toddlers, children and adolescents, from 3 months to less than 18 years of age. We have begun to commercialize Buccolam in Europe.

On November 15, 2011, we acquired a 100% ownership interest in DuoCort Pharma AB (DuoCort), a private company based in Helsingborg, Sweden focused on developing Plenadren® (hydrocortisone, modified release tablet) for treatment of AI.  The acquisition of Plenadren further expands our orphan disease commercial product portfolio. On November 3, 2011, the EC granted European Marketing Authorization for Plenadren, an orphan drug for treatment of AI in adults, which will bring these patients their first pharmaceutical innovation in over 50 years. We are in the process of launching Plenadren in various countries in Europe and a named patient program is available to patients in countries in which we have not launched Plenadren commercially. We are currently conducting an open label trial with Plenadren in Sweden and have initiated a registry study as a condition of approval in Europe. We also are currently exploring commercialization opportunities in additional geographies including the United States.

We also sell branded and authorized generic Vancocin HCl capsules, the oral capsule formulation of vancomycin hydrochloride, in the U.S. and its territories. Vancocin is indicated for the treatment of CDAD.  Vancocin capsules are also used for the treatment of enterocolitis caused by Staphylococcus aureus, including methicillin-resistant strains.

On April 9, 2012, the FDA denied the citizen petition we filed on March 17, 2006 related to the FDA’s proposed in vitro method for determining bioequivalence of abbreviated new drug applications (ANDAs) referencing Vancocin (vancomycin hydrochloride, USP) capsules.  The FDA also informed us in the same correspondence that the recent supplemental new drug application (sNDA) for Vancocin which was approved on December 14, 2011 would not qualify for three additional years of exclusivity, as the agency interpreted Section 505(v) of the FD&C Act to require a showing of a significant new use (such as a new indication) for an old antibiotic such as Vancocin in order for such old antibiotic to be eligible for a grant of exclusivity.  FDA also indicated that it approved three ANDA’s for generic vancomycin capsules and the companies holding these ANDA approvals indicated that they

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ViroPharma Incorporated

Notes to the Consolidated Financial Statements

began shipping generic vancomycin hydrochloride, USP. In June 2012, the FDA approved a fourth ANDA for generic vancomycin capsules.

Pursuant to the terms of a previously entered distribution agreement, we granted a third party a license under our NDA for Vancocin® (vancomycin hydrochloride capsules, USP) to distribute and sell vancomycin hydrochloride capsules as an authorized generic product. We are also obligated to pay Genzyme royalties of 10 percent, 10 percent and 16 percent of our net sales of Vancocin for the three year period following the approval of the sNDA as well as a lower royalty on sales of our authorized generic version of Vancocin in connection with our purchase of exclusive rights to two studies of Vancocin. 

Our product development portfolio is primarily focused on the following programs: C1 esterase inhibitor [human], maribavir for cytomegalovirus (CMV) infection, VP20621 (prevention of CDAD) and VP20629 (treatment of Friedreich’s Ataxia). 

We are currently undertaking studies on the viability of subcutaneous administration of Cinryze. In May 2011, Halozyme Therapeutics Inc. (Halozyme) granted us an exclusive worldwide license to use Halozyme’s proprietary Enhanze™ technology, a proprietary drug delivery platform using Halozyme’s recombinant human hyaluronidase enzyme (rHuPH20) technology, in combination with a C1 esterase inhibitor which we intend to apply initially to develop a subcutaneous formulation of Cinryze for routine prophylaxis against attacks of HAE. In the first quarter of 2012, we completed a Phase 2 study to evaluate the safety, and pharmacokinetics and pharmacodynamics of subcutaneous administration of Cinryze in combination with rHuPH20 and announced the presentation of positive data.  In December 2012, we initiated a Phase 2b double blind, multicenter, dose ranging study to evaluate the safety and efficacy of subcutaneous administration of Cinryze® (C1 esterase inhibitor [human]) in combination with PH20 in adolescents and adults with HAE for prevention of HAE attacks. We will continue to evaluate the subcutaneous administration of Cinryze as a standalone therapy. We are also investigating  recombinant forms of C1-INH.

Additionally, we are working on developing our C1 esterase inhibitor in further therapeutic uses and potential additional indications in other C1 mediated diseases.  We intend to support Investigator Initiated Studies (IIS) to identify further therapeutic uses for Cinryze. An IIS evaluating C1-INH as a treatment for Autoimmunie Hemolytic Anemia (AIHA) and Neuromyelitis Optica (NMO) were initiated in 2012. We are also sponsoring a clinical trial in Antibody-Mediated Rejection (AMR) and are evaluating, the potential effect of C1-INH in Refractory Parozysmal Nocturnal Hemoglobinuria (PNH) and may conduct clinical and non-clinical studies to evaluate additional therapeutic uses in the future.

During the second quarter of 2012, we announced the initiation of a Phase 2 program to evaluate maribavir for the treatment of CMV infections in transplant recipients.  The program consists of two independent Phase 2 clinical studies that include subjects who have asymptomatic CMV, and those who have failed therapy with other anti-CMV agents.  During the third quarter of 2012 and first quarter of 2013, we presented interim data from the Phase 2 open label clinical study being conducted in Europe evaluating maribavir as a treatment for patients with asymptomatic cases of CMV.  Results from this study as well as data from a second Phase 2 open label study of maribavir as a treatment for patients with refractory cases of CMV will periodically be evaluated.

We are also developing VP20621 for the prevention of CDAD.  In May 2011, we initiated a Phase 2 dose-ranging clinical study to evaluate the safety, tolerability, and efficacy of VP 20621 for prevention of recurrence of CDAD in adults previously treated for CDAD. We presented interim data from this study during the third quarter of 2012.  We completed enrollment of  patients in December 2012 and anticipate having the complete data set in 2013.

On September 30, 2011, we entered into a license agreement with Intellect Neurosciences, Inc. (INS) for the worldwide rights to its clinical stage drug candidate, VP20629, which we expect to develop for the treatment of Friedreich's Ataxia (FA), a rare, hereditary, progressive neurodegenerative disease. We expect to initiate a single and repeat dose Phase 1 study in patients in 2013 and expect to  initiate a subsequent Phase 2 study after completion of the phase1 study. Following completion of the Phase 2 study, a phase 3 study is planned.  We intend to file for Orphan Drug Designation upon review of the Phase 2 proof of concept data.

On December 22, 2011, we entered into an exclusive development and option agreement with  Meritage Pharma, Inc. (Meritage) , a private company based in San Diego, CA focused on developing oral budesonide suspension (OBS) as a treatment for eosinophilic

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ViroPharma Incorporated

Notes to the Consolidated Financial Statements

esophagitis (EoE). EoE is a newly recognized chronic disease that is increasingly being diagnosed in children and adults. It is characterized by inflammation and accumulation of a specific type of immune cell, called an eosinophil, in the esophagus. EoE patients may have persistent or relapsing symptoms, which include dysphagia (difficulty in swallowing), nausea, stomach pain, chest pain, heartburn, loss of weight and food impaction.

We intend to continue to evaluate in-licensing or other opportunities to acquire products in development, or those that are currently on the market. We plan to seek products that treat serious or life threatening illnesses with a high unmet medical need, require limited commercial infrastructure to market, and which we believe will provide both revenue and earnings growth over time.

Note2.  Basis of Presentation

Principles of Consolidation

The consolidated financial statements include the accounts of ViroPharma and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Cash and cash equivalents

We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Concentration of credit risk

We invest our excess cash and short-term investments in accordance with a policy objective that seeks to ensure both liquidity and safety of principal. The policy limits investments to certain types of instruments issued by the U.S. government and institutions with strong investment grade credit ratings and places restrictions in their terms and concentrations by type and issuer to reduce our credit risk.

We have an exposure to credit risk in trade accounts receivable from sales of product. In the U.S., Vancocin is distributed through wholesalers that sell the product to pharmacies and hospitals. We also granted a third party a license under our NDA for Vancocin® (vancomycin hydrochloride capsules, USP) to distribute and sell vancomycin hydrochloride capsules as an authorized generic product. In the US, we sell Cinryze to specialty pharmacy/specialty distributors (SP/SD’s) who then distribute to physicians, hospitals and patients, among others.

We sell Diamorphine in the UK, primarily to hospitals, through approved wholesalers. We began commercial sales of Cinryze and Buccolam in Europe during the fourth quarter of 2011, primarilythrough approved wholesalers, and launched Plenadren commercially through approved wholesalers and named patient program in Europe during the third quarter of 2012. The revenues and operating income from these sales are not material to our consolidated revenues and operating income for 2012 or 2011.

 Five customers represent approximately 85% of our trade accounts receivable at December 31, 2012 and five customers represent approximately 92%  of our 2012 net product sales.

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

Single source supplier

We currently outsource all manufacturing of our products to single source manufacturers. A change in these suppliers could cause a delay in manufacturing and a possible loss of sales, which would affect operating results adversely.

Accounts receivable

Accounts receivable are recorded at the invoiced amount, net of related cash discounts, rebates and estimated returns and do not bear interest. At December 31, 2012 and 2011, there was no allowance for doubtful accounts as all net amounts recorded are deemed collectible. We do not have any off-balance sheet exposure related to our customers.

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ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

Inventories

Inventories are stated at the lower of cost or market using actual cost. At December 31, 2012 and 2011, inventory consists of finished goods, work-in-process (WIP) and certain raw materials required to produce inventory of finished product.

Property, equipment and building improvements

Property, equipment and building improvements are recorded at cost. Depreciation and amortization are computed on a straight-line basis over the useful lives of the assets or the lease term, whichever is shorter, ranging from three to thirty years.

We lease certain of our equipment and facilities under operating leases. Operating lease payments are charged to operations on a straight-lined basis over the related period that such leased assets are utilized in service. Expenditures for repairs and maintenance are expensed as incurred.

On August 29, 2012, we entered into an amended and restated lease to expand our corporate headquarters. The lease arrangement involves the construction of expanded office space where we are involved in the design and construction of the expanded space and have the obligation to fund the tenant improvements to the expanded structure and to lease the entire building following completion of construction. This arrangement is referred to as build-to suit lease. We have concluded that under the guidance of ASC 840, Leases, we are considered the owner of the construction project for accounting purposes and must record a construction in progress asset (CIP) and a corresponding financing obligation for the construction costs funded by the landlord.  We anticipate to begin recording the CIP asset and a corresponding financing obligation during the first quarter of 2013 when construction is anticipated to start.Once the construction is complete we will depreciate the core and shell asset over 30 years. A portion of the lease payments will be reflected as principal and interest payments on the financing obligation.

Goodwill and Intangible Assets

We review the carrying value of goodwill and indefinite-lived intangible assets, to determine whether impairment may exist.  In September 2011, the Financial Accounting Standards Board issued ASU 2011-08, Testing Goodwill for Impairment (the Update). The objective of this Update is to simplify how entities test goodwill for impairment. The amendments in the Update provide the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The two-step goodwill impairment test consists of the following steps. The first step compares a reporting unit’s fair value to its carrying amount to identify potential goodwill impairment. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the second step of the impairment test must be completed to measure the amount of the reporting unit’s goodwill impairment loss, if any.  Step two requires an assignment of the reporting unit’s fair value to the reporting unit’s assets and liabilities to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of the reporting unit’s goodwill is then compared with the carrying amount of the reporting unit’s goodwill to determine the goodwill impairment loss to be recognized, if any.

We tested our goodwill during the fourth quarter of 2012 and there was no impairment as a result of the test.

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

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

Accounting Standards Codification (ASC) 350-30-35 provides guidance on determining the finite useful life of a recognized intangible asset wherein it defines the useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of an entity.

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ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

It also states that the estimate of the useful life of an intangible asset to an entity shall be based on an analysis of all pertinent factors, in particular, all of the following factors with no one factor being more presumptive than the other:

a.  The expected use of the asset by the entity.

b.  The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate.

c. Any legal, regulatory, or contractual provisions that may limit the useful life. The cash flows and useful lives of intangible assets that are based on legal rights are constrained by the duration of those legal rights. Thus, the useful lives of such intangible assets cannot extend beyond the length of their legal rights and may be shorter.

d.  The entity’s own historical experience in renewing or extending similar arrangements, consistent with the intended use of the asset by the entity, regardless of whether those arrangements have explicit renewal or extension provisions. In the absence of that experience, the entity shall consider the assumptions that market participants would use about renewal or extension consistent with the highest and best use of the asset by market participants, adjusted for entity-specific factors in this paragraph.

e.  The effects of obsolescence, demand, competition, and other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels).

f. The level of maintenance expenditures required to obtain the expected future cash flows from the asset (for example, a material level of required maintenance in relation to the carrying amount of the asset may suggest a very limited useful life). As in determining the useful life of depreciable tangible assets, regular maintenance may be assumed but enhancements may not.

Further, if an income approach is used to measure the fair value of an intangible asset, in determining the useful life of the intangible asset for amortization purposes, an entity shall consider the period of expected cash flows used to measure the fair value of the intangible asset adjusted as appropriate for the entity-specific factors noted.

Long-lived intangible assets acquired as part of the Vancocin and Lev acquisitions are being amortized on a straight-line basis over their estimated useful lives of 25 years. The contract rights acquired as part of the Auralis acquisition are being amortized on a straight-line basis over their estimated useful lives of 12 years and the product rights acquired under the Auralis and DuoCort acquisitions are being amortized on a straight-line basis over their estimated useful lives of 10 years. We estimated the useful life of the assets by considering competition by products prescribed for the same indication, the likelihood and estimated future entry of non-generic and generic competition with the same or similar indication and other related factors. The factors that drive the estimate of the life are often uncertain and are reviewed on a periodic basis or when events occur that warrant review.

In September 2011, the EC granted a Centralized PUMA for Buccolam, for treatment of prolonged, acute, convulsive seizures in infants, toddlers, children and adolescents, from 3 months to less than 18 years of age. This asset was previously classified as an indefinite-lived intangible asset. As a result of this approval, we began to amortize this asset over its estimated useful life of 10 years.

Due to the approval and launch of Buccolam, coupled with the approval and launch of Cinryze in Europe, we decided to alter our development and commercialization plans for the remaining Auralis IPR&D asset. The decision resulted in the impairment of the IPR&D asset and the Auralis Contract rights. Accordingly, we recorded a charge of approximately £5.4 million (approximately $8.5 million) during 2011.

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ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

Revenue recognition

Revenue is recognized when all four of the following criteria are met (1) the Company has persuasive evidence an arrangement exists, (2) the price is fixed and determinable, (3) title has passed, and (4) collection is reasonably assured. The Company’s credit and exchange policy includes provisions for return of its product when it (1) has expired, or (2) was damaged in shipment.

Product revenue is generally recorded upon delivery to either our wholesalers or distributors and when title has passed. Product demand from wholesalers during a given period may not correlate with prescription demand for the product in that period. As a result, the Company periodically estimates and evaluates the wholesalers’ inventory position and would defer recognition of revenue on product that has been delivered if the Company believes that channel inventory at a period end is in excess of ordinary business needs and if the Company believes the value of potential returns is materially different than the returns accrual.

Product return accruals are estimated based on our history of damage and product expiration returns and are recorded in the period in which we record the product sales. There is a no returns policy with sales of generic Vancocin to our distributor and Cinryze has a no returns policy. Returns of product for our European sales depends on the country of sale in Europe. Where returns are not mandated by laws or regulations, we generally have a no returns policy.  Where returns are required to be taken back, we defer revenue recognition until we receive information from our distribution partners that the drug has been consumed.

While we currently have no contracts with private third party payors, such as HMO’s. We 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 product sales. These accruals are based upon historical experience of government agencies’ market share, governmental contractual prices, our current pricing and current laws, regulations and interpretations.

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

Revenue from the launch of a new or significantly unique product may be deferred until estimates can be made for chargebacks, rebates, returns and all of the above conditions are met which is typically based on dispensed prescription data and other information obtained during the period following launch.

In April 2012, we began selling an authorized generic version of our prescription Vancocin capsules under a supply agreement with a distributor. The distributor has agreed to purchase all of its authorized generic product requirements from us and pay a specified invoice supply price for such products. We are also entitled to receive a percentage of the gross margin on net sales of the authorized generic products sold by the distributor. We recognize revenue from shipments to the distributor at the invoice supply price along with our percentage of the gross margin on net sales of the authorized generic products sold by the distributor when the distributor reports to us its gross margin on net sales of the products and our portion thereof. Any adjustments to the net sales previously reported to us related to the distributor’s estimated sales discounts and other deductions are recognized in the period the distributor reports the adjustments to us. There is a no returns policy with sales of generic Vancocin to our distributor.

Customers

We have principally sold our products directly to wholesale drug distributors and specialty pharmacies/specialty distributors (SP/SD) in the United States who then distribute the product to pharmacies, hospitals, patients, physicians and long-term care facilities, among others. For Cinryze, our customers are SP/SD’s who will distribute the product to physicians, hospitals and patients. For Vancocin, our customers are wholesalers who then distribute the product to pharmacies, hospitals and long term care facilities, among others. In April 2012, we began selling an authorized generic version of our prescription Vancocin capsules under a supply agreement with a distributor.

In the fourth quarter of 2011, we began to sell product to drug distributors in Europe, mainly wholesalers,  who then distribute the product to pharmacies, hospitals, and physicians.

Five wholesalers and/or SP/SD’s represent the majority of our total consolidated revenue, as approximated below:

	Percentage of total revenues
	2012			2011			2010
Customer A …………………………………		43	%		27	%		25	%
Customer B …………………………………		25	%		24	%		24	%
Customer C …………………………………		11	%		20	%		21	%
Customer D …………………………………		9	%		17	%		16	%
Customer E …………………………………		4	%		9	%		10	%
Total …………………………………………		92	%		97	%		96	%

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ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

Research and development expenses and Collaborations

Research and product development costs are expensed as incurred. Reimbursements of research and development costs under cost sharing collaborations are recorded as a reduction of research and development expenses. Research and development costs include costs for discovery research, pre-clinical and clinical trials, manufacture of drug supply, supplies and acquired services, employee-related costs and allocated and direct facility expenses.

We evaluate our collaborative agreements for proper income statement classification based on the nature of the underlying activity. If payments to and from our collaborative partners are not within the scope of other authoritative accounting literature, the income statement classification for these payments is based on a reasonable, rational analogy to authoritative accounting literature that is applied in a consistent manner.  Amounts due to our collaborative partners related to development activities are reflected as a research and development expense.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which the related temporary difference becomes deductible. The benefit of tax positions taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such positions are more likely than not of being sustained.

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.

Share-based payments

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. All grants under share-based payment programs are accounted for at fair value and that cost is recognized over the period during which an employee is required to provide service in exchange for the award – the requisite service period (vesting period).

Compensation expense for options granted to non-employees is determined as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The fair value of  awards granted to non-employees is re-measured each period until the related service is complete.

Earnings per share

Basic earnings per share (EPS) is calculated by dividing net income by the weighted average shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings, including the effect of dilution to net income of convertible securities, share-based payments and warrants.

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ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

Segment information

The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer. There is no segment or business unit management that reviews separate or discrete financial information. The Company does not operate separate lines of business or separate business entities with respect to any of its products or product candidates.

Foreign Currency Translation

The financial statements of the Company’s international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities, the historical exchange rate for stockholders’ equity and an average exchange rate for each period of revenues, expenses, and gain and losses. The functional currency of the Company’s non-U.S. subsidiaries is the local currency. Adjustments resulting from the translation of financial statements are reflected in accumulated other comprehensive income (loss). Transaction gains and losses are recorded within operating results.

Subsequent Events

We have evaluated all subsequent events through the date the consolidated financial statements were issued, and have not identified any such events.

New Accounting Standards

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (Topic 220). The standard requires that public and non-public companies present information about reclassification adjustments from accumulated other comprehensive income in their annual financial statements in a single note or on the face of the financial statements. Public companies will also have to provide this information in their interim financial statements. The standard requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, companies must instead cross reference to the related footnote for additional information. The standard allows companies to present the information either in the notes or parenthetically on the face of the financial statements provided that all of the required information is presented in a single location. The new disclosure requirements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of the provisions of this guidance will not have a material impact on our consolidated results of operations, cash flows, and financial position.

In July 2012, the FASB issued ASU 2012-02, Intangibles –Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (the revised standard). The objective of this ASU is to simplify how entities test indefinite-lived intangible assets other than goodwill for impairment. The amendments in the ASU provide the option to first assess qualitative factors to determine whether, as a result of its qualitative assessment, that it is more-likely-than-not (a likelihood of more than 50%) the asset is impaired and it is necessary to calculate the fair value of the asset in order to compare that amount to the carrying value to determine the amount of the impairment, if any. If an entity believes, as a result of its qualitative assessment, that it is not more-likely-than-not (a likelihood of more than 50%) that the fair value of a asset is less than its carrying amount, no further testing is required. The revised standard includes examples of events and circumstances that might indicate that the indefinite-lived intangible asset is impaired. The approach in the ASU is similar to the guidance for testing goodwill for impairment contained in ASU 2011-08, Intangibles –Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The revised standard, which may be adopted early, is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and does not change existing guidance on when to test indefinite-lived intangible assets for impairment. The adoption of the provisions of this guidance is not expected to have a material impact on our consolidated results of operations, cash flows, and financial position.

 In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, and the IASB issued IFRS 13,Fair Value Measurement. The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. The ASU is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited. The new guidance changes certain fair value measurement principles and disclosure requirements. We adopted this ASU January 1, 2012. The adoption of the provisions of this guidance did not have a material impact on our consolidated results of operations, cash flows, and financial position.

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ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (Topic 220). This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The standard is intended to enhance comparability between entities that report under US GAAP and those that report under IFRS, and to provide a more consistent method of presenting non-owner transactions that affect an entity's equity. Under the ASU, an entity can elect to present items of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts, net income and other comprehensive income, would need to be displayed under either alternative. The statement(s) would need to be presented with equal prominence as the other primary financial statements. This ASU does not change items that constitute net income and other comprehensive income, when an item of other comprehensive income must be reclassified to net income or the earnings-per-share computation (which will continue to be based on net income). The new US GAAP requirements are effective for public entities as of the beginning of a fiscal year that begins after December 15, 2011 and interim and annual periods thereafter.  We adopted this ASU January 1, 2012. The adoption of the provisions of this guidance did not have a material impact on our consolidated results of operations, cash flows, and financial position.

In September 2011, the FASB issued ASU 2011-08, Intangibles –Goodwill and Other (Topic 350): Testing Goodwill for Impairment (the revised standard). The objective of this ASU is to simplify how entities test goodwill for impairment. The amendments in the ASU provide the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The revised standard includes examples of events and circumstances that might indicate that a reporting unit's fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity's operating environment, entity-specific events such as declining financial performance, and other events such as an expectation that a reporting unit will be sold. An entity should also consider in its qualitative assessment the ''cushion'' between a reporting unit's fair value and carrying amount if determined in a recent fair value calculation. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of the provisions of this guidance did not have a material impact on our consolidated results of operations, cash flows, and financial position.

Note 3.  Short-Term Investments

Short-term investments consist of fixed income and debt securities with remaining maturities of greater than three months at the date of purchase.  At December 31, 2012, all of our short-term investments are classified as available for sale investments and measured as Level 1 instruments of the fair value measurements standard.

The following summarizes the Company’s available for sale investments at December 31, 2012:

(in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Debt securities:
U.S. Treasury	$	29,000	$	8	$	-	$	29,008
Corporate bonds		42,334		10		14		42,330
	$	71,334	$	18	$	14	$	71,338
Maturities of investments were as follows:
Less than one year	$	34,553	$	10	$	3	$	34,560
Greater than one year		36,781		8		11		36,778
Total	$	71,334	$	18	$	14	$	71,338

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ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

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

(in thousands)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Debt securities:
U.S. Treasury	$	48,351	$	14	$	3	$	48,362
Corporate Bonds		80,143		43		70		80,116
Total	$	128,494	$	57	$	73	$	128,478
Maturities of investments were as follows:
Less than one year	$	99,190	$	42	$	39	$	99,193
Greater than one year		29,304		15		34		29,285
Total	$	128,494	$	57	$	73	$	128,478

Note 4.   Inventory

Inventory is stated at the lower of cost or market using actual cost.  The following represents the components of the inventory at December 31, 2012 and December 31, 2011:

(in thousands)	2012		2011
Raw Materials	$	41,642	$	50,045
Work In Process		15,810		6,035
Finished Goods		6,932		4,236
Total	$	64,384	$	60,316

Note 5.  Property, Equipment and Building Improvements

Property, equipment and building improvements consists of the following at December 31, 2012 and 2011:

(in thousands)	2012		2011
Land	$	156	$	156
Building		3,039		3,039
Computers and equipment		13,387		12,019
Leasehold improvements		6,053		6,001
		22,635		21,215
Less: accumulated depreciation and amortization		11,787		9,232
Property, equipment and building improvements, net	$	10,848	$	11,983

The depreciable lives for the major categories of property and equipment are 30 years for buildings, 3 to 5 years for computers and equipment and up to the shorter of the respective lease term or the expected economic useful life for building improvements, not to exceed 15 years.  We recorded depreciation expense of approximately $2.9 million, $2.4 million and $1.8 million during the years ended December 31, 2012, 2011 and 2010, respectively.

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ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

Note 6.  Intangible Assets

The following represents the balance of the intangible assets at December 31, 2012:

(in thousands)	Gross Intangible Assets		Accumulated Amortization		Net Intangible Assets
Cinryze Product rights	$	521,000	$	87,394	$	433,606
Vancocin Intangibles		168,099		54,773		113,326
Plenadren Product rights		65,136		7,048		58,088
Buccolam Product rights		6,566		876		5,690
Auralis Contract rights		9,360		2,531		6,829
Total	$	770,161	$	152,622	$	617,539
The following represents the balance of the intangible assets at December 31, 2011:
(in thousands)	Gross Intangible Assets		Accumulated Amortization		Net Intangible Assets
Cinryze Product rights	$	521,000	$	66,554	$	454,446
Vancocin Intangibles		168,099		48,074		120,025
Plenadren Product rights		61,277		510		60,767
Buccolam Product rights		6,271		209		6,062
Auralis Contract rights		8,938		1,579		7,359
Total	$	765,585	$	116,926	$	648,659

Cinryze

In October 2008, Cinryze was approved by the FDA for routine prophylaxis against angioedema attacks in adolescent and adult patients with HAE.  Because the treatment indication is directed at a small population in the United States, orphan drug status was awarded by the FDA and orphan drug exclusivity was granted on the date of approval. Orphan drug exclusivity awards market exclusivity for seven years.  These seven years of exclusivity prevent the FDA from approving another product with the same active ingredient for routine prophylaxis against angioedema attacks in adolescent and adult patients with HAE through October 2015. In addition, a biosimilar version of Cinryze could not be approved before 2020 as a result of data protection provisions contained in the relevant biosimilar regulations.

As of December 31, 2012, the carrying amount of this intangible asset is approximately $433.6 million. We are amortizing this asset over its estimated 25 year useful life, through October 2033, or 18 years beyond the orphan exclusivity period and 13 years beyond the data protection period for biosimilar versions.

Our estimate of the useful life of Cinryze was based primarily on the following four considerations: 1) the exclusivity period granted to Cinryze as a result of marketing approval by the FDA with orphan drug status; 2) the landscape subsequent to the exclusivity period and the ability of follow-on biologics (FOB) entrants to compete with Cinryze; 3) the financial projections of Cinryze for both the periods of exclusivity and periods following exclusivity; and 4) barrier to entry for potentially competitive products.

When determining the post exclusivity landscape for Cinryze we concluded that barriers to entry for competitors to Cinryze are greater than other traditional biologics.  They include, but are not limited to the following. Cinryze treats a known population base of approximately 4,600 patients.  HAE is generally thought to inflict approximately 10,000 people in the United States, but many of whom have not yet been diagnosed.  Therefore the market upside for potential competitors is limited. The capital investment for a potential competitor to construct a manufacturing facility is prohibitive and would limit the number of participants willing to enter the prophylactic HAE market. In order to qualify for the abbreviated approval process for biosimilar versions of biologics licensed under

19

ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

full BLAs (“reference biologics”) a biosimilar applicant generally must submit analytical, animal, and clinical data showing that the proposed product is “highly similar” to the reference product and has no “clinically meaningful differences” from the reference product in terms of the safety, purity, and potency, although FDA may waive some or all of these requirements. FDA cannot license a biosimilar until 12 years after it first licensed the reference biologic. It is therefore likely that a biosimilar would have to conduct clinical trials to show that a FOB is highly similar to Cinryze and has no clinically meaningful differences.  To conduct these trials, one must produce enough drug to sustain a trial and attract the required number of HAE patients to prove safety and efficacy comparable to Cinryze.  Patients on Cinryze are those HAE patients who experience life threatening laryngeal attacks, or frequent attacks that inhibit their quality of life and/or ability to work.  To obtain patients for a clinical trial, the FOB company will have to convince patients to stop taking this life saving drug and test a new unproven product.  We believe that this would be met with great resistance from both patients and doctors and would limit the ability of a FOB company to perform clinical trials.

At present, one C1 inhibitor has received approval from FDA for the acute indication with de minimus impact on the prophylactic market, primarily due to the payor environment.  Though we might see competition at some point in the future, we believe it would be limited.

Based on the expected cash flows and value generated in the years following both the end of exclusivity and the potential entry of FOB competition, we concluded that an estimated useful life of 25 years for the Cinryze product rights was appropriate.

Vancocin

We acquired Vancocin from Lilly in November 2004 and determined that the identifiable intangible assets acquired had a 25 year useful life based on consideration of the various factors in ASC 350-30-35. Additionally, an income approach was used by an outside independent valuation expert to determine the fair value of these assets and  a 25 year period of expected cash flows was used in this asset valuation process. As of December 31, 2012, the carrying amount of the assets is approximately $113.3 million with a remaining estimated useful life of  17 years.

We paid Lilly an upfront cash payment of $116.0 million and were obligated to pay additional purchase price consideration based on annual net sales of Vancocin through 2011. We were obligated to pay Lilly additional amounts based on 35% of annual net sales between $45 and $65 million of Vancocin in 2005 through 2011. In June 2011, we satisfied our obligations to Lilly to make additional purchase price consideration payments under the purchase agreement.  In aggregate we have paid $51.1 million to Lilly in additional purchase price consideration. We accounted for these additional payments as additional purchase price which requires that the additional purchase price consideration is recorded as an increase to the intangible asset of Vancocin and is amortized over the remaining estimated useful life of the intangible asset.  In addition, at the time of recording the additional intangible assets, a cumulative adjustment was 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.

On April 9, 2012,FDA denied the citizen petition filed on March 17, 2006 related to the FDA’s proposed in vitro method for determining bioequivalence of Abbreviated New drug Applications (ANDAs) referencing Vancocin capsules and informed us that final guidance for vancomycin bioequivalence consistent with the FDA’s citizen petition response was forthcoming.

The FDA also informed us in the same correspondence that the recent supplemental New Drug Application (sNDA) for Vancocin which was approved on December 14, 2011 would not qualify for three additional years of exclusivity, as the agency interpreted Section 505(v) of the FD&C Act to require a showing of a significant new use (such as a new indication) for an old antibiotic such as Vancocin in order for such old antibiotic to be eligible for a grant of exclusivity.  FDA also indicated that it approved three ANDA’s for generic vancomycin capsules.  In June 2012, FDA approved a fourth ANDA for generic vancomycin capsules.

As a result of the actions of FDA,  we performed step one of the impairment test in the first  quarter of 2012 based on our current forecast (base case) of the impact of generics on our Vancocin and vancomycin cash flows. The sum of the undiscounted cash flows exceeded the carrying amount as of March 31, 2012 by approximately $210 million. During the third quarter of 2012, we experienced larger than anticipated erosion in the sales volume and net realizable price in the Vancocin Branded Market and the entrance of a fourth generic competitor which prompted us to determine it appropriate to perform the step one of the impairment test again as of September 30, 2012. The sum of the undiscounted cash flows exceeded the carrying amount as of September 30, 2012 by approximately $34 million.

As part of this analysis, we concluded that the erosion in vancomycin  revenue in the third quarter of 2012 was due to customers working down their inventory and increased generic competition. We believe that once the channel inventory is normalized to the new levels, our sales will begin to reflect the ongoing underlying prescription activity. Additionally, we will benefit from the expiration of the Genzyme royalty beginning in 2015.  There were no events during the fourth quarter of 2012 that indicated the need to perform another step one of the impairment test for Vancocin. However, should future events occur that cause further reductions in revenue or

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Notes to the Consolidated Financial Statements (continued)

operating results we would incur an impairment charge, which would be significant relative to the carrying value of the intangible assets as of  December 31, 2012.

Auralis and Buccolam

On May 28, 2010, we acquired Auralis, a UK based specialty pharmaceutical company. With the acquisition of Auralis we added one marketed product and several development assets to our portfolio.  We recognized an intangible asset related to certain supply agreements for the marketed product and one of the development assets.  Additionally, we recognized in-process research and development (IPR&D) assets related to the development assets which 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 contract rights acquired as part of the Auralis acquisition are being amortized on a straight-line basis over their estimated useful lives of 12 years and the product rights acquired are being amortized on a straight-line basis over their estimated useful lives of 10 years. In 2011, the European Commission granted a Centralized PUMA for Buccolam, for treatment of prolonged, acute, convulsive seizures in infants, toddlers, children and adolescents, from 3 months to less than 18 years of age. This asset was previously classified as an IPR&D asset. As a result of this approval we began to amortize this asset over its estimated useful life of 10 years.

Due to the approval and launch of Buccolam, coupled with the approval and launch of Cinryze in Europe, we decided to alter our development and commercialization plans for the remaining Auralis IPR&D asset. The decision resulted in the impairment of the IPR&D asset and a portion of the Auralis Contract rights. Accordingly, we recorded a charge of approximately £5.4 million (approximately $8.5 million) during the third quarter of 2011.

Plenadren

On November 15, 2011, we acquired DuoCort, a company focused on improving glucocorticoid replacement therapy for treatment of AI. The acquisition of DuoCort further expands our orphan disease commercial product portfolio. On November 3, 2011, the EC granted European Marketing Authorization for Plenadren® (hydrocortisone, modified release tablet), an orphan drug for treatment of adrenal insufficiency in adults, which will bring these patients their first pharmaceutical innovation in over 50 years.  We recognized an intangible asset related to the Plenadren product rights. The product rights acquired are being amortized on a straight-line basis over their estimated useful lives of 10 years.

Amortization expense for the years ended December 31, 2012, 2011 and 2010 was $35.3 million, $31.0 million and $29.4million, respectively.

Note 7.  Goodwill

On October 21, 2008, we completed our acquisition of Lev Pharmaceuticals, Inc.  The terms of the merger agreement provided for a contingent value right (CVR) to the former shareholders of $0.50 per share, or approximately $87.5 million, if Cinryze reaches at least $600 million in cumulative net product sales by October 2018. During the second quarter of 2012, we recognized cumulative sales of Cinryze in excess of the $600 million threshold; accordingly, we recorded the liability in the second quarter of 2012 with a corresponding increase to goodwill. We made this CVR payment along with certain other contingent acquisition related payments totaling approximately $92.3 million in the third and fourth quarters of 2012. These payments, net of related tax benefits, are reflected as an increase to goodwill of approximately $86.3 million, in accordance with SFAS 141, Accounting for Business Combinations, which was effective GAAP at the time of the acquisition.

On November 15, 2011, we acquired DuoCort, a company focused on improving glucocorticoid replacement therapy for treatment of AI. As a result of this acquisition we initially recorded goodwill of approximately $7.3 million. During the third quarter of 2012, we obtained new information about certain facts and circumstances that existed at the acquisition date related to acquired deferred tax assets. Based on this new information, in the third quarter of 2012 we released approximately SEK 22.8 million, or $3.5 million, of valuation allowance related to the deferred tax assets with a corresponding reduction of goodwill. All other changes in the carrying value of goodwill since acquisition is attributable to foreign currency fluctuations.

In May 2010, we acquired a 100% ownership interest in Auralis Limited, a UK based specialty pharmaceutical company. As a result of this acquisition we recorded initial goodwill of approximately $5.9 million. The change in the carrying value of goodwill since the acquisition date is attributable to foreign currency fluctuations.

Note 8. Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following at December 31, 2012 and 2011:

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Notes to the Consolidated Financial Statements (continued)

(in thousands)	2012		2011
Rebates and returns	$	33,261	$	48,115
Payroll, bonus and employee benefits liabilities		13,189		10,470
Clinical development and research liabilities		10,073		4,872
Selling and commercial liabilities		6,662		4,149
VAT payable		5,537		713
Interest payable		1,377		1,375
Other current liabilities		13,404		6,289
	$	83,503	$	75,983

Note 9.  Long-Term Debt

Long-term debt as of December 31, 2012 and December 31, 2011 is summarized in the following table:

(in thousands)	2012		2011
Senior convertible notes	$	161,793	$	153,453
less: current portion		-		-
Long-term debt	$	161,793	$	153,453

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

The debt and equity components of our senior convertible debt securities were bifurcated and accounted for separately based on the value and related interest rate of a 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 Consolidated Balance Sheet and, accordingly, the initial carrying value of the debt securities was reduced by $101.9 million.  Our net income for financial reporting purposes is reduced by recognizing the accretion of the reduced carrying values of our convertible debt securities to their face amount of $250.0 million as additional 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.

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

Concurrent with the issuance of the senior convertible notes, we entered into privately-negotiated transactions, comprised of purchased call options and warrants sold, to reduce the potential dilution of our common stock upon conversion of the senior

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Notes to the Consolidated Financial Statements (continued)

convertible notes.  The transactions, taken together, have the effect of increasing the initial conversion price to $24.92 per share.  The cost of the transactions was $23.3 million. 

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

The purchased call options are expected to reduce the potential dilution upon conversion of the senior convertible notes in the event that the market value per share of ViroPharma common stock at the time of exercise is greater than $18.87, which corresponds to the initial conversion price of the senior convertible notes, but less than $24.92 (the warrant exercise price). The warrant exercise price is 75.0% higher than the price per share of $14.24 of our common stock on the pricing date.  If the market price per share of ViroPharma common stock at the time of conversion of any senior 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.

Initially, the purchased call options and warrants sold with the terms described above were based upon the $250.0 million offering, and the number of shares we would purchase under the call option and the number of shares we would sell under the warrants was 13.25 million, to correlate to the $250.0 million principal amount. On March 24, 2009, we repurchased, in a privately negotiated transaction, $45.0 million in principal amount of our senior convertible notes due March 2017 for total consideration of approximately $21.2 million.  The repurchase represented 18% of our then outstanding debt and was executed at a price equal to 47% of par value. Additionally, in negotiated transactions, we sold approximately 2.38 million call options for approximately $1.8 million and repurchased approximately 2.38 million warrants for approximately $1.5 million which terminated the call options and warrants that were previously entered into by us in March 2007. We recognized a $9.1 million gain in the first quarter of 2009 as a result of this debt extinguishment.  For tax purposes, the gain qualifies for deferral until 2014 in accordance with the provisions of the American Recovery and Reinvestment Act.

As a result of the above negotiated sale and purchase transactions we are now entitled to receive approximately 10.87 million shares of our common stock at $18.87 from the call option holders and if the market price of ViroPharma common stock at the time of exercise of the sold warrants exceeds the strike price of the sold warrants ($24.92), will owe the counterparties an aggregate of approximately 10.87 million shares of ViroPharma common stock, which correlates to $205 million of convertible notes outstanding.

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

As of December 31, 2012, we have accrued $1.2 million in interest payable to holders of the senior convertible notes.  Debt issuance costs of $4.8 million have been capitalized and are being amortized over the term of the senior convertible notes, with an unamortized balance of $1.6 million at December 31, 2012.

The senior convertible notes were convertible into shares of our common stock during the second and fourth quarters of 2012 at the election of the holders as the last reported sale price of our common stock for the 20 or more trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeded 130% of the conversion price, $18.87 per share. No notes were converted.

As of December 31, 2012 senior convertible notes representing $205.0 million of principal debt are outstanding with a carrying value of $161.8 million and a fair value of approximately $284.6 million, based on the Level 2 valuation hierarchy of the fair value measurements standard.

Credit Facility

On September 9, 2011, we entered into a $200 million, three-year senior secured revolving credit facility (the “Credit Facility”), the terms of which are set forth in a Credit Agreement dated as of September 9, 2011 (the “Credit Agreement”) with JPMorgan Chase

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Notes to the Consolidated Financial Statements (continued)

Bank, N.A., as administrative agent, BMO Harris Financing Inc., TD Bank, N.A. and Morgan Stanley Bank, NA as co-syndication agents and certain other lenders.

The Credit Facility is available for working capital and general corporate purposes, including acquisitions which comply with the terms of the Credit Agreement. The Credit Agreement provides separate sub-limits for letters of credit up to $20 million and swing line loans up to $10 million.

The Credit Agreement requires us to maintain (i) a maximum senior secured leverage ratio of less than 2.00 to 1.00, (ii) a maximum total leverage ratio of less than 3.50 to 1.00, (iii) a minimum interest coverage ratio of greater than 3.50 to 1.00 and (iv) minimum liquidity equal to or greater than the sum of $100 million plus the aggregate amount of certain contingent consideration payments resulting from business acquisitions payable by us within a specified time period. The Credit Agreement also contains certain other usual and customary affirmative and negative covenants, including but not limited to, limitations on capital expenditures, asset sales, mergers and acquisitions, indebtedness, liens, dividends, investments and transactions with affiliates.

Our obligations under the Credit Facility are guaranteed by certain of our domestic subsidiaries (the “Subsidiary Guarantors”) and are secured by substantially all of our assets and the assets of the Subsidiary Guarantors. Borrowings under the Credit Facility will bear interest at an amount equal to a rate calculated based on the type of borrowing and our senior secured leverage ratio (as defined in the Credit Agreement) from time to time. For loans (other than swing line loans), we may elect to pay interest based on adjusted LIBOR plus between 2.25% and 2.75% or an Alternate Base Rate (as defined in the Credit Agreement) plus between 1.25% and 1.75%. We will also pay a commitment fee of between 35 to 45 basis points, payable quarterly, on the average daily unused amount of the Credit Facility based on our senior secured leverage ratio from time to time.

As of the date of this filing, we have not drawn any amounts under the Credit Facility and are in compliance with our covenants. However, as a result of the negative impact of approval of generic vancomycin on our consolidated operating results, our ability to borrow the full $200 million provided under the Credit Facility during portions of 2013 and 2014 may be limited or prohibited. Limitations on our ability to borrow under the Credit Facility could impact our liquidity and limit our ability to fund general corporate requirements, such as research and development expenses, or to make acquisitions.

At December 31, 2012, approximately $110.0 million of our cash and availability under the credit agreement is subject to the minimum liquidity covenant (iv), described above.

As of December 31, 2012, we have accrued $0.2 million in interest payable for the revolver. Financing costs of approximately $1.7 million incurred to establish the Credit Facility were deferred and are being amortized to interest expense over the life of the Credit Facility, with an unamortized balance of $0.9  million as of December 31, 2012.

Note 10.  Acquisitions, License and Research Agreements

DuoCort Pharma AB Acquisition

On November 15, 2011, we acquired a 100% ownership interest in DuoCort, a private company based in Helsingborg, Sweden focused on improving glucocorticoid replacement therapy for treatment of adrenal insufficiency (AI). We paid approximately 213 million Swedish Krona (SEK) or approximately $32.1 million in upfront consideration. We have also agreed to make additional payments ranging from SEK 240 million up to SEK 860 million or approximately $37 million to $132 million, contingent on the achievement of certain milestones. Up to SEK 160 million or approximately $25 million of the contingent payments relate to specific regulatory milestones; and up to SEK 700 million or approximately $108 million of the contingent payments are related to commercial milestones based on the success of the product.

The following tables summarize the consideration transferred to acquire DuoCort and the amounts of identified assets acquired and liabilities assumed at the acquisition date.

The consideration transferred was as follows:
	(in thousands)
Cash	$	32,121
Contingent Consideration		21,027
Total	$	53,148

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Notes to the Consolidated Financial Statements (continued)

The total consideration was allocated to the net assets acquired and liabilities assumed as follows:

	(in thousands)
Assets acquired:
Cash	$	80
Inventory		246
Other current assets		591
Product rights		63,821
Goodwill		7,264
Total assets	$	72,002
Liabilities assumed:
Trade and other payables	$	1,721
Loans payable		301
Deferred tax liabilities		16,832
Total liabilities	$	18,854
Consideration transferred	$	53,148

The DuoCort contingent consideration consists of three separate contingent payments. The first will be payable upon the regulatory approval to manufacture bulk product in the EU.The second contingent payment is based on the attainment of specified revenue targets and the third contingent payment is payable upon regulatory approval of the product in the United States.

The fair value of the first and third contingent consideration payments recognized on the acquisition date was estimated by applying a risk adjusted discount rate to the probability adjusted contingent payments and the expected approval dates. The fair value of the second contingent consideration payment recognized on the acquisition date was estimated by applying a risk adjusted discount rate to the potential payments resulting from probability weighted revenue projections and expected revenue target attainment dates.

These fair values are based on significant inputs not observable in the market, which are referred to in the guidance as Level 3 inputs. The contingent considerations are classified as liabilities and are subject to the recognition of subsequent changes in fair value through our results of operations.

The fair value of the product rights asset has been determined using an income approach based upon a discounted cash flow model. That measure is based on significant inputs not observable in the market, which are referred to in the guidance as Level 3 inputs. Key assumptions include a discount rate of 20.5%, the weighted average cost of capital implied by DuoCort’s business enterprise value, and probability weighted cash flows.

The fair value of inventory represents net realizable value for finished goods less a normal profit on selling efforts.  The fair value of the remaining assets and liabilities acquired are based on the price that would be received on the sale of the asset or the price paid to transfer the liability to a market participant and approximates it carrying value on the measurement date.

As a result of the transaction, we recognized $7.3 million of goodwill which is not deductible for tax purposes.

The DuoCort results of operations have been included in the Consolidated Statement of Operations beginning November 15, 2011.

The results of operations of DuoCort since the acquisition date and had the acquisition occurred on January 1, 2011 are immaterial to our consolidated results of operation. We incurred approximately $1.4 million of transaction cost as part of this acquisition.

Meritage Pharma, Inc.

On December 22, 2011, we entered into an exclusive development and option agreement with  Meritage Pharma, Inc. (Meritage) , a private development-stage company based in San Diego, CA focused on developing oral budesonide suspension (OBS) as a treatment for eosinophilic esophagitis (EoE). EoE is a newly recognized chronic disease that is increasingly being diagnosed in children and adults. It is characterized by inflammation and accumulation of a specific type of immune cell, called an eosinophil, in the esophagus.

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Notes to the Consolidated Financial Statements (continued)

EoE patients may have persistent or relapsing symptoms, which include dysphagia (difficulty in swallowing), nausea, stomach pain, chest pain, heartburn, loss of weight and food impaction.

As consideration for the agreement, we made an initial $7.5 million non-refundable payment to Meritage and have the option to provide Meritage up to an additional $12.5 million for the development of OBS.  Meritage will utilize the funding to conduct additional Phase 2 clinical assessment of OBS. We have an exclusive option to acquire Meritage, at our sole discretion, by providing written notice at any time during the period from December 22, 2011 to and including the date that is the earlier of (a) the date that is 30 business days after the later of (i) the receipt of the final study data for the Phase 2 study and (ii) identification of an acceptable clinical end point definition for a pivotal induction study agreed to by the FDA.  If we exercise this option, we have agreed to pay $69.9 million for all of the outstanding capital stock of Meritage.  Meritage stockholders could also receive additional payments of up to $175 million, upon the achievement of certain clinical and regulatory milestones.

We have determined that Meritage is a variable interest entity (VIE), however because we do not have the power to direct the activities of Meritage that most significantly impact its economic performance we are not the primary beneficiary of this VIE at this time. Further, we have no oversight of the day-to-day operations of Meritage, nor do we have sufficient rights or any voting representation to influence the operating or financial decisions of Meritage, nor do we participate on any steering or oversight committees. Therefore, we are not required to consolidate Meritage into our financial statements. This consolidation status could change in the future if the option agreement is exercised, or if other changes occur in the relationship between Meritage and us.

We valued the non-refundable $7.5 million upfront payment using the cost method. In June 2012, Meritage completed the delivery of all the documents and notifications needed to satisfy the conditions of the First Option Milestone, as defined in the agreement. As a result of achieving this milestone we made a $5.0 million milestone payment in the third quarter of 2012 and increased the carrying value of our cost method investment.  We have the option to provide Meritage up to an additional $7.5 million for the development of OBS.

Under the cost method, the fair value of the investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. As of December 31, 2012, we were not aware of any such adverse effects, as such no fair value estimate has been prepared.

The asset is recorded as an other long-term asset on our consolidated balance sheets and is amortized through other income (expense) in our consolidated results of operations over the expected term of the option agreement which is expected to be December 2014. We recognized approximately $3.8 million of amortization expense during 2012 related to this asset.

Intellect Neurosciences, Inc. License Agreement

On September 30, 2011, we entered into a license agreement with INS for the worldwide rights to its clinical stage drug candidate, VP20629, which we expect to develop for the treatment of Friedreich's Ataxia (FA), a rare, hereditary, progressive neurodegenerative disease. We expect to initiate a single and repeat dose phase 1 study in patients in 2013 and expect to  initiate a subsequent Phase 2 study after completion of the Phase1 study. Following completion of the Phase 2 study, a Phase 3 study is planned.  We intend to file for Orphan Drug Designation upon review of the Phase 2 proof of concept data. Under the terms of the agreement, we have exclusive worldwide rights to develop and commercialize VP20629 for the treatment, management or prevention of any disease or condition covered by INS’ patents. We paid INS a $6.5 million up-front licensing fee and may pay additional milestones up to $120 million based upon defined events.  We will also pay a tiered royalty of up to a maximum percentage of low teens, based on annual net sales. We are solely responsible for the costs of VP20629 development.

Halozyme Therapeutics License Agreement

In May 2011, Halozyme Therapeutics (Halozyme) granted us an exclusive worldwide license to use Halozyme’s proprietary Enhanze™ technology, a proprietary drug delivery platform using Halozyme’s recombinant human hyaluronidase enzyme (rHuPH20) technology in combination with a C1 esterase inhibitor. We intend to apply rHuPH20 initially to develop a novel subcutaneous formulation of Cinryze for routine prophylaxis against attacks.Under the terms of the license agreement, we paid Halozyme an initial upfront payment of $9 million. In the fourth quarter of 2011, we made a milestone payment of $3 million related to the initiation of a Phase 2 study begun in September 2011 to evaluatethe safety, and pharmacokinetics and pharmacodynamics of subcutaneous administration of Cinryze in combination with rHuPH20. Pending successful completion of an additional series of clinical and regulatory milestones we may make further milestone payments to Halozyme which could reach up to an additional $41 million related to HAE and up to $30 million of additional milestone payments for three additional indications. Additionally, we will pay an annual maintenance fee of $1 million to Halozyme until specified events have occurred. Upon regulatory approval, Halozyme will

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Notes to the Consolidated Financial Statements (continued)

receive up to a 10% royalty on net sales of the combination product utilizing Cinryze and rHuPH20, depending on the existence of a valid patent claim in the country of sale.

Auralis Acquisition

In May 2010, we acquired a 100% ownership interest in Auralis, 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 contingent upon the first regulatory approval of Buccolam, a product in late stage development.

In September of 2011, the EC granted a Centralized PUMA for Buccolam, and accordingly the additional consideration was paid. The U.S. dollar equivalent of the payment was approximately $15.8 million. 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 was based on significant inputs not observable in the market, which are referred to in the guidance as Level 3 inputs. The contingent consideration was classified as a liability and was 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.

The following tables summarize the consideration transferred to acquire Auralis and the amounts of identified assets acquired and liabilities assumed at the acquisition date.

The purchase price was as follows:

	(in thousands)
Cash	$	14,514
Contingent Consideration		9,000
Total purchase price	$	23,514

The total cost of the acquisition was allocated to Auralis assets acquired and liabilities assumed as follows:

	(in thousands)
Assets acquired:
Cash	$	1,362
Trade receivable		741
Inventory		1,623
Property, plant and equipment		23
Contract rights		11,600
IPR&D		10,500
Goodwill		5,851
Deferred tax assets		317
Total assets	$	32,017
Liabilities assumed:
Trade and other payables	$	519
Loan Payable		1,545
Deferred tax liabilities		6,439
Total liabilities	$	8,503
Total purchase price	$	23,514

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Notes to the Consolidated Financial Statements (continued)

Sanquin Rest of World (ROW) Agreement

On January 8, 2010, we obtained the exclusive rights to research, develop, import, use, sell and offer for sale C1-INH derived products (other than Cetor) worldwide, other than the Excluded Territory (as defined below) for all potential indications pursuant to a Manufacturing and Distribution Agreement (Europe and ROW) between our European subsidiary, ViroPharma SPRL (“VP SPRL”) and Sanquin (the “ROW Agreement”).  The Excluded Territory includes (i) certain countries with existing distributors of Cinryze, Cetor and Cetor NF namely France, Ireland, the United Kingdom, Egypt, Iran, Israel, Indonesia, Turkey, Argentina and Brazil(the “Third Party Distributors”) and (ii) countries in which Sanquin has historically operated namely, Belgium, Finland, Luxemburg and The Netherlands (including the Dutch Overseas Territories) (the “Precedent Countries” and collectively, the “Excluded Territory”). In the event that any agreement with a third party distributor in the Excluded Territory is terminated, we have a right of first refusal to obtain the foregoing exclusive licenses to the C1-INH derived products with respect to such terminated country.

On December 6, 2012, we entered into a first amendment to ROW Agreement. The first amendment to the ROW Agreement (the “First Amendment”) expands our territory to worldwide, with the exception of all countries in North America and South America (other than the Dutch Overseas Territories, Argentina and Brazil) and Israel, which remain the subject of the Restated US Agreement. The First Amendment also grants Sanquin the license to commercialize Cinryze  in certain countries in which Sanquin has pre-existing marketing arrangements, including Belgium, Luxembourg, The Netherlands, Finland, Turkey, Indonesia, and Egypt (the “Sanquin Licensed Territories”).  In the event that the marketing arrangements in the Sanquin Licensed Territories expire or are terminated, VP SPRL has a right of first refusal to include such country in its territory and/or to exclude such country from the countries covered by its license to Sanquin.  As a result of the First Amendment, we have worldwide rights to commercialize C1-INH products other than in the Sanquin Licensed Territories. In connection with the First Amendment, we made a payment of $1.3 million to Sanquin, reflected as research and development expense in our consolidated statement of operations.

Additionally, under the First Amendment, Sanquin agreed to withdraw its Cetor and Cebitor product from certain markets in which it is currently being sold in order to transition to Cinryze and its future forms and formulations.  The transition will be on a country by country basis and on a schedule agreed by VP SPRL and Sanquin to avoid supply interruptions to patients using Sanquin’s Cetor and/or Cebitor products.  The First Amendment also provides that in the countries in which Sanquin is licensed to commercialize VP SPRL C1-INH product, Sanquin shall have the right to liaise with regulators to set the reimbursement price, unless regulators require VP SPRL to do so.

We and Sanquin also agreed to certain provisions restricting the sale of competitive products relating to C1-INH without the other’s consent. We may not directly or indirectly commercially exploit competitive products in our territory without Sanquin’s consent.  On a country by country basis, following the applicable transition date in each country, Sanquin agrees not to directly or indirectly commercially exploit competitive products to any person anywhere in the world.  The First Amendment provides Sanquin with the right to sell and supply Cetor and/or Cebitor before the transition date and VP SPRL’s C1-INH product thereafter to a named manufacturer provided that the named manufacturer uses the products solely in connection with the manufacturer’s manufacture of certain plasma products under its own marketing authorization and corporate brand

Other Agreements

The Company has entered into various other licensing, research and other agreements. Under these other agreements, the Company is working in collaboration with various other parties. Should any discoveries be made under such arrangements, the Company would be required to negotiate the licensing of the technology for the development of the respective discoveries. There are no significant funding commitments under these other agreements.

Note 11. 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 million to repurchase shares of our common stock and/or our 2% Senior Convertible Notes due 2017. On September 14, 2011, our Board of Directors authorized the use of up to an additional $200 million to repurchase shares of our common stock and/or our 2% Senior Convertible Notes due 2017. On September 7, 2012, our

28

ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

Board of Directors authorized the use of up to an additional $200 million to repurchase shares of our common stock and/or our 2% Senior Convertible Notes due 2017. Purchases may be made by means of open market transactions, block transactions, privately negotiated purchase transactions or other techniques from time to time.

During 2012, through open market purchases, we reacquired approximately 6.9 million shares at a cost of approximately $180.3 million or an average price of $26.20 per share and during 2011, we reacquired approximately 9.2 million shares at a cost of approximately $169.7 million or an average price of $18.52 per share.

At December 31, 2012 we have approximately $200.0 million available under these authorizations to repurchase shares of our common stock and/or our 2% Senior Convertible Notes due 2017.

Note 12.  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.

Share-based compensation expense consisted of the following for the years ended December 31, 2012, 2011 and 2010:

(in thousands)	December 31,
	2012		2011		2010
Stock options	$	16,689	$	12,154	$	11,043
Performance shares		3,244		1,535		-
Restricted shares		974		401		-
Employee Stock Purchase Plan		225		152		129
Non-employee stock options		-		-		4
Total	$	21,132	$	14,242	$	11,176

29

Our share-based compensation expense is recorded as follows:

(in thousands)	December 31,
	2012		2011		2010
Research and development	$	4,522	$	3,335	$	3,329
Selling, general and administrative		16,610		10,907		7,847
Total	$	21,132	$	14,242	$	11,176

We currently have three option plans in place: a 1995 Stock Option and Restricted Share Plan (“1995 Plan”), a 2001 Equity Incentive Plan (“2001 Plan”) and a 2005 Stock Option and Restricted Share Plan (“2005 Plan”) (collectively, the “Plans”). In September 2005, the 1995 Plan expired and no additional grants will be issued from this plan.  The Plans were adopted by our board of directors to provide eligible individuals with an opportunity to acquire or increase an equity interest in the Company and to encourage such individuals to continue in the employment of the Company.

In May 2008, the 2005 Plan was amended and an additional 5,000,000 shares of common stock was reserved for issuance upon the exercise of stock options or the grant of restricted shares or restricted share units.  This amendment was approved by stockholders at our Annual Meeting of Stockholders in May of 2010.  In April 2012, the 2005 Plan was amended and an additional 2,500,000 shares of common stock was reserved for issuance upon the exercise of stock options or the grant of restricted shares or restricted share units.  This amendment was approved by stockholders at our Annual Meeting of Stockholders in May of 2012.

As of December 31, 2012, there were 4,693,750 shares available for grant under the Plans.

The following table lists information about these equity plans at December 31, 2012:

	1995 Plan		2001 Plan		2005 Plan		Combined
Shares authorized for issuance		4,500,000		500,000		15,350,000		20,350,000
Shares outstanding		4,500,000		500,000		10,656,250		15,656,250
Shares available for grant		-		-		4,693,750		4,693,750

Employee Stock Option Plans

Stock options granted under the 2005 Plan must be granted at an exercise price not less than the fair value of the Company’s common stock on the date of grant. Stock options granted under the 2001 Plan can be granted at an exercise price that is less than the fair value of the Company’s common stock at the time of grant. Stock options granted under the 1995 Plan were granted at an exercise price not less than the fair value of the Company’s common stock on the date of grant. Stock options granted from the Plans are exercisable for a period not to exceed ten years from the date of grant.

Vesting schedules for the stock options vary, but generally vest 25% per year, over four years. Shares issued under the Plans are new shares. The Plans provide for the delegation of certain administrative powers to a committee comprised of company officers.

Options granted during  2012, 2011 and 2010 had weighted average fair values of $14.08, $11.41 and $6.68 per option. The grant date fair value of each option grant was estimated throughout the year using the Black-Scholes option-pricing model using the following assumptions for the Plans:

	2012			2011			2010
Expected dividend yield	-			-			-
Range of risk free interest rate	1.0%	-	1.6%	1.4%	-	2.9%	1.9%	-	3.4%
Weighted-average volatility	61.3%			67.8%			71.4%
Range of volatility	58.0%	-	62.3%	62.3%	-	69.3%	69.3%	-	72.4%
Range of expected option life (in years)	5.50	-	6.25	5.50	-	6.25	5.50	-	6.25

30

ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Volatility is based on the Company’s historical stock price using the expected life of the grant.

We estimate forfeiture rates for all share-based awards and monitor stock options exercises and employee termination patterns in estimating the forfeiture rate.

The following table lists option grant activity for the three-year period ended December 31, 2012:

	Share Options			Weighted average exercise price per share
Balance at December 31, 2009		7,590,195		$	10.68
Granted		2,114,784			10.12
Exercised		(649,311	)		5.53
Forfeited		(66,393	)		10.21
Expired		(435,943	)		22.74
Balance at December 31, 2010		8,553,332			10.45
Granted		1,859,778			18.08
Exercised		(1,547,787	)		9.20
Forfeited		(274,057	)		13.62
Expired		(106,025	)		27.47
Balance at December 31, 2011		8,485,241			12.03
Granted		2,047,899			24.61
Exercised		(1,415,090	)		8.96
Forfeited		(300,719	)		17.53
Expired		(2,500	)		14.91
Balance at December 31, 2012		8,814,831		$	15.26

Included in the 2012 options exercises of 1,415,090 are 41,010 shares with a weighted average execise price of $29.29 per share that were withheld for minimum withholding tax purposes for optionees who elected to net share settle this obligation.

The total intrinsic value of share options exercised during the year ended December 31, 2012, 2011 and 2010 was approximately $27.3 million, $18.2 million and $5.9 million, respectively.

We have 8,814,831 option grants outstanding at December 31, 2012 with exercise prices ranging from $1.77 per share to $32.69 per share and a weighted average remaining contractual life of 6.77 years.  The following table lists the outstanding and exercisable option grants as of December 31, 2012:

	Number of options		Weighted average exercise price		Weighted average remaining contractual term (years)		Aggregate intrinsic value (in thousands)
Outstanding		8,814,831	$	15.26		6.77	$	72,046
Exercisable		4,533,274	$	11.85		5.25	$	49,464

As of December 31, 2012, there was $34.3 million of total unrecognized compensation cost related to unvested share options granted under the Plans.  This cost is expected to be recognized over a weighted-average period of 2.7 years.  The total fair value of shares vested during the year ended December 31, 2012 was $13.1 million.

31

ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

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, which are accounted for as equity awards, are based upon the following performance measures: (i) our revenue growth over the performance period, (ii) our adjusted net income as a percent of sales at the end of the performance period, and (iii) our relative total shareholder return, or TSR, compared to a peer group of companies at the end of the performance period.

In 2012 and 2011, approximately 186,000 and 155,000 PSUs subject to Company specific performance metrics were granted with weighted average grant date fair values of $28.16 and $17.84 per share, respectively. In 2012 and 2011, approximately 21,000 and 17,000 PSUs subject to the TSR metric were granted with weighted average grant date fair values of $45.37 and $24.38 per share, respectively. The number of PSUs reflected as granted represents the target number of shares that are eligible to vest subject to the attainment of the performance goals. Depending on the outcome of these performance goals, a recipient may ultimately earn a number of shares greater or less than their target number of shares granted, ranging from 0% to 200% of the PSUs granted. Shares of our common stock are issued on a one-for-one basis for each PSU earned. Participants vest in their PSUs at the end of the performance period.

The fair value of the PSUs subject to Company specific performance metrics is equal to the closing price of our common stock on the grant date.

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

	2012			2011
Closing stock price on grant date	$	28.16		$	17.84
Performance period starting price	$	24.94		$	16.85
Term of award (in years)		2.99			2.99
Volatility		65.06	%		69.75	%
Risk-free interest rate		0.45	%		1.19	%
Expected dividend yield		0.00	%		0.00	%
Fair value per TSR PSU	$	45.37		$	24.38

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

At December 31, 2012, there was approximately $5.9 million of unrecognized compensation cost related to all PSUs that is expected to be recognized over a weighted-average period of approximately 1.79 years.

32

The following summarizes select information regarding our PSU awards as of December 31, 2012:

	Share Units			Weighted-average grant date fair value
Balance at December 31, 2010		-		$	-
Granted		173,107			18.50
Vested		-			-
Forfeited		(8,415	)		18.49
Balance at December 31, 2011		164,692			18.50
Granted		206,900			29.88
Forfeited		(20,853	)		24.38
Balance at December 31, 2012		350,739		$	24.86

Restricted Stock Awards

Beginning in 2011, we also grant our non-employee directors restricted stock awards that generally vest after one year of service. In 2012 and 2011, 37,750 and 27,000 RSUs were granted with weighted average grant date fair values of $31.12 and $17.30 per share, respectively. The fair value of a restricted stock award is equal to the closing price of our common stock on the grant date.

The following summarizes select information regarding our restricted stock awards as of December 31, 2012:

	Share Units			Weighted-average grant date fair value
Balance at December 31, 2010		-		$	-
Granted		27,000			17.30
Vested		-			-
Forfeited		-			-
Balance at December 31, 2011		27,000			17.30
Granted		37,750			31.12
Vested		(27,000	)		17.30
Balance at December 31, 2012		37,750		$	31.12

As of December 31, 2012,there was approximately $0.27 million of unrecognized compensation cost related to RSUs that is expected to be recognized over a weighted average period of 0.97 years.

Employee Stock Purchase Plan

In 2000, the stockholders of the Company approved an employee stock purchase plan. A total of 300,000 shares originally were available under this plan. Since inception of the plan, the stockholders of the Company have approved amendments to the plan to increase the number of shares available for issuance under the plan by 600,000 shares. Under this plan,  29,927, 29,982 and 48,909 shares were sold to employees during 2012, 2011 and 2010. As of December 31, 2012 there are approximately  370,151 shares available for issuance under this plan.

Under this plan, employees may purchase common stock through payroll deductions in semi-annual offerings at a price equal to the lower of 85% of the closing price on the applicable offering commencement date or 85% of the closing price on the applicable offering termination date. Since the total payroll deductions from the plan period are used to purchase shares at the end of the offering period, the number of shares ultimately purchased by the participants is variable based upon the purchase price. Shares issued under the employee stock purchase plan are new shares. There are two plan periods: January 1 through June 30 (“Plan Period One”) and July 1 through December 31 (“Plan Period Two”). The plan qualifies under Section 423 of the Internal Revenue Code.

In November 2012, the plan was amended to revise Plan Period One to May 1 through October 31 and to revise Plan period Two to November 1 through April 30 along with minor administrative changes. The plan amendments are effective January 1, 2013 and provide an Initial Offering Period from January 1, 2013 through April 30, 2013.

The fair value of shares issued under the plan during 2012 was approximately $225,000. The fair value was estimated using the Type B model, with the following assumptions:

33

 

ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

	2012 Plan Period			2012 Plan Period
	Two			One
Risk free interest rate		0.15	%		0.06	%
Volatility		48.60	%		47.70	%
Expected option life (in years)		0.5			0.5

Under Plan Period Two,  15,490 shares were sold to employees on December 31, 2012 at $19.35 per share, which represents the closing price on the offer termination date of $22.76 per share at 85%.

Under Plan Period One,  14,437 shares were sold to employees on June 30, 2012 at $20.15 per share, which represents the closing price on the offer termination date of $23.70 per share at 85%.

Note 13.  Income Taxes

For the years ended December 31, 2012, 2011 and 2010, the following table summarizes the components of income before income taxes and the provision for income taxes:

	Year ended December 31,
	2012			2011			2010
(in thousands)
Income (loss) before income taxes:
Domestic	$	52,373		$	252,381		$	210,819
Foreign		(33,352	)		(44,374	)		(9,933	)
Income before income taxes	$	19,021		$	208,007		$	200,886
Income tax expense (benefit):
Current:
Federal	$	29,672		$	79,850		$	45,727
State and local		2,731			6,601			9,684
Foreign		853			337			(33	)
Subtotal		33,256			86,788			55,378
Deferred:
Federal	$	(17,519	)		1,318			26,926
State and local		5,628			(8,136	)		(4,198	)
Foreign		(7,955	)		(12,622	)		(2,828	)
Subtotal		(19,846	)		(19,440	)		19,900
Income tax expense	$	13,410		$	67,348		$	75,278
Effective income tax rate		70.5	%		32.4	%		37.5	%

34

ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

For the years ended December 31, 2012, 2011 and 2010, the following table reconciles the federal statutory income tax rate to the effective income tax rate:

	Year ended December 31,
(% of pre-tax income)	2012			2011			2010
U.S. federal statutory income tax rate		35.0	%		35.0	%		35.0	%
State and local income tax, net of federal  tax benefit		11.1			1.7			1.8
Share-based compensation		2.3			0.3			0.6
Orphan drug credit		(11.8	)		(0.2	)		(0.2	)
Change in valuation allowance		16.8			(2.2	)		0.1
Manufacturing deduction		(6.9	)		(4.1	)		-
Foreign rate differential		16.7			1.0			0.1
Charitable contributions		(8.3	)		(0.2	)		-
Non-deductible amortization		7.0			-			-
Contingent consideration		6.2			0.6			0.2
Other		2.4			0.5			(0.1	)
Effective income tax rate		70.5	%		32.4	%		37.5	%

In 2012, 2011 and 2010, respectively, $7.1 million, $3.2 million and $1.6 million related to current stock option tax benefits were allocated directly to stockholders’ equity.

The following table summarizes the components of deferred income tax assets and liabilities:

	December 31,
(in thousands)	2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	21,260		$	17,893
Charitable contribution carryforward		4,281			-
Capitalized research and development costs		4,574			6,503
Non-deductible reserves		10,383			6,118
Depreciation		576			273
Intangible asset amortization		9,733			11,179
Equity compensation		15,132			10,783
Other		2,036			1,267
Subtotal		67,975			54,016
Valuation allowance		(4,786	)		(4,876	)
Deferred tax assets		63,189			49,140
Deferred tax liabilities:
Intangible asset amortization		191,420			198,334
Convertible note		6,213			6,335
Prepaid expenses		1,728			1,388
Deferred tax liabilities		199,361			206,057
Net deferred tax assets (liability)	$	(136,172	)	$	(156,917	)

35

ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

At December 31, 2012 and 2011, deferred tax assets and liabilities were classified on the Company’s balance sheets as follows:
	December 31,
(in thousands)		2012		2011
Current assets	$	13,324	$	10,055
Non-current assets		17,988		11,786
Current liabilities		-		(52	)

Non-current liabilities		(167,484	)		(178,706	)
Net deferred tax liability	$	(136,172	)	$	(156,917	)
The following table summarizes the change in the valuation allowance:

	Year ended December 31,
(in thousands)	2012			2011			2010
Valuation allowance at beginning of year	$	4,876		$	6,238		$	5,949
Tax expense (benefit)		3,200			(4,662	)		289
Acquisitions		(3,298	)		3,435			-
Foreign exchange		8			(135	)		-
Valuation allowance at end of year	$	4,786		$	4,876		$	6,238

Due to uncertainty regarding the ability to realize the benefit of deferred tax assets relating to certain net operating loss carryforwards, valuation allowances have been established to reduce deferred tax assets to a level that is more likely than not to be realized. Realization of the remaining net deferred tax assets will depend on the generation of sufficient taxable income in the appropriate jurisdiction, the reversal of deferred tax liabilities, tax planning strategies and other factors prior to the expiration date of the carryforwards.  A change in the estimates used to make this determination could require a reduction in deferred tax assets if they are no longer considered realizable.

As of December 31, 2012, our foreign subsidiaries have incurred cumulative losses and consequently no deferred tax liability has been established for any future distribution of funds from foreign subsidiaries.

The following table summarizes carryforwards of net operating losses and charitable contributions as of December 31, 2012.  

(in thousands)	Amount		Expiration
Foreign net operating losses	$	39,768	Indefinite
Charitable contributions		10,962		2017
State net operating losses		119,293		2020-2024

At December 31, 2012 and 2011, the Company had no gross unrecognized tax benefits.  The Company does not expect any material increase or decrease in its gross unrecognized tax benefits during the next twelve months.

The Company and its domestic subsidiaries file consolidated income tax returns in the U.S. and certain states.  In addition, separate income tax returns are filed in other states.  The Company’s foreign subsidiaries file separate income tax returns in the foreign jurisdictions in which they are located.

Our policy is to record interest and penalties related to tax matters in income tax expense. Our last U.S. tax examination for 2008 concluded in the first quarter of 2011 with no material adjustments.  We are currently under examination in a foreign tax jurisdiction and various state income tax returns are also currently under examination.  At this time, we do not believe that the results of these examinations will have a material impact on our consolidated financial statements.

36

ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

Note 14.  Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in the components of accumulated other comprehensive income (loss):

	Cumulative Translation			Unrealized gains (losses) on securities			Accumulated other comprehensive income (loss)
(in thousands)
Balance at December 31, 2009	$	914		$	-		$	914
Current period other comprehensive income, net		(1,172	)		-			(1,172	)
Balance at December 31, 2010		(258	)		-			(258	)
Current period other comprehensive income, net		(3,145	)		(11	)		(3,156	)
Balance at December 31, 2011		(3,403	)		(11	)		(3,414	)
Current period other comprehensive income, net		427			12			439
Balance at December 31, 2012	$	(2,976	)	$	1		$	(2,975	)

Note 15.  Earnings per share

	For the years ended December 31,
(in thousands, except per share data)	2012		2011		2010
Basic Earnings Per Share
Net income	$	5,611	$	140,659	$	125,608
Common stock outstanding (weighted average)		68,214		74,517		77,820
Basic net income  per share	$	0.08	$	1.89	$	1.61
Diluted Earnings Per Share
Net income	$	5,611	$	140,659	$	125,608
Add interest expense on senior convertible notes, net of income tax		-		7,548		7,193
Diluted net income	$	5,611	$	148,207	$	132,801
Common stock outstanding (weighted average)		68,214		74,517		77,820
Add shares from senior convertible notes		-		10,864		10,864
Add stock options and stock awards		3,550		2,695		1,397
Common stock equivalents		71,764		88,076		90,081
Diluted net income per share	$	0.08	$	1.68	$	1.47

The following common stock equivalents were excluded from the calculations of diluted earnings per share as their effect would be anti-dilutive:

	For the years ended December 31,
(in thousands)	2012		2011		2010
Stock options		2,371		1,896		5,447
Shares from senior convertible notes		10,864		-		-

Note 16.  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.

37

ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

The following tables provide the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2012 and 2011:

	Total Carrying
	Value at			Fair Value Measurements at December 31, 2012
(in thousands)	December 31, 2012			(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	175,518		$	175,518	$	-	$	-
Short-term investments	$	71,338		$	71,338	$	-	$	-
Contingent consideration, short-term	$	8,367		$	-	$	-	$	8,367
Contingent consideration, long-term	$	17,710		$	-	$	-	$	17,710
	Total Carrying
	Value at			Fair Value Measurements at December 31, 2011
(in thousands of dollars)	December 31, 2011			(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	331,352		$	331,352	$	-	$	-
Short-term investments	$	128,478		$	128,478	$	-	$	-
Contingent consideration, short-term	$	7,293		$	-	$	-	$	7,293
Contingent consideration, long-term	$	12,896		$	-	$	-	$	12,896
The following table provides a rollforward of liabilities measured using Level 3 inputs:
	(in thousands of dollars)
Balance at December 31, 2010	$	10,973
Additions		21,027
Re-measurement		3,711
Impact of foreign exchange		306
Settlements		(15,828	)
Balance at December 31, 2011		20,189
Additions		-
Re-measurement		4,514
Impact of foreign exchange		1,374
Settlements		-
Balance at December 31, 2012	$	26,077

Valuation Techniques - Cash and cash equivalents and short-term investments are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy.  There were no changes in valuation techniques during the year ended December 31, 2012.

38

ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

During the third quarter of 2011, we settled (paid) the contingent consideration liability related to the regulatory approval of Buccolam,  acquired as part of  the Auralis acquisition.

In the fourth quarter of 2011, we recognized contingent consideration liabilities related to our acquisition of DuoCort. The fair values of the contingent consideration is measured using significant inputs not observable in the market, which are referred to in the guidance as Level 3 inputs. The contingent consideration payments are classified as liabilities and are subject to the recognition of subsequent changes in fair value through our results of operations in other operating expenses.

The fair value of the contingent consideration payments related to regulatory approvals, is estimated by applying risk adjusted discount rates, 13% and 20.3%, to the probability adjusted contingent payments and the expected approval dates. The fair value of the contingent consideration payment related to the attainment of future revenue targets is estimated by applying a risk adjusted discount rate, 16%, to the potential payments resulting from probability weighted revenue projections and expected revenue target attainment dates. These fair value estimates are most sensitive to changes in the probability of regulatory approvals or the probability of the achievement of the revenue targets.

There were no changes in the valuation techniques during the period and there were no transfers into or out of Levels 1 and 2.

Our 2% senior convertible notes due March 2017 are measured at amortized cost in our consolidated balance sheets and not fair value. The principal balance outstanding is $205.0 million with a carrying value of $161.8 million and a fair value of approximately $284.6 million, based on the level 2 valuation hierarchy of the fair value measurements standard.

We believe that the fair values of our other financial instruments approximate their reported carrying amounts.

Note 17. 401(k) Employee Savings Plan

The Company’s 401(k) Employee Savings Plan (the “401(k) Plan”) is available to all employees meeting certain eligibility criteria. The 401(k) Plan permits participants to contribute up to 92% of their compensation not to exceed the limits established by the Internal Revenue Code. Participants are always fully vested in their contributions. The Company matches 50% of the first 6% of participating employee contributions. The Company contributed approximately $2.0 million, $0.9 million and $0.5 million to the 401(k) Plan in each of the years ended December 31, 2012, 2011 and 2010, respectively. The Company’s contributions are made in cash. The Company’s common stock is not an investment option available to participants in the 401(k) Plan.

Note 18.  Commitments and Contingencies

We have committed to purchase up to 395,000 liters of plasma in 2013 and up to 450,000 liters of plasma per year in 2014 through 2017 from our suppliers which equates to a commitments in the range of  approximately $60 million to $80 million per year. Additionally, we are required to purchase a minimum number of units that total approximately $35 million per year from our third party toll manufacturers during 2013 through 2015.

Our future minimum contractual obligations and commercial commitments at December 31, 2012 are as follows (in thousands):

(in thousands)	Total		2013		2014		2015		2016		2017		Thereafter
Operating leases	$	46,561	$	1,935	$	2,884	$	3,063	$	3,130	$	3,116	$	32,433
Collaboration agreements		2,644		1,322		1,322		-		-		-		-
Purchase obligations		477,767		97,487		108,377		112,630		78,036		81,237		-
Total	$	526,972	$	100,744	$	112,583	$	115,693	$	81,166	$	84,353	$	32,433

We have severance agreements for certain employees and change of control agreements for executive officers and certain other employees.  Under the severance agreements, certain employees may be provided separation benefits from us if they are involuntarily

39

ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

separated from employment.  Under our change of control agreements, certain employees are provided separation benefits if they are either terminated or resign for good reason from ViroPharma within 12 months from a change of control.

In connection with the acquisition of DuoCort, we have also agreed to make additional payments ranging from SEK 240 million up to SEK 860 million or approximately $37 million to $132 million, contingent on the achievement of certain milestones.

In connection with the INS license agreement we may pay additional milestones up to $120 million based upon defined events.  We will also pay a tiered royalty of up to a maximum percentage of low teens, based on annual net sales. We are solely responsible for the costs of VP20629 development.

In connection with the Halozyme license agreement we may make further milestone payments to Halozyme which could reach up to an additional $41 million related to HAE and up to $30 million of additional milestone payments for three additional indications. Additionally, we will pay an annual maintenance fee of $1 million to Halozyme until specified events have occurred. Upon regulatory approval, Halozyme will receive up to a 10% royalty on net sales of the combination product utilizing Cinryze and rHuPH20, depending on the existence of a valid patent claim in the country of sale.

 In connection with the development and option agreement with  Meritage we retain the option to provide Meritage up to an additional $7.5 million for the development of OBS. We have an exclusive option to acquire Meritage, at our sole discretion. If we exercise this option, we have agreed to pay $69.9 million for all of the outstanding capital stock of Meritage.  Meritage stockholders could also receive additional payments of up to $175 million, upon the achievement of certain clinical and regulatory milestones.

On March 14, 2008, we entered into a lease for our corporate office building.  The lease agreement had a term of 7.5 years from the commencement date. On August 29, 2012, we entered into an amended and restated lease (the Amended Lease) to expand the corporate headquarters. The Amended Lease expires fifteen years from the “commencement date”, which will occur when the landlord has substantially completed the expansion, including any tenant improvements. We currently expect the commencement date to occur during the fourth quarter of 2013.

We have the option to renew the lease for two consecutive terms for up to a total of ten years at fair market value, subject to a minimum price per square foot. The first renewal term may be for between three and seven years, at our option, and the second renewal term may be for ten years less the length of the first renewal term.

On May 17, 2012, a class action complaint was filed in the United States District Court for the Eastern District of Pennsylvania naming as defendants ViroPharma Incorporated and Vincent J. Milano. The complaint alleges, among other things, possible securities laws violations by the defendants in connection with certain statements made by the defendants related to the Company’s Vancocin product. On October 19, 2012, the complaint was amended to include additional officers of the Company as named defendants and allege additional information as the basis for the claim. The defendants believe that the allegations in the class action complaint are without merit and intend to defend the lawsuit vigorously; however, there can be no assurance regarding the ultimate outcome of this lawsuit.

In addition, we have received a notification that the Federal Trade Commission (FTC) is conducting an investigation into whether we engaged in unfair methods of competition with respect to Vancocin. The existence of an investigation does not indicate that the FTC has concluded that we have violated the law and we do not believe that we have engaged in unfair methods of competition with respect to Vancocin.  We intend to continue to cooperate with the FTC investigation; however, at this time we cannot assess potential outcomes of this investigation.

In the fourth quarter of  2012, we became aware that certain Vancocin sales made to Government agencies under the Federal Supply Schedule contract between ViroPharma and the Veterans Administration (VA) were not compliant with the Trade Agreements Act.  Absent a waiver, the Trade Agreements Act prohibits the sale to the government of products manufactured in non-designated countries, such as China. We have self-reported the discovery to the VA and will work with the VA to address this matter moving forward. The timing and outcome of these discussions are not certain.  As such, we are not in a position to determine whether we have any liability or the extent of any such liability. Accordingly, we have not made any provisions for potential fines or penalties related to these potential violations  in our consolidated financial statements as of December 31, 2012.

From time to time we are a party to litigation in the ordinary course of our business and may become a party to additional litigation in the future as several law firms have issued press releases indicating that they are commencing investigations concerning whether the Company and certain of its officers and directors have violated laws. We do not believe these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial condition, results of operations or cash flows.

40

ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

Note 19.  Collaborations

In January 2010, we entered into a collaboration agreement with Sanquin to establish a Joint Steering Committee.  The Joint Steering Committee shall serve as a forum to establish and discuss progress under, among others, (i) a Global Commercialization Plan; (ii) clinical development programs of ViroPharma and the Sanquin Early Stage Research Programs; (iii) manufacturing Capacity Schedules; (iv) pharmacovigilence matters; (v) quality matters; (vi) manufacturing improvement programs; and (vii) regulatory matters.

Sanquin may conduct certain early stage research programs and we will provide to Sanquin €1,000,000 (approximately $1.3 million) per year for a period of five years to support such Early Stage Research Programs. We have a right of first refusal to further develop and commercialize the subject matter of each such Early Stage Research Program worldwide (except for the Excluded Territory) subject to Sanquin’s and its research partners’ right to use any such intellectual property for their internal, non-commercial research purposes. Except for the Early Stage Research Programs, we will be solely responsible for conducting all clinical trials and other development activities necessary to support our efforts to obtain regulatory approval of Cinryze in additional territories as well as any future C1-INH derived products developed pursuant to the Rest of World (ROW) Agreement. Sanquin has the right to approve any such clinical trials and development activities through the Joint Steering Committee.

We obtained, as part of the ROW Agreement, 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 2011, we began to commercialize Cinryze in European countries in which we have distribution rights. On December 6, 2012, we entered into a first amendment to the ROW Agreement. The amendment expands the territory to worldwide and also grants Sanquin the license to commercialize C1-INH derived product in certain countries in which Sanquin has pre-existing marketing arrangements. Additionally, under the amendment, Sanquin agrees to withdraw its Cetor and Cebitor product from certain markets in which it is currently being sold in order to transition to our C1-INH product, Cinryze, and its future forms and formulations.  In connection with the amendment, we made a payment of $1.3 million to Sanquin, reflected in research and development expense in our consolidated statement of operations.

Note 20.  Supplemental Cash Flow Information

	For the years ended December 31,
(in thousands)	2012		2011			2010
Supplemental disclosure of non-cash transactions:
Unrealized losses on available for sale securities	$	13	$	(11	)	$	-
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	40,629	$	93,648		$	52,484
Cash paid for interest	$	4,814	$	4,141		$	4,100

Note 21. Quarterly Financial Information (unaudited)

This table summarizes the unaudited consolidated financial results of operations for the quarters ended (amounts in thousands except per share data):

	March 31,			June 30, (2)			September 30,			December 31,
2012 Quarter Ended
Net product sales	$	135,800		$	94,639		$	91,004		$	106,490
Cost of sales (excluding amortization of product rights)		32,079			28,089			21,552			26,827
Operating expenses		63,411			67,149			73,625			81,687
Other income (expense)		(2,250	)		(8,159	)		(4,614	)		530
Income tax expense (benefit)		18,069			(2,928	)		(4,220	)		2,489
Net income (loss)		19,991			(5,830	)		(4,567	)		(3,983	)

41

ViroPharma Incorporated

Notes to the Consolidated Financial Statements (continued)

Basic net income (loss) per share(1)	$	0.28	$	(0.08	)	$	(0.07	)	$	(0.06	)
Diluted net income (loss) per share(1)	$	0.26	$	(0.08	)	$	(0.07	)	$	(0.06	)
2011 Quarter Ended
Net product sales	$	127,035	$	128,808		$	142,956		$	145,575
Cost of sales (excluding amortization of product rights)		18,869		21,309			20,115			19,683
Operating expenses		48,131		65,191			63,856			56,597
Impairment loss		-		-			8,495			-
Other (expense) income		365		(2,618	)		(5,970	)		(5,898	)
Income tax expense		23,954		16,894			16,281			10,219
Net income		36,446		22,796			28,239			53,178
Basic net income per share(1)	$	0.47	$	0.30		$	0.38		$	0.75
Diluted net income  per share(1)	$	0.40	$	0.28		$	0.35		$	0.65

(1)  Net income per share amounts may not agree to the per share amounts for the full year due to the use of weighted average shares for each period.

(2)  The table above reflects an immaterial correction to our reported results for the second quarter of 2012. As part of our review of our operating results during the fourth quarter of 2012, we noted that our reported cost of sales for the second quarter of 2012 were understated by approximately $3.4 million. We assessed the materiality of this error for the second quarter, the six months ended June 30, 2012 and the nine months ended September 30, 2012 in accordance with the guidance in SAB 99 (SAB Topic 1.M) Materiality, and determined that the error was immaterial to the three and six months ended June 30, 2012 and the nine months ended September 30, 2012. We will correct our results for the for three and six months ended June 30, 2012 and the nine months ended September 30, 2012 when those periods are presented in our subsequent periodic filings. The effect of reflecting the correction of this immaterial error in the second quarter of 2012, presented above, is shown in the table below.

	As Reported			Adjustment			As Revised
Quarter Ended June 30, 2012
Net product sales	$	94,639		$	-		$	94,639
Cost of sales (excluding amortization of product rights)		24,721			3,368			28,089
Operating expenses		67,149			-			67,149
Other income (expense)		(8,159	)		-			(8,159	)
Income tax benefit		(1,187	)		(1,741	)		(2,928	)
Net loss		(4,203	)		(1,627	)		(5,830	)
Basic net loss per share	$	(0.06	)	$	(0.02	)	$	(0.08	)
Diluted net loss per share	$	(0.06	)	$	(0.02	)	$	(0.08	)

42