1. BUSINESS OVERVIEW

Overview

Idenix Pharmaceuticals, Inc., which we refer to as Idenix, we, us or our, is a biopharmaceutical company engaged in the discovery and development of drugs for the treatment of human viral diseases with operations in the United States and Europe. Currently, our primary research and development focus is on the treatment of patients with hepatitis C virus, or HCV. In July 2011, we initiated enrollment of 100 HCV-infected patients into a 12-week phase IIb clinical trial of our most advanced drug candidate, IDX184, a nucleotide polymerase inhibitor, and have begun dosing patients in this clinical trial.

In addition to our strategy of developing drugs for the treatment of HCV, we have also developed products and drug candidates for the treatment of patients with hepatitis B virus, or HBV, human immunodeficiency virus type-1, or HIV, and acquired immune deficiency syndrome, or AIDS. We successfully developed and received worldwide marketing approval for telbivudine (Tyzeka^®/Sebivo^®), a drug for the treatment of HBV that we licensed to Novartis Pharma AG, or Novartis. In 2007, we began receiving royalties from Novartis based on a percentage of net sales of Tyzeka^®/Sebivo^®. We also discovered and developed through proof-of-concept clinical testing IDX899, a drug candidate from the class of compounds known as non-nucleoside reverse transcriptase inhibitors, or NNRTIs, for the treatment of HIV/AIDS. We licensed our NNRTI compounds, including IDX899, now known as ‘761, to GlaxoSmithKline, or GSK, in February 2009. In October 2009, GSK assigned this license agreement to ViiV Healthcare Company, or ViiV, which is an affiliate of GSK. In February 2011, ViiV informed us that the U.S. Food and Drug Administration, or FDA, placed ‘761 on clinical hold. ViiV has full responsibility for the development of ‘761, including any regulatory interactions.

On April 13, 2011, we issued approximately 21.1 million shares of our common stock pursuant to a shelf registration statement and approximately 1.8 million shares of our common stock to Novartis pursuant to a private placement agreement. The net proceeds of both transactions were $60.2 million. Upon completion of this offering, we have fully utilized the shelf registration statement. In conjunction with these issuances of common stock, we amended the collaboration with Novartis to provide that: a) Novartis retains the exclusive option to obtain rights to drug candidates developed by us so long as Novartis maintains ownership of at least 30% of our common stock, rather than ownership of at least 40% as was the case prior to the amendment; b) we will use reasonable best efforts to nominate for election as directors at least two designees of Novartis so long as Novartis maintains ownership of at least 30% of our common stock, rather than ownership of at least 35% as was the case prior to the amendment; and c) Novartis’ consent is required for the selection and appointment of our chief financial officer so long as Novartis owns at least 30% of our common stock, rather than ownership of at least 40% as was the case prior to the amendment. As of July 22, 2011, Novartis owned approximately 35% of our outstanding common stock.

We are subject to risks common to companies in the biopharmaceutical industry including, but not limited to, the successful development of products, clinical trial uncertainty, regulatory approval, fluctuations in operating results and financial risks, potential need for additional funding, protection of proprietary technology and patent risks, compliance with government regulations, dependence on key personnel and collaboration partners, competition, technological and medical risks and management of growth.

We have incurred losses in each year since our inception and at June 30, 2011, we had an accumulated deficit of $645.9 million. We expect to incur annual operating losses over the next several years as we continue to expand our drug discovery and development efforts, specifically, the initiation of a phase IIb clinical trial of IDX184 in July 2011. As a result of continuing operating losses, we may seek additional funding through a combination of public or private financing, collaborative relationships or other arrangements and we may seek a partner who will assist in the future development and commercialization of IDX184. Such additional financing may not be available when we need it or may not be available on terms that are favorable to us. Moreover, any financing requiring the issuance of additional shares of capital stock must first be approved by Novartis so long as Novartis continues to own at least 19.4% of our voting stock. We believe that our current cash, cash equivalents and the expected royalty payments associated with product sales of Tyzeka^®/Sebivo^® will be sufficient to sustain operations until at least the second quarter of 2012. However, if we are unable to obtain adequate financing on a timely basis, we could be required to delay, reduce or eliminate one or more of our drug development programs, enter into new collaborative, strategic alliances or licensing arrangements that may not be favorable to us and reduce the number of our employees. More generally, if we are unable to obtain adequate funding, we may be required to scale back, suspend or terminate our business operations.

Basis of Presentation

The condensed consolidated financial statements reflect the operations of Idenix Pharmaceuticals, Inc. and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements are unaudited and have been prepared by us in accordance with generally accepted accounting principles in the United States of America, or GAAP, for interim reporting. Accordingly, these interim financial statements do not include all the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2010, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 7, 2011. These interim financial statements are unaudited, but in the opinion of management, reflect all adjustments (including normal recurring accruals) necessary for a fair statement of the financial position and results of operations for the interim periods presented. The year end consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by GAAP.

The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, judgments and methodologies, including those related to revenue recognition, our collaborative relationships, clinical trial expenses, impairment and amortization of long-lived assets including intangible assets, share-based compensation, income taxes including the valuation allowance for deferred tax assets, contingencies, litigation and restructuring charges. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the fiscal year ending December 31, 2011.

Recent Accounting Pronouncements

In June, 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update No. 2011-5, Presentation of Comprehensive Income. The objective of this amendment is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This guidance is effective for fiscal years beginning after December 15, 2011. We do not expect that this guidance will have any material effect on our consolidated financial statements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Revenue is recognized in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, or SAB No. 101, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition, and for revenue arrangements entered into after June 30, 2003, in accordance with the revenue recognition guidance of the FASB. For multiple-element revenue arrangements entered into or materially modified after January 1, 2011, we recognize revenue under Accounting Standard Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, or ASU No. 2009-13. We record revenue provided that there is persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured.

Our revenues are generated primarily through collaborative research, development and/or commercialization agreements. The terms of these agreements typically include payments to us for non-refundable license fees, milestones, collaborative research and development funding and royalties received from our collaboration partners.

Milestone Payments

Revenue is recognized for payments that are contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone is substantive and meets all of the following criteria: a) performance consideration earned by achieving the milestone be commensurate with either performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from performance to achieve the milestone; b) it relates to past performance; and c) the payment is reasonable relative to all deliverables and payment terms in the arrangement.

Collaboration Revenue — Related Party

We entered into a collaboration with Novartis relating to the worldwide development and commercialization of our drug candidates in May 2003, which we refer to as the development and commercialization agreement. Under this arrangement, we have received non-refundable license fees, milestones, collaborative research and development funding and royalty payments. This arrangement has several joint committees in which we and Novartis participate. We participate in these committees as a means to govern or protect our interests. The committees span the period from early development of a drug candidate through commercialization of any drug candidate licensed by Novartis. As a result of applying the provisions of SAB No. 101, which was the applicable revenue guidance at the time the collaboration was entered into, our revenue recognition policy attributes revenue to the development period of the drug candidates licensed under the development and commercialization agreement. We have not attributed revenue to our involvement in the committees following the commercialization of the licensed products as we have determined that our participation on the committees, as such participation relates to the commercialization of drug candidates, is protective. Our determination is based in part on the fact that our expertise is, and has been, the discovery and development of drugs for the treatment of human viral diseases. Novartis, on the other hand, has the considerable commercialization expertise and infrastructure necessary for the commercialization of such drug candidates. Accordingly, we believe our obligation post commercialization is inconsequential.

We recognize non-refundable payments over the performance period of our continuing obligations. This period is estimated based on current judgments related to the product development timeline of our licensed drug candidates and is currently estimated to be through May 2021. This policy is described more fully in Note 5.

Royalty revenue consists of revenue earned under our license agreement with Novartis for sales of Tyzeka^®/Sebivo^®, which is recognized when reported from Novartis. Royalty revenue is equal to a percentage of Tyzeka^®/Sebivo^® net sales, with such percentage increasing according to specified tiers of net sales. The royalty percentage varies based on the specified territory and the aggregate dollar amount of net sales.

Other Revenue

In February 2009, we entered into a license agreement with ViiV, which we refer to as the ViiV license agreement. Under the ViiV license agreement, we granted ViiV an exclusive worldwide license to develop, manufacture and commercialize our NNRTI compounds, including ‘761, for the treatment of human diseases, including HIV/AIDS. This agreement has performance obligations, including joint committee participation and ViiV’s right to license other NNRTI compounds that we may develop in the future, that we have assessed under the FASB guidance related to multiple element arrangements, prior to the implementation of ASU No. 2009-13. We concluded that this arrangement should be accounted for as a single unit of accounting and recognized using the contingency adjusted performance method. Under this agreement, we received a non-refundable license fee payment and milestone payments from ViiV. These milestone payments did not meet our revenue recognition criteria for immediate recognition. The non-refundable license fee payment and milestone payments received from ViiV were recorded as deferred revenue and are recognized as revenue over the life of the agreement, which is estimated to be 17 years. A cumulative catch-up was recognized for the period from the execution of the license agreement in March 2009 through the period in which the milestone payments were received. In February 2011, ViiV informed us that the FDA placed ‘761 on clinical hold. ViiV has full responsibility for the development of ‘761, including any regulatory interactions.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with a maturity date of 90 days or less at the date of purchase to be cash equivalents.

In connection with certain of our operating lease commitments, we issued letters of credit collateralized by cash deposits that were classified as restricted cash on the condensed consolidated balance sheets. Restricted cash amounts have been classified as current or non-current based on the expected release date of the restrictions.

Fair Value Measurements

Our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010 are measured in accordance with FASB guidance. Fair values determined by Level 1 inputs utilize observable data such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Share-Based Compensation

We recognize share-based compensation for employees and directors using a fair value based method that results in expense being recognized in our condensed consolidated financial statements.

3. NET LOSS PER COMMON SHARE

Basic net loss per common share is computed by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net loss available to common stockholders by the weighted average number of common shares and other potential common shares then outstanding. Potential common shares consist of common shares issuable upon the assumed exercise of outstanding stock options (using the treasury stock method), issuance of contingently issuable shares subject to Novartis’ subscription rights (Note 5) and restricted stock awards.

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
		(In Thousands, Except								(In Thousands, Except
		per Share Data)								per Share Data)
Basic and diluted net loss per common share:
Net loss		$	(13,909	)		$	(16,256	)		$	(22,145	)		$	(32,469	)
Basic and diluted weighted average number of common shares outstanding			92,737				70,446				82,982				68,419
Basic and diluted net loss per common share		$	(0.15	)		$	(0.23	)		$	(0.27	)		$	(0.47	)

The following potential common shares were excluded from the calculation of diluted net loss per common share because their effect was anti-dilutive:

		Three and Six Months Ended
		June 30,
		2011				2010
		(In Thousands)
Options			7,935				6,817
Contingently issuable shares to related party			1,759				1,333
			9,694				8,150

In addition to the contingently issuable shares to related party listed in the table above, Novartis could be entitled to additional shares under its stock subscription rights which would be anti-dilutive in future periods based on our current stock price.

4. COMPREHENSIVE LOSS

For the three and six months ended June 30, 2011 and 2010 comprehensive loss was as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
		(In Thousands)								(In Thousands)
Net loss		$	(13,909	)		$	(16,256	)		$	(22,145	)		$	(32,469	)
Change in other comprehensive loss:
Foreign currency translation adjustment			115				(260	)			393				(419	)
Total comprehensive loss		$	(13,794	)		$	(16,516	)		$	(21,752	)		$	(32,888	)

5. NOVARTIS RELATIONSHIP

Overview

In May 2003, we entered into a collaboration with Novartis relating to the worldwide development and commercialization of our drug candidates. In May 2003, Novartis also purchased approximately 54% of our common stock. Since this date, Novartis has had the ability to exercise control over our strategic direction, research and development activities and other material business decisions.

Pursuant to the development and commercialization agreement, as amended, we have granted Novartis the option to license any of our development-stage drug candidates, so long as Novartis maintains at least 30% ownership of our common stock. Novartis may exercise this option generally after demonstration of activity and safety in a proof-of-concept clinical trial. If Novartis licenses a drug candidate, it is obligated to fund a portion of the development expenses that we incur in accordance with development plans agreed upon by us and Novartis. Under the development and commercialization agreement, we have granted Novartis an exclusive worldwide license to market and sell drug candidates that Novartis chooses to license from us. The commercialization rights under the development and commercialization agreement also include our right to co-promote or co-market all licensed products in the United States, United Kingdom, France, Germany, Italy and Spain. Under the development and commercialization agreement, we granted Novartis an exclusive worldwide license to market and sell telbivudine (Tyzeka^®/Sebivo^®), valtorcitabine and valopicitabine.

In 2003, Novartis licensed telbivudine from us under the development and commercialization agreement and we co-developed and co-launched Tyzeka^®/Sebivo^® for the treatment of HBV. In September 2007, we amended the development and commercialization agreement and we transferred to Novartis our worldwide development, commercialization and manufacturing rights and obligations pertaining to telbivudine in exchange for royalties based on net product sales of Tyzeka^®/Sebivo^® from Novartis. The royalty percentage increases according to specified tiers of net sales and the percentage varies based on specified territories and the aggregate dollar amounts of net sales. We recognized $1.2 million and $0.9 million as royalty revenue from Novartis’ sales of Tyzeka^®/Sebivo^® during the three months ended June 30, 2011 and 2010, respectively, and we recognized $2.2 million and $1.9 million as royalty revenue from Novartis’ sales of Tyzeka^®/Sebivo^® during the six months ended June 30, 2011 and 2010, respectively. The receivables from related party balances of $1.2 million and $0.8 million at June 30, 2011 and December 31, 2010, respectively, consisted of royalties associated with product sales of Tyzeka^®/Sebivo^® from Novartis.

In October 2009, Novartis waived its right to license IDX184. As a result, we retain the worldwide rights to develop, commercialize and license IDX184. We may seek a partner that will assist in the future development and commercialization of this drug candidate.

To date, we have received $117.2 million of non-refundable payments from Novartis under the development and commercialization agreement that have been recorded as deferred revenue. The $117.2 million of deferred payments are being recognized over the development period of the licensed drug candidates, which represents the period of our continuing obligations. We estimate this period to be through May 2021 based on current judgments related to the product development timeline of our licensed drug candidates. We review our assessment and judgment on a quarterly basis with respect to the expected duration of the development period of our licensed drug candidates. If the estimated performance period changes, we will adjust the periodic revenue that is being recognized and will record the remaining unrecognized non-refundable payments over the remaining development period during which our performance obligations will be completed. Significant judgments and estimates are involved in determining the estimated development period and different assumptions could yield materially different results. Related to the deferred revenue, we recognized $0.8 million and $1.3 million as revenue during the three months ended June 30, 2011 and 2010, respectively, and we recognized $1.6 million and $2.8 million as revenue during the six months ended June 30, 2011 and 2010, respectively. These amounts are impacted by Novartis’ stock subscription rights described below.

As mentioned above, in addition to the collaboration, in May 2003, Novartis purchased approximately 54% of our outstanding common stock from our then existing stockholders. The stockholders received $255.0 million in cash from Novartis with an additional aggregate amount of up to $357.0 million contingently payable to these stockholders if we achieve predetermined development milestones relating to specific HCV drug candidates. As of July 22, 2011, Novartis owned approximately 35% of our outstanding common stock.

Stockholders’ Agreement

In connection with Novartis’ purchase of stock from our stockholders, we, Novartis and substantially all of our stockholders at that time entered into a stockholders’ agreement, which we refer to as the stockholders’ agreement. The stockholders’ agreement was amended and restated in 2004 in connection with our initial public offering of our common stock and amended in April 2011 in connection with a subsequent offering of our common stock. The stockholders’ agreement, as amended, provides, among other things, that we will use our reasonable best efforts to nominate for election as a director at least two designees of Novartis for so long as Novartis and its affiliates own at least 30% of our voting stock and that we will use our reasonable best efforts to nominate for election as a director at least one designee of Novartis for so long as Novartis and its affiliates own at least 19.4% of our voting stock. As long as Novartis and its affiliates continue to own at least 19.4% of our voting stock, Novartis will have approval rights over a number of corporate actions that we may take, including the authorization or issuance of additional shares of capital stock and significant acquisitions and dispositions.

Novartis’ Stock Subscription Rights

Under our stock purchase agreement with Novartis, which we refer to as the stock purchase agreement, Novartis has the right to purchase, at par value of $0.001 per share, such number of shares as is required to maintain its percentage ownership of our voting stock if we issue shares of capital stock in connection with the acquisition or in-licensing of technology through the issuance of up to 5% of our stock in any 24-month period. These purchase rights of Novartis remain in effect until the earlier of: a) the date that Novartis and its affiliates own less than 19.4% of our voting stock; or b) the date that Novartis becomes obligated to make the additional contingent payments of $357.0 million to holders of our stock who sold shares to Novartis on May 8, 2003.

In addition to the right to purchase shares of our stock at par value as described above, if we issue any shares of our capital stock, other than in certain situations, Novartis has the right to purchase such number of shares required to maintain its percentage ownership of our voting stock for the same consideration per share paid by others acquiring our stock. Any financing requiring the issuance of additional shares of capital stock must first be approved by Novartis so long as Novartis continues to own at least 19.4% of our voting stock. In May 2009 and April 2011, we received approval from Novartis to issue capital shares pursuant to a financing under an existing shelf registration statement filed with the SEC in September 2008 so long as the issuance of shares did not reduce Novartis’ interest in Idenix below specified levels, 40% and 30%, respectively. Pursuant to this shelf registration statement, in August 2009 and in April 2010, we issued approximately 7.3 million and approximately 6.5 million shares, respectively, of our common stock pursuant to underwritten offerings and received $21.2 million and $26.3 million in net proceeds, respectively. Novartis did not participate in either of these offerings. On April 13, 2011, we issued approximately 21.1 million shares of our common stock pursuant to this shelf registration statement and approximately 1.8 million shares of our common stock to Novartis pursuant to a private placement agreement. The net proceeds of both transactions were $60.2 million. Upon completion of this offering, we have fully utilized the shelf registration statement. As of July 22, 2011, Novartis owned approximately 35% of our outstanding common stock.

In connection with the closing of our initial public offering in July 2004, Novartis terminated a common stock subscription right with respect to approximately 1.4 million shares of common stock issuable by us as a result of the exercise of stock options granted after May 8, 2003 pursuant to the 1998 equity incentive plan. In exchange for Novartis’ termination of such right, we issued 1.1 million shares of common stock to Novartis for a purchase price of $0.001 per share. The fair value of these shares was determined to be $15.4 million at the time of issuance. As a result of the issuance of these shares, Novartis’ rights to purchase additional shares as a result of future option grants and stock issuances under the 1998 equity incentive plan were terminated and no additional adjustments to revenue and deferred revenue will be required. Prior to the termination of the stock subscription rights under the 1998 equity incentive plan, as we granted options that were subject to this stock subscription right, the fair value of our common stock that would be issuable to Novartis, less par value, was recorded as an adjustment of the non-refundable payments received from Novartis. We remain subject to potential revenue adjustments with respect to grants of options and stock awards under our stock incentive plans other than the 1998 equity incentive plan.

Upon the grant of options and stock awards under our stock incentive plans, with the exception of the 1998 equity incentive plan, the fair value of our common stock that would be issuable to Novartis, less the exercise price, if any is payable by the option or award holder, is recorded as a reduction of the non-refundable payments associated with the Novartis collaboration. The amount is attributed proportionately between cumulative revenue recognized through the current date and the remaining amount of deferred revenue. These amounts will be adjusted through the date that Novartis elects to purchase the shares to maintain its percentage ownership based upon changes in the value of our common stock and in Novartis’ percentage ownership.

As of June 30, 2011, the aggregate impact of Novartis’ stock subscription rights has reduced the non-refundable payments by $18.3 million, which has been recorded as additional paid-in capital. Of this amount, $4.7 million has been recorded as a reduction of deferred revenue with the remaining amount of $13.6 million recorded as a reduction of license fee revenue. For the three months ended June 30, 2011, the impact of Novartis’ stock subscription rights has increased additional paid-in capital by $2.2 million, decreased deferred revenue by $0.7 million and decreased license fee revenue by $1.5 million. For the six months ended June 30, 2011, there was no cumulative significant impact of Novartis’ stock subscription rights to additional paid-in capital, deferred revenue or license fee revenue as the value of Novartis’ stock subscription rights at June 30, 2011 was comparable with the value at December 31, 2010.

Manufacturing and Supply Agreement

Under the master manufacturing and supply agreement, dated May 8, 2003, with Novartis, which we refer to as the manufacturing and supply agreement, we appointed Novartis to manufacture or have manufactured the clinical supply of the active pharmaceutical ingredient, or API, for each drug candidate licensed under the development and commercialization agreement and certain other drug candidates. The cost of the clinical supply will be treated as a development expense, allocated between us and Novartis in accordance with the agreement. We have the ability to appoint Novartis or a third-party to manufacture the commercial supply of the API based on a competitive bid process in which Novartis has the right to match the best third-party bid. Novartis will perform the finishing and packaging of the API into the final form for sale.

Product Sales Arrangement

In connection with the drug candidates that Novartis licenses from us, with the exception of Tyzeka^®/Sebivo^®, we have retained the right to co-promote or co-market all licensed products in the United States, United Kingdom, France, Germany, Italy and Spain. In the United States, we would act as the lead commercial party and record revenue from product sales and share equally the net benefit from co-promotion from the date of product launch. In the United Kingdom, France, Germany, Italy and Spain, Novartis would act as the lead commercial party, record revenue from product sales and would share with us the net benefit from co-promotion and co-marketing. The net benefit is defined as net product sales minus related cost of sales. The amount of the net benefit that would be shared with us would start at 15% for the first 12-month period following the date of launch, increasing to 30% for the second 12-month period following the date of launch and 50% thereafter. In other countries, we would effectively sell products to Novartis for their further sale to third-parties. Novartis would pay us for such products at a price that is determined under the terms of our manufacturing and supply agreement with Novartis and we would receive a royalty payment from Novartis on net product sales.

6. ViiV HEALTHCARE COMPANY AND GLAXOSMITHKLINE COLLABORATION

In February 2009, we entered into a license agreement which granted GSK an exclusive worldwide license to develop, manufacture and commercialize our NNRTI compounds, including ‘761, for the treatment of human diseases, including HIV/AIDS. We also entered into a stock purchase agreement with GSK in February 2009, which we refer to as the GSK stock purchase agreement. Under the GSK stock purchase agreement, GSK purchased approximately 2.5 million shares of our common stock at an aggregate purchase price of $17.0 million, or a per share price of $6.87. These agreements became effective in March 2009. In October 2009, GSK assigned this license agreement to ViiV, an affiliate of GSK.

In March 2009, we received $34.0 million related to this collaboration, which consisted of a $17.0 million license fee payment under the ViiV license agreement and $17.0 million under the GSK stock purchase agreement. In May 2010, we received a $6.5 million milestone payment related to the achievement of a preclinical operational milestone and in November 2010, we received a $20.0 million milestone payment for the initiation of a phase IIb clinical study related to the development of ‘761. These milestone payments did not meet our revenue recognition criteria for immediate recognition and are being recognized over the term of the agreement. Pursuant to the ViiV license agreement, we could also potentially receive up to $390.0 million in additional milestone payments as well as double-digit tiered royalties on worldwide product sales. The parties have agreed that if ViiV, its affiliates or its sublicensees desire to develop ‘761 for an indication other than HIV, or if ViiV intends to develop any other licensed compound for any indication, the parties will mutually agree on a separate schedule of milestone and royalty payments prior to the start of development.

The ViiV license agreement has performance obligations, including joint committee participation and ViiV’s right to license other NNRTI compounds that we may develop in the future, that we have assessed under the FASB guidance related to multiple element arrangements, prior to the implementation of ASU No. 2009-13. We concluded that this arrangement should be accounted for as a single unit of accounting and recognized using the contingency adjusted performance method. The $43.5 million payments from ViiV were recorded as deferred revenue and are being recognized as revenue over the life of the agreement, which is estimated to be 17 years. A cumulative catch-up was recognized for the period from the execution of the license agreement in March 2009 through the period in which milestone payments were received. We recognized $0.7 million and $0.8 million of collaboration revenue for the three months ended June 30, 2011 and 2010, respectively, and recognized $1.3 million and $1.0 million of collaboration revenue for the six months ended June 30, 2011 and 2010, respectively. We recorded $37.4 million and $38.7 million of deferred revenue as of June 30, 2011 and December 31, 2010, respectively, related to payments received from ViiV.

In February 2011, ViiV informed us that the FDA placed ‘761 on clinical hold. ViiV has full responsibility for the development of ‘761, including any regulatory interactions.

7. FAIR VALUE MEASUREMENTS

At June 30, 2011 and December 31, 2010, $47.7 million and $17.7 million, respectively, of our money market funds were classified as Level 2 fair value and included as part of cash and cash equivalents in our condensed consolidated balance sheets. There were no gross unrealized gains or losses for the three and six months ended June 30, 2011 or 2010.

The following table is a rollforward of our auction rate investments (described below) whose fair value was determined on a recurring basis using significant unobservable inputs (Level 3) at June 30, 2010 (no Level 3 assets were held at June 30, 2011):

		Three Months Ended				Six Months Ended
		June 30, 2010				June 30, 2010
		(In Thousands)
Beginning balance		$	1,418			$	1,584
Purchases, sales and settlements			(1,276	)			(1,476	)
Total realized net losses recognized in earnings			(142	)			(108	)
Ending balance		$	—			$	—

At December 31, 2009, we held one investment in an auction rate security with an estimated value of $1.6 million, which did not actively trade and therefore was classified as Level 3. At December 31, 2009, we determined the fair value of this security based on a cash flow model which incorporated a three-year discount period, a 1.97% per annum coupon rate, a 0.519% per coupon payment discount rate (which integrated a liquidity discount rate, 3-year swap forward rate and credit spread), as well as coupon history. We also considered in determining the fair value that our holding in the auction rate security was backed by the United States government and that the security was rated A3 at December 31, 2009. During the quarter ended March 31, 2010, we sold a portion of this security at par value for proceeds of $0.2 million and during the quarter ended June 30, 2010, we sold the remaining portion of the security for a total of $1.5 million and recognized a realized loss of $0.1 million.

8. INTANGIBLE ASSET, NET

Our intangible asset relates to a settlement agreement entered into by and among us along with our former chief executive officer in his individual capacity, the Universite Montpellier II, or the University of Montpellier, Le Centre National de la Recherche Scientifique, or CNRS, the Board of Trustees of the University of Alabama on behalf of the University of Alabama at Birmingham, or UAB, the University of Alabama at Birmingham Research Foundation, or UABRF, and Emory University as described more fully in Note 11. The settlement agreement, entered into in July 2008 and effective as of June 1, 2008, included a full release of all claims, contractual or otherwise, by the parties.

Pursuant to the settlement agreement, we paid UABRF (on behalf of UAB and Emory University) a $4.0 million upfront payment and will make additional payments to UABRF equal to 20% of all royalty payments received by us from Novartis based on worldwide sales of telbivudine, subject to minimum payment obligations aggregating $11.0 million. We are amortizing $15.0 million related to this settlement payment to UAB and related entities over the life of the agreement, or August 2019.

The following table is a rollforward of our intangible asset as shown in our condensed consolidated balance sheets:

		June 30,				December 31,
		2011				2010
		(In Thousands)
Beginning balance		$	9,843			$	11,069
Amortization expense			(568	)			(1,226	)
Ending balance		$	9,275			$	9,843

As of June 30, 2011 and December 31, 2010, accumulated amortization was $5.7 million and $5.2 million, respectively. Amortization expense for this asset is anticipated to be $1.1 million per year through June 30, 2016 and a total of $3.8 million thereafter through 2019, which is the term of the expected economic benefit of the asset.

9. ACCRUED EXPENSES

Accrued expenses consisted of the following:

		June 30,				December 31,
		2011				2010
		(In Thousands)
Research and development contract costs		$	1,397			$	1,948
Payroll and benefits			2,217				3,232
Professional fees			1,165				797
Short-term portion of accrued settlement payment			804				1,086
Severance payments			—				2,297
Other			1,489				2,112
		$	7,072			$	11,472

On October 28, 2010, our former chief executive officer resigned from his positions as chairman of the board of directors, president and chief executive officer and received severance payments of approximately $2.3 million, which were paid as of June 30, 2011.

10. SHARE-BASED COMPENSATION

The following table shows share-based compensation expense as reflected in our condensed consolidated statements of operations:

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
		(In Thousands)								(In Thousands)
Research and development		$	280			$	314			$	551			$	634
General and administrative			352				643				678				1,304
Total share-based compensation expense		$	632			$	957			$	1,229			$	1,938

The table below illustrates the fair value per share and Black-Scholes option pricing model with the following assumptions used for grants issued during the three and six months ended June 30, 2011 and 2010:

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Weighted average fair value of options		$	2.84			$	2.33			$	2.14			$	1.74
Risk-free interest rate			1.66	%			2.20	%			2.09	%			2.37	%
Expected dividend yield			—				—				—				—
Expected option term (in years)			5.20				5.14				5.20				5.14
Expected volatility			74.4	%			68.7	%			75.0	%			69.1	%

The expected option term and expected volatility were determined by examining the expected term and expected volatility of our stock.

The following table summarizes option activity under the equity incentive plans:

						Weighted
		Number of				Average Exercise
		Shares				Price per Share
Options outstanding at December 31, 2010			7,031,736			$	6.61
Granted			1,266,800			$	3.41
Cancelled			(282,947	)		$	6.40
Exercised			(80,105	)		$	2.75
Options outstanding at June 30, 2011			7,935,484			$	6.14
Options exercisable at June 30, 2011			5,750,536			$	7.07

We had an aggregate of $5.0 million of share-based compensation expense as of June 30, 2011 remaining to be amortized over a weighted average expected term of 2.78 years.

11. LEGAL COMMITMENTS AND CONTINGENCIES

Hepatitis C and HIV Drug Candidates

In connection with the resolution of matters relating to certain of our HCV drug candidates, we entered into a settlement agreement in May 2004 with UAB which provides for a milestone payment of $1.0 million to UAB upon receipt of regulatory approval in the United States to market and sell certain HCV products invented or discovered by our former chief executive officer during the period from November 1, 1999 to November 1, 2000. This settlement agreement also provides that if such HCV products were approved and commercialized, we will pay UAB an amount equal to 0.5% of worldwide net sales of such HCV products with a minimum sales-based payment equal to $12.0 million. Currently, there are no such HCV products approved and therefore there was no related liability recorded as of June 30, 2011.

We have potential payment obligations under the license agreement with the Universita degli Studi di Cagliari, or the University of Cagliari, pursuant to which we have the exclusive worldwide right to make, use and sell certain HCV and HIV technologies. We made certain payments to the University of Cagliari under these arrangements based on the payments we received under the ViiV and GSK collaboration. We are also liable for certain payments to the University of Cagliari if we receive license fees or milestone payments with respect to such technology from Novartis, ViiV or another collaborator.

Hepatitis B Product

Pursuant to the license agreement between us and UAB, we were granted an exclusive license to the rights that UABRF, an affiliate of UAB, Emory University and CNRS have to a 1995 U.S. patent application and progeny thereof and counterpart patent applications in Europe, Canada, Japan and Australia that cover the use of certain synthetic nucleosides for the treatment of HBV. In July 2008, we entered into a settlement agreement with UAB, UABRF and Emory University relating to our telbivudine technology. Pursuant to this settlement agreement, all contractual disputes relating to patents covering the use of certain synthetic nucleosides for the treatment of HBV and all litigation matters relating to patents and patent applications related to the use of ß-L-2’-deoxy-nucleosides for the treatment of HBV assigned to one or more of Idenix, CNRS and the University of Montpellier and which cover the use of Tyzeka^®/Sebivo^® (telbivudine) for the treatment of HBV have been resolved. UAB also agreed to abandon certain continuation patent applications it filed in July 2005. Under the terms of the settlement agreement, we paid UABRF (on behalf of UAB and Emory University) a $4.0 million upfront payment and will make additional payments to UABRF equal to 20% of all royalty payments received by us from Novartis based on worldwide sales of telbivudine, subject to minimum payment obligations aggregating $11.0 million. Our payment obligations under the settlement agreement will expire in August 2019. The settlement agreement was effective on June 1, 2008 and included mutual releases of all claims and covenants not to sue among the parties. It also included a release from a third-party scientist who had claimed to have inventorship rights in certain Idenix/CNRS/University of Montpellier patents.

In May 2003, we and Novartis entered into an amended and restated agreement with CNRS and the University of Montpellier pursuant to which we worked in collaboration with scientists from CNRS and the University of Montpellier to discover and develop technologies relating to antiviral substances, including telbivudine. This cooperative agreement expired in December 2006, but we retain rights to exploit the patents derived from the collaboration. Under the cooperative agreement, we are obligated to make royalty payments for products derived from such patents.

Legal Contingencies

In December 2001, we retained the services of Clariant (subsequently acquired by Archimica Group), a provider of manufacturing services in the specialty chemicals industry, in the form of a multi-project development and supply agreement. Under the terms of the agreement with Clariant, we would, on an “as needed” basis, utilize the Clariant process development and manufacture services in the development of certain of our drug candidates, including telbivudine. After reviewing respective bids from both Novartis and Clariant, the joint Idenix and Novartis manufacturing committee decided to proceed with Novartis as the primary manufacturer of telbivudine. In late 2007, we transferred full responsibility to Novartis for the development, commercialization and manufacturing of telbivudine. As a result, in January 2008, we exercised our right under the agreement with Clariant to terminate the agreement effective July 2008. In February 2008, Clariant asserted that they should have been able to participate in the manufacturing process for telbivudine as a non-primary supplier and as a result are due an unspecified amount. We do not agree with Clariant’s assertion. No estimate of a potential loss can be made and therefore we have not recorded a liability associated with this potential contingent matter. Clariant has not initiated legal proceedings. If legal proceedings are initiated, we intend to vigorously defend against such lawsuit.

We have been involved in a dispute with the City of Cambridge, Massachusetts and its License Commission pertaining to the level of noise emitted from certain rooftop equipment at our research facility located at 60 Hampshire Street in Cambridge. The License Commission has claimed that we are in violation of the local noise ordinance pertaining to sound emissions, based on a complaint from neighbors living adjacent to the property. We have contested this alleged violation before the License Commission, as well as the Middlesex County, Massachusetts, Superior Court. In July 2010, the License Commission granted us a special variance from the requirements of the local noise ordinance for a period of one-year, effective as of July 1, 2010. In August 2011, the License Commission granted an extension of the July 2010 variance until August 2012. We may, however, be required to cease certain activities at the building if: a) the noise emitted from certain rooftop equipment at our research facility exceeds the levels permitted by the special variance; b) the parties are unable to resolve this matter through negotiations and remedial action; or c) a future legal challenge to the position of the City of Cambridge and the License Commission is unsuccessful. In any such event, we could be required to relocate to another facility which could interrupt some of our business activities and could be time consuming and costly. No estimate of a potential loss can be made and therefore we have not recorded a liability associated with this potential contingent matter.

Indemnification

We have agreed to indemnify Novartis and its affiliates against losses suffered as a result of any breach of representations and warranties in the development and commercialization agreement and the stock purchase agreement. Under the development and commercialization agreement and the stock purchase agreement, we made numerous representations and warranties to Novartis regarding our HBV and HCV drug candidates, including representations regarding our ownership of the inventions and discoveries described above. If one or more of the representations or warranties were not true at the time they were made to Novartis, we would be in breach of one or both of these agreements. In the event of a breach by us, Novartis has the right to seek indemnification from us and, under certain circumstances, us and our stockholders who sold shares to Novartis, which include many of our directors and officers, for damages suffered by Novartis as a result of such breach. While it is possible that we may be required to make payments pursuant to the indemnification obligations we have under the development and commercialization agreement and stock purchase agreement, we cannot reasonably estimate the amount of such payments or the likelihood that such payments would be required.

Under the ViiV license agreement and the GSK stock purchase agreement, we have agreed to indemnify ViiV, GSK and their respective affiliates against losses suffered as a result of our breach of representations and warranties in these agreements. We made numerous representations and warranties to both parties regarding our NNRTI program, including ‘761, as well as representations regarding our ownership of inventions and discoveries. If one or more of these representations or warranties were not true at the time we made them, we would be in breach of these agreements. In the event of a breach by us, the parties have the right to seek indemnification from us for damages suffered as a result of such breach. While it is possible that we may be required to make payments pursuant to the indemnification obligations we have under these agreements, we cannot reasonably estimate the amount of such payments or the likelihood that such payments would be required.