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AEGR > SEC Filings for AEGR > Form 10-K on 18-Mar-2013All Recent SEC Filings

Show all filings for AEGERION PHARMACEUTICALS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for AEGERION PHARMACEUTICALS, INC.


18-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes. In addition to historical information, some of the information in this discussion and analysis contains forward-looking statements reflecting our current expectations and involves risk and uncertainties. For example, statements regarding our plans and strategy for our business, our expectations with respect to future financial performance, expense categories and levels, cash needs and liquidity sources are forward-looking statements. Our actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under the "Risk Factors" in Part I, Item 1A of this Form 10-K.

Overview

We are a biopharmaceutical company dedicated to the development and commercialization of novel, life-altering therapies for patients with debilitating, often fatal, rare diseases.

Our first product, JUXTAPID™ (lomitapide) capsules, also referred to as lomitapide ("JUXTAPID"), received marketing approval from the U.S. FDA on December 21, 2012, as an adjunct to a low-fat diet and other lipid-lowering treatments, including LDL apheresis where available, to reduce LDL-C, TC, apo B and non-HDL-C in patients with HoFH. We launched JUXTAPID in the U.S. in late January 2013. In the first quarter of 2012, we submitted a MAA to the EMA requesting approval to market lomitapide as an adjunct to a low-fat diet and other lipid-lowering therapies, with or without apheresis, to reduce LDL-C, TC, apo B and TG in adults with HoFH. In March 2012, the EMA accepted the MAA for review with a review start date of March 21, 2012.

We expect that our near-term efforts will be focused on:

• commercializing JUXTAPID as a treatment for HoFH in the U.S.;

• gaining regulatory approval of lomitapide for adult patients with HoFH in the EU and in other international markets, and launching lomitapide in those countries in which we receive marketing approval;

• supporting and facilitating expanded access to JUXTAPID in countries where named patient sales supply or compassionate use can occur as a result of the FDA approval of JUXTAPID;

• clinical development activities to support a potential marketing authorization application for lomitapide in HoFH in Japan; and

• activities in support of our planned clinical study of lomitapide in pediatric HoFH patients.

We also expect to build our business in the future by acquiring rights to one or more product candidates targeted at life-threatening or substantially debilitating rare diseases that leverage our infrastructure and expertise.

As of December 31, 2012, we had not generated any revenue from the sale of any product. In the near-term, our ability to generate revenues is entirely dependent upon sales of JUXTAPID in the U.S. and in countries where JUXTAPID is available for sale on a named patient sale basis as a result of the approval of JUXTAPID in the U.S. As of December 31, 2012, we had an accumulated deficit of approximately $192.7 million and approximately $82.2 million in cash, cash equivalents and marketable securities. In January 2013, we sold 3,110,449 shares of our common stock in an underwritten public offering at a price to the public of $26.64 per share. The net proceeds to us from this offering were approximately $78.3 million after deducting underwriting discounts and commissions.


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Financial Overview

Revenue

As of December 31, 2012, we had not generated any revenue from sales of any product, including JUXTAPID.

Research and Development Expenses

Since our inception, our research and development activities have primarily focused on the clinical development of JUXTAPID and regulatory activities directed at gaining approval of JUXTAPID in HoFH. We recognize both internal and external research and development expenses as they are incurred. Our research and development expenses have consisted primarily of:

• salaries and related expenses for personnel;

• fees paid to contract research organizations ("CROs"), in conjunction with independently monitoring our clinical trials and acquiring and evaluating data in conjunction with our clinical trials, including all related fees, such as for investigator grants, patient screening, laboratory work and statistical compilation and analysis;

• costs related to production of clinical materials, process validation and development efforts to support regulatory approval, including fees paid to contract manufacturers;

• costs related to upfront and milestone payments under in-licensing agreements;

• costs related to compliance with regulatory requirements in the U.S., EU and other foreign jurisdictions;

• consulting fees paid to third parties; and

• costs related to stock-based compensation granted to personnel in development functions.

We expense research and development costs as incurred. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Our research and development expenditures are subject to numerous uncertainties in timing and cost to completion. Our planned research and development activities, including those related to completing the process validation of our drug product, the conduct of non-clinical studies directed toward the possible expansion of the JUXTAPID label to include pediatric patients and clinical studies directed towards a potential filing for regulatory approval of JUXTAPID in Japan, may take several years or more to complete. The length of time generally varies according to the type, complexity, novelty and intended use of such a project.

Although we have received marketing approval for JUXTAPID from the FDA, we have not yet received marketing approval from the EMA, or any other foreign regulatory authority. Obtaining marketing approval is an extensive, lengthy, expensive and uncertain process, and the EMA or any other foreign regulatory authority, may delay, limit or deny approval of JUXTAPID for many reasons.

Our expenses related to development activities, including manufacturing and conducting clinical trials, are based on estimates of the services received and efforts expended pursuant to contracts with contract manufacturing organizations and with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed fee or unit price. Payments under the clinical contracts depend on factors such as the successful enrollment of patients or the completion of clinical trial milestones. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.


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As a result of the uncertainties discussed above, we are unable to determine with certainty the duration and completion costs of our development projects.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of compensation for employees in executive and operational functions, including finance, human resources, information technology, sales and marketing and legal. Other significant costs include costs related to stock-based compensation related to options granted to personnel in executive and operational functions, and professional fees for accounting and legal services, including expenses associated with obtaining and maintaining patents.

Interest Income and Interest Expense

Interest income consists of interest earned on our cash, cash equivalents and marketable securities. Interest expense consists primarily of cash and non-cash interest costs related to our outstanding debt. Non-cash interest expense consists of the amortization of capitalized costs incurred in connection with the issuance of debt. We amortize these costs over the life of our debt agreements as interest expense in our statements of operations.

Net Operating Losses and Tax Carryforwards-

As of December 31, 2012, we had federal and state net operating loss carryforwards of approximately $121.5 million and $55.4 million, respectively. We also had federal and state research and development tax credit carryforwards of approximately $22.2 million and $0.8 million available to offset future taxable income. These federal net operating loss and federal tax credit carryforwards will begin to expire at various dates beginning in 2025, if not utilized. The state net operating loss and tax credit carryforwards will expire at various dates starting in 2014, if not utilized. The Tax Reform Act of 1986 provides for a limitation on the annual use of net operating loss and research and development tax credit carryforwards following certain ownership changes that could limit our ability to utilize these carryforwards. We have not completed a study to assess whether an ownership change has occurred, or whether there have been multiple ownership changes since our inception. Accordingly, we expect our ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be utilized against future taxes. As a result, we may not be able to take full advantage of these carryforwards for federal and state tax purposes.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates.

While our significant accounting policies are more fully described in Note 2 to our financial statements appearing in Item 8 of this Form 10-K, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results, and affect the more significant judgments and estimates that we use in the preparation of our financial statements.

Accrued Expenses

As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel as well as applicable vendor personnel to identify services that have been performed on our behalf and estimating


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the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers, and make adjustments if necessary. Examples of estimated accrued expenses include:

• salary and related employee compensation costs;

• fees paid to consultants helping us to launch JUXTAPID as a treatment for HoFH in the U.S.

• fees paid to contract manufacturers in connection with the production of JUXTAPID, including fill/finish capabilities and for the manufacture of our validation runs;

• fees paid to contract research organizations and investigative sites in connection with clinical studies; and

• professional service fees.

Valuation of Financial Instruments

We regularly invest excess operating cash in deposits with major financial institutions; money market funds; notes issued by the U.S. government and U.S. and non U.S. corporations; as well as fixed income investments and U.S. bond funds, both of which can be readily purchased and sold using established markets. The carrying amounts of these marketable securities are generally considered to be representative of their respective fair values based upon pricing of securities with similar investment characteristics and holdings. We believe that the market risk arising from our holdings of these financial instruments is mitigated as many of these securities are government backed or of high credit quality.

Stock-Based Compensation

We measure the fair value of stock options and other stock-based compensation issued to employees and directors on the date of grant. The fair value of equity instruments issued to non-employees are remeasured as the award vests. For service type awards, compensation expense is recognized using the straight line method over the requisite service period, which is typically the vesting period. For awards that vest or begin vesting upon achievement of a performance condition, we begin recognizing compensation expense when achievement of the performance condition is deemed probable and recognize compensation expense using an accelerated attribution method over the implicit service period.

For equity awards that have previously been modified, any incremental increase in the fair value over the original award has been recorded as compensation expense on the date of the modification for vested awards or over the remaining service (vesting) period for unvested awards. The incremental compensation cost is the excess of the fair value based measure of the modified award on the date of modification over the fair value based measure of the original award immediately before the modification. We recorded stock-based compensation expense in our statement of operations as follows:

                                                   Years Ended December 31,
                                                 2012         2011        2010
                                                        (in thousands)
         Selling, general and administrative   $   8,335     $ 4,635     $ 1,501
         Research and development                  2,306       1,437         337
         Restructuring costs                       1,094         580          -

         Total                                 $  11,735     $ 6,652     $ 1,838


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We calculate the estimated fair value of stock-based compensation awards using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the input of subjective assumptions, including stock price volatility and the expected life of stock options. As a recent public company, we do not have sufficient history to estimate the volatility of our common stock price or the expected life of our options. We calculate expected volatility based on reported data for selected reasonably similar publicly traded companies, or guideline peer group, for which the historical information is available. We will continue to use the guideline peer group volatility information until the historical volatility of our common stock is relevant to measure expected volatility for future option grants.

The assumed dividend yield is based on our expectation of not paying dividends in the foreseeable future. We determine the average expected life of stock options according to the "simplified method" as described in Staff Accounting Bulletin 110, which is the mid-point between the vesting date and the end of the contractual term. We determine the risk-free interest rate by reference to implied yields available from five-year and seven-year U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant. We estimate forfeitures based on our historical analysis of actual stock option forfeitures. The weighted-average assumptions used in the Black-Scholes option-pricing model are as follows:

                                                          Years Ended December 31,
                                                      2012         2011          2010
 Risk-free interest rate                                1.09 %       1.80 %        1.14 %
 Dividend yield                                           -            -             -
 Weighted-average expected life of options (years)      6.13         6.51          6.26
 Volatility                                            85.03 %      83.88 %      150.00 %

There is a high degree of subjectivity involved when using option-pricing models to estimate stock-based compensation. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee stock-based awards is determined using an option-pricing model, the calculated value may not be indicative of the fair value observed in a market transaction between a willing buyer and willing seller. If factors change and we employ different assumptions when valuing our options, the compensation expense that we record in the future may differ significantly from what we have historically reported.

Results of Operations

Comparison of the Years Ended December 31, 2012 and 2011

The following table summarizes the results of our operations for each of the
years ended December 31, 2012 and 2011, together with the changes in those items
in dollars and as a percentage:



                                                Years Ended December 31,
                                              2012                  2011              Change           %
                                                               (in thousands)
Costs and expenses:
Research and development                  $     25,164        $         24,433       $     731            3 %
Selling, general and administrative             34,077                  13,966          20,111          144 %
Restructuring costs                              1,366                     912             454           50 %

Total costs and expenses                        60,607                  39,311          21,296           54 %

Loss from operations                           (60,607 )               (39,311 )       (21,296 )         54 %
Interest expense                                  (937 )                (1,114 )           177          (16 )%
Interest income                                    162                     209             (47 )        (22 )%
Other (expense)/income, net                       (883 )                   748          (1,631 )       (218 )%

Net loss                                  $    (62,265 )      $        (39,468 )     $  22,797          (58 )%


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Revenue

We did not recognize any revenue for the years ended December 31, 2012 or 2011, respectively.

Research and Development Expenses

Research and development expenses were $25.2 million for the year ended December 31, 2012, compared to $24.4 million for the year ended December 31, 2011. The $0.8 million increase was primarily attributable to increases of $3.6 million in manufacturing validation expenses, $3.1 million in salary and other employee-related compensation costs, $2.4 million in outside service expenses, and $0.9 million in stock-based compensation expense, offset in part by decreases of $7.8 million in pre-clinical and clinical trial expenses and $1.7 million in consulting expenses. The increase in manufacturing validation expenses was due to completion of our drug substance validation campaign in 2012. The increases in salary and related employee- related compensation costs and stock-based compensation expense were primarily due to an increase in research and development headcount and an annualization of costs for those employees hired in 2011. The increases in outside service expenses were due to resources devoted to regulatory work and related activities in connection with our NDA and other lomitapide regulatory filings. The decrease in both clinical trial costs and consulting expenses is due to the substantial completion of our pivotal clinical trial for JUXTAPID in 2011.

We expect research and development costs will increase in 2013 as compared to 2012 as a result of increases in headcount, primarily in our medical affairs function; our planned clinical development activities to support a marketing authorization application for JUXTAPID in HoFH in Japan; activities in support of our planned clinical study of JUXTAPID in pediatric HoFH patients; future international regulatory filings for JUXTAPID and other possible clinical development activities and post marketing commitments. Due to the numerous risks and uncertainties associated with the timing and costs to conduct clinical trials and related activities, we cannot determine these future expenses with certainty and the actual amounts may vary significantly from our forecasts. Generally, inventory may be capitalized if it is probable that future revenue will be generated from the sale of the inventory and that these revenues will exceed the cost of the inventory. Since the approval of JUXTAPID in the U.S. in December 2012 and subsequent product launch in January 2013 the Company evaluated whether a portion of its costs incurred for manufacturing validation runs may be capitalized as inventory. In 2012, we expensed the costs of our manufacturing validation runs due to the high risk inherent in drug development and uncertainty as to whether lomitapide would be approved and ultimately saleable.

Selling General and Administrative Expenses

Selling, general and administrative expenses were $34.1 million for the year ended December 31, 2012, as compared to $14.0 million for the year ended December 31, 2011. The $20.1 million increase was primarily due to an $11.2 million increase in salary and employee-related compensation costs, a $3.7 million increase in stock-based compensation expense and a $4.4 million increase in outsourced services and consulting expenses, which includes pre-launch sales and marketing expenditures, and legal, accounting and auditing fees. These increases were primarily due to the build-out of the sales, marketing and general and administrative functions and related headcount as well as costs incurred to prepare for the commercial launch of JUXTAPID.

We expect that our selling, general and administrative expenses will increase in 2013 due to the annualization of costs for those sales and marketing employees hired throughout 2012, continued activities related to the commercialization of JUXTAPID in the U.S., and the building of our commercial infrastructure in countries outside the U.S. in anticipation of both named patient sales efforts and of a possible future launch in those countries. These increases will likely include increased costs for additional sales and marketing personnel, including sales representatives and reimbursement case managers, as well as additional costs associated with the establishment of our international distribution channel for JUXTAPID.


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Restructuring Costs

In the fourth quarter of 2011, we consolidated facilities and related administrative functions into our Cambridge headquarters. As a result, we closed our Bedminster, New Jersey office, effective December 31, 2011, and reduced headcount by five positions. Restructuring costs were $1.4 million and $0.9 million for the years ended December 31, 2012 and 2011, respectively. Included in the restructuring charges are $0.3 million and $0.2 million of employee severance and outplacement services costs for five employees, primarily in general and administrative positions, for the years ended December 31, 2012 and 2011, respectively.

In addition, we accelerated the vesting of 137,136 total stock options granted in 2010, 2009 and 2008 to the former New Jersey employees upon the termination of their employment. As such, we recognized expense related to those stock options based on the fair value of the stock options at the date of the modification of each award. We expensed the value of the modification over the remaining service periods for each of the employees. We recognized approximately $1.1 million and $0.6 million of stock compensation expense related to these modifications for the years ended December 31, 2012 and 2011, respectively.

In January 2012, we entered into a sublease agreement for the Bedminster, New Jersey facility for the remaining term of the lease. In determining the ongoing facilities charge, we considered our sublease arrangement for the facility, including sublease terms and the sublease rates. We will record ongoing restructuring charges of approximately $35,000 related to the remaining lease obligation through July 2018.

Interest Expense

Interest expense was $0.9 million and $1.1 million for the years ended December 31, 2012 and 2011, respectively. The $0.2 million decrease was primarily due to the reduced interest rate associated with the Silicon Valley Bank ("Silicon Valley Bank") term loan compared to our loan with Hercules Technology, II, L.P. and Hercules III, L.P. (collectively, "the Hercules Funds") that was repaid in the first quarter of 2012.

Interest Income

Interest income was $0.2 million for both of the years ended December 31, 2012 and 2011, respectively.

Other (Expense)/Income

For the year ended December 31, 2012 other expense was $0.9 million primarily attributable to charges incurred in relation to the early repayment of our $10.0 million loan to the Hercules Funds. For the year ended December 31, 2011, other income was $0.7 million, primarily attributable to a gain on sale of our long-term investment in an auction rate security and an auction rate security converted to preferred stock.


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Comparison of the Years Ended December 31, 2011 and 2010



                                                 Years Ended December 31,
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