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AEGR > SEC Filings for AEGR > Form 10-Q on 10-May-2013All Recent SEC Filings

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

Form 10-Q for AEGERION PHARMACEUTICALS, INC.


10-May-2013

Quarterly Report


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

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included in our audited financial statements and notes thereto for the year ended December 31, 2012, and Management's Discussion and Analysis of Financial Condition and Results of Operation included in our 2012 Form 10-K to which the reader is directed for additional information. In addition to historical information, some of the information in this discussion and analysis contains forward-looking statements reflecting our current expectations and that are subject to risks and uncertainties. All statements included or incorporated by reference into this report other than statements or characterizations of historical fact, are forward-looking statements. Forward-looking statements are often identified by words such as "anticipates," "expects," "intends," "plans," "predicts," "believes," "forecasts," "seeks," "estimates," "may," "will," "should," "would," "could," "potential," "guidance", "continue," "ongoing" and similar expressions, and variations or negatives of these words. For example, statements regarding the potential plans and strategy for our business, clinical, regulatory and commercial activities, and 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 II, Item 1A of this Quarterly Report on Form 10-Q.

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 received marketing approval from the U.S. Food and Drug Administration ("FDA") on December 21, 2012, as an adjunct to a low-fat diet and other lipid-lowering treatments, including low-density lipoprotein ("LDL") apheresis where available, to reduce low-density lipoprotein cholesterol ("LDL-C"), total cholesterol ("TC"), apolipoprotein B ("apo B") and non-high-density lipoprotein cholesterol ("non-HDL-C") in patients with homozygous familial hypercholesterolemia ("HoFH"). We launched JUXTAPID in the U.S. in late January 2013. In the first quarter of 2012, we submitted a Marketing Authorization Application ("MAA") to the European Medicines Agency ("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 triglycerides ("TG") in adults with HoFH in the European Union ("EU"). 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 or 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.

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 March 31, 2013, we had an accumulated deficit of approximately $210.9 million and approximately $140.7 million in cash, cash equivalents and marketable securities.

Financial Overview

Net Product Sales

We began recognizing net product sales of JUXTAPID in the first quarter of 2013. There were no net product sales of JUXTAPID for the three months ended March 31, 2012.

Cost of Sales

We began recognizing costs of sales in the first quarter of 2013. Cost of sales includes the cost of inventory sold, manufacturing and supply chain costs, product shipping and handling costs, as well as actual and estimated royalties payable to The Trustees of the University of Pennsylvania ("UPenn") related to the sale of JUXTAPID. Prior to the approval of JUXTAPID by the FDA in December 2012, we recorded manufacturing costs relating to JUXTAPID as research and development expense. Subsequent to approval, we began capitalizing these costs as inventory is manufactured. As a result, there will be no cost of sales attributable to the sale of JUXTAPID inventory that was on hand at the time of FDA approval.


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Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of compensation for employees in executive and operational functions, including sales and marketing, finance, human resources, information technology and legal. Other significant costs include 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.

Research and Development Expenses

Since our inception, our research and development activities have primarily focused on the clinical development of lomitapide and regulatory activities directed at gaining approval of lomitapide 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 conduct and independently monitoring of 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, and 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 lomitapide 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 for lomitapide 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 lomitapide for many reasons.

Our expenses related to development activities, including process development, 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.

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

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 using the effective interest method over the life of our debt agreements as interest expense in our statements of operations.


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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, respectively, available to offset future taxable income. The 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 ("GAAP"). 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.

We believe that our application of the following accounting policies, each of which requires significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our reported financial results:

• Revenue recognition;

• Inventories;

• Accrued expenses; and

• Stock-based compensation.

For a complete discussion of critical accounting policies, refer to "Critical Accounting Policies and Use of Estimates" within "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" included within our 2012 Form 10-K. We have reviewed our critical accounting policies as disclosed in our 2012 Form 10-K, as set forth below, and we have revised such policies in light of our commercial shift to include revenue recognition and inventories as critical accounting policies.

Revenue Recognition

To date, our net product sales have consisted solely of sales of JUXTAPID for the treatment of HoFH. We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, title to product and associated risk of loss has passed to the customer, the price is fixed or determinable, collectability is reasonably assured and we have no further performance obligations.

JUXTAPID is only available for distribution from our specialty pharmacy and shipped directly to the patient. JUXTAPID is not available in retail pharmacies. Prior authorization or confirmation of coverage level by the patient's private insurance plan or government payer is a prerequisite to the shipment of product to a patient. We recognize revenue once the product has been received by the patient. To the extent amounts are billed in advance of delivery to the patient, we will defer revenue until delivery occurs.

We record revenue net of expected discounts and rebates, including those paid to Medicare and Medicaid. Allowances are recorded as a reduction of revenue at the time product sales are recognized. Allowances for government rebates and discounts are established based on the actual payer information, which is known at the time of delivery, and the government-mandated discounts applicable to government-funded programs. These allowances are adjusted to reflect known changes in the factors that may impact such allowances in the quarter those changes are known.

The following table summarizes activity in each of the product revenue allowance and reserve categories during the three months ended March 31, 2013:

                                                         Rebates and
                                                          Discounts
            Balance at December 31, 2012                $          -
            Provision related to current period sales              80
            Credits/payments made                                  -

            Balance at March 31, 2013                   $          80


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Inventories

Inventories are stated at the lower of cost or market price with cost determined on a first-in, first-out basis. Inventories are reviewed periodically to identify slow-moving or obsolete inventory based on sales activity, both projected and historical, as well as product shelf-life which is currently two years for JUXTAPID capsules. In evaluating the recoverability of inventories produced in preparation for product launches, we consider the probability that revenue will be obtained from the future sale of the related inventory. Prior to the approval of JUXTAPID by the FDA in December 2012, we recorded manufacturing costs relating to JUXTAPID as research and development expense. Subsequent to approval, we began capitalizing these costs as inventory is manufactured. As a result, there will be no cost of sales attributable to the sale of JUXTAPID inventory that was on hand at the time of FDA approval. We did not capitalize inventory at December 31, 2012.

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 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 fees paid to CROs and investigative sites in connection with clinical studies and professional service fees.

Stock-Based Compensation

We measure the fair value of stock options and other stock-based awards 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, 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:

                                                        Three Months
                                                      Ended March 31,
                                                      2013        2012
                                                       (in thousands)
              Selling, general and administrative   $  2,656     $ 1,550
              Research and development                   922         563
              Restructuring                               -          649

              Total                                 $  3,578     $ 2,762

In addition, we capitalized approximately $0.1 million of stock-based compensation expense to inventories in the three months ended March 31, 2013. All of this stock-based compensation expense was attributable to employees who supported our manufacturing operations.

We calculate the estimated fair value of stock-based 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.


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The expected 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:

                                                  Three Months Ended
                                                       March 31,
                                                  2013            2012
             Expected stock price volatility         80.5 %        84.5 %
             Risk free interest rate                 1.20 %        1.25 %
             Expected life of options (years)         6.4           6.3
             Expected dividend yield                  0.0 %         0.0 %

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 Three Months Ended March 31, 2013 and March 31, 2012

The following table summarizes the results of our operations for each of the
three-month periods ended March 31, 2013 and 2012, together with the changes in
those items in dollars and as a percentage:



                                                Three Months Ended March 31,                         Change
                                              2013                       2012                   $               %
                                                                      ( in thousands)
Net product sales                       $            1,231         $               -         $  1,231            N/A
Cost of sales                                          183                         -              183            N/A
Operating expenses:
Selling, general and administrative                 13,220                      5,111           8,109          158.7 %
Research and development                             5,775                      4,635           1,140           24.6
Restructuring                                            1                        831            (830 )        (99.9 )

Total operating expenses                            18,996                     10,577           8,419           79.6

Loss from operations                               (17,948 )                  (10,577 )        (7,371 )         69.7
Interest expense, net                                 (148 )                     (286 )           138          (48.3 )
Other expense, net                                     (46 )                     (802 )           756          (94.3 )

Net loss                                $          (18,142 )       $          (11,665 )      $ (6,477 )         55.5 %


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Net Product Sales

We generated net product sales of JUXTAPID for the three months ended March 31, 2013 of $1.2 million, representing sales made directly to patients in the U.S. We did not recognize any revenue for the three months ended March 31, 2012. We expect net product sales to increase on a quarterly basis for the remainder of 2013.

Cost of Sales

We recorded cost of sales of $0.2 million for the three months ended March 31, 2013. Cost of sales includes the cost of inventory sold, manufacturing and supply chain costs, product shipping and handling costs as well as estimated royalties payable to UPenn related to the sale of JUXTAPID. Prior to approval of JUXTAPID by the FDA in December 2012, we recorded manufacturing costs relating to JUXTAPID as research and development expense. Subsequent to approval, we began capitalizing these costs as inventory as they are incurred. We expect cost of sales to increase in the future due to the expected increases in net product sales and the fact that we had previously expensed all manufacturing costs as research and development expenses in prior periods.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $13.2 million and $5.1 million for the three months ended March 31, 2013 and 2012, respectively. The $8.1 million increase was primarily attributed to a $4.5 million increase in salary and employee-related costs, a $2.3 million increase in outside services expenses, which include sales and marketing expense related to the commercial launch of JUXTAPID, and legal, accounting and auditing fees, and a $1.1 million increase in stock-based compensation expense.

Research and Development Expenses

Research and development expenses were $5.8 million and $4.6 million for the three months ended March 31, 2013 and 2012, respectively. The $1.1 million increase for the three months ended March 31, 2013 was primarily attributed to a $1.2 million increase in clinical development expenses in connection with clinical activities to support a potential marketing authorization application for lomitapide in Japanese HoFH patients, and a $0.7 million increase in salary and employee-related expenses and a $0.4 million increase in stock-based compensation expense related to the increased headcount required to support our regulatory and medical affairs activities. These increases were partially offset by a $1.0 million decrease in JUXTAPID manufacturing development costs. After the approval of JUXTAPID by the FDA, we began capitalizing certain manufacturing and overhead costs into inventory. Prior to approval, these costs were recorded as research and development expenses.

Restructuring Expenses

Restructuring costs of $0.8 million for the three months ended March 31, 2012, . . .

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