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AEGR > SEC Filings for AEGR > Form 10-Q on 8-Nov-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.


8-Nov-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


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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, lomitapide, received marketing approval, under the brand name JUXTAPID® (lomitapide) capsules ("JUXTAPID"), 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 adult patients with homozygous familial hypercholesterolemia ("HoFH"). We launched JUXTAPID in the U.S. in late January 2013. On July 31, 2013, we received marketing authorization for lomitapide, under the brand name LOJUXTA® (lomitapide) hard capsules ("LOJUXTA"), as a treatment for HoFH in adults in the European Union ("EU"). We also sell lomitapide, on a named patient basis, in a limited number of countries outside the U.S. and the EU where such a mechanism exists based on the U.S. approval.

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

• continuing to commercialize JUXTAPID as a treatment for HoFH in the U.S.;

• continuing to generate named patient sales in key countries outside the U.S. and the EU;

• gaining pricing approval of lomitapide in the key EU markets, and launching lomitapide in those markets in which we gain pricing approval at acceptable levels;

• gaining regulatory approval of lomitapide in other international markets, and launching lomitapide in those countries in which we receive marketing approval and pricing approval at acceptable levels;

• continuing to support and facilitate additional expanded access to lomitapide in countries where named patient sales or supply or compassionate use can occur as a result of the approval of lomitapide in the U.S. or EU;

• 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 lomitapide in the U.S. and in a limited number of countries where lomitapide is available for sale on a named patient sale basis as a result of the approval of lomitapide in the U.S. We also expect to generate revenues from sales of lomitapide in the EU, assuming we are successful in gaining pricing approval in key EU countries at acceptable levels, and from sales of lomitapide in additional countries outside the U.S. and the EU in which a marketing authorization for lomitapide is ultimately approved. In the nine months ended September 30, 2013, we have generated approximately $24.1 million of revenues from net product sales. As of September 30, 2013, we have approximately $126.2 million in cash, cash equivalents and marketable securities on hand.

Financial Overview

Net Product Sales

We began recognizing revenues from net product sales of lomitapide in the first quarter of 2013 and have recognized $24.1 million of revenues from net product sales in the nine months ended September 30, 2013. We did not have net product sales in the nine months ended September 30, 2012. While most revenues from net product sales have come from customers in the U.S., our net product sales also include products shipped to fill named patient sales orders outside the U.S., many of which were orders for multiple months of therapy.


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Cost of Sales

We began recognizing cost 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 royalties payable to The Trustees of the University of Pennsylvania ("UPenn") related to the sale of lomitapide. Prior to the approval of lomitapide by the FDA in December 2012, we recorded manufacturing costs relating to lomitapide 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 lomitapide inventory that was on hand at the time of FDA approval. The impact to cost of sales as a result of inventory not capitalized prior to FDA approval is immaterial.

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, marketing 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 consist primarily of:

• salaries and related expenses for personnel;

• fees paid to contract research organizations ("CROs"), in conjunction with conduct and independent monitoring of our clinical trials, acquisition and evaluation of 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, technology transfer and process validation in connection with a potential second source of lomitapide drug substance, and process validation and development efforts related to additional dosage forms of lomitapide;

• costs related to medical affairs activities;

• 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 research and 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 conduct of clinical studies directed towards a potential filing for regulatory approval of lomitapide in Japan and towards the possible expansion of the indication for lomitapide to include the treatment of pediatric patients, 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.

We have received marketing approval for lomitapide in the U.S. and the EU. We are seeking approval of lomitapide in several other countries. Obtaining marketing approval in such countries may be an extensive, lengthy, expensive and uncertain process, and any foreign regulatory authority may delay, limit or deny approval of lomitapide for many reasons.

Our expenses related to development activities, including process development 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.


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Interest Expense, Net

Interest expense net of interest income consists of cash and non-cash interest costs related to our outstanding debt and interest earned on our cash, cash equivalents and marketable securities.

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 lomitapide 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.

In the U.S., JUXTAPID is only available for distribution through a specialty pharmacy, and is shipped directly to the patient. JUXTAPID is not available in retail pharmacies. Prior authorization and 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 in the U.S. Revenue from sales in the U.S. is generally recognized once the product has been received by the patient. For uninsured amounts billed directly to the patient, we recognize revenue at the time of cash receipt as collectability is not reasonably assured at the time the product is received. To the extent amounts are billed in advance of delivery to the patient, we will defer revenue until delivery occurs.

In addition, we recorded revenue on sales in countries where lomitapide is available on a named patient basis and typically paid for by a government authority or institution. In many cases, these sales are facilitated through a third party distributor that takes title to the product upon acceptance. Because of factors such as the pricing of JUXTAPID, the limited number of patients, the short period from product sale to delivery to the end-customer and the limited contractual return rights, these distributors only hold inventory to supply specific orders for the product. We generally recognize revenue for these named-patient programs once the product is accepted by the distributor or by the payer. In the event the payer's credit worthiness has not been established, we will recognize revenue on the cash basis.


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We record revenue net of discounts and rebates, including those paid to Medicare and Medicaid in the U.S. 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 nine months ended September 30, 2013 (in thousands):

                                             Government        Contractual
                                              Rebates           Discounts         Total
Balance at December 31, 2012                $         -       $          -       $    -
Provision related to current period sales          1,222                317        1,539
Credits/payments made                               (190 )             (317 )       (507 )

Balance at September 30, 2013               $      1,032      $          -       $ 1,032

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 lomitapide 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 lomitapide by the FDA in December 2012, we recorded manufacturing costs relating to lomitapide 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 lomitapide inventory that was on hand at the time of FDA approval. The impact to cost of sales as a result of inventory not capitalized prior to FDA approval is immaterial.

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. If our previous estimates are 5% too high or too low, this may result in an adjustment to our accrued expenses in future periods of approximately $0.6 million.

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 is 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 awards that vest upon the achievement of a market capitalization condition, we recognize compensation expense using an accelerated attribution method over the derived service period. For equity awards that have 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 of the modified award on the date of modification over the fair value of the original award immediately before the modification.

For service type awards and awards that begin vesting upon achievement of a performance condition, we calculate the estimated fair value of stock-based compensation awards using the Black-Scholes option-pricing model. For awards that vest upon achievement of a market condition, we calculate the estimated fair value of the stock-based awards using a Monte Carlo simulation. The Black-Scholes option-pricing model requires the input of subjective assumptions, including stock price volatility and the expected life of stock options. A Monte Carlo simulation requires the input of assumptions, including our stock price, volatility of our stock price, and was developed to reflect the impact of the market condition on the value of the award. As a recent public company, we do not have


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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:

                                        Three Months Ended           Nine Months Ended
                                           September 30,               September 30,
                                        2013            2012         2013           2012
   Expected stock price volatility         78.1 %        86.0 %         82.3 %       84.9 %
   Risk free interest rate                 1.88 %        0.84 %         1.21 %       1.14 %
   Expected life of options (years)        6.07          6.02           6.14         6.18
   Expected dividend yield                  0.0 %         0.0 %          0.0 %        0.0 %

Results of Operations

Comparison of the Three Months Ended September 30, 2013 and 2012

The following table summarizes the results of our operations for each of the
three-month periods ended September 30, 2013 and 2012, together with the changes
in those items in dollars and as a percentage:



                                            Three Months Ended September 30,                  Change
                                              2013                    2012               $             %
                                                                   (in thousands)
Net product sales:                       $        16,330         $            -       $ 16,330         100.0 %
Cost of sales:                                     1,750                      -          1,750         100.0 %
Operating expenses:
Selling, general and administrative               18,843                   8,163        10,680         130.8 %
Research and development                           7,892                   6,522         1,370          21.0 %
Restructuring costs                                    1                       1            -            0.0 %

Total operating expenses                          26,736                  14,686        12,050          82.1 %

Loss from operations                             (12,156 )               (14,686 )       2,530         (17.2 %)
Interest expense, net                               (100 )                  (159 )          59         (37.1 %)
Other expense, net                                   (47 )                   (29 )         (18 )        62.1 %

Loss before provision for income taxes           (12,303 )               (14,874 )       2,571         (17.3 %)
Provision for income taxes                          (164 )                    -           (164 )      (100.0 %)

Net loss                                 $       (12,467 )       $       (14,874 )    $  2,407         (16.2 %)

Net Product Sales

We generated revenues from net product sales of lomitapide of $16.3 million for the three months ended September 30, 2013. We did not generate any revenue for the three months ended September 30, 2012. We expect net product sales to increase for the remainder of 2013.

Cost of Sales

We recorded cost of sales of $1.8 million for the three months ended September 30, 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 lomitapide. Prior to the approval of lomitapide by the FDA in December 2012, we recorded manufacturing costs related to lomitapide as research and development expense. Subsequent to approval, we began capitalizing these


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costs as inventory as they are incurred. We expect cost of sales to increase due to the expected increases in net product sales of lomitapide and the fact that we had expensed all manufacturing costs as research and development expense in periods prior to the approval of lomitapide in the U.S. The impact to cost of sales as a result of inventory not capitalized prior to FDA approval is immaterial.

Selling, General and Administrative Expenses . . .

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