TMCnet News

AEGERION PHARMACEUTICALS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[November 10, 2014]

AEGERION PHARMACEUTICALS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) 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, 2013, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2013 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; our expectations and plans with respect to clinical, regulatory and commercial activities, and anticipated timing and outcomes of such activities; our expectations with respect to future financial performance, revenues, expense categories and levels, cash needs and liquidity sources; and our expectations regarding the timeline for completing the proposed acquisition of the biological product metreleptin for injection ("MYALEPT") from Amylin Pharmaceuticals , LLC and its affiliate AstraZeneca Pharmaceuticals LP, and our proposed launch of MYALEPT, 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 innovative therapies for patients with debilitating 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") in late December 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. In July 2013, we received marketing authorization for lomitapide in the European Union ("EU"), under the brand name LOJUXTA ® (lomitapide) hard capsules ("LOJUXTA"), as a treatment for HoFH in adults.


Lomitapide is also approved for the treatment of HoFH in Mexico, Canada, and a small number of other countries. We sell lomitapide, on a named patient basis in Brazil and in a limited number of other countries outside the U.S. and the EU where such a mechanism exists based on the U.S. or the EU approval.

In November 2014, we entered into an asset purchase agreement relating to the acquisition (the "Myalept Transaction") of certain assets and rights associated with the biological product metreleptin for injection ("MYALEPT") from Amylin Pharmaceuticals, LLC ("Amylin") and AstraZeneca Pharmaceuticals LP, an affiliate of Amylin for total cash consideration of $325 million. MYALEPT is an orphan product that is approved in the US for the treatment of generalized lipodystrophy, and it has orphan drug designation in the US, EU, and Japan.

Under the terms of the agreement, we will pay AstraZeneca $325 million upfront to acquire the global rights to develop, manufacture and commercialize MYALEPT, subject to an existing distributor license with Shionogi covering Japan, South Korea, Taiwan which we will assume upon closing. In addition, we will assume obligations of AstraZeneca AB (Pvbe) and its affiliates to (a) make certain royalty and milestone payments to Bristol-Myers Squibb Company with respect to net sales of the product in the United States, and (b) use certain specified resources and efforts to commercialize, market, promote and sell the product.

The transaction does not include the transfer of any AstraZeneca employees or facilities. We anticipate the acquisition to be completed in January 2015.

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 support named patient sales of lomitapide as a treatment for HoFH in Brazil and in other key countries where such sales are permitted; • gaining pricing and reimbursement approvals for lomitapide in key EU markets, Mexico, Canada and other countries where we may obtain regulatory approval, and launching lomitapide in those markets where based on such approvals it makes commercial sense to do so; • gaining regulatory approval to market lomitapide as a treatment for HoFH in other international markets, and commencing commercialization efforts in those markets where it makes commercial sense to do so; • minimizing the number of patients who decide not to commence treatment with lomitapide after being prescribed the product, or who discontinue lomitapide treatment, including due to tolerability issues through activities such as patient support programs, to the extent permitted in a particular country; • if the Myalept Transaction is consummated, transitioning MYALEPT operations to us at closing and building and maintaining market acceptance for MYALEPT in the U.S. in the treatment of generalized lipodystrophy; • clinical development activities to support a potential marketing authorization application for lomitapide in HoFH in Japan, • clinical development activities in support of our planned clinical study of lomitapide in pediatric HoFH patients; • other possible clinical development activities; and • assessment, and possible acquisition of, potential new product opportunities.

Since the commercial launch of lomitapide through September 30, 2014, the Company has generated net product sales of $155.2 million. In the near-term, we expect that the large majority of our revenues will be derived from sales of JUXTAPID in the U.S. We also expect to generate revenues from sales of JUXTAPID in a limited number of other countries where lomitapide is available on a named patient sale basis as a result of the U.S. and EU approvals, and from sales of lomitapide in those countries outside the U.S. in which we have or receive marketing approval and are able to obtain pricing and reimbursement approval at acceptable levels. We expect that prescriptions for named patient sales in Brazil in the near term will continue to be our largest source of revenues, on a country-by-country basis, outside the U.S. In some countries, including Brazil, orders for named patient sales are for multiple months of therapy. We expect net product sales from named 21 -------------------------------------------------------------------------------- Table of Contents patient sales to fluctuate quarter-over-quarter significantly more than sales in the U.S., as a result of government actions, economic pressures and political unrest. For example, with respect to named patient sales in Brazil in 2014, we have experienced longer than expected turn-around times between price quotation and order at the federal level, and delays in receipt of orders from the government of Sao Paolo as a result of an ongoing Sao Paolo investigation which is focused on determining whether there has been any violation of Brazilian anti-corruption laws in connection with prescriptions written in Sao Paolo. A similar investigation has also been initiated by the federal government in Brazil.

We have submitted documentation seeking pricing and reimbursement approvals from governmental authorities in key markets of the EU, and plan to seek such approvals from governmental authorities, social funds and private payers in Mexico and Canada. We anticipate reimbursement decisions in some of those countries over the course of 2014 and 2015. In March 2014, the reimbursement authority in Germany, the G-BA (Gemeinsamer Bundesausschuss) deemed our dossier for LOJUXTA to be incomplete as a result of certain technical deficiencies. As a result of the technical deficiencies, LOJUXTA was automatically put into the category of "no additional benefit" under the G-BA process, without a review of the clinical merits, which limits the reimbursement level significantly. We intend to re-file our dossier for LOJUXTA in June 2015, which we expect would result in an assessment by G-BA in the fourth quarter of 2015. We do not plan to sell LOJUXTA in Germany unless and until we receive reimbursement approval at levels that are acceptable to us.

Financial Overview Net Product Sales We began recognizing revenues from net product sales of lomitapide in the first quarter of 2013. In the three and nine months ended September 30, 2014, we have recognized $43.7 million and $106.7 million, respectively, of revenues from net product sales. In the three and nine months ended September 30, 2014, $39.6 and $99.0 million, respectively, of our net product sales were derived from prescriptions for lomitapide written in the U.S., and $4.1 million and $7.7 million, respectively, were derived from prescriptions for lomitapide written outside the U.S, primarily Brazil.

Cost of Product Sales We began recognizing cost of product sales in the first quarter of 2013. Cost of product sales includes the cost of inventory sold, manufacturing and supply chain costs, product shipping and handling costs, charges for excess and obsolete inventory as well as royalties payable to The Trustees of the University of Pennsylvania ("UPenn") related to the sale of lomitapide.

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 the ongoing investigation of our sales and marketing practices in the U.S. by the U.S. Department of Justice.

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. Our research and development expenses consist primarily of: • salaries and related expenses for personnel; • fees paid to contract research organizations ("CROs") in conjunction with conducting 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 our plannedimplementation of a new 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 the initiation and conduct of post-marketing studies for lomitapide, including an observational cohort study and a vascular imaging study; • costs related to compliance with regulatory requirements in the U.S., EU, Brazil, Mexico, Canada and other countries; • consulting fees paid to third parties; and • costs related to stock-based compensation granted to personnel in research and development functions.

22 -------------------------------------------------------------------------------- Table of Contents 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 research and development activities, including those related to a clinical study directed towards a potential filing for regulatory approval of lomitapide in Japan for treatment of adult HoFH and a planned clinical study directed towards the possible expansion of the indication for lomitapide to include the treatment of pediatric HoFH patients, may take several years or more to complete. The length of time and cost of such clinical studies generally varies according to the type, complexity, novelty and intended use of such studies.

We have received marketing approval for lomitapide in the U.S., the EU, Mexico, Canada and certain other countries. We are seeking approval of lomitapide in several additional 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 these agreements 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 or 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 amortization of the debt discount associated with the Convertible Notes and amortization of debt issuance costs. We amortize these costs using the effective interest rate method over the life of our debt agreements as interest expense in our statements of operations.

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 2013 Form 10-K.

Revenue Recognition To date, our net product sales have consisted solely of sales of lomitapide which is indicated 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.

23-------------------------------------------------------------------------------- Table of Contents 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 currently 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, revenue is recognized at the time of cash receipt as collectability is not reasonably assured at the time the product is received by the patient. To the extent amounts are billed in advance of delivery to the patient, we will defer revenue until the product has been received by the patient.

In addition, we have recorded revenue on sales in Brazil and other 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 lomitapide, 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 typically only hold inventory to supply specific orders for the product. We generally recognize revenue for these named patient programs once either the product is accepted by the distributor or by the payer or the product is shipped through to the government authority or institution. In the event the payer's creditworthiness has not been established, we recognize revenue on the cash basis if all other revenue recognition criteria have been met.

We record distribution and other fees paid to our distributors as a reduction of revenue, unless we receive an identifiable and separate benefit for the consideration and we can reasonably estimate the fair value of the benefit received. If both conditions are met, we record the consideration paid to the distributor as an operating expense. We record revenue net of estimated discounts and rebates, including those provided to Medicare, Medicaid and other governmental programs 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 reasonably estimated at the time of delivery, and the government-mandated discounts applicable to government-funded programs. We also provide financial support to a 501(c)(3) organization which assists patients in accessing treatment for HoFH. Such organization assists HoFH patients according to eligibility criteria defined independently by the organization. We record donations made to the 501(c)(3) organization as selling, general and administrative expense. Any payments received from the 501(c)(3) organization on behalf of a patient, who is taking lomitapide for treatment of HoFH, we record as a reduction of selling, general and administrative expenses rather than as revenue.

These allowances are adjusted to reflect known changes in the factors that may impact such allowances in the quarter those changes are known. To date, such adjustments have not been significant.

The following table summarizes activity in each of the product revenue rebate and discount categories during the nine months ended September 30, 2014 (in thousands): Government Contractual Rebates Discounts Total Balance as of December 31, 2013 $ 1,651 $ - $ 1,651 Provision related to current period sales 3,549 1,160 4,709 Adjustments to provision 456 51 507 Payments made (3,522 ) (931 ) (4,453 ) Balance as of September 30, 2014 $ 2,134 $ 280 $ 2,414 Inventories and Cost of Product Sales 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 drug product. In evaluating the recoverability of inventories produced, we consider the probability that revenue will be obtained from the future sale of the related inventory and will write down inventory quantities in excess of expected requirements. Expired inventory is disposed of and the related costs are recognized as cost of product sales in the statement of operations.

We analyze our inventory levels to identify inventory that may expire prior to sale, inventory that has a cost basis in excess of its estimated realizable value, or inventory in excess of expected sales requirements. Although the manufacturing of lomitapide is subject to strict quality controls, certain batches or units of product may no longer meet quality specifications or may expire, which would require adjustments to our inventory values.

In the future, reduced demand, quality issues or excess supply beyond those anticipated by management may result in an adjustment to inventory levels, which would be recorded as an increase to cost of product sales. The determination of whether or not inventory costs will be realizable requires estimates by our management. A critical input in this determination is future expected inventory requirements based on our internal sales forecasts which we then compare to the expiry dates of inventory on hand. To the extent that inventory is expected to expire prior to being sold, we will write down the value of inventory. If actual results differ from those estimates, additional inventory write-offs may be required.

24 -------------------------------------------------------------------------------- Table of Contents Accrued Expenses As part of the process of preparing our 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. If our previous estimates prove to be 5% too high or too low, this may result in an adjustment to our accrued expenses in future periods of approximately $1.2 million.

Stock-Based Compensation We issue stock options, restricted stock and restricted stock units ("RSUs") with service conditions, which are generally the vesting periods of the awards.

We also have issued stock options that vest upon the satisfaction of certain performance conditions.

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. The fair value of restricted stock units is determined to be the fair market value of the shares of common stock underlying the unit at the date of grant. For service type awards, compensation expense is recognized using the ratable 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 model over the implicit service period.

For awards that vest upon the achievement of a market condition, we recognize compensation expense 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. We have 1,214,272 outstanding unvested stock options that contain performance criteria, which require significant judgment to assess whether the criteria is deemed probable to be achieved and for certain of the awards the number of options that will ultimately vest upon meeting the criteria. 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, and the 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 sufficient history to estimate the volatility of our common stock price or the expected life of our options. Our expected stock price volatility is based on an average of our own historical volatility and that of several peer companies. We utilized a weighted average method using our own volatility data for the time that we have been public, along with similar data for peer companies that are publicly traded. For purposes of identifying peer companies, we considered characteristics such as industry, length of trading history, and stage of life cycle. We will continue to use a weighted average method 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 ("SAB") 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 have performed a historical analysis of both options and awards that were forfeited prior to vesting and recorded total stock-based compensation expense that reflected this estimated forfeiture rate. Forfeitures are estimated each period and adjusted if actual forfeitures differ from those estimates.

25 -------------------------------------------------------------------------------- Table of Contents 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, 2014 2013 2014 2013 Expected stock price volatility 58.4 % 78.1 % 58.1 % 82.3 % Risk free interest rate 1.91 % 1.88 % 1.92 % 1.21 % Expected life of options (years) 6.25 6.07 6.26 6.14 Expected dividend yield 0.0 % 0.0 % 0.0 % 0.0 % Results of Operations Comparison of the Three Months Ended September 30, 2014 and September 30, 2013 The following table summarizes the results of our operations for each of the three-month periods ended September 30, 2014 and 2013, together with the changes in those items in dollars and as a percentage: Three Months Ended September 30, Change 2014 2013 $ % (in thousands) Net product sales $ 43,674 $ 16,330 $ 27,344 167 % Cost of product sales 3,783 1,750 2,033 116 % Operating expenses: Selling, general and administrative 31,438 18,843 12,595 67 % Research and development 10,438 7,892 2,546 32 % Restructuring 2 1 1 100 % Total operating expenses 41,878 26,736 15,142 57 % Loss from operations (1,987 ) (12,156 ) 10,169 (84 )% Interest expense, net (3,175 ) (100 ) (3,075 ) 3,075 % Other expense, net (511 ) (47 ) (464 ) 987 % Loss before provision for income taxes (5,673 ) (12,303 ) 6,630 (54 )% Provision for income taxes (198 ) (164 ) (34 ) 21 % Net loss $ (5,871 ) $ (12,467 ) $ 6,596 (53 )% Net Product Sales We generated net product sales of lomitapide of $43.7 million in the three months ended September 30, 2014, an increase of $27.3 million as compared to the same period in 2013. The increase in net product sales in the three months ended September 30, 2014 is attributable to an increase in the number of patients on therapy as compared to the three months ended September 30, 2013. We expect revenues from net product sales to continue to increase throughout 2014 due to an increase in the number of new patients starting lomitapide and in the number of existing patients maintained on lomitapide. The expected increases in patients starting lomitapide and staying on therapy are dependent upon a number of factors, including our ability to continue to build and to maintain market acceptance for lomitapide among healthcare professionals and patients, primarily in the U.S., the safety and tolerability profile in commercial use, and impact of competition.

Commencing in early 2014 we implemented two separate but related initiatives designed to increase net product sales in the U.S. First, we expanded our U.S.

sales force in order to permit deeper penetration into the pool of potential prescribing physicians. Second, we established patient engagement teams to help physicians educate patients on HoFH and prepare patients for commencing JUXTAPID therapy with the goal of optimizing the treatment experience and outcome while minimizing the likelihood that patients for whom JUXTAPID has been prescribed choose to forego treatment or discontinue treatment due to tolerability issues.

We believe these initiatives contributed to the increase in net product sales through the third quarter from the first quarter of 2014, and we expect these initiatives to continue to be key drivers of potential revenue growth.

Cost of Product Sales We recorded cost of product sales of $3.8 million in the three months ended September 30, 2014, an increase of $2.0 million as compared to the same period in 2013. Cost of product sales includes the cost of inventory sold, manufacturing and supply chain costs, product shipping and handling costs, charges for excess and obsolete inventory, as well as estimated royalties payable to UPenn related to the sale of lomitapide.

26-------------------------------------------------------------------------------- Table of Contents The increase in cost of product sales is attributed to the increase in net product sales from lomitapide in the three months ended September 30, 2014 compared to the same period in 2013. We expect cost of product sales to continue to increase throughout 2014 due to expected increases in net product sales of lomitapide.

Selling, General and Administrative Expenses Selling, general and administrative expenses were $31.4 million in the three months ended September 30, 2014, an increase of $12.6 million, or 67%, as compared to the same period in 2013. The $12.6 million increase was primarily attributed to a $6.4 million increase in salary and employee-related costs, a $1.9 million increase in consulting and outside service expenses related to the continued activities related to the commercialization of lomitapide, $1.8 million increase in legal fees, a $1.6 million increase in infrastructure expenses, and a $0.7 million increase related to stock-based compensation expense. The increases in salary and employee-related costs, infrastructure costs and stock-based compensation costs are related to increased headcount in both the selling and administrative functions. The increase in legal fees is primarily related to the ongoing investigation of our U.S. sales and marketing practices by the U.S. Department of Justice.

We expect that our selling, general and administrative expenses will continue to increase throughout 2014 due to the expansion of our U.S. based sales and customer service infrastructure, the continued activities related to the commercialization of lomitapide as a treatment for adult HoFH in countries where lomitapide is approved, as well as the continued expansion of efforts to support named patient sales of lomitapide in certain key countries, such as Brazil. We also expect that selling, general and administrative expenses will increase as a result of legal fees related to the ongoing investigation of our U.S. sales and marketing practices by the U.S. Department of Justice and our securities class action lawsuit.

Research and Development Expenses Research and development expenses were $10.4 million in the three months ended September 30, 2014, an increase of $2.5 million, or 32%, as compared to the same period in 2013. The $2.5 million increase was primarily attributed to a $1.3 million increase in clinical development expenses associated with the initiation of observational cohort and vascular imaging post marketing studies, post-marketing drug-to-drug interaction studies and to support the marketing authorization application for lomitapide in pediatric patients, a $1.1 million increase in salary and employee-related expenses, a $0.6 million increase attributed to outside service expenses related to pharmacovigilance and a $0.5 million increase attributed to expenses related to contract manufacturing process development activities associated with new strengths of lomitapide and regulatory requirements in Brazil. These increases were partially offset by a $1.2 million decrease in stock-based compensation.

We expect research and development expenses will continue to increase throughout 2014 as a result of our clinical development activities to generate data to support a potential marketing authorization application for lomitapide in HoFH in Japan and pediatric HoFH patients; continued conduct of observational cohort and vascular imaging post marketing studies; post-marketing drug-to-drug interaction studies; work directed at gaining regulatory approval of lomitapide in other international markets; 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.

Interest Expense, net Interest expense was $3.2 million in the three months ended September 30, 2014, a significant increase as compared to the same period in 2013. The increase was primarily attributed to the issuance of the Convertible Notes in August 2014.

Interest income was $62,000 in the three months ended September 30, 2014, a decrease of $12,000, or 16%, due to lower invested balances as compared to the same period in 2013.

Other Expense, net Other expense, net was $0.5 million in the three months ended September 30, 2014, an increase of $0.5 million, or 987%, as compared to the same period in 2013. Other expense, net relates to foreign currency charges incurred related to our foreign operations.

Provision for Income Taxes Our provision for income taxes was $0.2 million for the three months ended September 30, 2014 and 2013, respectively. The provision reflects estimated taxes for certain foreign subsidiaries.

27-------------------------------------------------------------------------------- Table of Contents Results of Operations Comparison of the Nine Months Ended September 30, 2014 and September 30, 2013 The following table summarizes the results of our operations for each of the nine month periods ended September 30, 2014 and 2013, together with the changes in those items in dollars and as a percentage: Nine Months Ended September 30, Change 2014 2013 $ % (in thousands) Net product sales $ 106,661 $ 24,051 $ 82,610 343 % Cost of product sales 10,605 2,660 7,945 299 % Operating expenses: Selling, general and administrative 95,545 48,912 46,633 95 % Research and development 27,284 21,285 5,999 28 % Restructuring 4 3 1 33 % Total operating expenses 122,833 70,200 52,633 75 % Loss from operations (26,777 ) (48,809 ) 22,032 (45 )% Interest expense, net (3,316 ) (363 ) (2,953 ) 813 % Other expense, net (649 ) (170 ) (479 ) 282 % Loss before provision for income taxes (30,742 ) (49,342 ) 18,600 (38 )% Provision for income taxes (527 ) (164 ) (363 ) 221 % Net loss $ (31,269 ) $ (49,506 ) $ 18,237 (37 )% Net Product Sales We generated net product sales of lomitapide of $106.7 million in the nine months ended September 30, 2014, an increase of $82.6 million as compared to the same period in 2013. The increase in net product sales in the nine months ended September 30, 2014 is attributable to an increase in the number of patients on therapy as compared to the nine months ended September 30, 2013, during which we launched lomitapide.

Cost of Product Sales We recorded cost of product sales of $10.6 million in the nine months ended September 30, 2014, an increase of $7.9 million as compared to the same period in 2013. The increase in cost of product sales is largely attributed to the increase in net product sales from lomitapide during the nine months ended September 30, 2014 compared to the same period in 2013, as well as charges recorded to write off production costs of estimated excess quantities of new capsule strengths of lomitapide.

Selling, General and Administrative Expenses Selling, general and administrative expenses were $95.5 million in the nine months ended September 30, 2014, an increase of $46.6 million, or 95%, as compared to the same period in 2013. The $46.6 million increase was primarily attributed to a $22.1 million increase in salary and employee-related costs, a $7.8 million increase in stock-based compensation expense, a $6.6 million increase in consulting and outside service expenses related to the continued activities related to the commercialization of lomitapide, a $5.1 million increase in legal fees, and a $4.4 million increase in infrastructure expenses.

The increases in salary and employee-related costs, infrastructure costs and stock-based compensation costs are related to increased headcount in both the selling and administrative functions. The increase in legal fees is primarily related to the ongoing investigation of our U.S. sales and marketing practices by the U.S. Department of Justice.

Research and Development Expenses Research and development expenses were $27.3 million in the nine months ended September 30, 2014, an increase of $6.0 million, or 28%, as compared to the same period in 2013. The $6.0 million increase was primarily attributed to a $3.0 million increase in salary and employee-related expenses, a $1.7 million increase in clinical development expenses associated with the initiation of observational cohort and vascular imaging post marketing studies, post-marketing drug-to-drug interaction studies and support the marketing authorization application for lomitapide in pediatric patients, a $1.7 million increase attributed to outside service expenses related to contract manufacturing and process development activities associated with new strengths of lomitapide and regulatory requirements in Brazil, a $1.3 million increase attributed to outside service expenses related to pharmacovigilance. These increases were partially offset by a $2.3 million decrease in stock-based compensation.

28-------------------------------------------------------------------------------- Table of Contents Interest Expense, net Interest expense was $3.5 million in the nine months ended September 30, 2014, a significant increase as compared to the same period in 2013. The increase was primarily attributed to the amortization of the issuance of the Convertible Notes in August 2014. Interest income was $0.2 million in the nine months ended September 30, 2014 and 2013, respectively.

Other Expense, net Other expense, net was $0.6 million in the nine months ended September 30, 2014, an increase of $0.5 million, or 282%, as compared to the same period in 2013.

Other expense, net relates to foreign currency charges incurred related to our foreign operations.

Provision for Income Taxes Our provision for income taxes was $0.5 million and $0.2 million for the nine months ended September 30, 2014 and 2013, respectively. The provision reflects estimated taxes for certain foreign subsidiaries.

Liquidity and Capital Resources Since our inception in 2005, we have funded our operations primarily through proceeds from the issuance of the Convertible Notes, public issuances of common stock, revenues from the sales of lomitapide, proceeds from our long-term debt and the private placement of convertible preferred stock. We have incurred losses since inception and except for the three months ended September 30, 2014, have generated negative cash flows from operations since inception.

During the nine months ended September 30, 2014, we generated approximately $106.7 million of revenues from net product sales. As of September 30, 2014, we had approximately $367.6 million in cash, cash equivalents and marketable securities on hand.

Cash Flows The following table sets forth the major sources and uses of cash and cash equivalents for the periods set forth below: Nine months ended September 30, 2014 2013 (in thousands) Net cash provided by (used in): Operating activities $ (11,256 ) $(37,771 ) Investing activities 8,698 (34,009 ) Financing activities 256,492 83,870 Effect of exchange rates on cash 208 (17 ) Net increase in cash and cash equivalents $ 254,142 $ 12,073 Net cash used in operating activities amounted to $11.3 million and $37.8 million in the nine months ended September 30, 2014 and 2013, respectively. For the nine months ended September 30, 2014, the cash used in operations was primarily related to the continued expansion of our global sales, marketing and general and administrative functions to support the commercialization of lomitapide. Additionally, for the nine months ended September 30, 2014, the cash used in operations included an increase of inventory of $9.8 million, a $6.7 million increase in accounts receivable associated with the net product sales of lomitapide, offset by noncash items, including stock-based compensation of $23.5 million and amortization of debt discount and debt issuance costs of $2.4 million. For the nine months ended September 30, 2013, the cash used in operations was primarily related to the clinical development of lomitapide for adult HoFH patients and activities to support a potential marketing authorization application for lomitapide in Japanese HoFH patients, as well as the initial build out of our global sales, marketing and general and administrative functions to support the commercialization of lomitapide.

Additionally, for the nine months ended September 30, 2013, the cash used in operations included an increase in accounts receivable associated with the net product sales of lomitapide of $4.6 million, an increase in prepaid expenses of $1.7 million and an increase of inventory of $1.3 million offset by noncash items, including stock-based compensation of $17.8 million.

Cash provided by investing activities for the nine months ended September 30, 2014 of $8.7 million was primarily from the maturities of marketable securities of $58.3 million, offset by purchases of marketable securities of $46.5 million and additions of property and equipment of $3.1 million. Cash used by investing activities for the nine months ended September 30, 2013 of $34.0 million was primarily from the purchases of marketable securities of $72.0 million, offset by maturities of marketable securities of $38.7 million.

Cash provided by financing activities for the nine months ended September 30, 2014 of $256.5 million primarily consisted of $325.0 million in gross proceeds from the issuance of our convertible debt, $60.5 million of proceeds from the issuance of warrants issued in 29-------------------------------------------------------------------------------- Table of Contents connection with the issuance of our convertible debt, $3.3 million of proceeds from exercises of stock options, offset by the purchase of convertible bond hedges of $86.6 million, $35.0 million to repurchase our common stock, $8.0 million for the payment of debt issuance costs in connection with our convertible debt and $2.7 million in principal repayments of our long-term debt.

Net cash provided by financing activities for the nine months ended September 30, 2013 primarily consisted of $78.0 million of net proceeds from our 2013 public offering of common stock and $8.0 million of proceeds from exercises of stock options, offset by $2.1 million in principal repayments of our long-term debt.

Future Funding Requirements In the future, we may need to raise additional capital to fund our operations.

Our future capital requirements may be substantial, and will depend on many factors, including: • the level of physician, patient and payer acceptance of JUXTAPID; • the success of our commercialization efforts and the level of revenues we generate from sales of JUXTAPID in the U.S.; • the level of revenue we receive from named patient sales of lomitapide in Brazil and other key countries where a mechanism exists to sell the product on a pre-approval basis in such country based on U.S. or EU approval; • our ability to obtain pricing and reimbursement approval of lomitapide in the key countries in which lomitapide is approved, at acceptable prices, and without significant restriction or caps or cost containment measures; • the cost of continuing to build and maintain the sales and marketing capabilities necessary for commercial launch of lomitapide in HoFH in the U.S., Mexico, Canada and the EU and certain other key international markets, if approved; • the impact of competitive products, such as PCSK9 product candidates, on the levels of revenues that we generate from sales of lomitapide and our ability to secure pricing and reimbursement forlomitapide at acceptable levels after approval of PCSK9 products; • the timing and costs of future business development opportunities; • the timing and cost of an anticipated clinical trial to evaluate lomitapide for treatment of pediatric patients with HoFH; • the timing and cost of our clinical development program of lomitapide in HoFH in Japanese patients; • the cost of filing, prosecuting and enforcing patent claims; • the costs of our manufacturing-related activities and the other costs of commercializing lomitapide; • the costs associated with ongoing government investigations and lawsuits, including any damages, settlement amounts, fines or other payments that may result if we are unsuccessful in our efforts to defend ourselves; • the levels, timing and collection of revenue received from sales of lomitapide worldwide in the future; • the cost of our observational cohort study and other post marketing commitments to the FDA and EU, and costs of post marketing commitments in any other countries where lomitapide is ultimately approved; and • the timing and cost of other clinical development activities.

On February 15, 2013, we filed an automatic shelf registration statement on Form S-3 ASR with the Securities and Exchange Commission ("SEC"), which became immediately effective. This shelf registration statement permits us to offer, from time to time, an unspecified amount of any combination of common stock, preferred stock, debt securities and warrants.

We may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. The source, timing and availability of any future financing will depend principally upon equity and debt market conditions, interest rates and, more specifically, on the extent of our commercial success and our continued progress in our regulatory and development activities. There can be no assurance that external funds will be available on favorable terms, if at all. Through September 30, 2014, we have only generated revenues of $155.2 million, all of which are from net product sales of lomitapide. We expect the results of operations to allow for cash to be generated by operations in the final quarter of 2014. If the Myalept Transaction is consummated, as disclosed in Note 13 within the notes to the financial statements, a substantial amount of our existing cash, cash equivalents and marketable securities will be used in completing this transaction, which may greatly accelerate our need to raise additional capital. If we are unable to obtain such financing at all or on acceptable terms, we may be required to reduce the scope of our planned activities which could harm our business, financial condition and operating results.

30 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Commitments During the quarter ended September 30, 2014, we issued $325.0 million of 2.0% Convertible Notes due August 15, 2019. The Convertible Notes are governed by the terms of an indenture between us, as issuer, and The Bank of New York Mellon Trust Company, N.A., as the trustee. The Convertible Notes are senior unsecured obligations and bear interest at a rate of 2.0% per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2015. The Convertible Notes will mature on August 15, 2019, unless earlier repurchased or converted. The Convertible Notes will be convertible into shares of our common stock at an initial conversion rate of approximately 24.2866 shares of common stock per $1,000 principal amount of the Convertible Notes, which corresponds to an initial conversion price of approximately $41.175 per share of our common stock and represents a conversion premium of approximately 35% based on the last reported sale price of our common stock of $30.50 on August 11, 2014, the date the notes offering was priced. In addition, in connection with the pricing of the Convertible Notes, we entered into convertible bond hedge transactions and separate warrant transactions.

In November 2014, we entered into the Myalept Transaction to purchase certain assets and rights associated with MYALEPT from Amylin and AstraZeneca Pharamaceuticals LP, and affiliate of Amilyn for total cash consideration of $325 million. MYALEPT is an orphan product that is approved in the US for the treatment of generalized lipodystrophy, and it has orphan drug designation in the US, EU, and Japan. Under the terms of the agreement, we will pay AstraZeneca $325 million upfront to acquire the global rights to develop, manufacture and commercialize MYALEPT, subject to an existing distributor license with Shionogi covering Japan, South Korea, Taiwan which we will assume upon closing. The transaction does not include the transfer of any AstraZeneca employees for facilities. We anticipate the acquisition to be completed in January 2015.

There have been no other material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 3, 2014.

[ Back To TMCnet.com's Homepage ]