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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

Commission File Number 001-34921

 

 

AEGERION PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE		20-2960116
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

101 Main Street, Suite 1850

Cambridge, Massachusetts 02142

(Address of principal executive offices, including zip code)

(617) 500-7867

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer		x		Accelerated Filer		¨
Non-Accelerated Filer		¨  (Do not check if a smaller reporting company)		Smaller Reporting Company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s Common Stock as of July 29, 2014 was 29,547,119.

 

 

 

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AEGERION PHARMACEUTICALS, INC.

INDEX

 

				Page
Part I. Condensed Consolidated Financial Information					3
Item 1.		Unaudited Financial Statements			3
		Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013			3
		Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013			4
		Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2014 and 2013			5
		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013			6
		Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			29
Item 4.		Controls and Procedures			29
Part II. Other Information					30
Item 1.		Legal Proceedings			30
Item 1A.		Risk Factors			30
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			62
Item 3.		Defaults Upon Senior Securities			62
Item 4.		Mine Safety Disclosure			62
Item 5.		Other Information			62
Item 6.		Exhibits			63
Signatures					64
Exhibits & Certifications

Note: Aegerion, JUXTAPID and LOJUXTA are registered trademarks of Aegerion. All other trademarks referenced in this Form 10-Q are the property of their respective owners.

 

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Forward-Looking Statements

All statements included or incorporated by reference into this Quarterly Report on Form 10-Q, or Quarterly Report, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “forecasts,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing” and similar expressions, and variations or negatives of these words. Examples of forward-looking statements contained in this Quarterly Report include our statements regarding: the commercial potential for lomitapide; our estimates as to the potential number of patients with homozygous familial hypercholesterolemia; our expectations with respect to reimbursement of lomitapide in the United States; our expectations with respect to pricing and reimbursement approvals required in countries of the European Union and other countries in which we receive, or have received, marketing approval for lomitapide; our expectations with respect to named patient sales in Brazil and other countries where such sales are permitted; the potential for and possible timing of approval of lomitapide in countries where we have not yet obtained approval; our expectations with respect to the decisions of regulatory and reimbursement authorities, including with respect to appeals; our expectations and plans for clinical development of lomitapide; our expectations regarding a possible future filing for approval in Japan; our plans for marketing, sales, manufacturing and distribution; our expectations with respect to the impact of competition on our future operations and results; our beliefs with respect to our intellectual property portfolio and the extent to which it protects us; our expectations regarding the availability of data and marketing exclusivity in the United States, the European Union and other countries; our view of ongoing government investigations and stockholder litigation and the possible impact of each on our business; our forecasts regarding our future revenues, expenses, our cash position and the timing of any future need for additional capital to fund operations; and our plans to acquire rights to one or more product candidates.

The forward-looking statements contained in this Quarterly Report and in the documents incorporated into this Quarterly Report by reference are based on our current beliefs and assumptions with respect to future events, all of which are subject to change. Forward-looking statements are not guarantees of future performance, and are subject to risks, uncertainties and assumptions that are difficult to predict, including those discussed in “Risk Factors” in Part II, Item 1A of this Quarterly Report. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors may impact our operations or results. New risks may emerge from time to time. Past financial or operating performance is not necessarily a reliable indicator of future performance. Given these risks and uncertainties, we can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does occur, what impact it will have on our results of operations and financial condition. Our actual results could differ materially and adversely from those expressed in any forward-looking statement in this Quarterly Report or in our other filings with the Securities and Exchange Commission.

Except as required by law, we undertake no obligation to revise our forward-looking statements to reflect events or circumstances that arise after the date of this Quarterly Report or the respective dates of documents incorporated into this Quarterly Report by reference that include forward-looking statements. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in these forward-looking statements.

In this Quarterly Report, “Aegerion Pharmaceuticals, Inc.,” “Aegerion,” the “Company,” “we,” “us” and “our” refer to Aegerion Pharmaceuticals, Inc. taken as a whole, unless otherwise noted.

 

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PART I. FINANCIAL INFORMATION

Aegerion Pharmaceuticals, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

 

		June 30, 2014				December 31, 2013
Assets
Current assets:
Cash and cash equivalents		$	46,650			$	61,011
Marketable securities			58,037				65,220
Accounts receivable			12,437				7,572
Inventories			6,836				1,640
Prepaid expenses and other current assets			7,064				5,071
Total current assets			131,024				140,514
Property and equipment, net			3,385				1,654
Other assets			210				164
Total assets		$	134,619			$	142,332
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	1,950			$	4,139
Accrued liabilities			18,498				17,127
Current portion of long-term debt			3,578				3,578
Total current liabilities			24,026				24,844
Long-term debt, net of current portion			2,222				4,011
Other liabilities			1,794				445
Total liabilities			28,042				29,300
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 shares authorized at June 30, 2014 and December 31, 2013; none issued and outstanding at June 30, 2014 and December 31, 2013, respectively			—				—
Common stock, $0.001 par value, 125,000 shares authorized at June 30, 2014 and December 31, 2013; 29,627 and 29,488 shares issued at June 30, 2014 and December 31, 2013, respectively; 29,523 and 29,384 shares outstanding at June 30, 2014 and December 31, 2013, respectively			30				29
Treasury stock, at cost; 104 shares at June 30, 2014 and December 31, 2013			—				—
Additional paid-in-capital			388,131				369,055
Accumulated deficit			(281,478	)			(256,080	)
Accumulated other comprehensive items			(106	)			28
Total stockholders’ equity			106,577				113,032
Total liabilities and stockholders’ equity		$	134,619			$	142,332

See accompanying notes.

 

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Aegerion Pharmaceuticals, Inc.

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Net product sales		$	36,014			$	6,490			$	62,987			$	7,721
Cost of product sales			4,158				727				6,822				910
Operating Expenses:
Selling, general and administrative			32,329				16,849				64,107				30,069
Research and development			8,942				7,618				16,846				13,393
Restructuring costs			1				1				2				2
Total operating expenses			41,272				24,468				80,955				43,464
Loss from operations			(9,416	)			(18,705	)			(24,790	)			(36,653	)
Interest expense, net			(70	)			(114	)			(141	)			(263	)
Other expense, net			(31	)			(78	)			(138	)			(123	)
Loss before provision for income taxes			(9,517	)			(18,897	)			(25,069	)			(37,039	)
Provision for income taxes			(105	)			—				(329	)			—
Net loss		$	(9,622	)		$	(18,897	)		$	(25,398	)		$	(37,039	)
Net loss per common share — basic and diluted		$	(0.33	)		$	(0.66	)		$	(0.86	)		$	(1.30	)
Weighted-average common shares outstanding — basic and diluted			29,494				28,836				29,453				28,588

See accompanying notes.

 

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Aegerion Pharmaceuticals, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Net loss		$	(9,622	)		$	(18,897	)		$	(25,398	)		$	(37,039	)
Other comprehensive loss:
Unrealized losses on available-for-sale marketable securities			(23	)			(6	)			(44	)			(37	)
Foreign currency translation			(63	)			(17	)			(90	)			(34	)
Other comprehensive loss			(86	)			(23	)			(134	)			(71	)
Comprehensive loss		$	(9,708	)		$	(18,920	)		$	(25,532	)		$	(37,110	)

See accompanying notes.

 

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Aegerion Pharmaceuticals, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

		Six Months Ended June 30,
		2014				2013
Operating activities
Net loss		$	(25,398	)		$	(37,039	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			530				210
Amortization of premium on marketable securities			654				836
Stock-based compensation			16,489				10,350
Noncash interest expense			36				54
Deferred rent expense			603				(7	)
Provision for inventory excess and obsolescence			1,235				—
Changes in assets and liabilities:
Accounts receivable			(4,865	)			(3,239	)
Inventories			(5,719	)			(1,298	)
Prepaid expenses and other current assets			(1,899	)			(245	)
Other long-term assets			(64	)			(4	)
Accounts payable			(2,325	)			(3,620	)
Accrued liabilities			727				419
Net cash used in operating activities			(19,996	)			(33,583	)
Investing activities
Purchases of property and equipment			(1,348	)			(454	)
Purchases of marketable securities			(38,401	)			(58,386	)
Maturities of marketable securities			44,887				17,916
Net cash provided by (used in) investing activities			5,138				(40,924	)
Financing activities
Principal repayment of long-term debt			(1,789	)			(1,233	)
Proceeds from exercises of stock options			2,339				5,120
Proceeds from issuances of stock, net of offering expenses			—				78,036
Net cash provided by financing activities			550				81,923
Exchange rate effect on cash			(53	)			(54	)
Net (decrease) increase in cash and cash equivalents			(14,361	)			7,362
Cash and cash equivalents, beginning of period			61,011				37,171
Cash and cash equivalents, end of period		$	46,650			$	44,533
Supplemental disclosures of cash flow information
Cash paid for interest expense		$	233			$	346
Cash paid for income taxes		$	744			$	—
Non-cash investing activities
Purchases of property and equipment included in accrued liabilities		$	576			$	—
Purchases of property and equipment included in accounts payable		$	115			$	—

See accompanying notes.

 

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Aegerion Pharmaceuticals, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2014

1. Description of Business and Significant Accounting Policies

Organization

Aegerion Pharmaceuticals, Inc. (the “Company” or “Aegerion”) is a biopharmaceutical company dedicated to the development and commercialization of innovative therapies for patients with debilitating rare diseases.

The Company’s 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”). The Company launched JUXTAPID in the U.S. in late January 2013. In July 2013, the Company received marketing authorization for lomitapide in the European Union (“EU”), under the brand name LOJUXTA^® (lomitapide) hard capsules (“LOJUXTA”), as a treatment for adult HoFH. Lomitapide is also approved for the treatment of HoFH in Mexico, Canada, and a small number of other countries. Lomitapide is also available for sale on a named patient basis in Brazil and in a limited number of other countries as a result of the approval of lomitapide in the U.S. or the EU. In the near-term, the Company’s ability to generate revenues is primarily dependent upon sales of lomitapide in the U.S. and in Brazil. The Company also expects to generate revenues from sales of lomitapide in certain key countries of the EU, and in Mexico and Canada, assuming pricing and reimbursement approvals are received in those countries at acceptable levels, and from sales of lomitapide in those additional countries in which a marketing authorization for lomitapide is ultimately approved. Based on the Company’s current operating plan, the Company believes that its existing cash, cash equivalents and marketable securities provide for sufficient resources to fund its currently planned operations, including the Company’s continued development of lomitapide, for at least the next 12 months.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments (including normal recurring accruals) considered necessary for fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. Operating results for the current interim period are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2014 or for any future periods. This Form 10-Q should be read in conjunction with the audited financial statements and accompanying notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”).

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

To date, Aegerion’s net product sales have consisted solely of sales of lomitapide for the treatment of HoFH. The Company applies the revenue recognition guidance in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-15, Revenue Recognition—Products. The Company recognizes 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 the Company has no further performance obligations.

 

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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, the Company will defer revenue until the product has been received by the patient.

In addition, the Company has also 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. The Company generally recognizes 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, the Company will recognize revenue on a cash basis if all other revenue recognition criteria have been met.

The Company records distribution and other fees paid to our customers as a reduction of revenue, unless the Company receives an identifiable and separate benefit for the consideration and the Company can reasonably estimate the fair value of the benefit received. If both conditions are met, the Company records the consideration paid to the customer as an operating expense. The Company records revenue net of estimated discounts and rebates, including those paid to Medicare, Medicaid and other government programs in the U.S. Allowances are recorded as a reduction of revenue at the time revenues from 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. To date, such adjustments have not been significant.

Concentration of Credit Risk

The Company’s financial instruments that are exposed to credit risks consist primarily of cash and cash equivalents, available-for-sale marketable securities and accounts receivable. The Company maintains its cash and cash equivalents in bank accounts, which, at times, exceed federally insured limits. The Company has not experienced any credit losses in these accounts and does not believe it is exposed to any significant credit risk on these funds. The Company’s investment policy includes guidelines on the quality of the financial institutions and financial instruments the Company is allowed to invest in, which the Company believes minimizes the exposure to concentration of credit risk.

The Company is subject to credit risk from its accounts receivable related to its product sales of lomitapide. The majority of the Company’s accounts receivable arises from product sales in the U.S. For accounts receivable that have arisen from named patient sales outside of the U.S., the payment terms are predetermined and the Company evaluates the creditworthiness of each customer or distributor on a regular basis. The Company periodically assesses the financial strength of the holders of its accounts receivable to establish allowances for anticipated losses, if necessary. The Company reserves all uninsured amounts billed directly to a patient until the time of cash receipt as collectability is not reasonably assured at the time the product is received. To date, the Company has not incurred any credit losses.

Inventories and Cost of 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, the Company considers the probability that revenue will be obtained from the future sale of the related inventory. The Company writes 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.

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 The Trustees of the University of Pennsylvania (“UPenn”) related to the sale of lomitapide.

 

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Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which provides guidance that supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. The FASB’s objective in issuing ASU 2014-09 is to provide clarity to overall revenue recognition guidance as well as industry specific revenue recognition guidance for improved financial reporting. The amendments in this update are effective for the Company after December 15, 2016. The Company currently is still evaluating whether it will apply a retrospective or modified retrospective approach for this standard and is still evaluating the impact that ASU 2014-09 will have on its financial statements.

2. Cash, Cash Equivalents and Marketable Securities

As of June 30, 2014 and December 31, 2013, the Company held $46.7 million and $61.0 million in cash and cash equivalents, respectively, consisting of cash and money market funds. As of June 30, 2014 and December 31, 2013, the Company held $58.0 million and $65.2 million of marketable securities, respectively. The marketable securities are classified as available-for-sale, and as such, are reported at fair value on the Company’s balance sheet. Unrealized holding gains and losses are reported within accumulated other comprehensive items as a separate component of stockholders’ equity. If a decline in the fair value of a marketable security below the Company’s amortized cost basis is determined to be other than temporary, such marketable security is written down to its estimated fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. The cost of securities sold is based on the specific identification method.

Consistent with the Company’s investment policy, the Company does not use derivative financial instruments in its investment portfolio. The Company regularly invests excess operating cash in deposits with major financial institutions and money market funds and in notes issued by the U.S. government, as well as in fixed income investments and U.S. bond funds, both of which can be readily purchased and sold using established markets. The Company believes that the market risk arising from its holdings of these financial instruments is mitigated based on the fact that many of these securities are either government backed or of high credit rating.

The following is a summary of the Company’s marketable securities as of June 30, 2014:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value at June 30, 2014
		(in thousands)
Corporate debt securities		$	54,357			$	12			$	(20	)		$	54,349
U.S. government agency securities			3,689				—				(1	)			3,688
Total		$	58,046			$	12			$	(21	)		$	58,037

The following is a summary of the Company’s marketable securities as of December 31, 2013:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value at December 31, 2013
		(in thousands)
Corporate debt securities		$	62,186			$	36			$	(1	)		$	62,221
Commercial paper			2,999				—				—				2,999
Total		$	65,185			$	36			$	(1	)		$	65,220

At June 30, 2014, the Company’s securities held in an unrealized loss position are not considered to be other-than-temporarily impaired, as the Company has the ability to hold such investments until recovery of their fair value.

 

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The estimated fair value and amortized cost of the Company’s marketable securities by contractual maturity as of June 30, 2014 and December 31, 2013 are summarized as follows:

 

		As of June 30, 2014								As of December 31, 2013
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(in thousands)
Due in one year or less		$	50,844			$	50,840			$	65,185			$	65,220
Due after one year through two years			7,202				7,197				—				—
Total		$	58,046			$	58,037			$	65,185			$	65,220

3. Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, accrued liabilities, and long-term debt. The carrying amount of accounts receivable, accounts payable, and accrued liabilities are generally considered to be representative of their respective fair values because of the short-term nature of those instruments at June 30, 2014 and December 31, 2013. The fair value of the Company’s long-term debt, computed pursuant to a discounted cash flow technique using the effective interest rate under the Company’s loan, is $5.8 million and $7.6 million, respectively, at June 30, 2014 and December 31, 2013. The effective interest rate considers the fair value of the loan issuance costs and a deferred financing charge.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC 820, Fair Value Measurements and Disclosures establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between fair value measurements based on market data (observable inputs) and those based on the Company’s own assumptions (unobservable inputs). This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

•

Level 1 —Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The Company’s Level 1 assets consist of cash and money market investments.

 

•

Level 2 —Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly. The Company’s Level 2 assets consist of corporate debt securities, U.S. government agency securities, commercial paper and certificates of deposit.

 

•

Level 3 —Inputs that are unobservable for the asset or liability.

The Company’s cash equivalents are generally classified within Levels 1 and 2 of the fair value hierarchy. The Company’s investments in marketable securities are classified within Level 2 of the fair value hierarchy.

 

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The fair value measurements of the Company’s financial instruments at June 30, 2014 and December 31, 2013 are summarized in the tables below:

 

		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Balance at June 30, 2014
		(in thousands)
Cash and cash equivalents:
Cash		$	8,695			$	—			$	—			$	8,695
Money market funds			37,955				—				—				37,955
Total cash and cash equivalents			46,650				—				—				46,650
Marketable securities:
Corporate debt securities			—				54,349				—				54,349
U.S. government agency securities			—				3,688				—				3,688
Total marketable securities			—				58,037				—				58,037
Total		$	46,650			$	58,037			$	—			$	104,687
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Balance at December 31, 2013
		(in thousands)
Cash and cash equivalents:
Cash		$	6,383			$	—			$	—			$	6,383
Money market funds			54,628				—				—				54,628
Total cash and cash equivalents			61,011				—				—				61,011
Marketable securities:
Corporate debt securities			—				62,221				—				62,221
Commercial paper			—				2,999				—				2,999
Total marketable securities			—				65,220				—				65,220
Total		$	61,011			$	65,220			$	—			$	126,231

4. Inventories

The components of inventory are as follows:

 

		June 30, 2014				December 31, 2013
		(in thousands)
Work-in-process		$	3,631			$	—
Finished goods			3,205				1,640
Total		$	6,836			$	1,640

During the three and six months ended June 30, 2014, the Company recorded charges in the statement of operations for excess inventory of $0.9 million and $1.2 million, respectively. $0.9 million of the charges recorded in the statement of operations for the six months ended June 30, 2014 relates to the production costs of new capsule strengths of lomitapide.

 

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5. Other Comprehensive Loss and Accumulated Other Comprehensive Items

Other comprehensive loss includes changes in equity that are excluded from net loss, such as unrealized gains and losses on marketable securities and foreign currency translation adjustments.

The following table summarizes other comprehensive loss and the changes in accumulated other comprehensive items, by component, for the six months ended June 30, 2014 and 2013 (in thousands):

 

		Unrealized Gains/(Losses) on Marketable Securities				Foreign Currency Translation Adjustment				Total Accumulated Other Comprehensive Items
Balance at December 31, 2013		$	35			$	(7	)		$	28
Other comprehensive loss			(44	)			(90	)			(134	)
Balance at June 30, 2014		$	(9	)		$	(97	)		$	(106	)
		Unrealized Gains/(Losses) on Marketable Securities				Foreign Currency Translation Adjustment				Total Accumulated Other Comprehensive Items
Balance at December 31, 2012		$	1			$	16			$	17
Other comprehensive loss			(37	)			(34	)			(71	)
Balance at June 30, 2013		$	(36	)		$	(18	)		$	(54	)

The following table summarizes other comprehensive loss and the changes in accumulated other comprehensive items, by component, for the three months ended June 30, 2014 and 2013 (in thousands):

 

		Unrealized Gains/(Losses) on Marketable Securities				Foreign Currency Translation Adjustment				Total Accumulated Other Comprehensive Items
Balance at March 31, 2014		$	14			$	(34	)		$	(20	)
Other comprehensive loss			(23	)			(63	)			(86	)
Balance at June 30, 2014		$	(9	)		$	(97	)		$	(106	)

 

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		Unrealized Losses on Marketable Securities				Foreign Currency Translation Adjustment				Total Accumulated Other Comprehensive Items
Balance at March 31, 2013		$	(30	)		$	(1	)		$	(31	)
Other comprehensive loss			(6	)			(17	)			(23	)
Balance at June 30, 2013		$	(36	)		$	(18	)		$	(54	)

6. Debt Financing

On March 28, 2012, the Company entered into a Loan and Security Agreement (as amended the “Loan and Security Agreement”) with Silicon Valley Bank, pursuant to which Silicon Valley Bank made a term loan to the Company in the principal amount of $10.0 million. The Loan and Security Agreement provided for interest-only payments through February 28, 2013, with per annum interest of 6.75% and a final payment of $0.2 million. The proceeds of the term loan were used by the Company to repay the Company’s existing loan from Hercules Technology II, L.P. and Hercules Technology III, L.P. (collectively, “the Hercules Funds”). Under the Loan and Security Agreement, the Company has agreed to repay the principal balance of the term loan in 36 equal monthly installments, which started on March 1, 2013 and will continue through February 1, 2016. As of June 30, 2014, the Company owed approximately $5.6 million under the term loan. The Company may prepay all or any part of the outstanding term loan subject to a prepayment premium (defined in the Loan and Security Agreement) at its option. During the six months ended June 30, 2014, the Company made principal repayments to Silicon Valley Bank under the term loan amounting to approximately $1.7 million.

In connection with the Loan and Security Agreement, the Company granted Silicon Valley Bank a security interest in all of the Company’s personal property then owned or thereafter acquired, excluding intellectual property and assets held within the Company’s securities corporation, and a negative pledge on intellectual property. In addition, as part of the Loan and Security Agreement, the Company is required to maintain certain amounts at Silicon Valley Bank. The Loan and Security Agreement also provides for standard indemnification of Silicon Valley Bank and contains representations, warranties and certain covenants of the Company, including the agreement by the Company to maintain a specified level of liquidity, below which the Company would be required to pledge up to $2.9 million to Silicon Valley Bank.

In July 2012, the Loan and Security Agreement was amended to include a line of credit of up to $0.8 million to finance the purchase of certain types of equipment acquired by the Company during the two years ended December 31, 2012 with per annum interest rate of 4.75%. The Company financed approximately $0.6 million under this arrangement, and the remaining line of credit balance expired unused. As of June 30, 2014, the Company owed approximately $0.2 million under the line of credit. Pursuant to the agreement, the Company is required to make monthly principal payments beginning in January 2013 and continuing through December 2015. During the six months ended June 30, 2014, the Company made principal payments to Silicon Valley Bank under the line of credit amounting to approximately $0.1 million.

7. Capital Structure

Preferred Stock

At June 30, 2014, the Company was authorized to issue 5,000,000 shares of $0.001 par value preferred stock. There were no shares issued and outstanding.

Common Stock

At June 30, 2014, the Company was authorized to issue 125,000,000 shares of $0.001 par value common stock. Dividends on the common stock will be paid when, and if, declared by the Board of Directors. Each holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held.

The Company will, at all times, reserve and keep available, out of its authorized but unissued shares of common stock, sufficient shares to affect the conversion of shares for stock options.

 

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Public Offerings

In January 2013, the Company sold 3,110,449 shares of common stock at a public offering price of $26.64 per share, resulting in proceeds to the Company of approximately $78.0 million, net of underwriting discounts, commissions and other offering expenses.

8. Accrued Liabilities

Accrued liabilities as of June 30, 2014 and December 31, 2013 consisted of the following:

 

		June 30, 2014				December 31, 2013
		(in thousands)
Accrued employee compensation and related costs		$	5,984			$	7,679
Accrued professional fees			2,660				1,373
Accrued royalties			2,095				1,211
Accrued sales allowances			1,845				1,651
Accrued research and development costs			1,431				1,664
Accrued manufacturing costs			975				596
Accrued sales and marketing costs			565				590
Other accrued liabilities			2,943				2,363
Total		$	18,498			$	17,127

9. Stock Option Plans

The Company issues stock options, restricted stock and restricted stock units (“RSUs”) with service conditions, which are generally the vesting periods of the awards. The Company also has issues stock options that vest upon the satisfaction of certain performance conditions.

Determining the Fair Value of Stock Options

The Company measures the fair value of stock options and other stock-based awards to employees, consultants and directors on the date of grant using the Black Scholes option pricing model. 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 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, the Company recognizes compensation expense when achievement of the performance condition is deemed probable using an accelerated attribution model over the implicit service period. The Company recorded $1.1 and $2.0 million of stock-based compensation related to the achievement or probable achievement of certain performance conditions in the three and six months ended June 30, 2014, respectively. Certain of the Company’s awards that contain performance conditions also require the Company to estimate the number of awards that will vest, which the Company estimates when the performance condition is deemed probable of achievement. For awards that vest upon the achievement of a market condition, the Company calculates the estimated fair value of the stock-based awards using a Monte Carlo simulation and recognizes compensation expense over the derived 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 Company does not have sufficient history to support a calculation of volatility and expected term using only its historical data. As such, the Company has used a weighted-average volatility considering the Company’s own volatility since its initial public offering in October 2010, and the volatilities of several guideline companies. For purposes of identifying similar entities, the Company considered characteristics such as industry, length of trading history, and stage of life cycle. The Company will continue to use this weighted average method until the historical volatility of its common stock is relevant to measure expected volatility for future option grants. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The average expected life was determined according to the “simplified method” as described in SAB 110, which is the mid-point between the vesting date and the end of the contractual term. The risk-free interest rate is determined by reference to implied yields available from U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant. Forfeitures are estimated

 

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based on the Company’s historical analysis of both options and awards that forfeited prior to vesting. The weighted-average assumptions used in the Black-Scholes option-pricing model are as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Expected stock price volatility			58.2	%			84.4	%			58.0	%			82.8	%
Risk free interest rate			2.01	%			1.07	%			1.92	%			1.12	%
Expected life of options (years)			6.22				6.01				6.27				6.15
Expected dividend yield			0.0	%			0.0	%			0.0	%			0.0	%

The Company’s stock option activity for the six months ended June 30, 2014 is as follows:

 

		Number of Outstanding Stock Options				Weighted- Average Exercise Price Per Share				Weighted Average Remaining Contractual Life (years)
		(in thousands, except per share amounts)
Balance outstanding at December 31, 2013			5,163			$	22.76				8.1
Granted			1,325			$	50.40
Exercised			(139	)		$	16.87
Forfeited/cancelled			(81	)		$	42.32
Balance outstanding at June 30, 2014			6,268			$	28.48				8.0

Restricted Stock Unit Awards (RSUs) with Service-Based Vesting Conditions

RSUs are generally subject to forfeiture if employment terminates prior to the release of vesting restrictions. The Company expenses the cost of the RSUs, which is determined to be the fair value of the shares of common stock underlying the RSUs at the date of grant, ratably over the period during which the vesting restrictions lapse.

The Company’s RSU activity for the six months ended June 30, 2014 is as follows:

 

		Number of Outstanding RSUs				Weighted- Average Fair Value				Weighted Average Remaining Contractual Life (years)
		(in thousands, except per share amounts)
Balance outstanding at December 31, 2013			—			$	—				—
Granted			103			$	39.28
Exercised			—			$	—
Forfeited/cancelled			(1	)		$	47.11
Balance outstanding at June 30, 2014			102			$	39.22				2.4

 

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Stock-based Compensation Expense

The Company recorded stock-based compensation expense in its statements of operations as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		( in thousands)
Stock-based compensation expense by type of award:
Stock options		$	7,906			$	5,870			$	16,479			$	9,418
Restricted stock and restricted stock units			208				977				259				1,075
Less stock-based compensation expense capitalized to inventories			(148	)			(75	)			(249	)			(143	)
Total stock-based compensation expense included in costs and expenses		$	7,966			$	6,772			$	16,489			$	10,350

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		( in thousands)
Stock-based compensation expense by line item:
Selling, general and administrative		$	6,672			$	4,181			$	13,931			$	6,837
Research and development			1,294				2,591				2,558				3,513
Total stock-based compensation expense included in costs and expenses		$	7,966			$	6,772			$	16,489			$	10,350

Total unrecognized stock-based compensation cost related to unvested stock options and RSUs as of June 30, 2014 was $65.0 million. This unrecognized cost is expected to be recognized over a weighted-average period of approximately 2.1 years. In addition, the Company has 1,175,516 shares of outstanding unvested stock options that contain performance criteria, which require 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. Total unrecognized compensation cost related to those awards was $10.6 million as of June 30, 2014.

In the quarter ending March 31, 2014, the Company migrated from its legacy third party stock option software application to a new third party software application and noted a significant cumulative difference in the manner in which the two systems calculated stock-based compensation expense for service type awards granted to employees since 2010, which the Company concluded was an error in its historical stock-based compensation expense. The Company assessed the impact of the difference between the stock-based compensation expense as calculated by the legacy third party stock option software and the new third party software and as a result of the analysis, recorded an additional $1.5 million in stock-based compensation expense to correct the error related to the incorrect calculation of service type awards to employees in its statement of operations in the quarter ending March 31, 2014. In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality and SAB No. 108 (“SAB 108”), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company assessed the materiality of this error on its financial statements for the year ended December 31, 2013, using both the roll-over method and iron-curtain methods as defined in SAB 108. The Company concluded the effect of this error was not material to its financial statements for any prior period and, as such, those financial statements are not materially misstated. The Company also concluded that providing for the correction of the error in 2014 did not have a material effect on its financial statements for the year ending December 31, 2014.

10. Basic and Diluted Net Loss per Common Share

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per common share is computed by dividing the net loss by the weighted-average number of unrestricted common shares and dilutive common share equivalents outstanding for the period, determined using the treasury-stock method. Since the Company has had net losses for all periods presented, all potentially dilutive securities are anti-dilutive. Accordingly, basic and diluted net loss per common share are equal.

The following table shows historical dilutive common share equivalents outstanding, prior to consideration of the treasury stock method, which are not included in the above historical calculation, as the effect of their inclusion is anti-dilutive during each period.

 

		As of June 30,
		2014				2013
		(in thousands)
Stock options			6,268				5,400
Unvested restricted stock units			102				10
Total			6,370				5,410

11. Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. The Company provides a valuation allowance when it is more likely than not that deferred tax assets will not be realized.

 

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The Company’s tax provision reflects that the Company has an international corporate structure and owes income taxes in certain international jurisdictions. Accordingly, a tax provision is reflected for the taxes incurred in such jurisdictions. The total provision for income taxes for the three and six months ended June 30, 2014 was $0.1 million and $0.3 million, respectively.

The Company does not recognize a tax benefit for uncertain tax positions unless it is more likely than not that the position will be sustained upon examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit that is recorded for these positions is measured at the largest amount of cumulative benefit that has greater than a 50 percent likelihood of being realized upon ultimate settlement. Deferred tax assets that do not meet these recognition criteria are not recorded and the Company recognizes a liability for uncertain tax positions that may result in tax payments. If such unrecognized tax benefits were realized and not subject to valuation allowances, the entire amount would impact the tax provision. As of June 30, 2014, the Company had no uncertain tax positions.

12. Commitments and Contingencies

In late 2013, the Company received a subpoena from the U.S. Department of Justice, represented by the U.S. Attorney’s Office in Boston, Massachusetts requesting documents regarding our marketing and sales of JUXTAPID in the U.S. in connection with an investigation of our practices. As of the filing date of this Form 10-Q, the Company cannot reasonably estimate whether the outcome will have a material adverse effect on its financial statements and as a result, the Company has not recorded any amounts for a loss contingency.

In January, 2014, a putative class action lawsuit was filed against the Company and certain of the Company’s executive officers alleging certain misstatements and omissions related to the marketing of JUXTAPID and the Company’s financial performance in violation of federal securities laws. As of the filing date of this Form 10-Q, the Company cannot reasonably estimate whether the outcome will have a material adverse effect on its financial statements and as a result, the Company has not recorded any amounts for a loss contingency.

13. Subsequent Events

The Company has evaluated all events or transactions that occurred after June 30, 2014 through the date the Company issued these financial statements. There were no other material events that impacted the unaudited condensed consolidated financial statements or disclosures.

 

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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, 2013, and Management’s Discussion and Analysis of Financial Condition and Results of Operation 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; and our expectations with respect to future financial performance, revenues, 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 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.

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 outside the U.S., the EU, Mexico and Canada;

 

•

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;

 

•

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 June 30, 2014, the Company has generated net product sales of $111.5 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 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 final reimbursement decisions in some of those countries over the course of the rest of 2014. In other countries, we do not expect pricing and reimbursement decisions until 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.

 

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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 six months ended June 30, 2014, we have recognized $36.0 million and $63.0 million, respectively, of revenues from net product sales. In the three and six months ended June 30, 2014, $33.5 and $59.4 million, respectively, of our net product sales were derived from prescriptions for lomitapide written in the U.S., and $2.5 million and $3.6 million, respectively, were derived from prescriptions for lomitapide written outside the U.S.

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 planned implementation 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.

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 and a planned clinical study directed 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 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.

 

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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 the amortization of capitalized costs incurred in connection with the issuance of debt. 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.

Net Operating Losses and Tax Carryforwards

As of December 31, 2013, we had federal and state net operating loss carryforwards of approximately $184.9 million and $88.1 million, respectively. We also had federal and state research and development tax credit carryforwards of approximately $28.6 million and $1.8 million 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 state tax credit carryforwards will begin to expire at various dates beginning 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. A study was conducted to assess whether an ownership change has occurred, or whether there have been multiple ownership changes since our inception. Based on this analysis, we determined that approximately $0.9 million of net operating loss carryforwards would be subject to limitations. 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 2013 Form 10-K.

 

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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 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 will recognize revenue on the cash basis if all other revenue recognition criteria have been met.

We record distribution and other fees paid to our customers 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 customer as an operating expense. We record revenue net of estimated discounts and rebates, including those paid 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 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. 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 six months ended June 30, 2014 (in thousands):

 

		Government Rebates				Contractual Discounts				Total
Balance as of December 31, 2013.		$	1,651			$	—			$	1,651
Provision related to current period sales			2,181				622				2,803
Adjustments to provision related to prior period sales			273				—				273
Payments made			(2,389	)			(493	)			(2,882	)
Balance as of June 30, 2014		$	1,716			$	129			$	1,845

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.

 

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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.

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. 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 prove to be 5% too high or too low, this may result in an adjustment to our accrued expenses in future periods of approximately $0.9 million.

Stock-Based Compensation

We issue stock options, restricted stock and restricted stock units 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 1,175,516 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, 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.

 

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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.

The weighted-average assumptions used in the Black-Scholes option-pricing model are as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Expected stock price volatility			58.2	%			84.4	%			58.0	%			82.8	%
Risk free interest rate			2.01	%			1.07	%			1.92	%			1.12	%
Expected life of options (years)			6.22				6.01				6.27				6.15
Expected dividend yield			0.0	%			0.0	%			0.0	%			0.0	%

Results of Operations

Comparison of the Three Months Ended June 30, 2014 and June 30, 2013

The following table summarizes the results of our operations for each of the three-month periods ended June 30, 2014 and 2013, together with the changes in those items in dollars and as a percentage:

 

		Three Months Ended June 30,								Change
		2014				2013				$				%
		(in thousands)
Net product sales		$	36,014			$	6,490			$	29,524				455	%
Cost of product sales			4,158				727				3,431				472	%
Operating expenses:
Selling, general and administrative			32,329				16,849				15,480				92	%
Research and development			8,942				7,618				1,324				17	%
Restructuring			1				1				—				N/A
Total operating expenses			41,272				24,468				16,804				69	%
Loss from operations			(9,416	)			(18,705	)			9,289				(50	)%
Interest expense, net			(70	)			(114	)			44				(39	)%
Other expense, net			(31	)			(78	)			47				60	%
Loss before provision for income taxes			(9,517	)			(18,897	)			9,380				(50	)%
Provision for income taxes			(105	)			—				(105	)			N/A
Net loss		$	(9,622	)		$	(18,897	)		$	9,275				(49	)%

Net Product Sales

We generated net product sales of lomitapide of $36.0 million in the three months ended June 30, 2014, an increase of $29.5 million as compared to the same period in 2013. The increase in net product sales in the three months ended June 30, 2014 is attributable to an increase in the number of patients on therapy as compared to the three months ended June 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 in the second quarter from the first quarter of 2014, and we expect these initiatives to continue to be key drivers of potential revenue growth.

In the second quarter, named patient sales for patients in Brazil continued to contribute materially to total net product sales. Orders with respect to named patient sales in Brazil are submitted by governmental entities in Brazil that are responsible for payment. The government authorities in Brazil tend to aggregate patient orders and order multiple months of therapy for each patient, rather than tendering orders on a single month of therapy basis, which is the norm in the U.S. The timing of these aggregated orders can lead to significant volatility in net product sales quarter-over-quarter. We expect this volatility to continue unless and until named patient sales decline significantly as a percentage of total product sales.

 

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Cost of Product Sales

We recorded cost of product sales of $4.2 million in the three months ended June 30, 2014, an increase of $3.4 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. The increase in cost of product sales is largely attributed to the increase in net product sales from lomitapide in the three months ended June 30, 2014 compared to the same period in 2013 as well as charges recorded to write off production costs of new capsule strengths of lomitapide. 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 $32.3 million in the three months ended June 30, 2014, an increase of $15.5 million, or 92%, as compared to the same period in 2013. The $15.5 million increase was primarily attributed to a $7.0 million increase in salary and employee-related costs, a $2.5 million increase in stock-based compensation expense, a $1.8 million increase in sales and marketing outside services expenses, a $1.7 million increase in legal fees, and a $1.5 million increase in infrastructure expenses. The increases in salary and employee-related 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 and our securities class action lawsuit.

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 of 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, outside the U.S. and the E.U. 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 $8.9 million in the three months ended June 30, 2014, an increase of $1.3 million, or 17%, as compared to the same period in 2013. The $1.3 million increase was primarily attributed to a $0.9 million increase in salary and employee-related expenses, a $0.8 million increase attributed to outside service expenses related to contract manufacturing process development activities associated with new strengths of lomitapide and regulatory requirements in Brazil, a $0.7 million increase in clinical development expenses associated with the post-marketing drug-to-drug interaction studies, and a $0.5 million increase attributed to outside service expenses related to pharmacovigilance. These increases were partially offset by a $1.4 million decrease in stock-based compensation and a $0.5 million decrease in outside services related to medical affairs and regulatory affairs activities.

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; initiation and conduct of observational cohort and vascular imaging post marketing 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 $0.1 million in the three months ended June 30, 2014, a decrease as compared to the same period in 2013. The decrease was primarily due to a decrease in the outstanding debt balance due to the commencement of principal repayments in March 2013 under the existing debt facility. Interest income was $50,000 in the three months ended June 30, 2014, a decrease of $22,000, or 30%, due to lower cash equivalent and marketable securities balances as compared to the same period in 2013.

Other Expense, net

Other expense, net was $31,000 in the three months ended June 30, 2014, a decrease of $47,000, or 60%, as compared to the same period in 2013. Other expense, net relates to foreign currency charges incurred related to our foreign operations as well as late charges incurred by customers for past due balances.

 

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Provision for Income Taxes

Our provision for income taxes in the three months ended June 30, 2014 was $0.1 million and reflects estimated taxes for certain foreign subsidiaries. There was no provision for income taxes in the three months ended June 30, 2013.

Results of Operations

Comparison of the Six Months Ended June 30, 2014 and June 30, 2013

The following table summarizes the results of our operations for each of the six month periods ended June 30, 2014 and 2013, together with the changes in those items in dollars and as a percentage:

 

		Six Months Ended June 30,								Change
		2014				2013				$				%
		(in thousands)
Net product sales		$	62,987			$	7,721			$	55,266				716	%
Cost of product sales			6,822				910				5,912				650	%
perating expenses:
Selling, general and administrative			64,107				30,069				34,038				113	%
Research and development			16,846				13,393				3,453				26	%
Restructuring			2				2				—				N/A
Total operating expenses			80,955				43,464				37,491				86	%
Loss from operations			(24,790	)			(36,653	)			11,863				(32	)%
Interest expense, net			(141	)			(263	)			122				(46	)%
Other expense, net			(138	)			(123	)			(15	)			12	%
Loss before provision for income taxes			(25,069	)			(37,039	)			11,970				(32	)%
Provision for income taxes			(329	)			—				(329	)			N/A
Net loss		$	(25,398	)		$	(37,039	)		$	11,641				(31	)%

Net Product Sales

We generated net product sales of lomitapide of $63.0 million in the six months ended June 30, 2014, an increase of $55.3 million as compared to the same period in 2013. The increase in net product sales in the six months ended June 30, 2014 is attributable to an increase in the number of patients on therapy as compared to the six months ended June 30, 2013, during which we launched lomitapide.

Cost of Product Sales

We recorded cost of product sales of $6.8 million in the six months ended June 30, 2014, an increase of $5.9 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. The increase in cost of product sales is largely attributed to the increase in net product sales from lomitapide six months ended June 30, 2014 compared to the same period in 2013, as well as charges recorded to write off production costs of new capsule strengths of lomitapide.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expenses were $64.1 million in the six months ended June 30, 2014, an increase of $34.0 million, or 113%, as compared to the same period in 2013. The $34.0 million increase was primarily attributed to a $15.7 million increase in salary and employee-related costs, a $7.1 million increase in stock-based compensation expense, a $3.7 million increase in sales and marketing outside services expenses, a $3.5 million increase in legal fees, and a $2.8 million increase in infrastructure expenses. The increases in salary and employee-related 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 and our securities class action lawsuit.

Research and Development Expenses

Research and development expenses were $16.8 million in the six months ended June 30, 2014, an increase of $3.5 million, or 26%, as compared to the same period in 2013. The $3.5 million increase was primarily attributed to a $1.9 million increase in salary and employee-related expenses, a $1.3 million increase attributed to outside service expenses related to contract manufacturing process development activities associated with new strengths of lomitapide and regulatory requirements in Brazil, a $0.7 million increase attributed to outside service expenses related to pharmacovigilance, and a $0.3 million increase in regulatory filing fees. These increases were partially offset by a $1.1 million decrease in stock-based compensation.

Interest Expense, net

Interest expense was $0.3 million in the six months ended June 30, 2014 a decrease as compared to the same period in 2013. The decrease was primarily due to a decrease in the outstanding debt balance due to the commencement of principal repayments in March 2013 under the existing debt facility. Interest income was $0.1 million in the six months ended June 30, 2014 and 2013, respectively.

Other Expense, net

Other expense, net was $0.1 million in the six months ended June 30, 2014 and 2013, respectively. Other expense, net relates to foreign currency charges incurred related to our foreign operations as well as late charges incurred by customers for past due balances.

Provision for Income Taxes

Our provision for income taxes in the six months ended June 30, 2014 was $0.3 million and reflects estimated taxes for certain foreign subsidiaries. There was no provision for income taxes in the six months ended June 30, 2013.

Liquidity and Capital Resources

Since our inception in 2005, we have funded our operations primarily through proceeds from our 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 and generated negative cash flows from operations since inception.

During the six months ended June 30, 2014, we generated approximately $63.0 million of revenues from net product sales. As of June 30, 2014, we had approximately $104.7 million in cash, cash equivalents and marketable securities on hand.

On March 28, 2012, we entered into a Loan and Security Agreement with Silicon Valley Bank (as amended, the “Loan and Security Agreement”), pursuant to which Silicon Valley Bank made a term loan to us in the principal amount of $10.0 million. The Loan and Security Agreement provided for interest-only payments through February 28, 2013, with per annum interest of 6.75% and a final payment of $0.2 million. We used the proceeds of the term loan to fully repay our existing loan from Hercules Technology II, L.P. and Hercules Technology III, L.P. (collectively, “the Hercules Funds”).

Under the Loan and Security Agreement, we have agreed to repay the principal balance of the term loan in 36 equal monthly installments, which began on March 1, 2013 and will continue through February 1, 2016. As of June 30, 2014, we owed approximately $5.6 million under the term loan. We may prepay all or any part of the outstanding term loan subject to a prepayment premium (defined in the Loan and Security Agreement) at our option. During the six months ended June 30, 2014, we made principal repayments to Silicon Valley Bank under the term loan amounting to approximately $1.7 million.

        In July 2012, the Loan and Security Agreement was amended to include a line of credit of up to $0.8 million to finance the purchase of certain types of equipment acquired by us during the two years ended December 31, 2012 with a per annum interest rate of 4.75%. We financed approximately $0.6 million under this arrangement, and the remaining line of credit balance expired unused. As of June 30, 2014, we owed approximately $0.2 million under the line of credit. Pursuant to the amendment, we are required to make monthly principal payments beginning in January 2013 and continuing through December 2015. During the six months ended June 30, 2014, we made principal payments to Silicon Valley Bank under the line of credit amounting to approximately $0.1 million.

 

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In January 2013, we sold 3,110,449 shares of our common stock in an underwritten public offering at a price to the public of $26.64 per share. The net proceeds to us from this offering were approximately $78.0 million, net of underwriting discounts, commissions and other offering expenses.

Cash Flows

The following table sets forth the major sources and uses of cash and cash equivalents for the periods set forth below:

 

		Six months ended June 30,
		2014				2013
		(in thousands)
Net cash provided by (used in):
Operating activities		$	(19,996	)		$	(33,583	)
Investing activities			5,138				(40,924	)
Financing activities			550				81,923
Effect of exchange rates on cash			(53	)			(54	)
Net (decrease)/increase in cash and cash equivalents		$	(14,361	)		$	7,362

 

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Net cash used in operating activities amounted to $20.0 million and $33.6 million in the six months ended June 30, 2014 and 2013, respectively. For the six months ended June 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 six months ended June 30, 2014, the cash used in operations included an increase of inventory of $5.7 million and a $4.9 million increase in accounts receivable associated with the net product sales of lomitapide, offset by noncash items, including stock-based compensation of $16.5 million. For the six months ended June 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 six months ended June 30, 2013, the cash used in operations included an increase in accounts receivable associated with the net product sales of lomitapide of $3.2 million, a decrease of accounts payable of $3.6 million, and an increase of inventory of $1.3 million offset by noncash items, including stock-based compensation of $10.4 million.

Cash provided by investing activities for the six months ended June 30, 2014 of $5.1 million was primarily from the maturities of marketable securities of $44.9 million, offset by purchases of marketable securities of $38.4 million and additions of property and equipment of $1.3 million. Cash used by investing activities for the six months ended June 30, 2013 of $40.9 million was primarily from the purchases of marketable securities of $58.4 million, offset by maturities of marketable securities of $17.9 million.

Cash provided by financing activities for the six months ended June 30, 2014 of $0.5 million primarily consisted of $2.3 million of proceeds from exercises of stock options, offset by $1.8 million in principal repayments of our long-term debt. Cash provided by financing activities for the six months ended June 30, 2013 of $81.9 million primarily consisted of $78.0 million of net proceeds from our 2013 public offering of common stock and $5.1 million of proceeds from exercises of stock options, offset by $1.2 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 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.

 

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On January 14, 2013, we completed an underwritten public offering of 3,110,449 common shares at a price to the public of $26.64 per share pursuant to a Form S-3 registration statement. The net proceeds to us from this offering were approximately $78.0 million, after deducting underwriting discounts, commissions and other offering expenses.

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 June 30, 2014, we have only generated revenues of $111.5 million, all of which are from net product sales of lomitapide. We expect our continuing operating losses to result in cash used in operations at least into the second half of 2014. We anticipate our existing cash, cash equivalents and marketable securities will be sufficient to enable us to maintain our currently planned operations, including our continued product development, until we are profitable. If we are required to obtain additional financing and 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.

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.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk related to changes in interest rates. As of June 30, 2014 and December 31, 2013, we had cash and cash equivalents and marketable securities of $104.7 million and $126.2 million, respectively, consisting of money market funds, corporate debt including commercial paper, and U.S. government agency securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term marketable securities. These marketable securities are subject to interest rate risk, and could fall in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. We have the ability to hold our marketable securities until maturity, and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments. We do not currently have any auction rate securities.

We are also exposed to market risk related to change in foreign currency exchange rates related to our international subsidiaries in which we continue to help support operations with financial contributions. We do not currently hedge our foreign currency exchange rate risk.

We do not have any derivative financial instruments.

 

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of such date are effective, at the reasonable assurance level, in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (“the Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

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PART II — OTHER INFORMATION

 

Item 1.

Legal Proceedings

In late 2013, we received a subpoena from the U.S. Department of Justice, represented by the U.S. Attorney’s Office in Boston, requesting documents regarding our marketing and sales of JUXTAPID in the U.S. in connection with an investigation of our practices. We intend to cooperate fully with the investigation. While we intend to vigorously defend ourselves, we cannot predict whether the outcome of this inquiry will have a material adverse effect on our business.

On January 15, 2014, a putative class action lawsuit was filed against us and certain of our executive officers (the “Defendants”) in the United States District Court for the District of Massachusetts (the “Court”) alleging certain misstatements and omissions related to the marketing of JUXTAPID and the Company’s financial performance in violation of federal securities laws. On February 6, 2014, the plaintiffs agreed to a motion suspending the Defendants’ obligation to answer, move, or otherwise respond to the complaint until the court appoints a lead plaintiff and an anticipated amended complaint is filed. On March 31, 2014, one of three separate motions for appointment as lead plaintiff was withdrawn, and a motion was filed for the other two plaintiffs to serve together as lead plaintiff. After the appointment of a lead plaintiff is approved by the Court, we expect the lead plaintiff to file an amended complaint. We intend to vigorously defend ourselves against the claims made in this lawsuit.

 

Item 1A.

Risk Factors

Risks Associated with Product Development and Commercialization

Our business currently depends entirely on the success of lomitapide. We may not be able to meet expectations with respect to sales of lomitapide and revenues from such sales, or to attain profitability or positive cash flow from operations, in the time periods we anticipate, or at all.

Our business currently depends entirely on the successful commercialization of our first product, lomitapide. Lomitapide was launched in the U.S. in late January 2013, under the brand name, JUXTAPID^® (lomitapide) capsules, as an adjunct to a low-fat diet and other lipid-lowering treatments, including low-density (“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”). On July 31, 2013, the European Commission (“EC”) authorized lomitapide for marketing in the EU, under the brand name, LOJUXTA^® (lomitapide) hard capsules, as an adjunct to a low-fat diet and other lipid-lowering medicinal products with or without LDL apheresis in adult patients with HoFH. Lomitapide is also approved for the treatment of HoFH in Mexico, Canada, Norway, Iceland and Liechtenstein. We also 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. We expect that 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.; however, we expect net product sales from named patient sales in Brazil and other countries to continue to fluctuate quarter-over-quarter significantly more than sales in the U.S. We have also filed for marketing approval in certain other countries, and expect to file for marketing approval in additional countries where, in light of the potential size of the market and other relevant commercial and regulatory factors, it makes business sense to do so. We have a limited history of generating revenues from the sale of lomitapide. Our ability to meet expectations with respect to sales of lomitapide and revenues from such sales, and to attain profitability and positive cash flow from operations, in the time periods we anticipate, or at all, will depend on a number of factors, including the following:

 

•

our ability to continue to build, and to maintain, market acceptance for lomitapide among healthcare professionals and patients in the U.S., and to gain such market acceptance in the countries where lomitapide is approved, or may in the future receive approval;

 

•

the degree to which both physicians and patients determine that the safety and side effect profile of lomitapide are manageable, and that the benefits of lomitapide in reducing LDL-C levels outweigh the risks, including those risks set forth in the boxed warning and other labeling information for JUXTAPID in the U.S. and in the prescribing information and risk management plan for lomitapide where it is approved outside the U.S., which cite the risk of liver toxicity, and any other risks that may be identified in the course of commercial use;

 

•

the prevalence of HoFH being significantly higher than the historically reported rate of one person in one million, and more consistent with management’s estimates;

 

•

a safety and side effect profile for lomitapide in commercial use and in further clinical development that is not less manageable than that seen in our pivotal trial;

 

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•

the degree to which patients are willing to agree to be treated with lomitapide after taking into account the potential benefits, the dietary restrictions recommended to reduce the risk of gastrointestinal (“GI”) side effects and the safety and side effect profile; the long-term ability of patients who use lomitapide to comply with the dietary restrictions, and to tolerate the drug and stay on the medication; and our ability to minimize the number of patients who discontinue lomitapide treatment, including due to tolerability issues;

 

•

our continued ability to be able to sell lomitapide on a named patient sales basis or through an equivalent mechanism in Brazil and other certain key markets where such sales are permitted based on U.S. or EU approval, and the amount of revenues generated from such sales;

 

•

the extent to which the diagnosis criteria for HoFH used by physicians in the countries of the EU and in other countries is similar to that used by physicians in the U.S.;

 

•

the willingness of insurance companies, managed care organizations, other private payers, and government entities that provide reimbursement for medical costs in the U.S. to continue to provide reimbursement for lomitapide at the prices at which we offer lomitapide without requiring genotyping for specific mutations that cause HoFH or imposing any additional major hurdles to access or other significant restrictions or limitations;

 

•

our ability to obtain pricing approval and/or reimbursement required for selling lomitapide in the major countries of the EU, Mexico and Canada and in other countries in which we may receive approval to market lomitapide on a timely basis and at price levels that are acceptable to us without the applicable government agencies or other payers in such countries imposing onerous caps, rebate, risk sharing or other requirements which effectively and significantly lower the reimbursement rates for lomitapide, and without requiring genotyping, narrowing the diagnosis criteria for HoFH patients or imposing any additional major hurdles to access or other significant restrictions or limitations, such as requirements that patients fail on other therapies, such as LDL apheresis, before using lomitapide;

 

•

our ability to gain approval of risk management plans in any future markets where lomitapide may be approved;

 

•

the level of acceptance by physicians of the efficacy data from our pivotal trial, which is based on the surrogate endpoints of LDL-C lowering, and which was not designed to show clinical outcome data as to the effect of the LDL-C lowering on cardiac outcomes in HoFH patients;

 

•

the mix of government and private payers providing coverage and reimbursement for JUXTAPID in the U.S.;

 

•

our ability to gain regulatory approval of lomitapide outside the countries in which we have already received approval without restrictions that are substantially more onerous or manufacturing specifications that are more difficult to consistently achieve than those imposed in the U.S. and EU;

 

•

our ability to successfully defend ourselves in connection with the ongoing government investigation in the U.S., and the investigations of certain employees in Brazil related to named patient sales of JUXTAPID, without incurring significant damages, fines or penalties; and the willingness of physicians to continue to prescribe JUXTAPID, and in the case of named patient sales in Brazil, the willingness of the state and federal governments to continue to process orders of JUXTAPID without significant delay, despite such investigations;

 

•

the impact of any data on lomitapide generated in the course of the Japanese or pediatric development programs or any other post-approval studies, and the extent to which regulatory authorities agree with our assessment of such data;

 

•

our ability to successfully gain approval of lomitapide in pediatric patients, and to generate revenues from sales in the pediatric indications, if approved;

 

•

our ability to successfully transfer the manufacture of lomitapide active pharmaceutical ingredient (“API”) to a new contract manufacturer, and to manufacture, or have manufactured, sufficient bulk quantities of API and sufficient quantities of each strength of lomitapide to meet demand;

 

•

our ability to continue to execute effectively on our commercial launch plan and other key activities related to lomitapide in the U.S., and to launch lomitapide successfully in the EU and in other key markets outside the U.S., and the level of cost required to conduct such activities; and

 

•

our ability to effectively differentiate lomitapide from Kynamro® (mipomersen sodium) Injection (“Kynamro”), which is being commercialized in the U.S. and other countries by Genzyme Corporation (“Genzyme”), a Sanofi company (“Sanofi”), under a collaboration with Isis Pharmaceuticals, Inc. (“Isis”), and from products directed at the PCSK9 gene if approved or used by physicians for HoFH, and, in the EU, to differentiate lomitapide from LDL apheresis.

 

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We may not be able to gain or maintain market acceptance for lomitapide.

The commercial success of lomitapide will depend upon our ability to gain and maintain the acceptance of the product by the medical community, including physicians, healthcare payers, and by patients.

Some physicians and patients may determine that the benefits of lomitapide in reducing LDL-C levels do not outweigh the risks, including those risks set forth in the boxed warning for JUXTAPID in the U.S., and in the prescribing information for lomitapide in the other countries in which it is approved, which warn physicians that lomitapide can cause hepatotoxicity as manifested by elevations in transaminases and increases in hepatic fat, and that physicians are recommended to measure alanine aminotransferase (“ALT”), aspartate aminotransferase (“AST”), alkaline phosphatase, and total bilirubin before initiating treatment and then to measure ALT and AST regularly during treatment. During the first year of treatment, physicians must conduct a liver-related test prior to each increase in the dose of lomitapide or monthly, whichever occurs first. After the first year, physicians are required to perform these tests every three months and before increases in dose. The prescribing information in the EU provides further recommendations for monitoring for hepatic steatohepatitis/fibrosis and the risk of progressive liver disease, including annual imaging for tissue elasticity, and measuring of biomarkers and/or scoring methods in consultation with a hepatologist.

Because of the risk of liver toxicity, JUXTAPID is available in the U.S. only through a Risk Evaluation and Mitigation Strategy (“REMS”) program under which we must certify all qualified healthcare providers who prescribe JUXTAPID and the pharmacies that dispense the medicine. The goals of the JUXTAPID REMS Program are:

 

•

to educate prescribers about the risk of hepatotoxicity associated with the use of JUXTAPID and the need to monitor patients during treatment with JUXTAPID as per product labeling; and

 

•

to restrict access to therapy with JUXTAPID to patients with a clinical or laboratory diagnosis consistent with HoFH.

Similarly, in the EU and other countries where we have obtained approval of lomitapide, we have adopted a risk management plan to help educate physicians on the safety information for lomitapide and appropriate precautions to be followed by healthcare professionals and patients. Other countries that may approve lomitapide for use in the treatment of HoFH may require risk management plans that may be similar or more onerous to those imposed in the U.S. and EU. Physicians who prescribe lomitapide on a named patient basis where available in a country prior to approval are trained using either the JUXTAPID U.S. label and JUXTAPID REMS Program or the LOJUXTA EU prescribing information and risk management plan. Physicians may be hesitant to prescribe lomitapide, and patients may be hesitant to take lomitapide, because of the boxed warning or warnings in the prescribing information, the requirements for liver testing and monitoring or the existence of the JUXTAPID REMS Program or risk management plan. The prescribing information also describes a number of additional contraindications, warnings, and precautions, including those related to pregnancy and potential adverse interactions with other drugs, and other potential adverse reactions, that could limit the market acceptance of lomitapide. For example, GI adverse reactions are common with lomitapide, occurring in 27 out of 29 patients in our pivotal trial. We expect that GI adverse reactions may lead to treatment discontinuation in some patients. To reduce the risk of GI adverse reactions, patients should adhere to a low-fat diet supplying less than 20% of calories from fat and the dosage of lomitapide should be increased gradually. Patients may decide that they do not want to start or maintain the recommended diet. In the EU and in many other countries outside the U.S., we cannot communicate directly with or provide promotional or supportive materials directly to patients. As a result, it may be more difficult to support patients in their efforts to adjust to the recommended dietary restrictions while taking lomitapide. Patients on lomitapide in the U.S. are also advised not to consume more than one alcoholic drink per day. The LOJUXTA prescribing information in the EU specifies that the use of alcohol during LOJUXTA treatment is not recommended. These requirements may make it more difficult for a patient to decide to begin therapy or to stay on therapy. As a result, even if a physician prescribes lomitapide, the prescription may not result in a patient beginning therapy or staying on therapy.

The degree of market acceptance of lomitapide will also depend on a number of other factors, including:

 

•

physicians’ views as to the scope of the approved indication and limitations on use and warnings and precautions contained in the approved labeling or prescribing information for lomitapide;

 

•

the efficacy and safety of competitive therapies;

 

•

pricing and the perception of physicians and payers as to cost effectiveness;

 

•

the existence of sufficient private payer, government or other third-party coverage or reimbursement; and

 

•

the effectiveness of our sales, marketing and distribution strategies.

If we are not able to achieve a high degree of market acceptance of lomitapide in the treatment of HoFH, we may not be able to achieve our revenue goals or other financial goals or to achieve profitability or to become cash-flow positive in the time periods we expect, or at all.

 

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The number of patients suffering from HoFH is small, and has not been established with precision. We believe that the patient population is significantly larger than the reported prevalence indicates, but our assumptions and estimates may be wrong. If the actual number of HoFH patients is smaller than we estimate or if any approval outside the U.S. and EU is based on a narrower definition of these patient populations, our revenue and ability to achieve profitability and to become cash-flow positive will be adversely affected, possibly materially.

There is no patient registry or other method of establishing with precision the actual number of patients with HoFH in any geography. Medical literature has historically reported the prevalence rate of genotypic HoFH as one person in a million, based on a prevalence rate for heterozygous familial hypercholesterolemia (“HeFH”) of one person in 500. However, recent articles in the European Heart Journal (“EHJ”) suggest that the prevalence rate of HeFH may be closer to one person in 200. These data would suggest a prevalence rate for HoFH that is higher than historically reported. Based on the existing data and our experience to date, we also believe that the prevalence rate of HoFH is higher than historically reported, and that HoFH is under-diagnosed. At the time the prevalence rate was first reported, many of the genetic mutations leading to defects in LDL-R function were not characterized, and some mutations remain uncharacterized even today. There are more than 1,700 known mutations that can impair the function of the LDL-R. The EHJ estimates that current genetic tests may fail to positively detect 10% to 40% of FH cases which would suggest that any prevalence of HoFH based on genotyping, or extrapolated from genotyped HeFH patients, would be underestimated. In addition, genetic analysis of HoFH can be complex. HoFH patients may have the same defect on both copies of the same gene or may have different defects, one inherited from each parent, on the same gene or defects inherited from each parent on two different genes each affecting the function of the LDL-R. As a result, most physicians in the U.S. and in many other countries use clinical findings and family history to make a clinical diagnosis of HoFH. Because of the complexity of the genetics, there also appears to be more heterogeneity in clinical symptoms of HoFH than historically reported which we believe may also result in under-diagnosis of HoFH. In 2010, we commissioned an independent consultant in the healthcare industry to prepare a commercial assessment of the HoFH market for us. In its report, this consultant estimated that the total number of patients likely to seek treatment with symptoms, signs or laboratory findings consistent with HoFH in each of the U.S. and the EU is approximately 3,000 patients. This consultant’s estimates, however, included a segment of severe HeFH patients whose levels of LDL-C are not controlled by current therapies. These patients may be phenotypically indistinct from HoFH patients. Lomitapide is indicated in the U.S. and EU and in the other countries in which it is approved solely for HoFH. In the U.S., our prescribing information specifies that the safety and effectiveness of JUXTAPID have not been established in patients with hypercholesterolemia who do not have HoFH. In the EU, the prescribing information for LOJUXTA specifies that genotyping of patients should be obtained whenever possible, and that other forms of primary hyperlipoproteinemia and secondary causes of hypercholesterolemia (e.g. nephrotic syndrome, hypothyroidism) must be excluded. We are not permitted to promote lomitapide in the U.S. or the EU or in any other country where the product is approved for any indication other than HoFH. Our existing and planned applications for marketing approvals of lomitapide outside the U.S. and EU are also limited to HoFH. As part of the prescriber authorization form under the JUXTAPID REMS Program in the U.S., the prescriber must affirm that the patient has a clinical or laboratory diagnosis consistent with HoFH. We do not know how many patients in the U.S. will be determined to have a clinical or laboratory diagnosis consistent with HoFH, and there is no generally accepted and referenced definition of HoFH matching these criteria. However, rare diseases are often found to have a higher than expected prevalence rate once products available to treat the disease are introduced. We expect this may also be true for HoFH. As a result and given our view of the underdiagnosis of HoFH, we believe that, even if we exclude the patients in the U.S. who have a clinical phenotype consistent with HoFH, but as to whom the prescriber cannot conclude and affirm that the patient has a clinical or laboratory diagnosis consistent with HoFH, there still may be at least 3,000 HoFH patients in the U.S. based on our belief that the base prevalence rate may be higher than our consultant estimated. There is no guarantee that our assumptions and beliefs are correct. The number of patients with HoFH could actually be significantly lower than we expect, and could be closer to the historically reported rates than to our estimate of at least 3,000 patients. Ultimately the actual size of the total addressable market in the U.S. will be determined only after we have substantial commercial history selling JUXTAPID and we are able to assess how it is being used clinically.

We believe that the prevalence rate in the EU is likely to be consistent with the prevalence rate in the U.S.; however, we expect that our net product sales in the EU are likely to be lower than in the U.S. Similarly, we expect that our net product sales in many other countries outside the U.S. are likely to be lower as a percentage of the total HoFH population than in the U.S. given a variety of factors. In some countries of the EU and certain other countries, genotyping of HoFH patients is more common than in the U.S. We do not know whether physicians in the EU or in such other countries will typically require genotyping of HoFH patients for purposes of prescribing LOJUXTA or JUXTAPID. In addition, we do not know how many government payers in the key markets in the EU and other countries will require genotyping. Not all of the genetic defects in LDL-C receptor function that result in HoFH have been fully characterized. As a result, not all HoFH patients will be correctly identified where genotyping is used as the sole diagnostic criteria. Consequently, in any country which may in the future require genotyping as the sole diagnostic criteria, the number of patients prescribed lomitapide may be substantially lower than we expect. In addition, because of economic pressures to reduce healthcare costs in most countries and the widespread availability and use of LDL apheresis as a treatment for HoFH in the EU, it is likely that governmental authorities in some

 

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or all of the countries in the EU and in other markets outside the U.S. will impose some form of limitation on reimbursement or price. The total addressable HoFH market in the EU and other key markets outside the U.S. will depend ultimately on how physicians in the EU or in such other markets diagnose HoFH, how lomitapide is used in clinical practice, how government and other payers define HoFH for reimbursement purposes and the restrictions imposed on reimbursement. If the total addressable market in the U.S. and the EU and other key markets are smaller than we expect, then it may be more difficult for us to generate revenues, to achieve our revenue goals and estimates and to achieve or maintain profitability.

We have studied lomitapide initially for the treatment of patients with HoFH who are 18 years of age or older. The label for JUXTAPID in the U.S., Mexico and Canada specifies that the safety and effectiveness of JUXTAPID have not been established in pediatric patients. The prescribing information for LOJUXTA in the EU specifies that the safety and efficacy of LOJUXTA in children below 18 years of age have not been established and the use of the product in children is therefore not recommended, and specifies further that no pediatric data are available. As part of our post-marketing commitments to the FDA, we have completed a juvenile toxicology study in rodents to ascertain the impact, if any, of lomitapide on growth and development prior to initiating a clinical study of lomitapide in pediatric patients, and have submitted the results of this study to the FDA. We are working with the FDA and the Pediatric Committee (“PDCO”) of the European Medicines Agency (“EMA”) on a unified protocol for a clinical trial of lomitapide in the treatment of pediatric HoFH patients. There is no guarantee that we will be able to agree with the FDA and PDCO on a unified protocol. Failure to reach agreement on a protocol could result in a delay in commencement of the trial. Even if we conduct a study in pediatric patients, we may not be able to show, to the satisfaction of the FDA or EMA or regulatory authorities in other countries, that lomitapide is safe and effective in pediatric patients, and we may never receive approval for this indication. The lack of approval to market lomitapide for the pediatric HoFH population will limit our product revenue potential, and may make it more difficult for us to achieve or maintain profitability.

As a result of the side effects observed in the Phase 3 clinical study and other clinical and preclinical studies of lomitapide, the prescribing information for lomitapide in the U.S. and the EU and in the other countries in which lomitapide is approved contains significant limitations on use and other important warnings and precautions, including a boxed warning in the JUXTAPID labeling, and warnings in the LOJUXTA prescribing information, citing concerns over liver toxicity. Lomitapide may continue to cause such side effects or have other properties that could impact market acceptance and drop-out rates, result in adverse limitations in any approved labeling or other adverse regulatory consequences, including delaying or preventing additional marketing approval in territories outside the U.S. and EU.

The prescribing information for lomitapide in the U.S. and the EU and in the other countries in which lomitapide is approved contains significant limitations on use and other important warnings and precautions, including a boxed warning in the JUXTAPID labeling, and warnings in the LOJUXTA prescribing information citing concerns over liver toxicity associated with use of lomitapide. Lomitapide can cause elevations in liver transaminases. In our pivotal trial of lomitapide, 10 of the 29 patients (34%) treated with lomitapide had at least one elevation in ALT or AST greater than or equal to three times the upper limit of normal (“ULN”), including four patients who experienced liver enzymes greater than or equal to five times the ULN. There were no concomitant clinically meaningful elevations of total bilirubin, international normalized ratio (“INR”), or alkaline phosphatase. Lomitapide also has been shown to increase hepatic fat, with or without concomitant increases in transaminases. The median absolute increase in hepatic fat during the pivotal trial was 6% after both 26 and 78 weeks of treatment, from 1% at baseline, measured by magnetic resonance spectroscopy. Hepatic steatosis associated with lomitapide treatment may be a risk factor for progressive liver disease, including steatohepatitis and cirrhosis.

The most common adverse reactions in our pivotal trial of lomitapide were GI adverse reactions, reported by 27 of 29 patients (93%). Adverse reactions reported by greater than or equal to eight patients (28%) in the HoFH pivotal clinical trial included diarrhea, nausea, vomiting, dyspepsia and abdominal pain. Other common adverse reactions, reported by five to seven (17-24%) patients, included weight loss, abdominal discomfort, abdominal distension, constipation, flatulence, increased ALT, chest pain, influenza, nasopharyngitis and fatigue.

In a two-year dietary carcinogenicity study of lomitapide in mice, statistically significant increased incidences of tumors in the small intestine and liver were observed. The relationship of these findings in mice is uncertain with regard to human safety for a number of reasons, including the fact that they did not occur in a dose-related manner, and liver tumors are common spontaneous findings in the strain of mice used in this study. In a two-year oral carcinogenicity study of lomitapide in rats, there were no statistically significant increases in the incidences of any tumors, but there can be no assurance that long-term usage of lomitapide in humans will not be determined to cause an increase in tumors.

As part of our post-marketing commitment to the FDA, the EMA, and Health Canada , we have initiated an observational cohort study to generate more data on the long-term safety profile of lomitapide, the patterns of use and compliance and the long-term effectiveness of controlling LDL-C levels. The commitment to the FDA is to target enrollment of 300 HoFH patients worldwide, and

 

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to study enrolled patients for a period of 10 years. The EMA has required that all patients taking lomitapide in the EU be encouraged to participate in the study, and that the study period be open-ended. In the study, investigators will follow each patient to track malignancies, tumors, teratogenicity, hepatic effects, GI adverse reactions, events associated with coagulopathy, major adverse cardiovascular events and death. The EMA has also required that we conduct a vascular imaging study to determine the impact of lomitapide on vascular endpoints. In addition, we are conducting certain drug-drug interactions studies. Post-marketing commitments imposed by regulatory authorities outside the U.S. and the EU may be more onerous and/or different than those imposed by the FDA and the EU, which could result in increased costs to us. A failure to meet post-marketing commitments to the FDA, the EMA or other regulatory authorities could impact our ability to continue to market lomitapide in countries where we are unable to meet such commitments.

In addition, as part of our observational cohort study or in the conduct of additional clinical studies or in post-marketing surveillance, we or others may identify additional safety information on known side effects or new undesirable side effects caused by lomitapide, or the data may raise other issues with respect to lomitapide, and, in that event, a number of potentially significant negative consequences could result, including:

 

•

negative impact on market acceptance and drop-out rates;

 

•

regulatory authorities may suspend or withdraw their approval of lomitapide;

 

•

regulatory authorities may require the addition of labeling statements, such as warnings or contraindications or distribution and use restrictions;

 

•

regulatory authorities may require us to issue specific communications to healthcare professionals, such as “Dear Doctor” letters;

 

•

regulatory authorities may issue negative publicity regarding lomitapide, including safety communications;

 

•

we may be required to change the way lomitapide is administered, conduct additional preclinical studies or clinical trials or restrict the distribution or use of lomitapide;

 

•

we could be sued and held liable for harm caused to patients;

 

•

the regulatory authorities may require us to amend the REMS or risk management plan; and

 

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our reputation may suffer.

As part of the development of the commercial manufacturing process, we tightened specifications for lomitapide drug substance such that the commercial drug substance differs from the material used in our Phase 3 trial in certain physical parameters and specifications that we assessed not to be clinically meaningful. Exposure measurements collected in the Japanese pharmacokinetic and pharmacodynamic (“PK/PD”) study using material meeting current commercial specifications, however, do not align with certain earlier data generated under different circumstances using pre-commercial materials. Importantly, there was no evidence of a relationship between increases in dose or exposure and elevations in ALT or AST levels in the PK/PD study. While we do not expect the differences between our commercial material and our clinical material to have adverse efficacy or safety consequences, there is the risk that we may see unexpected differences in the type or severity of side effects with the commercial product from those observed in our Phase 3 trial. If, when our analysis is complete, we ultimately conclude, based on all available data, that there are meaningful exposure differences at a particular dose, we may decide to modify our prescribing information. There is the risk that regulatory authorities may not agree with our assessment of the differences between the materials or the potential impact of such differences or may require changes in the prescribing information that are different than changes we may propose.

Any known safety concerns for lomitapide or any unknown safety issues that may develop could prevent us from achieving or maintaining market acceptance of lomitapide, could affect our ability to obtain or retain marketing approval of lomitapide in one or more countries, or result in onerous restrictions on such approval, or could affect our ability to achieve our financial goals.

If we are unable to execute effectively our sales and marketing activities, we may be unable to generate sufficient product revenue.

We launched lomitapide in the U.S. in January 2013 under the brand name JUXTAPID. In July 2013, the European Commission (“EC”) authorized lomitapide for marketing in the EU under the brand name, LOJUXTA. We have also received marketing approval for lomitapide in Mexico, Canada, and a small number of other countries. We also expect to generate revenues from sales of JUXTAPID in Brazil and 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. We have filed for approval, or plan to file for approval, in other key markets. We are continuing to build our sales, marketing, managerial and other non-technical capabilities in the U.S., and our commercial infrastructure in the EU, Mexico, Canada, Argentina, Brazil and Taiwan. The establishment and development of our commercial infrastructure will continue to be expensive and time-consuming, and we may not be able to successfully fully develop this capability outside the U.S. in a timely manner or at all. We anticipate developing a commercial infrastructure across multiple

 

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jurisdictions. Doing so will require a high degree of coordination and compliance with laws and regulations in such jurisdictions. If we are unable to effectively coordinate such activities or comply with such laws and regulations, our ability to commercialize lomitapide, if approved, in those jurisdictions will be adversely affected. Our sales force in countries outside the U.S. may not be successful in commercializing lomitapide in the countries in which it is approved. If we are unable to establish and maintain adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate product revenue consistent with our expectations and may not become profitable.

We have evaluated markets outside the U.S. and major market countries in the EU to determine in which geographies we might choose to commercialize lomitapide ourselves, if approved, and in which geographies we might choose to collaborate with third parties. To the extent we rely on third parties to commercialize lomitapide, if marketing approval is obtained in the relevant country, we may receive less revenue than if we commercialized the product ourselves. In addition, we would have less control over the sales efforts of any third parties involved in our commercialization efforts, including, in some countries, pricing. In the event we are unable to collaborate with third parties to commercialize lomitapide, for certain geographies, our ability to generate product revenue may be limited internationally.

We only have regulatory approval for commercial distribution and reimbursement of lomitapide in a small number of countries, and may not receive regulatory approval in other countries. We also rely on named patient sales, and there is no assurance that named patient sales will continue at current levels, or at all.

We are currently permitted to market lomitapide in only a small number of countries on a commercial basis. To obtain marketing approval in other countries, we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials, pricing, promotion and distribution of the product. Approval procedures vary among countries, and can involve additional product testing and additional administrative review periods. For example, we have filed to register JUXTAPID as a marketed product in Brazil, and in May 2014, appealed a rejection of the registration by ANVISA, the Brazilian regulatory authorities. We believe we have strong arguments to overcome the rejection, but we may not be successful. In addition, regulatory authorities in countries outside the U.S. and EU are increasingly requiring risk management plans and post-marketing commitments which may be more onerous than those required in the U.S. and EU. The time required to obtain approval in other countries may differ from that required to obtain FDA approval or marketing authorization from the EC. In particular, in many countries outside the U.S., including many EU countries, Mexico and Canada, a product must receive pricing and reimbursement approval before it can be commercialized broadly. This can result in substantial delays in such countries, and the price that is ultimately approved may be lower than the price for which we expect to offer, or would be willing to offer, lomitapide in such countries, and may impact pricing in other countries. Marketing and pricing and reimbursement approval in one country does not ensure such approvals in another. Failure to obtain the approvals necessary to commercialize lomitapide in other countries or any delay or setback in obtaining such approvals would impair our ability to develop foreign markets for lomitapide. For example, 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, even after an oral hearing to discuss the issues. 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 its 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. There can be no assurances that the G-BA will make an assessment in the future that results in a reimbursement level that is acceptable to us.

It is possible that regulatory authorities in countries where we seek approval may not consider the efficacy and safety data from our pivotal Phase 3 clinical trial of lomitapide in patients with HoFH or the risk/benefit profile of lomitapide to be sufficient for approval of lomitapide for this indication, or may not consider LDL-C lowering alone sufficient for approval without demonstrating a beneficial effect on a clinical outcome. It is possible that such regulatory authorities may not agree with our assessment that certain changes made to lomitapide’s physical parameters and specifications as compared to the material used in the pivotal trial are not clinically meaningful. If such regulatory authorities require additional studies or trials or changes to specifications, we would incur increased costs and delays in the marketing approval process and may not be able to obtain approval. For example, Japanese regulatory authorities required us to conduct a Phase 1 bridging study of the PK/PD properties of lomitapide in Japanese and Caucasian patients, which we have completed, and are requiring a small therapeutic study of lomitapide in Japanese HoFH patients, for which we have completed enrollment. There is no assurance that we will be successful in our efforts to generate the data we need to submit a marketing authorization application in Japan or to achieve regulatory approval in Japan on a reasonable timeline, or at all.

In Brazil and in a limited number of other countries where permitted based on U.S. or EU approval of lomitapide, we are making lomitapide available on a named patient sales or equivalent basis. There is no assurance that named patient sales will continue to be authorized in any particular country. Government action, economic pressures, political unrest, the availability of competitive products and other factors in a country may adversely affect the availability or level of named patient sales of lomitapide in such country. For example, we are aware that federal and Sao Paolo authorities in Brazil are each conducting an investigation to determine whether there have been

 

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any violations of Brazilian anti-corruption laws in connection with prescriptions for lomitapide written in Brazil. Based on our investigation to date, we do not believe that a violation of Brazilian anti-corruption laws has occurred. In the event any Brazilian authorities ultimately decide to bring action against us or our employees, we intend to vigorously defend ourselves and our employees, as appropriate. The investigations have resulted in a slower turn-around between price quotation and orders, including re-orders, from the federal government, and delays in orders and re-orders from the government of Sao Paolo after a patient has obtained access to JUXTAPID through the judicial process. These delays may continue. We may also experience other delays or suspension of the ordering process or a reluctance of physicians to prescribe JUXTAPID, or patients to take JUXTAPID, as a result of the investigations. In certain countries, we may decide not to pursue named patient sales even if permitted to do so. Even if named patient sales or their equivalent sales are permitted in a certain country, and we elect to make lomitapide available on such basis in such country, there is no guarantee that physicians in such country will prescribe lomitapide, and that patients will be willing to start therapy, or that the country will agree to pay for the product or, after access is granted, will continue to pay for the product at the levels initially approved, without delay or imposing other hurdles on payment, or at all. There is no guarantee that we will generate sales or substantial revenue from such sales. If named patient sales do not meet our expectations in key markets outside the U.S. and EU, particularly Brazil, we may not be able to meet our expectations with respect to sales of lomitapide or revenues from such sales in the time periods we anticipate or at all. There may also be countries where we choose to make lomitapide available at no cost prior to approval in such country.

We are currently transferring manufacturing for lomitapide drug substance to a new contract manufacturer, and we depend on a single third-party manufacturer to produce our drug product. This may increase the risk that we will not have sufficient quantities of lomitapide or will not be able to obtain such quantities at an acceptable cost, which could delay, prevent or impair our clinical development and commercialization of lomitapide.

We currently have no manufacturing facilities and limited personnel with manufacturing experience. We rely on contract manufacturers to produce drug substance for lomitapide and drug product for our clinical trials and for commercial supplies. We have completed technology transfer and are in the process of preparing to manufacture validation batches at a new contract manufacturer for drug substance to replace our current contract manufacturer, because the current manufacturer intends to close, in 2014, the facility at which lomitapide drug substance has been manufactured. We have also expanded our inventory of lomitapide drug substance to maintain a sufficient supply throughout the transition of our manufacturing operations to our new contract manufacturer. We will have to obtain regulatory approval of our new contract manufacturer’s facility, which will include an inspection by the FDA, the EMA, and other regulatory authorities. If we are unsuccessful in completing the manufacture of validation batches at our new contract manufacturer, or are unable to obtain timely regulatory approvals of our new contract manufacturer’s facility, we may not have sufficient quantities of lomitapide drug substance, which could delay, prevent or impair our development and commercialization of lomitapide.

We have a letter of intent with the new contract manufacturer for long-term supply of lomitapide drug substance, and a long-term supply agreement with the drug product manufacturer. We do not have any other agreements in place for redundant supply or a second source for lomitapide drug substance or drug product. Any failure to enter into an agreement, or termination or non-renewal of our agreements, including by reason of merger and acquisition activities, performance failure, bankruptcy filing, plant closing or strategic shift on the part of our existing or future manufacturers could impact availability of lomitapide for commercial sale in any country where it is approved for commercial sale or sold on a named patient basis, or may delay further clinical development or marketing approval of lomitapide in additional countries. If for some reason our contract manufacturers cannot or will not perform as agreed, we may be required to replace such manufacturer. If we are unable to maintain arrangements for third-party manufacturing, or are unable to do so on commercially reasonable terms, or are unable to obtain timely regulatory approvals in connection with our contract manufacturers, we may not be able to successfully commercialize lomitapide or complete development of lomitapide. Although we believe there are a number of third-party manufacturers that could manufacture the clinical and commercial supply of lomitapide drug substance or drug product, we may incur significant added costs and delays in identifying and qualifying any such replacements. Furthermore, although we generally do not begin a clinical trial unless we have a sufficient supply of a product candidate for the trial, any significant delay in the supply of a product candidate for an ongoing trial due to the need to replace a third-party manufacturer could delay completion of the trial. If for any reason we are unable to obtain adequate supplies of lomitapide or any other product candidate that we develop, or the drug substances used to manufacture it, it will be more difficult for us to compete effectively, generate revenue, and further develop our products. In addition, if we are unable to assure a sufficient quantity of the drug for patients with rare diseases or conditions, we may lose any orphan drug exclusivity to which the product otherwise would be entitled.

We have limited experience manufacturing commercial supplies of lomitapide. We rely on our contract manufacturers to utilize processes that consistently produce drug substance and drug product to their required specifications, including those imposed by the FDA, the EMA and other regulatory authorities. As part of the development of the commercial manufacturing process, we tightened specifications for drug substance such that the commercial drug substance differs from the material used in our Phase 3 trial in certain physical parameters and specifications that we do not believe are clinically meaningful. There can be no assurance that our contractors will consistently be able to produce commercial supplies of drug substance or drug product meeting the approved specifications. Any failure by our third-party manufacturers to produce product that meets specifications could lead to a shortage of lomitapide.

 

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The FDA, the EMA and other regulatory authorities require that product candidates and drug products be manufactured according to current good manufacturing practice (“cGMP”). Any failure by our third-party manufacturers to comply with cGMP could lead to a shortage of lomitapide. In addition, such failure could be the basis for action by the FDA, the EMA or regulatory authorities in other territories or countries to withdraw approvals previously granted to us and for other regulatory action, including seizure, injunction or other civil or criminal penalties. Certain countries may impose additional requirements on the manufacturing of drug products or drug substance, and on our third-party manufacturers, as part of the regulatory approval process for lomitapide in such countries. The failure by us or our third-party manufacturers to satisfy such requirements could impact our ability to obtain or maintain approval of lomitapide in such countries.

Our market is subject to intense competition. If we are unable to compete effectively, lomitapide or any other product candidate that we develop may be rendered noncompetitive or obsolete.

Our industry is highly competitive and subject to rapid and significant technological change. Our potential competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical and generic drug companies, academic institutions, government agencies and research institutions. All of these competitors currently engage in, have engaged in or may engage in the future in the development, manufacturing, marketing and commercialization of new pharmaceuticals, some of which may compete with lomitapide or other product candidates we may develop. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Key competitive factors affecting the commercial success of lomitapide and any other product candidates that we develop are likely to be efficacy, safety and tolerability profile, reliability, convenience of dosing, price and reimbursement.

The market for cholesterol-lowering therapeutics is large and competitive with many drug classes. Lomitapide is approved in the U.S., the EU and in certain other countries as an adjunct to a low-fat diet and other lipid-lowering treatments to reduce LDL-C in adult HoFH patients. As a treatment for HoFH, JUXTAPID competes in the U.S. and certain other countries with Kynamro, which is being commercialized by Genzyme, a Sanofi company, under a collaboration with Isis Pharmaceuticals Inc. (“Isis”). Kynamro is an antisense apolipoprotein B-100 inhibitor which is taken as a weekly subcutaneous injection. In the EU, the CHMP recommended against approval of Kynamro. If Isis and Genzyme obtain marketing approval of Kynamro for the treatment of patients with HoFH in any country prior to us, they could obtain a competitive advantage associated with being the first to market. We believe that lomitapide will face additional competition for the treatment of HoFH. Although there are no other MTP-I compounds currently approved by the FDA for the treatment of hyperlipidemia, there may be other MTP-I compounds in development. We are aware of other pharmaceutical companies that are developing product candidates that may compete with lomitapide in the treatment of HoFH, including Regeneron, in collaboration with Sanofi, Roche Holding AG, Pfizer, Amgen, and Alnylam Pharmaceuticals, Inc., in collaboration with The Medicines Company, all of which are developing molecules that attempt to mimic the impact observed in patients with defects in their PCSK9 gene. Such patients have lower LDL-C levels and an observed reduction in cardiovascular events, and some researchers believe that medicines that duplicate this behavior may effectively reduce LDL-C levels with a similar benefit. Some HoFH patients who might otherwise be candidates for treatment with lomitapide are committed to, or candidates for, clinical studies of anti-PCSK9 antibodies or may be prescribed an anti-PCSK9 antibody once approved. Based upon the status of ongoing Phase 3 clinical programs, we believe one or more PCSK-9 products could receive approval as early as mid-2015. This, along with the participation of HoFH patients in clinical trials for such products, may make it more difficult for us to generate revenues and achieve profitability.

In addition, in the EU, patients with HoFH who are unable to reach their recommended target LDL-C levels on conventionally used drug therapies are commonly treated using LDL apheresis, in which cholesterol is removed from the body through mechanical filtration. Although levels of LDL-C are reduced acutely using apheresis, there is a rapid rebound. Because apheresis provides only temporary reductions in LDL-C levels, it must be repeated frequently, typically one or two times per month. The widespread use and availability of apheresis as a treatment for HoFH in the EU, combined with the lower cost of apheresis as compared to LOJUXTA, may make it more difficult for us to obtain commercially acceptable pricing and reimbursement approvals for lomitapide in the key markets of the EU and, even where commercially acceptable approvals are obtained, may limit the use of LOJUXTA as a treatment for HoFH patients.

We may also face future competition from companies selling generic alternatives of lomitapide in countries where we do not have patent coverage, orphan drug status or another form of data or marketing exclusivity or where patent coverage or data or marketing exclusivity has expired or may, in the future, be challenged.

Many of our potential competitors have substantially greater financial, technical and human resources than we do, and significantly greater experience in the discovery and development of drug candidates, obtaining FDA and other regulatory approvals of products and the commercialization of those products. Accordingly, our competitors may be more successful than we may be in obtaining marketing approvals for drugs and achieving and maintaining widespread market acceptance.

 

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Our competitors’ drugs may be more effective, or more effectively marketed and sold, than any drug we may commercialize, and may render lomitapide or any other product candidate that we develop obsolete or non-competitive before we can recover the expenses of developing and commercializing the product. We anticipate that we will face intense and increasing competition as new drugs enter the market and advanced technologies become available. Finally, the development of new treatment methods for the diseases we are targeting could render lomitapide or any other product candidate that we develop non-competitive or obsolete.

We may face resistance from certain private, government and other third-party payers given the price we charge for JUXTAPID in the U.S., and expect to charge for lomitapide in the EU and in other countries in which lomitapide is or may be approved. We may not be able to achieve our revenue goals or achieve profitability or become cash-flow positive in the time periods we expect, or at all, if reimbursement for the product is limited or delayed.

Market acceptance and sales of lomitapide will continue to depend on coverage and reimbursement policies, and may be affected by healthcare reform measures. Government authorities and third-party payers, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third-party payers have attempted to control costs by limiting coverage and limiting the amount of reimbursement for particular medications.

Given that HoFH is a rare disease with a small patient population, we have set a price for JUXTAPID in the U.S. that is significantly higher than that of most pharmaceuticals in order to generate enough revenue to fund our operating costs and become profitable. Certain payers in the U.S. may resist providing adequate coverage and reimbursement for JUXTAPID. Based on our experience to date, genotyping has not typically been required in the U.S. to determine a diagnosis of HoFH for reimbursement purposes, although there have been some exceptions. A few payers in the U.S. have, however, imposed requirements, conditions or limitations as conditions to coverage and reimbursement for JUXTAPID, or have required the patient to try a less expensive alternative therapy first, and more payers may decide to do so in the future.

In the EU, Mexico, Canada and other countries outside the U.S. where lomitapide is or may be approved, we are seeking or expect to seek a price that, like the U.S. price, is at a level that is significantly higher than that of most pharmaceuticals, and which reflects the rare nature of HoFH. There is no assurance that government agencies in such countries that are responsible for reimbursement of healthcare costs or other third-party payers in such countries will agree to provide coverage for lomitapide at the prices we propose, or at all. In the EU, and in certain other countries outside the U.S., the proposed pricing for a drug must be approved by governmental authorities before it may be lawfully sold. The requirements governing drug pricing vary widely from country to country. The EU Member States are free to restrict the range of medicinal products for which the national health insurance systems provide reimbursement, and to control the prices and/or reimbursement levels of medicinal products for human use. An EU Member State may approve a specific price or level of reimbursement for the medicinal product, or alternatively adopt a system of direct or indirect controls on the profitability of the company responsible for placing the medicinal product on the market, including volume-based arrangements, payment or patient caps, reference pricing mechanisms, and the use of other therapies prior to the use of a medicinal product. In some countries, pricing negotiations with governmental authorities can take nine to 15 months or longer after the receipt of marketing authorization. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies, which may not be possible for us to do. We are in the process of seeking to obtain pricing and reimbursement approvals in key EU Member States, Mexico and Canada. There is no assurance that we will receive such approvals or, if we do, that the price and terms will be acceptable to us. Outside the U.S., the continuing effects of the debt crisis and the macroeconomic climate in the EU and other countries, or local regulations or practices, may adversely affect our ability to set and charge a sufficiently high price to generate adequate revenue in those markets.

Even if we are successful in obtaining pricing and reimbursement approval for lomitapide in a country, such countries may impose onerous conditions on reimbursement, which may include genotyping or the use of other therapies, such as apheresis, prior to the use of lomitapide. Countries outside the U.S. may also require significant discounts or impose price or total expenditure caps. The price of lomitapide in one country may adversely affect the price in other countries. We may elect not to launch lomitapide in any country where it does not make commercial sense to do so given the approved price.

In addition, in certain of the EU Member States and other countries, products that have orphan drug status may be exempted or waived from having to provide certain clinical, cost-effectiveness and other economic data in connection with their filings for pricing/reimbursement approval. In the EU, LOJUXTA was not granted orphan drug status by the EMA and it may not be eligible for such automatic exemptions or waivers. We may not be able to provide all of the data required to obtain pricing/reimbursement approvals in certain EU Member States or we may not satisfactorily meet the technical or substantive requirements of such submissions, which could result in delays of pricing/reimbursement approvals for LOJUXTA, LOJUXTA not obtaining pricing/reimbursement approval at all, or LOJUXTA obtaining approvals at less than acceptable levels or with significant restrictions on use or reimbursement. For example, the reimbursement authority in Germany, the G-BA (Gemeinsamer Bundesausschuss), deemed

 

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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 its 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. There can be no assurances that the G-BA will make an assessment in the future that results in an acceptable reimbursement level to us. We may also face pricing and reimbursement pressure in the U.S., EU and other countries as a result of prices charged for competitive products or therapies.

We are making lomitapide available in Brazil and certain other countries that allow use of a drug, on a named patient basis or under a compassionate use or other type of so-called expanded access program, before marketing approval has been obtained in such country. We are seeking reimbursement for lomitapide for authorized pre-approval uses in some of these countries to the extent permitted by applicable law and local regulatory authorities. In other countries or under certain circumstances, we are providing lomitapide free of charge for permitted pre-approval uses. In certain countries where we seek reimbursement for the product during the pre-approval phase, we are able to establish the price for lomitapide, while in other countries we need to negotiate the price. Such negotiations may not result in a price acceptable to us, in which case we may elect to not pursue distribution of lomitapide in such country prior to approval or we may curtail distribution. In addition, the price we are able to charge for named patient sales of lomitapide in Brazil and other countries prior to approval may be higher than the price that is approved by governmental authorities after approval.

If we fail to successfully secure and maintain reimbursement coverage for lomitapide or are significantly delayed in doing so or if onerous conditions are imposed by private payers, government authorities or other third-party payers on such reimbursement, we will have difficulty achieving or maintaining market acceptance of our products and our business and ability to achieve our financial expectations will be harmed.

We support a certain independent patient foundation in the U.S. that assists patients determined by the foundation to be eligible with certain co-payments or co-insurance requirements, and assists certain eligible uninsured or underinsured patients in the U.S. Our support of these programs could result in significant costs to us. We do not have control or input into the decisions of these foundations.

The amount of reimbursement for JUXTAPID and the manner in which government and private payers in the U.S. may reimburse for our potential products is uncertain.

Beginning April 1, 2013, Medicare payments for all items and services under Part A and B, including drugs and biologicals, and most payments to plans under Medicare Part D were reduced by 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011 (“BCA”) as amended by the American Taxpayer Relief Act. The BCA requires sequestration for most federal programs, excluding Medicaid, Social Security, and certain other programs. The BCA caps the cuts to Medicare payments for items and services and payments to Part D plans at 2%. Subsequent legislation extended the 2% reduction, on average, to 2024. As long as these cuts remain in effect, they could adversely impact payment for JUXTAPID. Payers also are increasingly considering new metrics as the basis for reimbursement rates, such as average sales price (“ASP”), average manufacturer price (“AMP”) or actual acquisition cost (“AAC”). The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates. The Centers for Medicare & Medicaid Services (“CMS”) has begun posting drafts of this retail survey price information on at least a monthly basis in the form of draft National Average Drug Acquisition Cost (“NADAC”) files, which reflect retail community pharmacy invoice costs, and National Average Retail Price (“NARP”) files, which reflect retail community pharmacy prices to consumers. In July 2013, CMS suspended the publication of draft NARP data pending funding decisions. In November 2013, CMS moved to publishing final rather than draft NADAC data and has since made updated NADAC data publicly available on a weekly basis. It is difficult to project the impact of these evolving reimbursement mechanics on the willingness of providers to furnish JUXTAPID, and the prices we can command for it and other products we may market. Legislative changes to the Public Health Service Section 340B drug pricing program (the “340B program”), the Medicaid Drug Rebate Program, and the Medicare Part D prescription drug benefit also could impact our revenues. If reimbursement is not available or available only to limited levels, we may not be able to generate sufficient revenue to meet our operating costs or to achieve our revenue, cash flow breakeven or profitability goals in the timeframe that we expect, or at all.

 

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The FDA, the EU Member States and other regulatory agencies outside the U.S. and the EU actively enforce laws and regulations prohibiting the promotion of off-label uses. If we are found to have promoted off-label uses, we may be subject to significant liability.

The FDA, the competent authorities of the EU Member States and other regulatory agencies outside the U.S. and the EU strictly regulate the promotional claims that may be made about prescription drug products. In particular, a drug product may not be promoted prior to approval or for uses that are not approved by the FDA, the EC, the competent authorities of the EU Member States or such other regulatory agencies as reflected in the product’s approved prescribing information. In the U.S., promotion of drug products for unapproved (or off-label) uses may result in enforcement letters, inquiries and investigations, and civil and criminal sanctions by the FDA. Promotion of drug products for off-label uses in the U.S. can also result in false claims litigation under federal and state statutes, which can lead to consent decrees, civil money penalties, restitution, criminal fines and imprisonment, and exclusion from participation in Medicare, Medicaid and other federal and state health care programs.

In late 2013, we received a warning letter from the FDA alleging that certain statements about JUXTAPID made by our Chief Executive Officer, Marc Beer, during two broadcast interviews on the CNBC television show, Fast Money, promoted a claim that JUXTAPID has an effect on cardiovascular morbidity and mortality, and that JUXTAPID is effective as a monotherapy, which would be considered unapproved uses. We responded promptly to the FDA, and are working with the FDA’s Office of Prescription Drug Promotion (“OPDP”) to resolve the concerns raised in the warning letter. As a result of our discussions with the FDA on this matter, we ran a corrective advertisement to clarify any misimpressions arising from the interviews and also agreed to post the corrective advertisement on our website for 30 days. We believe that the corrective advertisement, and the promotional material review we have already conducted, will address the FDA’s concerns cited in the warning letter.

We also received a subpoena in late 2013 from the U.S. Department of Justice, represented by the U.S. Attorney’s Office in Boston, Massachusetts, requesting documents and other information pertaining to our promotion, marketing, and sale of JUXTAPID in the U.S. in connection with a government investigation of our practices. We are in the process of responding to the subpoena, and intend to cooperate fully with the investigation. We intend to vigorously defend ourselves; however, this investigation, if resolved adversely, could result in civil and/or criminal sanctions being levied against us or our employees, including significant fines or other penalties, or in other negative consequences that could have a material adverse effect on our business, financial condition, or results of operations. Even if we can resolve this matter without incurring significant penalties, responding to the subpoena has been, and is expected to continue to be, costly and time-consuming. Moreover, this investigation could adversely impact our reputation and the willingness of physicians to prescribe lomitapide for their HoFH patients, and may divert management’s attention and resources, which could have a material adverse effect on our business, financial condition, or results of operations.

Our relationships with customers and payers in the U.S. will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers and others have and will continue to play an important role in the recommendation and prescription of lomitapide and any other products for which we obtain marketing approval. Our arrangements with third-party payers and customers in the U.S. have and will continue to expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute lomitapide and other products for which we may obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations in the U.S. include the following:

 

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The federal healthcare Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, paying, or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward the purchasing, leasing, ordering, or arranging or recommending for the purchase, lease or order of any healthcare item or service, for which payment may be made, in whole or in part, by federal healthcare programs such as Medicare and Medicaid. This statute has been interpreted to apply to, among others, arrangements between pharmaceutical companies, on the one hand, and prescribers, purchasers, formulary managers and organizations that provide financial assistance to patients, on the other. Further, the Healthcare Reform Act, among other things, clarified that a person or entity need not have actual knowledge of this statute or specific intent to violate it. In addition, the Healthcare Reform Act amended the Social Security Act to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common manufacturer business arrangements and activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration may be subject to scrutiny if they do not qualify for an exemption or safe harbor. We intend to comply with the exemptions and safe harbors whenever possible, but our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability, and may be subject to scrutiny.

 

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The federal civil False Claims Act prohibits any person from, among other things, knowingly presenting, or causing to be presented a false claim for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding, decreasing or concealing an obligation to pay money to the federal government. Many pharmaceutical and other healthcare companies have been investigated and have reached substantial financial settlements

 

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with the federal government under the federal Anti-Kickback Statute and the civil False Claims Act for a variety of alleged marketing activities, including providing free product to customers with the expectation that the customers would bill federal programs for the product; providing consulting fees, grants, free travel, and other benefits to physicians to induce them to prescribe the company’s products; and inflating prices reported to private price publication services, which are used to set drug payment rates under government healthcare programs. Companies have been prosecuted for causing false claims to be submitted because of the marketing of their products for unapproved uses. Pharmaceutical and other healthcare companies have also been prosecuted on other legal theories of Medicare and Medicaid fraud.

 

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The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, among other things, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program, and also imposes obligations with respect to safeguarding the privacy, security and transmission of individually identifiable health information.

 

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As of August 1, 2013, the federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requires certain pharmaceutical manufacturers to engage in extensive tracking of payments and other transfers of value to physicians and teaching hospitals and to submit data to CMS, which will then make all of this data publicly available on the CMS website. We began tracking applicable payments and transfers of value on August 1, 2013 and have reported aggregate and detailed payment data to CMS prior to the relevant deadlines for reporting such data. Beginning in 2015, all data will be due annually by March 31. Failure to comply with the reporting obligations may result in civil monetary penalties.

 

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Analogous state laws and regulations, such as state anti-kickback and false claims laws may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by Medicaid or other state programs or, in several states, apply regardless of the payer. Several states now require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states. Some of these states also prohibit certain marketing-related activities including the provision of gifts, meals, or other items to certain health care providers. In addition, several states require pharmaceutical companies to implement compliance programs or marketing codes. Efforts to ensure that our business arrangements with third parties will continue to comply with applicable healthcare laws and regulations could be costly. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations, including activities conducted by our sales team, are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government-funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs.

In late 2013, we received a subpoena from the U.S. Department of Justice, represented by the U.S. Attorney’s Office in Boston, Massachusetts, requesting documents and other information pertaining to our promotion, marketing, and sale of JUXTAPID in the U.S. in connection with a government investigation of our practices. We could become subject to other government investigations and related subpoenas. Subpoenas are often associated with previously filed qui tam actions, or lawsuits filed under seal under the federal civil False Claims Act. Qui tam actions are brought by private plaintiffs suing on behalf of the federal government for alleged federal civil False Claims Act violations. We are in the process of responding to the subpoena, and intend to continue to cooperate fully with the investigation. The time and expense associated with responding to subpoenas, and any related qui tam or other actions, may be extensive, and we cannot predict the results of our review of the responsive documents and underlying facts or the results of such actions. We intend to vigorously defend ourselves; however, this investigation, if resolved adversely, could result in civil and/or criminal sanctions being levied against us or our employees, including significant fines, sanctions, or other negative consequences that could have a material adverse effect on our business, financial condition, or results of operations. Even if we can resolve this matter without incurring significant penalties, responding to the subpoena has been, and is expected to continue to be, costly and time-consuming. Moreover, this investigation could adversely impact our reputation and the willingness of physicians to prescribe lomitapide for their HoFH patients and may divert management’s attention and resources, which could have a material adverse effect on our business, financial condition, or results of operations. Responding to any other government investigations, defending any claims raised, and any resulting fines, restitution, damages and penalties, settlement payments or administrative actions, as well as any related actions brought by stockholders or other third parties, could also have a material impact on our reputation, business and financial condition and divert the attention of our management from operating our business.

The number and complexity of both federal and state laws continues to increase, and additional governmental resources are being added to enforce these laws and to prosecute companies and individuals who are believed to be violating them. In particular, the Healthcare Reform Act includes a number of provisions aimed at strengthening the government’s ability to pursue anti-kickback and false claims cases against pharmaceutical manufacturers and other healthcare entities, including substantially increased funding for

 

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healthcare fraud enforcement activities, enhanced investigative powers, and amendments to the False Claims Act that make it easier for the government and whistleblowers to pursue cases for alleged kickback and false claim violations. While it is too early to predict what effect these changes will have on our business, we anticipate that government scrutiny of pharmaceutical sales and marketing practices will continue for the foreseeable future and subject us to the risk of government investigations and enforcement actions. Responding to a government investigation or enforcement action would be expensive and time-consuming, and could have a material adverse effect on our business and financial condition and growth prospects.

Enacted and future legislation and related implementing regulations may increase the difficulty and cost for us to commercialize lomitapide or any other product candidate that we develop, and may affect the prices we are able to obtain for lomitapide.

In the U.S., there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that restrict or regulate post-approval activities, and may affect our ability to profitably sell JUXTAPID or any other product candidate for which we obtain marketing approval. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes for JUXTAPID may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may subject us to more stringent product labeling and post-marketing testing and other requirements.

In the U.S., most outpatient prescription drugs, including JUXTAPID, may be covered under Medicare Part D. Medicare Part D prescription drug plans are authorized to use formularies where they can limit the number of drugs that will be covered in any therapeutic class and/or impose differential cost sharing or other utilization management techniques. This places pressure on us to contain and reduce costs. Changes to Medicare Part D that give plans more freedom to limit coverage or manage utilization, and/ or other cost reduction initiatives in the program could decrease the coverage and price that we receive for any approved products, and could seriously harm our business.

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation as amended by the Health Care and Education Reconciliation Act of 2010, referred to herein as the “Healthcare Reform Act,” a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The Healthcare Reform Act made significant changes to the Medicaid Drug Rebate program, including changes to the definition of AMP, and contains a number of provisions that are expected to impact our business and operations, in some cases in ways we cannot currently predict. Changes that may affect our business in the U.S. include those governing expanded enrollment in federal and private healthcare programs, changes to Medicare Part D, increased rebates and taxes on pharmaceutical products, expansion of the 340B program, and revised fraud and abuse and enforcement requirements.

Additional provisions of the Healthcare Reform Act, some of which have already taken effect, may negatively affect our future revenues. For example, the Healthcare Reform Act requires pharmaceutical manufacturers of branded prescription drugs, such as JUXTAPID, to pay a branded prescription drug fee to the federal government. Each individual pharmaceutical manufacturer pays a prorated share of the branded prescription drug fee of $3.0 billion in 2014 (and set to increase in ensuing years), based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law. As part of the Healthcare Reform Act’s provisions closing a coverage gap that currently exists in the Medicare Part D prescription drug program (commonly known as the “donut hole”), manufacturers are required to provide a 50% discount on branded prescription drugs dispensed to beneficiaries within this donut hole. The Healthcare Reform Act also made changes to the Medicaid Drug Rebate Program, including revising the definition of AMP and increasing the minimum rebate from 15.1% to 23.1% of the AMP for most innovator products, and from 11% to 13% for non-innovator products. The increased minimum rebate of 23.1% applies to JUXTAPID. We do not know the full effects that the Health Care Reform Act will have on our sales of JUXTAPID, our business and operations. Although it is too early to determine the effect of the Health Care Reform Act, the law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

In 2012, CMS issued proposed regulations to implement the changes to the Medicaid Drug Rebate program under the Healthcare Reform Act but has not yet issued final regulations. CMS is currently expected to release the final regulations in 2014. Moreover, in the future, Congress could enact legislation that further increases Medicaid drug rebates or other costs and charges associated with participating in the Medicaid Drug Rebate program. The issuance of regulations and coverage expansion by various governmental agencies relating to the Medicaid Drug Rebate program has and will continue to increase our costs and the complexity of compliance, has been and will be time-consuming, and could have a material adverse effect on our results of operations.

The Healthcare Reform Act expanded the 340B program to include additional entity types: certain free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by the Healthcare Reform Act.

 

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The Healthcare Reform Act exempts orphan drugs from the ceiling price requirements for these newly-eligible entities. The Health Resources and Services Administration (“HRSA”), the agency which administers the 340B program, issued a final “legislative” rule to implement the orphan drug exception in July 2013. The final rule, which became effective October 1, 2013, was vacated by the U.S. District Court for the District of Columbia on May 23, 2014, in response to a lawsuit that sought to block its implementation, on the ground that HRSA did not have the authority to issue a legislative rule on this topic. It is not yet clear whether HRSA will appeal the court’s decision. On July 21, 2014, HRSA issued an “interpretive” rule that again interprets the orphan drug exception narrowly, consistent with the invalidated final rule. Like the invalidated final rule, it exempts orphan drugs from the ceiling price requirements for the newly-eligible entities only when the orphan drug is used for its orphan indication. Under the interpretive rule, the newly-eligible entities are entitled to purchase orphan drugs at the ceiling price when the orphan drug is not used for its orphan indication. The legal challenge to the final rule remains ongoing and has been extended to challenge the July 21 interpretive rule as well. The uncertainty regarding how the statutory orphan drug exception will be applied will increase the complexity of compliance, will make compliance more time-consuming, and could negatively impact our results of operations.

The Healthcare Reform Act also obligates HRSA to create regulations and processes to improve the integrity of the 340B program and to update the agreement that manufacturers must sign to participate in the 340B program to obligate a manufacturer to offer the 340B price to covered entities if the manufacturer makes the product available to any other purchaser at any price and to report the ceiling prices for its drugs to the government. HRSA previously was expected to issue a comprehensive proposed regulation in 2014 that would have addressed many aspects of the 340B program. However, the invalidation of the orphan drug final rule on the ground that HRSA did not have rulemaking authority for that topic has raised questions regarding whether HRSA has the authority to issue the comprehensive regulation. Therefore, it is now unclear if HRSA will issue this proposed regulation in 2014. If that regulation is proposed and finalized, it could affect our 340B ceiling price calculations and our obligations under the 340B program in ways we cannot anticipate. Further, legislation may be introduced that, if passed, would further expand the 340B program to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in the inpatient setting.

Countries outside the U.S. may make changes to their healthcare systems which may in the future affect the revenues we generate from sales of lomitapide.

We face extensive regulatory requirements, and lomitapide may still face future development and regulatory difficulties.

Even after marketing approval, a regulatory authority may still impose significant restrictions on a product’s indications, conditions for use, distribution or marketing or impose ongoing requirements for post-marketing surveillance, post-approval studies or clinical trials. Because of the risk of liver toxicity, JUXTAPID is available in the U.S. only through the JUXTAPID REMS Program. We must certify all healthcare providers who prescribe JUXTAPID and the pharmacies that dispense the medicine. The FDA has also required that we periodically assess the effectiveness of the JUXTAPID REMS Program. In the EU and in the other countries outside the U.S. in which lomitapide is approved, we have adopted a risk management plan to help educate physicians on the safety information for lomitapide and appropriate precautions to be followed by healthcare professionals and patients.

Regulatory authorities have significant post-marketing authority, including, for example, the authority to require labeling changes based on new safety information, and to require post-marketing studies or clinical trials to evaluate serious safety risks related to the use of a drug. As described previously, part of our post-marketing commitment to the FDA and EMA with respect to lomitapide is to conduct an observational cohort study, which we have initiated, to generate more data on the long-term safety profile of lomitapide, the patterns of use and compliance and the long-term effectiveness of controlling LDL-C levels. The EMA has also required that we conduct a vascular imaging study to determine the impact of lomitapide on vascular endpoints. Our post-marketing commitments also include certain drug-drug interaction studies, for which we have completed the clinical phase and are reviewing the data. We expect that the regulatory authorities in certain other countries outside the U.S. and EU where lomitapide is, or may be, approved may impose post-approval obligations, including patient registries, and requirements that may in some countries be more onerous than those imposed by the FDA and EMA.

In the EU, because we were not able to provide comprehensive clinical data on efficacy and safety under normal conditions of use due to the rarity of the disease, and in light of our commitments to conduct an appropriate risk-mitigation program, LOJUXTA was approved under exceptional circumstances. This type of marketing authorization will require an annual reassessment of the risk/benefit of LOJUXTA by the CHMP. Any changes in known safety concerns for lomitapide or any unknown safety issues that may develop could cause the EC to decline to renew our market authorization for lomitapide in the EU which could affect our ability to achieve our financial goals.

We will also be subject to other ongoing regulatory requirements in each of the countries in which lomitapide is approved governing the labeling, packaging, storage, advertising, distribution, promotion, recordkeeping and submission of safety and other

 

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post-marketing information, including adverse reactions, and any changes to the approved product, product labeling, or manufacturing process. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA, the EMA and other regulatory authorities for compliance with cGMP, and other regulations.

If we, or our drug substance or drug product or the manufacturing facilities for our drug substance or drug product, fail to comply with applicable regulatory requirements, a regulatory agency may:

 

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issue warning letters or untitled letters;

 

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seek an injunction or impose civil or criminal penalties or monetary fines;

 

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suspend or withdraw or alter the conditions of our marketing approval;

 

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require us to provide corrective information to healthcare practitioners;

 

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suspend any ongoing clinical trials;

 

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require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

 

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refuse to approve pending applications or supplements to applications submitted by us;

 

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suspend or impose restrictions on operations, including costly new manufacturing requirements;

 

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seize or detain products, refuse to permit the import or export of products or request that we initiate a product recall; or

 

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refuse to allow us to enter into supply contracts, including government contracts.

If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate Program or other governmental pricing programs in the U.S., we could be subject to additional reimbursement requirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We participate in the Medicaid Drug Rebate Program and a number of other Federal and state government pricing programs in the U.S., and we may participate in additional government pricing programs in the future. These programs are described in detail in the “Business—Regulatory Matters” section of our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 3, 2014 (the “2013 Form 10-K”), and generally require us to pay rebates or provide discounts to government payers in connection with drugs, including JUXTAPID, dispensed to beneficiaries of these programs. In some cases, such as with the Medicaid Drug Rebate Program, the rebates are based on pricing and rebate calculations that we report on a monthly and quarterly basis to the government agencies that administer the programs. The terms, scope and complexity of these government pricing programs change frequently. Responding to current and future changes may increase our costs and the complexity of compliance, will be time-consuming, and could have a material adverse effect on our results of operations.

Pricing and rebate calculations vary among products and programs. The calculations are complex and are often subject to interpretation by governmental or regulatory agencies and the courts. For example, the Medicaid rebate amount is computed each quarter based on our submission to the CMS of our AMP and best price for the quarter. If we become aware that our reporting for prior quarters was incorrect, or has changed as a result of recalculation of the pricing data, we will be obligated to resubmit the corrected data for a period not to exceed 12 quarters from the quarter in which the data originally were due. Such restatements and recalculations would serve to increase our costs for complying with the laws and regulations governing the Medicaid rebate program. Any corrections to our rebate calculations could result in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction. Price recalculations also may affect the price that we will be required to charge certain safety net providers under the Public Health Service 340B drug discount program.

We are liable for errors associated with our submission of pricing data and for overcharging government payers. For example, in addition to retroactive rebates and the potential for 340B program refunds, if we are found to have knowingly submitted false AMP or best price information to the government, we may be liable for civil monetary penalties in the amount of $100,000 per item of false information. Our failure to submit monthly/quarterly AMP and best price data on a timely basis could result in a civil monetary penalty of $10,000 per day for each day the submission is late beyond the due date. In the event that CMS were to terminate our rebate agreement, no federal payments would be available under Medicaid or Medicare Part B for our covered outpatient drugs, such as JUXTAPID. In addition, if we overcharge the government in connection with our FSS contract or under any other government program, we will be required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges could result in allegations against us under the federal civil False Claims Act and other laws and regulations.

 

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Federal law requires that for a company to be eligible to have its products paid for with federal funds under the Medicaid and Medicare Part B programs as well as to be purchased by certain federal agencies, it also must participate in the Department of Veterans Affairs (“VA”) Federal Supply Schedule (“FSS”) pricing program. This program is described in detail in the “Business—Regulatory Matters” section of our 2013 Form 10-K, and generally requires us to charge four Federal agencies pricing no higher than the Federal Ceiling Price (“FCP”) for our covered drugs, including JUXTAPID, when those agencies purchase from an FSS contract or depot contract. The FCP is calculated based on the “non-federal average manufacturer price” (“Non-FAMP”), which manufacturers are required to report on a quarterly and annual basis to the VA. If a company misstates Non-FAMPs or FCPs it must restate these figures. Pursuant to the VHCA, knowing provision of false information in connection with a Non-FAMP filing can subject a manufacturer to penalties of $100,000 for each item of false information.

In addition, pursuant to regulations issued by the DoD Defense Health Agency (“DHA”) to implement Section 703 of the National Defense Authorization Act for Fiscal Year 2008, we expect that DoD will claim entitlement to rebates on covered drug prescriptions dispensed to TRICARE beneficiaries by TRICARE network retail pharmacies. The formula for determining the rebate is established in the regulations and our Section 703 Agreement and is based on the difference between annual Non-FAMP and the FCP.

If we overcharge the government in connection with VA FSS pricing program or TRICARE Retail Pharmacy Program, whether due to a misstated FCP or otherwise, we are required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges can result in allegations against us under the False Claims Act and other laws and regulations.

Unexpected refunds to the U.S. government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Commercialization of lomitapide requires third-party relationships, and our dependence on these relationships may have an adverse effect on our business.

Lomitapide is our first marketed product. As a result, we have not demonstrated the same ability to commercialize a product as companies that have previously obtained marketing approval for drug candidates and commercially launched drugs. To maximize the commercial potential of JUXTAPID, we plan to utilize distributors and other third parties to help distribute and, in some cases, to commercialize lomitapide.

We currently have a contract with a single specialty pharmacy distributor in the U.S., a single logistics provider in the EU and single distributors, importers and/or specialty pharmacies in certain other countries. Any performance failure or inability or refusal to perform on the part of our specialty pharmacy distributor in the U.S., our logistics provider in the EU, or our single third party service providers in other countries could impair our marketing, sales or named patient supply of lomitapide. In those countries outside the U.S. where we plan to use our own personnel to commercialize lomitapide, we have, or plan to have, agreements with local distributors to provide logistics and distribution support. In those geographic locations in which we are using third parties to commercialize our product, we will be reliant on such strategic partners to generate revenue on our behalf. If we enter into arrangements with third parties to perform sales, marketing or distribution services, our product revenues or the profitability of these product revenues to us are likely to be lower than if we were to market and sell any products that we develop ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell and market our products or in doing so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our products.

 

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Failures or delays in the completion of our planned clinical testing of lomitapide in Japanese HoFH patients, the commencement or completion of our planned clinical testing in pediatric HoFH patients or of any other clinical trials we plan to conduct could result in increased costs to us and delay, prevent or limit our ability to generate revenue with respect to the relevant product candidate or new indication.

The commencement and completion of clinical trials may be delayed or prevented for a number of reasons, including:

 

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difficulties obtaining regulatory clearance to commence a clinical trial or complying with conditions imposed by a regulatory authority regarding the scope or term of a clinical trial;

 

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delays in reaching or failing to reach agreement on acceptable terms with prospective clinical research organizations (“CROs”) and trial sites, and problems with the performance of CROs;

 

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insufficient or inadequate supply or quality of a product candidate or other materials necessary to conduct our clinical trials, or other manufacturing issues;

 

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difficulties obtaining institutional review board (“IRB”) approval or Ethics Committee’s positive opinion to conduct a clinical trial at a prospective site;

 

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challenges recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including the size and nature of a patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the nature of trial protocol, the availability of approved treatments for the relevant disease and the competition from other clinical trial programs for similar indications;

 

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severe or unexpected drug-related side effects experienced by patients in a clinical trial; and

 

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difficulties retaining patients who have enrolled in a clinical trial but may be prone to withdraw due to the rigors of the trials, lack of efficacy, side effects or personal issues, or who are lost to further follow-up.

Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results or the results of other clinical, preclinical or nonclinical studies. In addition, a clinical trial may be suspended or terminated by us, the FDA, the competent authorities of the EU Member States and other countries, the IRBs or the Ethics Committees at the sites, or a data safety monitoring board overseeing the clinical trial at issue, or other regulatory authorities due to a number of factors, including:

 

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failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

 

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inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities;

 

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unforeseen safety issues or lack of effectiveness; and

 

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lack of adequate funding to continue the clinical trial.

Positive results in preclinical studies and earlier clinical trials of our product candidates may not be replicated in later clinical trials, which could result in development delay or a failure to obtain marketing approval or affect market acceptance.

Positive results in preclinical or clinical studies of lomitapide or any other product candidate that we develop may not be predictive of similar results in humans during further clinical trials. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development. Accordingly, there is, for example, a possibility that our planned clinical study of lomitapide in pediatric HoFH patients or our clinical program to support approval of lomitapide in Japan in adult patients with HoFH may generate results that are not consistent with the results of our Phase 3 clinical study or other relevant studies. The results of such clinical trials may not be sufficient to gain approval of lomitapide for adult HoFH patients in Japan or for pediatric HoFH patients. Our preclinical studies or clinical trials for any future product candidate may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical studies or clinical trials. Moreover, preclinical and clinical data can be susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain FDA or other regulatory approval for their products.

Changes in regulatory requirements and guidance or unanticipated events during our clinical trials may occur, as a result of which we may need to amend clinical trial protocols. Amendments may require us to resubmit our clinical trial protocols to the IRBs, Ethics Committees or the competent authorities of the EU Member States for review and approval, which may impact the cost, timing or successful completion of a clinical trial. If we experience delays in completion of, or if we terminate, any of our previous clinical trials of lomitapide or generate results that differ from our clinical trial results the commercial prospects for lomitapide may be harmed.

 

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If we fail to obtain or maintain orphan drug exclusivity for lomitapide in any country where exclusivity is available, we will have to rely on our data and marketing exclusivity, if any, and on our intellectual property rights, to the extent there is coverage in such country, which may reduce the length of time that we can prevent competitors from selling generic versions of lomitapide.

We have obtained orphan drug exclusivity for JUXTAPID in the U.S. for the treatment of HoFH. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, defined, in part, as a patient population of fewer than 200,000 in the U.S. In the U.S., the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the FDA from approving another application for the “same drug” for the same orphan indication during the exclusivity period, except in very limited circumstances. For small molecule drugs, the FDA defines “same drug” as a drug that contains the same active moiety and is intended for the same use as the drug in question. A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing rights in the U.S. may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.

The EMA grants orphan drug designation to promote the development of products that may offer therapeutic benefits for life-threatening or chronically debilitating conditions affecting not more than five in 10,000 people in the EU. Orphan drug designation from the EMA provides ten years of marketing exclusivity following drug approval, subject to reduction to six years if the designation criteria are no longer met. Despite the prevalence rate, we do not have orphan drug exclusivity for lomitapide in the treatment of HoFH in the EU since the EMA views the relevant condition, for orphan drug purposes, to include HoFH and HeFH. Our failure to obtain orphan drug designation for lomitapide for the treatment of HoFH in the EU means that we will not have the benefit of the orphan drug market exclusivity for this indication in the EU, and, as a result, will need to rely on our intellectual property rights and other exclusivity provisions. Lomitapide qualifies as an innovative medicinal product in the EU. Innovative medicinal products authorized in the EU on the basis of a full marketing authorization application (as opposed to an application for marketing authorization that relies on data in the marketing authorization dossier for another, previously approved medicinal product) are entitled to eight years’ data exclusivity. During this period, applicants for approval of generics of these innovative products cannot rely on data contained in the marketing authorization dossier submitted for the innovative medicinal product. Innovative medicinal products are also entitled to ten years’ market exclusivity, which runs concurrently with the data exclusivity period. During this ten-year period no generic medicinal product can be placed on the EU market. The ten-year period of market exclusivity can be extended to a maximum of eleven years if, during the first eight years of those ten years, the marketing Authorization Holder for the innovative product obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison with existing therapies. If we do not obtain extended patent protection and data exclusivity for JUXTAPID and any other product candidates we develop, our business may be materially harmed.

In Mexico, COFEPRIS, the regulatory authority in Mexico, granted JUXTAPID approval as an orphan drug given that HoFH is a disease that affects less than five in 10,000 people in Mexico. Applicable Mexican legislation also provides 5 years post-approval data protection to approved products. There are many other countries, including some key markets for lomitapide, like Brazil, in which we do not have intellectual property coverage, and where neither orphan drug exclusivity nor data and marketing exclusivity is available.

Even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition. In the U.S., even after an orphan drug is approved, the FDA can subsequently approve the same drug for the same condition if the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care.

Recent federal legislation and actions by state and local governments may permit re-importation of drugs from foreign countries into the U.S., including foreign countries where the drugs are sold at lower prices than in the U.S. Similarly, purchasers in the EU are permitted to purchase lomitapide in one EU Member State and import it into another EU Member State where the price may be higher. These practices could materially adversely affect our operating results and our overall financial condition.

The Medicare Prescription Drug, Improvement and Modernization Act contains provisions that may change importation laws and expand pharmacists’ and wholesalers’ ability to import lower priced versions of an approved drug and competing products from Canada, where there are government price controls. These changes to U.S. importation laws will not take effect unless and until the Secretary of Health and Human Services certifies that the changes will pose no additional risk to the public’s health and safety, and may result in a significant reduction in the cost of products to consumers. While the Secretary of Health and Human Services has not yet announced any plans to make this required certification, we may ultimately face the risk that a distributor or other purchaser of lomitapide in the U.S. will be permitted to import lower priced product from a country outside the U.S. that places price controls on

 

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pharmaceutical products. This risk may be particularly applicable to a drug such as JUXTAPID that is formulated for oral delivery and currently commands a premium price. Some states and local governments have implemented importation schemes for their citizens and, in the absence of federal action to curtail such activities, other states and local governments may launch importation efforts.

In the EU, a purchaser cannot be restricted from purchasing a medicine in one EU Member State and importing the product into another EU Member State in which is it also subject to marketing authorization, which is called parallel importing. As a result, a purchaser in one EU Member State may seek to import lomitapide from another EU country where lomitapide is sold at a lower price.

The re-importation of lomitapide into the U.S. market from a foreign market and the parallel importation of lomitapide among countries of the EU could negatively impact our revenue and anticipated profitability, possibly materially.

We face potential product liability exposure, and, if claims are brought against us, we may incur substantial liability.

The use of lomitapide or any other product candidate in clinical trials and the sale of lomitapide or any other product candidate for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, healthcare providers or others selling or otherwise coming into contact with our product and product candidates. If we cannot successfully defend ourselves against product liability claims, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in:

 

•

decreased demand for lomitapide or any other product candidate for which we obtain marketing approval;

 

•

impairment of our business reputation and exposure to adverse publicity;

 

•

increased warnings on product labels;

 

•

withdrawal of clinical trial participants;

 

•

costs as a result of related litigation;

 

•

distraction of management’s attention from our primary business;

 

•

substantial monetary awards to patients or other claimants;

 

•

loss of revenue; and

 

•

the inability to successfully commercialize lomitapide or any other product candidate for which we obtain marketing approval.

We have obtained product liability insurance coverage for both our clinical trials and our commercial exposures with a $20.0 million annual aggregate coverage limit. However, our insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects or warnings found to be inadequate. The cost of any product liability litigation or other proceedings, even if resolved in our favor, could be substantial. A product liability claim or series of claims brought against us could cause our stock price to decline and, if the claim is successful and judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

A variety of risks associated with our international business operations could materially adversely affect our business.

In each country outside the U.S. in which lomitapide is approved, or where we are making lomitapide available on a named patient or compassionate use basis before it has obtained marketing approval, we are subject to additional risks related to entering into international business operations, including:

 

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differing regulatory requirements for drug approvals in foreign countries;

 

•

pricing that has a negative impact on our global pricing strategy;

 

•

potentially reduced protection for intellectual property rights;

 

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the potential for parallel importing;

 

•

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

•

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

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•

compliance with foreign or U.S. laws, rules, regulations or industry codes, including data privacy requirements, labor relations laws, tax laws, anti-competition regulations, import, export and trade restrictions, and reporting payments to healthcare professionals and others;

 

•

foreign taxes;

 

•

foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;

 

•

workforce uncertainty in countries where labor unrest is more common than in the U.S.;

 

•

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;

 

•

dependence upon third parties to perform distribution, quality control testing, collections and other aspects of the distribution, supply chain and commercialization of our products that are required to be performed in order to conduct such activities in international markets, and our ability to effectively manage such third parties; and

 

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business interruptions resulting from geo-political and economic events or actions, including social unrest, economic crises, war, terrorism, or natural disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires.

In addition to the foregoing, we are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (the “FCPA”) and various other anti-corruption laws. The FCPA generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits. While we have certain training programs, policies and guidelines for our employees and third parties to promote compliance with laws prohibiting corrupt business conduct, we continue to review the effectiveness of our programs, policies and guidelines and seek ways as we grow and our business becomes more complex to further strengthen our compliance controls in this area.

Our activities outside the U.S. or those of our employees, licensees, distributors, manufacturers, CROs, or other third parties who act on our behalf or with whom we do business could subject us to investigation or prosecution under such foreign or U.S. laws. For example, federal and São Paulo authorities in Brazil are each conducting an investigation to determine whether there have been any violations of Brazilian anti-corruption laws in connection with prescriptions of lomitapide written in Brazil. Based on our investigation to date we do not believe that a violation of Brazilian anti-corruption laws has occurred. In the event any Brazilian authorities ultimately decide to bring action against us or our employees, we intend to vigorously defend ourselves and our employees, as appropriate. If our activities in Brazil or in any other country outside the U.S. are found as part of these investigations or any other investigation to be in violation of any laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, and fines, or under certain circumstances we could be barred from further named patient sales in such country. In addition, the investigations in Brazil have resulted in a slower turn-around or, in some cases, a delay in certain government orders or re-orders after a patient has obtained access to JUXTAPID through the judicial process. These delays may continue. We may also experience other delays or suspension of the ordering process or a reluctance of physicians to prescribe JUXTAPID, or patients to take JUXTAPID, while the investigations are ongoing, or if our activities are found to have violated applicable laws.

Despite our ongoing efforts to ensure compliance with foreign and domestic laws, our employees, agents, and companies with which we do business may nevertheless take actions in violation of our policies, for which we may be ultimately held responsible. If so, we may be subject to criminal or civil penalties or other punitive measures, including restrictions on our ability to continue selling in certain markets. Any such outcome, or any allegation or investigation regarding such actions involving us, could harm our reputation and have a material adverse impact on our business, financial condition, results of operations and prospects.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our suppliers, customers and business partners, healthcare professionals and patients. This includes, where required or permitted by applicable laws, personally identifiable information. The secure maintenance of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, disrupt our operations, and damage our reputation which could adversely affect our business.

Risks Related to Our Intellectual Property

If our patent position does not adequately protect our product and product candidates, others could compete against us more directly, which would harm our business, possibly materially.

Our lomitapide patent portfolio consists of five issued U.S. patents and issued patents in Europe, Canada, Israel, Australia, New Zealand and Japan and pending applications in the U.S., Australia, Japan, Canada, India and South Korea, all of which have been licensed to us in a specific field. The U.S. patent covering the composition of matter of lomitapide is scheduled to expire in 2015, but we have filed an application for patent term extension for this patent. The non-U.S. patents directed to the composition of matter of lomitapide issued in certain jurisdictions of the EU, Canada, Israel and Japan are scheduled to expire in 2016. Our two method-of use-patents in the U.S., covering certain dosing regimens for lomitapide, expire in 2027 and 2025, respectively, and our European Patent Office (“EPO”) methods-of-use patent expires in 2025. The EPO method of use patent may be eligible for up to three years of supplemental protection in certain EPO countries, and we are seeking such protection in the countries in which LOJUXTA is approved, on a country-by-country basis. An opposition has been filed by a third party with respect to the EPO method-of-use patent. Our commercial success with respect to lomitapide will depend significantly on our ability to protect our existing patent position with

 

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respect to lomitapide as well as our ability to obtain and maintain adequate protection of other intellectual property for our technologies, product candidates and any future products in the U.S. and other countries. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. Our ability to use the patents and patent applications licensed to us to protect our business will also depend on our ability to comply with the terms of the applicable licenses and other agreements. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S., and we may encounter significant problems in protecting our proprietary rights in these countries.

There are many countries, including some key markets for lomitapide, like Brazil, in which we do not have intellectual property coverage, and where neither orphan drug exclusivity nor data and marketing exclusivity is available.

The patent positions of biotechnology and pharmaceutical companies, including our patent position, involve complex legal and factual questions, and, therefore, validity and enforceability cannot be predicted with certainty. Patents may be challenged, deemed unenforceable, invalidated or circumvented. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies, product candidates and any future products are covered by valid and enforceable patents or are effectively maintained as trade secrets.

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

 

•

we will be able to successfully commercialize our product before some or all of our relevant patents expire, or in countries where we do not have patent protection;

 

•

we or our licensors were the first to make the inventions covered by each of our pending patent applications;

 

•

we or our licensors were the first to file patent applications for these inventions;

 

•

others will not independently develop similar or alternative technologies or duplicate any of our technologies;

 

•

any of our pending patent applications or those we have licensed will result in issued patents;

 

•

any of our patents or those we have licensed will be valid or enforceable;

 

•

any patents issued to us or our licensors and collaborators will provide a basis for any additional commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;

 

•

we will develop additional proprietary technologies or product candidates that are patentable; or

 

•

the patents of others will not have an adverse effect on our business.

If we do not obtain protection under the Hatch-Waxman Act and similar foreign legislation by extending the patent terms and obtaining regulatory exclusivity for our product or product candidates, our business may be materially harmed.

The Hatch-Waxman Act established a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. Our U.S. composition of matter patent for lomitapide is scheduled to expire in 2015, and we have filed an application for patent term extension for this patent. We are also seeking three years of supplemental protection for our EPO method-of-use patent in certain EPO countries in which LOJUXTA is approved. However, we may not be granted an extension in a particular country if we, for example, fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the applicable time period of the extension or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration of the term of any such extension is less than we request, our competitors, including manufacturers of generic alternatives, may obtain approval of competing products following our patent expiration, and our revenue could be reduced, possibly materially.

In addition, the FDA has classified lomitapide as a new chemical entity (“NCE”) in the U.S. and it is therefore eligible for data exclusivity under the Hatch-Waxman Act. A drug can be classified as a NCE if the FDA has not previously approved any other new drug containing the same active moiety. An NCE that is granted marketing approval may, even in the absence of patent protection, be eligible for five years of data exclusivity in the U.S. following marketing approval. This data exclusivity precludes submission of 505(b)(2) applications or Abbreviated New Drug Applications (“ANDA”) that reference the NCE application for four years if certain patents covering the NCE or its method-of-use expire or are challenged by a generic applicant. Innovative medicinal products authorized in the EU on the basis of a full marketing authorization application (as opposed to an application for marketing authorization that relies on data in the marketing authorization dossier for another, previously approved medicinal product) are entitled to eight years’ data exclusivity. During this period, applicants for approval of generics of these innovative products cannot rely on data contained in the marketing authorization dossier submitted for the innovative medicinal product. Innovative medicinal products are

 

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also entitled to ten years’ market exclusivity. During this ten-year period no generic medicinal product can be placed on the EU market. The ten-year period of market exclusivity can be extended to a maximum of 11 years if, during the first eight years of those ten years, the Marketing Authorization Holder for the innovative product obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison with existing therapies. If we are not able to gain or exploit the period of data exclusivity, we may face significant competitive threats to our commercialization of these compounds from other manufacturers, including the manufacturers of generic alternatives. Further, even though our compounds are considered to be NCEs and we were able to gain the period of data exclusivity, another company nevertheless could also market another version of the drug if such company submits a full NDA or a full application for marketing authorization in the EU with a complete human clinical trial program and obtains marketing approval of its product.

If we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of our technology, product and any product candidates could be significantly diminished.

We may rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. For example, the FDA is currently considering whether to make additional information publicly available on a routine basis, and the EMA is planning to amplify its disclosure rules. These changes could mean that information that we may consider to be trade secrets or other proprietary information may be disclosed, and it is not clear at the present time how the FDA’s and EMA’s disclosure policies may change in the future, if at all. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing our product and any product candidates.

Our success will depend in part on our ability to operate without infringing the proprietary rights of third parties. There could be issued patents of which we are not aware that our products or product candidates infringe. There also could be patents that we believe we do not infringe, but that we may ultimately be found to infringe. Moreover, patent applications are in some cases maintained in secrecy until patents are issued. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made and patent applications were filed. Because patents can take many years to issue, there may be currently pending applications of which we are unaware that may later result in issued patents that our products or product candidates infringe. For example, pending applications may exist that provide support or can be amended to provide support for a claim that results in an issued patent that our product infringes.

The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may obtain patents in the future and allege that our products or product candidates or the use of our technologies infringes these patent claims or that we are employing their proprietary technology without authorization. Likewise, third parties may challenge or infringe upon our existing or future patents.

Proceedings involving our patents or patent applications or those of others could result in adverse decisions regarding:

 

•

the patentability of our inventions relating to our product or any product candidates; and

 

•

the enforceability, validity or scope of protection offered by our patents relating to our product or any product candidates.

Even if we are successful in these proceedings, we may incur substantial costs and divert management’s time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion.

In addition, if we do not obtain a license, develop or obtain non-infringing technology, fail to defend an infringement action successfully or have infringed patents declared invalid, we may:

 

•

incur substantial monetary damages;

 

•

encounter significant delays in bringing our product candidates to market; and

 

•

be precluded from manufacturing or selling our product candidates.

In such event, our business could be adversely affected, possibly materially.

 

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If we fail to comply with our obligations in our license agreements for our product candidates, we could lose license rights that are important to our business.

Our existing license agreement with The Trustees of the University of Pennsylvania (“UPenn”) imposes, and we expect any future license agreements that we enter into will impose, various diligence, milestone payment, royalty, insurance and other obligations on us.

In addition, our license agreement with UPenn limits the field of use for lomitapide as a monotherapy or in combination with other dyslipidemic therapies for treatment of patients with HoFH, or for the treatment of patients with severe hypercholesterolemia unable to come within 15% of the National Cholesterol Education Program (“NCEP”) LDL-C goal on maximal tolerated oral therapy, as determined by the patient’s prescribing physician, or with severe combined hyperlipidemia unable to come within 15% of the NCEP non-HDL-C goal on maximal tolerated oral therapy, as determined by the patient’s prescribing physician, or with severe hypertriglyceridemia unable to reduce triglycerides (“TG”) levels to less than 1,000 mg/dL on maximal tolerated therapy. If we fail to comply with the obligations and restrictions under our license agreements, including the limited field of use under our license agreement with UPenn, the applicable licensor may have the right to terminate the license, in which case we might not be able to market any product that is covered by the licensed patents. Any breach or termination of our license agreement with UPenn would have a particularly significant adverse effect on our business because of our reliance on the commercial success of lomitapide. Although we intend to comply with the restrictions on field of use in our license agreement with UPenn by seeking product labels for lomitapide that are consistent with the license field, we may still be subject to the risk of breaching the license agreement if we are deemed to be promoting or marketing lomitapide for an indication not covered by any product label that we are able to obtain. In addition, because this restriction on the field of use limits the indications for which we can develop lomitapide, the commercial potential of lomitapide may not be as great as without this restriction.

Risks Related to Our Dependence on Third Parties

If we are unable to establish and maintain effective sales, marketing and distribution capabilities, or to enter into agreements with third parties to do so, we will be unable to successfully commercialize lomitapide.

We are marketing and selling lomitapide for HoFH directly in the U.S. using our own marketing and sales resources. We are, or plan to, market and sell lomitapide directly, using our own marketing and sales resources, in certain key countries in the EU and in several other countries in which lomitapide is, or may be, approved where it makes business sense to do so. We use, and plan to use, third parties to provide warehousing, shipping, third-party logistics, invoicing, collections and other distribution services on our behalf in those countries. We have entered into, or may selectively seek to establish, distribution and similar forms of arrangements to reach patients with HoFH in certain geographies that we do not believe we can cost-effectively address with our own sales and marketing capabilities. If we are unable to establish, and maintain, the capabilities to sell, market and distribute lomitapide, either through our own capabilities or through arrangements with others, or if we are unable to enter into distribution agreements in those countries where we do not believe we can cost-effectively address with our own sales and marketing capabilities, we may not be able to successfully sell lomitapide. We cannot guarantee that we will be able to establish and maintain our own capabilities or to enter into and maintain any distribution agreements with third-parties on acceptable terms, if at all. Additionally, we currently have a contract with a single specialty pharmacy distributor in the U.S., a single logistics provider in the EU and single distributor, importers and/or specialty pharmacies in certain other countries. While we believe that we would be able to replace any distributor or service provider, any performance failure or inability or refusal to perform on the part of our specialty pharmacy distributor in the U.S., our logistics provider in the EU, or our distributors, importers and/or specialty pharmacies in certain other countries could, for a period of time, impair our marketing and sales of lomitapide. Furthermore, our expenses associated with building up and maintaining the sales force and distribution capabilities around the world may be disproportionate compared to the revenues we may be able to generate on sales of lomitapide. We cannot guarantee that our success in commercializing lomitapide will meet our expectations.

We rely on third parties to conduct our clinical trials and to perform related services, and those third parties may not perform satisfactorily, including failing to meet established deadlines for the completion of such clinical trials. We may become involved in commercial disputes with these parties.

We do not have the ability to independently conduct clinical trials, and we rely on third parties such as CROs, medical institutions, academic institutions, and clinical investigators to perform this function. Our reliance on these third parties for clinical development activities reduces our control over these activities. However, if we sponsor clinical trials, we are responsible for ensuring

 

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that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA and the competent authorities in the EU and Japan require us to comply with standards, commonly referred to as Good Clinical Practices, for conducting, recording, and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties does not relieve us of these responsibilities and requirements. Furthermore, these third parties may have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the data they provide is compromised due to the failure to adhere to regulatory requirements or our clinical trial protocols, or for other reasons, our development programs may be extended, delayed or terminated, additional marketing approvals for lomitapide or any other product candidate may be delayed or denied in the targeted indication or jurisdiction, and we may be delayed or precluded in our efforts to successfully commercialize lomitapide or any other product candidate for targeted indications or in the targeted jurisdiction.

In addition, we may from time to time become involved in commercial disputes with these third parties, for example regarding the quality of the services provided by these third parties or our ultimate liability to pay for services they purported to provide, or the value of such services. Due to our reliance on third-party service providers, we may experience commercial disputes such as this in the future. In some cases, we may be required to pay for work that was not performed to our specifications or not utilized by us, and these obligations may be material.

We do not have drug research or discovery capabilities, and will need to acquire or license existing drug compounds from third parties to expand our product candidate pipeline.

Certain intellectual property related to lomitapide has been licensed to us by UPenn. We currently have no drug research or discovery capabilities. Accordingly, if we are to expand our product candidate pipeline, we will need to acquire or license existing compounds from third parties. We will face significant competition in seeking to acquire or license promising drug compounds. Many of our competitors for such promising compounds may have significantly greater financial resources and more extensive experience in preclinical testing and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products, and thus, may be a more attractive option to a potential licensor than us. In addition, our rights under UPenn to intellectual property with respect to lomitapide are limited to specified patient populations, such as patients with HoFH, severe hypercholesterolemia or severe hypertriglyceridemia. Accordingly, if we wished to expand the development of lomitapide to address indications that are outside of the specified patient populations, we would need to expand our license agreement with UPenn and potentially acquire rights from Bristol-Myers Squibb Company (“BMS”). If we are unable to acquire or license additional promising drug compounds or expand our rights to lomitapide should we wish to do so, we will not be able to expand our product candidate pipeline, which may adversely impact our future profitability or growth prospects.

Risks Related to Employee Matters and Managing Growth

Our future success depends on our ability to hire and retain our key executives and to attract, retain, and motivate qualified personnel.

We are highly dependent upon the principal members of our executive, commercial, medical, and development teams. We have entered into employment agreements with certain members of our executive, commercial, medical and development teams, but any employee may terminate his or her employment with us at any time. We do not maintain “key man” life insurance for any of our employees. The loss of the services of any of these persons might impede the achievement of our development and commercialization objectives.

We expect to continue hiring qualified personnel. Recruiting and retaining qualified personnel will be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel.

In addition, we need to continue to establish and maintain effective disclosure and financial controls, particularly as our business grows and continues to expand internationally. Failure to maintain adequate controls could impact the quality and integrity of our financial statements and cause us reputational harm.

In addition, we rely on consultants and advisors, including scientific, manufacturing, clinical, regulatory, pharmacovigilance and sales and marketing advisors, to assist us in formulating our development, manufacturing and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

 

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We will need to grow our organization, and we may encounter difficulties in managing this growth, which could disrupt our operations.

We currently have approximately 256 employees, and we expect to experience significant growth in the number of our employees and the scope of our operations. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Our management may need to divert a disproportionate amount of its attention away from our day-to-day activities, and devote a substantial amount of time to managing these growth activities. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. The physical expansion of our operations may lead to significant costs, and may divert financial resources from other projects. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate or increase our revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize lomitapide successfully, and to compete effectively will depend, in part, on our ability to effectively manage any future growth.

Risks Related to Our Financial Position and Capital Requirements

We have incurred significant operating losses since our inception, and anticipate that we will incur additional losses.

We have a limited operating history. To date, we have primarily focused on developing and commercializing lomitapide. We have funded our operations to date primarily through proceeds from our initial public offering and the proceeds from our June 2011, June 2012 and January 2013 public offerings, revenues from JUXTAPID, proceeds from our long-term debt and our private placement of convertible preferred stock. We have incurred losses in each year since our inception in February 2005. As of June 30, 2014, we had an accumulated deficit of approximately $281.5 million. Substantially all of our operating losses resulted from costs incurred in connection with our development programs and from selling, general and administrative costs associated with our operations. The losses we have incurred to date, combined with future losses, if any, have had and may continue to have an adverse effect on our stockholders’ equity and working capital. We expect our expenses to substantially increase in the near-term as a result of continued spending on the commercial launch of lomitapide in the U.S. and in the key countries in which lomitapide is currently approved, or may be approved in the future, and expected distribution of lomitapide in Brazil and certain other countries as part of named patient supply or compassionate use; hiring of additional key personnel in the U.S., Europe and other countries; a clinical development program to support a potential application for marketing approval of lomitapide in Japan in adult patients with HoFH; a planned clinical study of lomitapide in the treatment of pediatric patients with HoFH; the conduct of our observational cohort study and other post-marketing commitments to the FDA and EMA; the conduct of any post marketing commitments imposed by regulatory authorities in countries outside the U.S. and EU where lomitapide is or may be approved; and other possible clinical development activities. We expect to incur significant sales, marketing, and outsourced manufacturing expenses, as well as continued research and development expenses. In addition, we have incurred, and expect to continue to incur, additional costs associated with operating as a public company and in connection with ongoing government investigations and a securities class action lawsuit, as described in detail in Part II, Item 1—“Legal Proceedings.” As a result, we expect to continue to incur operating losses at least for part of 2014 and potentially for a longer period.

Because of the numerous risks and uncertainties associated with developing and commercializing pharmaceutical products, we are unable to predict with certainty the extent of any future losses or when we will become profitable, if at all.

We have not generated significant revenue from lomitapide or any other product, and may never be profitable.

Our ability to become profitable depends upon our ability to generate revenue. We do not have a long history of generating revenue from any product including lomitapide, our only product. Our ability to generate significant revenue depends on a number of factors, including our ability to:

 

•

effectively market, sell and distribute lomitapide in the U.S.;

 

•

continue to have named patient sales of lomitapide in Brazil and other key countries where such sales can occur as a result of the FDA approval or of the marketing authorization granted by the EC for lomitapide in the EU;

 

•

obtain timely pricing and reimbursement approval of lomitapide in the key countries outside the U.S. where lomitapide is approved at acceptable prices and without onerous restrictions or caps, and to effectively launch lomitapide in the those countries;

 

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•

obtain timely approval of lomitapide in other key international markets as a treatment for patients with HoFH without onerous restrictions or limitations in the resulting label, and successfully obtain timely pricing approval for lomitapide in such markets at acceptable prices;

 

•

obtain and maintain market acceptance by patients, physicians and payors for lomitapide as a treatment for HoFH; and minimize the number of patients who discontinue lomitapide treatment, including due to tolerability issues, through activities such as patient support programs, to the extent permitted in a particular country;

 

•

effectively estimate the size of the total addressable market; and

 

•

maintain reimbursement policies for lomitapide in the U.S. that do not impose significant restrictions on reimbursement.

Lomitapide may not gain or maintain long-term market acceptance or achieve or maintain commercial success. In addition, we anticipate incurring significant costs associated with commercializing lomitapide and meeting our post-marketing commitments, and in connection with our on-going clinical efforts related to lomitapide. We may not achieve profitability. If we are unable to continue to generate significant product revenue, we will not become profitable, and may be unable to continue operations without additional funding.

We may need substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.

We may, in the future, 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 lomitapide;

 

•

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 on a timely basis, and without significant restrictions or caps or other cost containment measures;

 

•

the cost of continuing to build and maintain the sales and marketing capabilities necessary for the commercial launch of lomitapide as a treatment for HoFH in the U.S., the EU, Mexico, Canada and certain other key international markets, if approved;

 

•

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 the costs of post marketing commitments in any other countries where lomitapide is ultimately approved; and

 

•

the timing and cost of other clinical development activities.

In February 2013, we filed an automatic shelf registration statement on Form S-3 ASR with the SEC. 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, so long as we qualify as “well known seasoned issuer,” as defined under SEC regulations.

In March 2012, we entered into a Loan and Security Agreement with Silicon Valley Bank (as amended, the “Loan and Security Agreement”), pursuant to which Silicon Valley Bank made a term loan to us in the principal amount of $10.0 million. The Loan and Security Agreement provided for interest-only payments through February 28, 2013, with per annum interest of 6.75% and a final payment of $0.2 million. We used the proceeds of the term loan to fully repay our existing loan from Hercules Technology II, L.P. and

 

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Hercules Technology III, L.P. (collectively, the “Hercules Funds”). Under the Loan and Security Agreement, we have agreed to repay the principal balance of the term loan in 36 monthly installments starting on March 1, 2013, and continuing through February 1, 2016. As of June 30, 2014, we owed approximately $5.6 million under the term loan. We may prepay all or any part of the outstanding term loan subject to a prepayment premium (defined in the Loan and Security Agreement) at our option. In connection with the Loan and Security Agreement, we granted Silicon Valley Bank a negative pledge on our intellectual property and a security interest in all of our personal property then owned or thereafter acquired, excluding intellectual property. The Loan and Security Agreement also provides for standard indemnification of Silicon Valley Bank and contains representations, warranties and certain covenants (including the agreement by us to maintain a specified level of liquidity). During the three and six months ended June 30, 2014, we made principal payments to Silicon Valley Bank under the term loan amounting to $0.9 million and $1.7 million, respectively.

In July 2012, the Loan and Security Agreement was amended to include a line of credit of up to $0.8 million to finance the purchase of certain types of equipment acquired by us during the two years ended December 31, 2012 with a per annum interest of 4.75%. We financed approximately $0.6 million under this arrangement, and the remaining line of credit balance expired unused. As of June 30, 2014, we owed approximately $0.2 million under the line of credit. Pursuant to the amendment, monthly principal payments on the line of credit began in January 2013 and continue through December 2015. During each of the three and six month periods ended June 30, 2014, we made principal payments to Silicon Valley Bank under the line of credit amounting to $0.1 million.

We may pursue opportunities to obtain additional external financing in the future through debt and equity financing, lease arrangements related to facilities and capital equipment, collaborative research and development agreements, and license agreements.

We anticipate that our existing cash and cash equivalents will be sufficient to enable us to maintain our currently planned operations, including our continued development of lomitapide. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, including to finance product acquisition opportunities, even if we believe we have sufficient funds for our current or future operating plans.

Additional financing may not be available when we need it or may not be available on terms that are favorable to us.

If we are unable to obtain additional financing, we may be required to reduce the scope of our planned development, sales and marketing efforts, which could harm our business, financial condition and operating results. 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 the results of our future development efforts. There can be no assurance that external funds will be available on favorable terms, if at all.

We face certain litigation risks that could harm our business.

In January 2014, a federal securities class action lawsuit filed against us alleging that we and certain of our executive officers made certain misstatements and omissions related to the marketing of JUXTAPID and the Company’s financial performance in violation of federal securities laws. We intend to vigorously defend ourselves against the claims made in this lawsuit. An unfavorable outcome or settlement of this or any similar stockholder lawsuits that may be filed against us could have a material adverse effect on our financial position, liquidity or results of operations. Even if this lawsuit is not resolved against us, the uncertainty and expense associated with an unresolved lawsuit could adversely impact our business, financial condition and reputation. Litigation is costly, time-consuming and disruptive to normal business operations. The continued costs of defending this lawsuit could be significant. While we maintain directors’ and officers’ liability insurance that we believe to be applicable to this claim, certain costs, such as those below a retention amount, are not covered by our insurance policies. In addition, our insurance carriers could refuse to cover some or all of these claims in whole or in part. The continued defense of this lawsuit may also result in continued diversion of our management’s time and attention away from business operations, which could harm our business.

In late 2013, we received a subpoena from the United States Department of Justice, represented by the U.S. Attorney’s Office in Boston, requesting documents and other information pertaining to our promotion, marketing, and sale of JUXTAPID in connection with a government investigation of our practices. We are in the process of responding to the subpoena, and intend to continue to cooperate fully with the investigation. We intend to vigorously defend ourselves; however, this investigation, if resolved adversely, could result in civil and/or criminal sanctions being levied against us or our employees, including significant fines, settlement amounts, sanctions, or other negative consequences that could have a material adverse effect on our business, financial condition, or results of operations. Even if we are able to resolve this matter without incurring significant payments or penalties, responding to the subpoena has been, and is expected to continue to be, costly and time-consuming. Moreover, this investigation could adversely impact our reputation and the willingness of physicians to prescribe lomitapide for their HoFH patients, and may divert management’s attention and resources, which could have a material adverse effect on our business, financial condition, or results of operations.

 

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We are aware that federal and Sao Paulo authorities in Brazil are each conducting an investigation to determine whether there have been any violations of Brazilian anti-corruption laws in connection with prescriptions for lomitapide written in Brazil. Based on our investigation to date, we do not believe that a violation of Brazilian anti-corruption laws has occurred. In the event any Brazilian authorities ultimately decide to bring action against us or our employees, we intend to vigorously defend ourselves and our employees, as appropriate. If our operations in Brazil or in any other country in which we sell lomitapide through an expanded access program are found as part of this or any other investigation to be in violation of any laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, and fines, or under certain circumstances, we could be barred from further named patient sales in such country. In addition, the investigations in Brazil have resulted in a slower turn-around between price quotation and orders, including re-orders, from the federal government, and delays in orders or re-orders from the government of Sao Paolo after a patient has obtained access to JUXTAPID through the judicial process. These delays may continue. We may also experience other delays or suspension of the ordering process or reluctance of physicians to prescribe JUXTAPID, or patients to take JUXTAPID, while the investigation is ongoing, or if our activities are found to have violated applicable laws.

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights.

We may seek additional capital through a combination of private and public equity offerings, debt financings and collaborations and strategic and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration, strategic alliance and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates, or grant licenses on terms that are not favorable to us.

Our limited operating history makes it difficult to evaluate our business and prospects.

We were incorporated in February 2005. Our operations to date have been limited to organizing and staffing our company and conducting product development activities, commercial-build and activities related to commercialization of lomitapide. We only began generating revenues in January 2013. Consequently, any predictions about our future performance may not be as accurate as they could be if we had a longer operating history and more experience in generating revenue. In addition, as a relatively young business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors.

Changes in our effective income tax rate could adversely affect our results of operations, particularly once we utilize our remaining federal and state net operating loss, or NOL, carryforwards.

We are subject to federal and state income taxes in the U.S. Various factors may have favorable or unfavorable effects on our effective income tax rate. These factors include, but are not limited to, interpretations of existing tax laws, the accounting for stock-based compensation, the accounting for business combinations, including accounting for contingent consideration, changes in tax laws and rates, the tax impact of existing or future health care reform legislation, future levels of research and development spending, changes in accounting standards, changes in the mix of earnings in the various tax jurisdictions in which we operate, the outcome of examinations by the Internal Revenue Service and other jurisdictions, the accuracy of our estimates for unrecognized tax benefits and realization of deferred tax assets and changes in overall levels of pre-tax earnings. The impact on our provision for income tax resulting from the above-mentioned factors may be significant and could adversely affect our results of operations, including our expected net income. The effect of provision for income tax on our results of operations may impact, or be perceived to impact, our financial condition and may therefore cause our stock price to decline.

Any changes to existing accounting pronouncements or taxation rules or practices may cause adverse fluctuations in our reported results of operations or affect how we conduct our business.

A change in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results and may affect our reporting of transactions completed before the change is effective. New accounting pronouncements, taxation rules and varying interpretations of accounting pronouncements or taxation rules have occurred in the past and may occur in the future. The change to existing rules, future changes, if any, or the need for us to modify a current tax or accounting position may adversely affect our reported financial results or the way we conduct our business.

 

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Risks Related to our Common Stock

We have limited history generating product revenue, and may, in the future, need to raise capital to operate our business.

We do not have a long history generating revenues from sales of lomitapide. We launched lomitapide in the U.S. under the brand name JUXTAPID in the first quarter of 2013 and have had revenues from named patient sales of lomitapide in certain countries where such sales can occur as a result of the FDA or EU approval of lomitapide. The EC granted market authorization to lomitapide under the brand name, LOJUXTA, on July 31, 2013. Lomitapide is also approved in Mexico, Canada, and a small number of other countries. We do not yet have governmental pricing and reimbursement approval for LOJUXTA in any country of the EU. We are in the process of obtaining the various pricing and reimbursement approvals required in Mexico and Canada. We have not yet generated any material revenues from commercial sales in any country outside the U.S, except Brazil. We continue to expect to generate revenues from sales of lomitapide 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. We expect that prescriptions for named patient sales in Brazil in the near term will continue to be the second largest source of revenues, on a country-by-country basis, outside the U.S. Our ability to generate significant product revenue in the foreseeable future, and the amount of any such revenue, depend on a number of factors, including our ability to:

 

•

effectively market, sell and distribute lomitapide in the U.S.;

 

•

obtain anticipated levels of named patient sales of lomitapide in Brazil and in other key countries where such sales can occur as a result of the FDA approval or grant by the EC of marketing authorization of lomitapide in the EU;

 

•

successfully obtain timely reimbursement and pricing approval for lomitapide in key countries in which lomitapide is, or may be, approved at acceptable prices and on acceptable terms, and successfully launch lomitapide in those countries;

 

•

maintain market acceptance by patients and physicians for lomitapide as a treatment for HoFH, and minimize the number of patients who discontinue lomitapide treatment, including due to tolerability issues through activities such as patient support programs, to the extent permitted in a particular country;

 

•

obtaining timely approval of lomitapide in key international markets outside the countries where lomitapide is currently approved without onerous restrictions or limitations in the regulatory label, and effectively launching lomitapide in such markets;

 

•

effectively estimate the size of the total addressable market;

 

•

have sufficient commercial quantities of lomitapide to meet demand; and

 

•

recognize revenue from certain distributors where revenue recognition is dependent upon cash collection.

We may in the future require additional financing. If we do not succeed in raising additional funds on acceptable terms, if needed, we may be required to alter or scale back our planned activities. In addition, we could be forced to discontinue product development, forego attractive business opportunities or curtail operations. Any additional sources of financing could involve the issuance of our equity securities, which would have a dilutive effect on our stockholders. No assurance can be given that additional financing will be available to us when needed on acceptable terms, or at all.

The market price of our common stock has been, and may continue to be, highly volatile.

Our stock price is volatile, and from October 22, 2010, the first day of trading of our common stock, to June 30, 2014, the trading prices of our stock have ranged from $9.00 to $101.00 per share. This is in part because there has been a public market for our common stock only since our initial public offering in October 2010, and our stock could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including the following:

 

•

the short-term or long-term success or failure of our commercialization of lomitapide in the U.S.;

 

•

the level of revenue we receive from named patient sales of lomitapide in Brazil and other key countries where such sales can occur as a result of FDA approval or the marketing authorization granted by the EC for lomitapide;

 

•

our ability to obtain timely pricing and reimbursement approval for lomitapide in the key countries of the EU and in the other countries in which lomitapide is, or may be, approved at acceptable price levels and on acceptable terms;

 

•

the short-term or long-term success or failure of our commercialization of lomitapide in key countries outside the U.S. in which we have or obtain approval, and the level of revenues we generate;

 

•

the initiation and results of our planned further clinical trials of lomitapide;

 

•

any issues that may arise with our supply chain for lomitapide;

 

•

any adverse regulatory decisions made with respect to lomitapide;

 

•

any issues that may arise with respect to the safety of lomitapide;

 

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•

our ability to defend ourselves successfully in ongoing government investigations and against claims made in securities class action lawsuits, and, if we are unsuccessful in such defense, the type and amount of any damages, settlement amounts, fines or other payments or adverse consequences that may result;

 

•

fluctuations in stock market prices and trading volumes of similar companies; and general market conditions and overall fluctuations in U.S. equity markets;

 

•

low trading volume and short interest positions in our stock;

 

•

international financial market conditions, including the on-going sovereign debt crisis in the EU;

 

•

variations in our quarterly operating results;

 

•

changes in our financial guidance or securities analysts’ estimates of our financial performance;

 

•

announcements of investigations or litigation, and updates to the status of investigations and litigation, or other notifications from enforcement or regulatory authorities related to our business or business practices;

 

•

announcements of clinical data, new products, services or technologies, commercial relationships, acquisitions or other events by us or our competitors;

 

•

changes in or materially incorrect application of accounting principles;

 

•

issuance by us of new securities, or sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

 

•

additions or departures of key personnel;

 

•

success or failure of products within our therapeutic area of focus;

 

•

discussion of us or our stock price by the financial press and in online investor communities;

 

•

our relationships with and the conduct of third parties on which we depend; and

 

•

other risks and uncertainties described in these risk factors.

In particular, our revenue guidance relating to our year ending 2014 is predicated on many assumptions, most notably that our recent quarter-over-quarter U.S. revenue growth continues and ex-U.S. sales, particularly in Brazil, grow in the second half of 2014 such that 2014 ex-U.S. sales are at least consistent as a percentage of total sales as that experienced in 2013. If any of our assumptions turn out to be incorrect, our 2014 financial results could be weaker than expected, and the price of our common stock could decline, perhaps precipitously.

In addition, the stock market in general, and the market for small pharmaceutical and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In addition, broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market in a company’s stock, securities class-action litigation has often been instituted against such a company. We, and certain of our executive officers, have been named as defendants in a federal securities class action lawsuit filed against us alleging that we and certain of our executive officers made certain false and misleading statements in violation of federal securities laws. See Part II, Item 1—“Legal Proceedings.” These proceedings and similar litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business and financial condition.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our certificate of incorporation and by-laws may delay or prevent an acquisition of us or a change in our management. These provisions include a classified board of directors, a prohibition on actions by written consent of our stockholders and the ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board of directors was considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

 

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We do not intend to pay dividends on our common stock and, consequently, a stockholder’s ability to achieve a return on investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividend on our common stock, and do not currently intend to do so for the foreseeable future.

We currently anticipate that we will retain any future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in the value of such shares. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

Future sales of our common stock may cause our stock price to decline.

Sales of a substantial number of shares of our common stock in the public market or a sale of securities convertible into common stock or the perception that these sales might occur, could significantly reduce the market price of our common stock and impair our ability to raise adequate capital through the sale of additional equity securities.

If our existing stockholders sell, or if the market believes our existing stockholders will sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline significantly.

 

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As of June 30, 2014, there were:

 

•

6,268,184 shares issuable upon the exercise of stock options outstanding under our 2006 Stock Option and Award Plan, the 2010 Stock Option and Incentive Plan and the Inducement Stock Option Plan;

 

•

101,800 shares of restricted common stock subject to vesting;

 

•

958,223 shares available for future issuance under the 2010 Stock Option and Incentive Plan; and

 

•

966,501 shares available for issuance under our Inducement Stock Option Plan, a plan that is to be used exclusively for the grant of stock options to individuals who were not previously an employee or a non-employee director (or following a bona fide period of non-employment with us), as an inducement material to the individual’s entry into employment, other than as an executive officer, with us within the meaning of Rule 5635(c)(4) of the NASDAQ Listing Rules.

Under the 2010 Plan, the shares reserved for issuance under the plan are automatically increased on an annual basis in accordance with a pre-determined formula. As a result, on January 1, 2014, January 1, 2013, and January 1, 2012, an additional 1,175,372, 1,019,590, and 848,012 shares, respectively, were added to the aggregate number of shares reserved for future issuance under the 2010 Plan under the annual automatic share increase provision of the plan.

If additional shares are sold, or if it is perceived that they will be sold, in the public market, the price of our common stock could decline substantially.

We have registered approximately 8,000,000 shares of the common stock described above that are subject to outstanding stock options and reserved for issuance under our equity plans. These shares can be freely sold in the public market upon issuance, subject to vesting restrictions.

 

Item 2.

Unregistered Sales of Securities and Use of Proceeds

Not applicable.

 

Item 3.

Defaults Upon Senior Securities

Not applicable.

 

Item 4.

Mine Safety Disclosure

Not applicable.

 

Item 5.

Other Information

Not applicable.

 

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Item 6.

Exhibits

 

31.1*		Certification of Marc D. Beer, Chief Executive Officer of the Company, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
31.2*		Certification of Mark J. Fitzpatrick, Chief Financial Officer of the Company, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.1**		Certification of Marc D. Beer, Chief Executive Officer of the Company, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2**		Certification of Mark J. Fitzpatrick, Chief Financial Officer of the Company, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.
101.INS*		XBRL Instance Document.
101.SCH*		XBRL Taxonomy Extension Schema Document.
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.

 

*	Filed herewith

**	Furnished Herewith

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				AEGERION PHARMACEUTICALS, INC.
						(Registrant)
Date: August 8, 2014				By:		/s/ Marc D. Beer
						Marc D. Beer Chief Executive Officer (principal executive officer)
Date: August 8, 2014				By:		/s/ Mark J. Fitzpatrick
						Mark J. Fitzpatrick Chief Financial Officer (principal financial officer)

 

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