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EX-31.1 - EXHIBIT 31.1 - Aegerion Pharmaceuticals, Inc.aegr-20160930_exhibit311.htm
EX-32.2 - EXHIBIT 32.2 - Aegerion Pharmaceuticals, Inc.aegr-20160930_exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - Aegerion Pharmaceuticals, Inc.aegr-20160930_exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Aegerion Pharmaceuticals, Inc.aegr-20160930_exhibit312.htm
EX-10.3 - EXHIBIT 10.3 - Aegerion Pharmaceuticals, Inc.exhibit103.htm
EX-10.2 - EXHIBIT 10.2 - Aegerion Pharmaceuticals, Inc.exhibit102.htm
EX-10.1 - EXHIBIT 10.1 - Aegerion Pharmaceuticals, Inc.exhibit101.htm

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 September 30, 2016
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.)
 
One Main Street, Suite 800
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  o
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  o 
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
o
 
 
 
 
Non-Accelerated Filer
o  (Do not check if a smaller reporting company)
Smaller Reporting Company
o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No   x 
The number of shares outstanding of the registrant’s Common Stock as of October 31, 2016 was 29,545,088.




AEGERION PHARMACEUTICALS, INC.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


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,” "guidance", “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 proposed transaction with QLT Inc. (“QLT”), including the timing and financial and strategic costs and benefits thereof and the loan arrangements with QLT in connection therewith; the commercial potential for, and market acceptance of, our products; our estimates as to the potential number of patients with the diseases for which our products are approved; our expectations with respect to reimbursement of our products in the United States; our plans to withdraw lomitapide from, or alternatively to license or partner lomitapide in, the European Union and certain other global markets; our expectations with respect to pricing and reimbursement approvals required for lomitapide in Japan, Canada and Colombia, and other countries in which we receive, or have received, marketing approval and plan to commercialize lomitapide; our expectations with respect to named patient sales of our products in Brazil and in other countries where such sales are permitted; the potential for and possible timing of approval of our products in countries where we have not yet obtained approval; our plans for further clinical development of our products; our expectations regarding future regulatory filings for our products, including planned marketing approval applications with respect to metreleptin in the European Union and a planned application to expand the indication for metreleptin in the United States, subject to discussions with the FDA; our plans for commercial marketing, sales, manufacturing and distribution of our products; our expectations with respect to the impact of competition on our future operations and results; our beliefs with respect to our intellectual property portfolio for our products and the extent to which it protects us; our expectations regarding the availability of data and marketing exclusivity for our products in the United States, the European Union, Japan and other countries; our view of ongoing government investigations, including the terms of preliminary agreements in principle with the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) and potential outcomes of the ongoing DOJ and SEC investigations, stockholder litigation and investigations in Brazil, and the possible impact and additional consequences of each on our business; our forecasts regarding sales of our products, our future expenses, our cash position and the timing of any future need for additional capital to fund operations; and our ability to work with Silicon Valley Bank to obtain a further forbearance or waiver of our breach of certain covenants of our loan agreement with Silicon Valley Bank and to otherwise avoid an acceleration of our debt.
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 I, 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 such event 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.
Trademarks
Aegerion, JUXTAPID, LOJUXTA and MYALEPT are trademarks of Aegerion. All other trademarks referenced in this Form 10-Q are the property of their respective owners.

3


PART I. FINANCIAL INFORMATION

Aegerion Pharmaceuticals, Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)

 
September 30, 2016
 
December 31, 2015
Assets
    
 
    
Current assets:
 
 
 
Cash and cash equivalents
$
32,363

 
$
64,501

Restricted cash
26,048

 
25,529

Accounts receivable
7,843

 
13,557

Inventories
41,517

 
58,706

Prepaid expenses and other current assets
13,007

 
13,645

Total current assets
120,778

 
175,938

Property and equipment, net
4,744

 
4,893

Intangible assets, net
227,779

 
242,917

Goodwill

 
9,600

Other assets
525

 
850

Total assets
$
353,826

 
$
434,198

Liabilities and stockholders’ (deficit) equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
9,953

 
$
10,784

Accrued liabilities
40,410

 
39,103

Contingent litigation accrual (Note 13)
40,509

 
12,000

Long-term debt in default
25,000

 
25,000

Short-term debt, net
2,915

 

Total current liabilities
118,787

 
86,887

Long-term liabilities:
 
 
 
Convertible 2.0% senior notes, net
246,420

 
229,782

Other liabilities
1,445

 
1,984

Total liabilities
366,652

 
318,653

Commitments and contingencies (Note 13)

 

Stockholders’ (deficit) equity:
 
 
 
Preferred stock, $0.001 par value, 5,000 shares authorized; none issued and outstanding at September 30, 2016 and December 31, 2015

 

Common stock, $0.001 par value, 125,000 shares authorized at September 30, 2016 and December 31, 2015; 30,795 and 30,715 shares issued at September 30, 2016 and December 31, 2015, respectively; 29,544 and 29,464 shares outstanding at September 30, 2016 and December 31, 2015, respectively
31

 
31

Treasury Stock, at cost; 1,251 shares at September 30, 2016 and December 31, 2015
(35,000
)
 
(35,000
)
Additional paid-in-capital
530,532

 
519,166

Accumulated deficit
(507,733
)
 
(368,804
)
Accumulated other comprehensive (loss) income
(656
)
 
152

Total stockholders’ (deficit) equity
(12,826
)
 
115,545

Total liabilities and stockholders’ (deficit) equity
$
353,826

 
$
434,198

See accompanying notes.

4



Aegerion Pharmaceuticals, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net product sales
$
35,387

 
$
67,303

 
$
115,633

 
$
190,884

Cost of product sales
13,838

 
14,486

 
51,867

 
40,321

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative
27,827

 
43,923

 
107,942

 
133,523

Research and development
9,940

 
11,282

 
30,495

 
33,551

Provision for contingent litigation
126

 

 
28,509

 

Impairment of goodwill

 

 
9,600

 

Restructuring
2,421

 

 
4,172

 

Total operating expenses
40,314

 
55,205

 
180,718

 
167,074

Loss from operations
(18,765
)
 
(2,388
)
 
(116,952
)
 
(16,511
)
Interest expense, net
(7,720
)
 
(7,113
)
 
(22,371
)
 
(21,113
)
Other income, net
165

 
30

 
1,126

 
1,631

Loss before provision for income taxes
(26,320
)
 
(9,471
)
 
(138,197
)
 
(35,993
)
Provision for income taxes
(246
)
 
(294
)
 
(732
)
 
(747
)
Net loss
$
(26,566
)
 
$
(9,765
)
 
$
(138,929
)
 
$
(36,740
)
Net loss per common share—basic and diluted
$
(0.90
)
 
$
(0.34
)
 
$
(4.71
)
 
$
(1.28
)
Weighted-average shares outstanding—basic and diluted
29,525

 
28,681

 
29,500

 
28,598

See accompanying notes.

5


Aegerion Pharmaceuticals, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(in thousands)


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(26,566
)
 
$
(9,765
)
 
$
(138,929
)
 
$
(36,740
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation
(127
)
 
(248
)
 
(808
)
 
201

Other comprehensive (loss) income
(127
)
 
(248
)
 
(808
)
 
201

Comprehensive loss
$
(26,693
)
 
$
(10,013
)
 
$
(139,737
)
 
$
(36,539
)
 
 
See accompanying notes.

6


Aegerion Pharmaceuticals, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
Nine Months Ended
 
September 30,
 
2016
 
2015
Operating activities
    
 
    
Net loss
$
(138,929
)
 
$
(36,740
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation
1,501

 
1,178

Amortization of intangible assets
15,138

 
15,281

Stock-based compensation
11,147

 
18,240

Noncash interest expense
16,726

 
15,693

Provision for inventory excess and obsolescence
16,343

 
1,423

Impairment of goodwill
9,600

 

Unrealized foreign exchange gain
(1,111
)
 
(394
)
Loss on disposal of property and equipment
215

 
66

Deferred income taxes
423

 
409

Deferred rent
(413
)
 
(126
)
Changes in assets and liabilities, excluding the effect of acquisition:
 
 
 
Accounts receivable
5,714

 
(1,096
)
Inventories
1,161

 
3,715

Prepaid expenses and other assets
963

 
(3,364
)
Accounts payable
(859
)
 
962

Accrued and other liabilities
759

 
8,850

Contingent litigation accrual
28,509

 

Net cash (used in) provided by operating activities
(33,113
)
 
24,097

Investing activities
 
 
 
Purchases of property and equipment
(1,540
)
 
(1,207
)
Payment for acquisition of MYALEPT

 
(325,000
)
Net cash used in investing activities
(1,540
)
 
(326,207
)
Financing activities
 
 
 
Proceeds from short-term debt, net
2,828

 
24,962

Increase in restricted cash to collateralize long-term debt in default
(519
)
 
(25,505
)
Principal repayment of long-term debt

 
(4,010
)
Payments for withholding taxes on restricted stock units
(102
)
 
(297
)
Proceeds from exercises of stock options
5

 
3,056

Net cash provided by financing activities
2,212

 
(1,794
)
Exchange rate effect on cash
303

 
(295
)
Net decrease in cash and cash equivalents
(32,138
)
 
(304,199
)
Cash and cash equivalents, beginning of period
64,501

 
375,937

Cash and cash equivalents, end of period
$
32,363

 
$
71,738

Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
$
7,073

 
$
7,015

Cash paid for taxes
$
932

 
$
1,018

Non-cash investing activities
 
 
 
Purchases of property and equipment included in accounts payable
$
28

 
$
61

 
See accompanying notes.


7


Aegerion Pharmaceuticals, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2016
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 patients with HoFH. Lomitapide is also approved for the treatment of adult HoFH in Canada, Japan, Mexico, Taiwan, South Korea and a small number of other countries. Pricing and reimbursement approval of lomitapide has not yet been received in many of the countries in which the product is approved. As a result of this and other factors, on July 20, 2016, the Company announced a restructuring under which it intends to withdraw lomitapide from the EU and certain other global markets by the end of 2016, unless the Company earlier enters into supply, license or other arrangements with suitable partners in such markets.  Lomitapide is also sold on a named patient basis in Brazil as a result of the approval of lomitapide in the U.S. and in a limited number of other countries as a result of the approval of lomitapide in the U.S. or the EU.
The Company acquired its second product, metreleptin, from Amylin Pharmaceuticals, LLC (“Amylin”) and AstraZeneca Pharmaceuticals LP, an affiliate of Amylin, in January 2015. Metreleptin, a recombinant analog of human leptin, is currently marketed in the U.S. under the brand name MYALEPT® (metreleptin) for injection (“MYALEPT”). MYALEPT received marketing approval from the FDA in February 2014 as an adjunct to diet as replacement therapy to treat the complications of leptin deficiency in patients with congenital or acquired generalized lipodystrophy (“GL”). Metreleptin is also sold, or approved for sale, on a named patient basis in Brazil and other international countries as a result of the approval of metreleptin in the U.S.
In the near term, the Company’s ability to generate revenue is primarily dependent upon sales of lomitapide and metreleptin in the U.S. and, on a named patient basis, in Brazil. The Company has incurred substantial losses in every fiscal period since inception, and expects operating losses and negative cash flows during 2016. As of September 30, 2016, the Company had an accumulated deficit of $507.7 million.
 
The unaudited condensed consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. However, at September 30, 2016, the Company had unrestricted cash of $32.4 million and an accumulated deficit of $507.7 million. In the three months and nine months ended September 30, 2016, the Company incurred net losses of $26.6 million and $138.9 million, respectively.  Due to the introduction of two competitive therapies during 2015, the Company incurred a significant reduction in net sales of JUXTAPID during the second half of 2015 and the first half of 2016, and expects total 2016 net sales to be significantly lower than 2015.  Additionally, as described further in Note 13, the Company is the subject of ongoing government investigations in the U.S. and Brazil.  The Company has reached preliminary agreements in principle with the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) to resolve their investigations into the marketing and sales activities and disclosures relating to JUXTAPID. However, the preliminary agreements in principle and any final settlements are subject to final approvals and do not cover the DOJ and SEC’s inquiries concerning the Company’s operations in Brazil. The Company is also the subject of ongoing government investigations in Brazil.  The outcome of these investigations has had and could have additional material negative consequences for the Company’s business, financial position, results of operations and/or cash flows. As a result of these factors, there is substantial doubt about the Company’s ability to continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern. The Company is currently considering several activities to finance its operations and reduce operating costs,

8


including raising additional capital and reductions in its ongoing expenses through the headcount reductions and lease restructuring described in Note 8.  However, there can be no assurances that these activities will be successful and/or mitigate the risks associated with the factors noted above.
 
Proposed Merger with QLT. On June 14, 2016, the Company entered into a definitive merger agreement (as amended, the “Merger Agreement”) pursuant to which the Company will be merged with an indirect wholly-owned subsidiary of QLT Inc. (“QLT”). Upon completion of the proposed merger, each outstanding share of the Company’s common stock will be exchanged for 1.0256 shares of QLT common stock. QLT plans to change its name to Novelion Therapeutics Inc. (“Novelion”) upon closing of the proposed transaction and its common shares will trade on the NASDAQ Global Select Market and the Toronto Stock Exchange.
 
A broad-based investor syndicate (the “Investors”) comprised of both new investors and existing shareholders of both companies has committed to invest approximately $22 million in QLT and to vote in favor of the proposed merger and related transactions. This investment would be funded immediately prior to the closing of the merger and is expected to provide Novelion with additional capital to support future operations and the potential opportunity for targeted business development initiatives.
 
The exchange ratio for the merger is subject to downward adjustment if the Company’s previously disclosed securities class action litigation and DOJ and SEC investigations are resolved prior to the closing of the merger for amounts in excess of negotiated thresholds up to a maximum excess amount of $25 million. In the event that either the class action litigation or DOJ and SEC investigations are not settled prior to closing of the merger, QLT will enter into a warrant agreement pursuant to which warrants will be issued to QLT shareholders and the Investors that would be exercisable for additional Novelion common shares if the class action litigation or DOJ and SEC investigations are subsequently resolved for amounts in excess of negotiated thresholds up to a maximum excess amount of $25 million. The equity exchange ratio will not be adjusted to reflect stock price changes for either QLT or Aegerion prior to the closing of the merger.
 
Upon completion of the merger, and giving effect to the investment in QLT immediately prior to the merger by the Investors, QLT shareholders immediately prior to the merger will own approximately 67% of the outstanding Novelion common shares, and the Company’s stockholders will own approximately 33% of the outstanding Novelion common shares.  The Company’s in-the-money stock options and restricted stock units (“RSUs”) will be converted into the right to receive equivalent options and RSUs exercisable for or convertible into, respectively, Novelion common shares. The remainder of the Company’s equity-based awards would be cancelled upon the completion of the merger. In addition, the Company would enter into a supplemental indenture to the indenture governing the Company’s 2.00% Convertible Senior Notes Due 2019 (the “Convertible Notes”) providing that as of the effective time of the merger each outstanding Convertible Note will be convertible solely into Novelion common shares. See Note 6, “Debt Financing,” for discussion of the treatment of the Convertible Notes in connection with the pending merger.
 
Concurrent with the signing of the Merger Agreement, the Company and QLT entered into a loan agreement under which QLT has agreed to loan the Company up to $15 million for working capital. The Company borrowed $3 million in connection with execution of the Merger Agreement and may borrow up to $3 million per month in subsequent months, subject to certain conditions, if and to the extent such amounts are necessary in order for the Company to maintain an unrestricted cash balance of $25 million. See Note 6 for further information regarding the loan arrangements with QLT.
 
The Merger Agreement provides that the Novelion board of directors would consist of four individuals designated by the Company, four individuals designated by QLT, one individual designated by Broadfin Capital, LLC and one individual designated by Sarissa Capital Management LP (“Sarissa Capital”). For a specified period of time following the merger, Sarissa Capital would also have the right to designate one additional member of the board of directors of Novelion. Mary Szela, the Company’s Chief Executive Officer, would serve as Chief Executive Officer of Novelion.
 
The completion of the merger is subject to the approval of shareholders of the Company and QLT and other outstanding closing conditions, including, among others, (i) the approval of the listing on the NASDAQ Global Select Market and the Toronto Stock Exchange of the Novelion common shares to be issued in connection with the merger, (ii) the Company's entry into a supplemental indenture related to the Convertible Notes and (iii) receipt by QLT of the proceeds of an equity investment from the Investors contemplated in connection with the merger.
 
The Merger Agreement contains certain termination rights for both QLT and the Company, including, among others, a right to terminate with the mutual consent of the Company and QLT, in the event that the merger is not consummated by December 14, 2016, subject to an extension in certain circumstances; and if the requisite shareholder approvals are not received. The Merger Agreement also provides for payment of a $5 million termination fee by QLT or the Company, as

9


applicable, upon termination of the Merger Agreement under specified circumstances, including, among others, termination of the Merger Agreement by a party following a change in the recommendation of the Company’s or QLT’s board of directors, as applicable.
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, 2016. This Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”). Certain prior period amounts have been reclassified to conform to the current period presentation, including the classification of contingent litigation accrual in the unaudited condensed consolidated financial statements.
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. The Company operates in one segment, pharmaceuticals.
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. Significant estimates in these consolidated financial statements have been made in connection with the calculation of net product sales, inventories, certain accruals related to contingencies and the Company’s research and development expenses, stock-based compensation, valuation procedures for the fair value of intangible assets, tangible assets and goodwill from the acquisition of MYALEPT, useful lives of acquired intangibles, impairments of goodwill and long-lived assets and the provision for or benefit from income taxes. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.
     Revenue Recognition
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.
Lomitapide
In the U.S., JUXTAPID is only available for distribution through a specialty pharmacy, and is generally 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 are currently prerequisites to the shipment of product to a patient in the U.S. Revenue from sales in the U.S. covered by the patient’s private insurance plan or government payer is 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 defers revenue until the product has been received by the patient.
The Company also records 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 sales under these named patient programs once the product is shipped through to the government authority or institution. In the event the payer’s creditworthiness has not been established, the Company recognizes revenue on a cash basis if all other revenue recognition criteria have been met.

10


The Company records distribution and other fees paid to its distributors 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 distributor as an operating expense. At this time, neither condition has been met and therefore, the fees paid to the Company’s distributors are recorded as a reduction to revenue. The Company records revenue net of estimated discounts and rebates, including those provided to Medicare, Medicaid, Tricare and other government programs in the U.S. and other countries. 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 reasonably estimable at the time of delivery. These allowances are adjusted to reflect known changes in the factors that may impact such allowances in the quarter those changes are known.
 
The Company also provides financial support to 501(c)(3) organizations that assist patients in the U.S. in accessing treatment for certain diseases and conditions. These organizations provide charitable services to patients according to eligibility criteria defined independently by the organization. The Company records donations made to 501(c)(3) organizations as selling, general and administrative expense. Any payments received from a 501(c)(3) organization that has received a donation from the Company are recorded as a reduction of selling, general and administrative expense rather than as revenue. Effective January 2015, the Company also offers a branded co-pay assistance program for certain patients in the U.S. with HoFH who are on JUXTAPID therapy. The branded co-pay assistance program assists commercially insured patients who have coverage for JUXTAPID, and is intended to reduce each participating patient’s portion of the financial responsibility for JUXTAPID’s purchase price up to a specified dollar amount of assistance. The Company records revenue net of amounts paid under the branded specific co-pay assistance program for each patient. 
Metreleptin
In the U.S., MYALEPT is only available through an exclusive third-party distributor that takes title to the product upon shipment. MYALEPT is not available in retail pharmacies. The distributor may only contractually acquire up to 21 business days worth of inventory. The Company recognizes revenue for these sales once the product is received by the patient, as it is currently unable to reasonably estimate the rebates owed to certain government payers at the time of receipt by the distributor. Prior authorization and confirmation of coverage level by the patient’s private insurance plan or government payer are currently prerequisites to the shipment of product to a patient in the U.S.
The Company also records revenue on sales in Brazil and other countries where metreleptin is available on a named patient basis and is 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 metreleptin, 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 sales under these named patient programs once the product is shipped through to the government authority or institution. In the event the payer’s creditworthiness has not been established, the Company recognizes revenue on a cash basis if all other revenue recognition criteria have been met.
The Company records distribution and other fees paid to its distributor 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 distributor as an operating expense. At this time, neither condition has been met and therefore, these fees paid to the distributor of MYALEPT are recorded as reduction to revenue. The Company records revenue from sales of MYALEPT net of estimated discounts and rebates, including those provided to Medicare and Medicaid in the U.S. Allowances for government rebates and discounts are established based on the actual payer information, which is reasonably estimable at the time of delivery. These allowances are adjusted to reflect known changes in the factors that may impact such allowances in the quarter those changes are known.
 
As discussed above, the Company also provides financial support to 501(c)(3) organizations that assist patients in the U.S. in accessing treatment for certain diseases and conditions. These organizations provide charitable services to patients according to eligibility criteria defined independently by the organization. The Company records donations made to 501(c)(3) organizations as selling, general and administrative expense. Any payments received from a 501(c)(3) organization that has received a donation from the Company are recorded as a reduction of selling, general and administrative expense rather than as revenue. The Company also offers co-pay assistance for patients in the U.S. with GL who are on MYALEPT therapy. The co-pay assistance program assists commercially insured patients who have coverage for MYALEPT, and is intended to reduce each participating patient’s portion of the financial responsibility for MYALEPT’s purchase price up to a specified dollar amount of assistance. The Company records revenue net of amounts paid under the MYALEPT co-pay assistance program for each patient. 

11


Business Combinations
The Company evaluates acquisitions of assets and other similar transactions to assess whether or not each such transaction should be accounted for as a business combination by assessing whether or not the Company has acquired inputs and processes that have the ability to create outputs. If the Company determines that an acquisition qualifies as a business, the Company assigns the value of consideration transferred in such business combination to the appropriate accounts on the Company’s consolidated balance sheet based on their fair value as of the effective date of the transaction. Transaction costs associated with business combinations are expensed as incurred.
Fair Value of Purchased Tangible Assets, Intangibles and In-process Research and Development Assets in Business Combinations
The present-value models used to estimate the fair values of purchased tangible assets, intangibles and in-process research and development assets incorporate significant assumptions, include, but are not limited to: assumptions regarding the probability of obtaining marketing approval and/or achieving relevant development milestones for a drug candidate; estimates regarding the timing of and the expected costs to develop a drug candidate; estimates of future cash flows from potential product sales; and the appropriate discount and tax rates.
The Company records the fair value of purchased intangible assets with definite useful lives as of the transaction date of a business combination. Purchased intangible assets with definite useful lives are amortized to their estimated residual values over their estimated useful lives and reviewed for impairment if certain events occur. Impairment testing and assessments of remaining useful lives are performed when a triggering event occurs that could indicate a potential impairment. Such test first entails comparison of the carrying value of the intangible asset to the undiscounted cash flows expected from that asset. If impairment is indicated by this test, the intangible asset is written down by the amount, if any, by which the discounted cash flows expected from the intangible asset exceeds its carrying value. See Note 4 for further discussion of the Company’s interim impairment analysis.
The Company records the fair value of in-process research and development assets as of the transaction date of a business combination. Each of these assets is accounted for as an indefinite-lived intangible asset and is maintained on the Company’s consolidated balance sheet until either the project underlying it is completed or the asset becomes impaired. If the asset becomes impaired or is abandoned, the carrying value of the related intangible asset is written down to its fair value, and an impairment charge is recorded in the period in which the impairment occurs. If a project is completed, the carrying value of the related intangible asset is amortized as a part of cost of product revenue over the remaining estimated life of the asset beginning in the period in which the project is completed. In-process research and development assets are tested for impairment on an annual basis as of October 31, and more frequently if indicators are present or changes in circumstances suggest that impairment may exist. See Note 4 for further discussion of the Company’s interim impairment analysis.
The Company records the fair value of purchased tangible assets as of the transaction date of a business combination. These tangible assets are accounted for as either inventory or clinical and compassionate use materials, which are classified as other assets on the Company’s consolidated balance sheet. Inventory is maintained on the Company’s consolidated balance sheet until the inventory is sold, donated as part of the Company’s compassionate use program, used for clinical development, or determined to be in excess of expected requirements. Inventory that is sold or determined to be in excess of expected requirements is recognized as cost of product sales in the consolidated statement of operations, inventory that is donated as part of the Company’s compassionate use program is recognized as a selling, general and administrative expense in the consolidated statement of operations, and inventory used for clinical development is recognized as research and development expense in the consolidated statement of operations. Other assets are maintained on the Company’s consolidated balance sheet until these assets are consumed. If the asset becomes impaired or is abandoned, the carrying value is written down to its fair value, and an impairment charge is recorded in the period in which the impairment occurs.
Goodwill
The difference between the purchase price and the fair value of assets acquired and liabilities assumed in a business combination is allocated to goodwill. Goodwill is evaluated for impairment on an annual basis as of October 31, and more frequently if indicators are present or changes in circumstances suggest that impairment may exist. See Note 4 for further discussion of the Company’s interim goodwill impairment analysis, which resulted in an impairment charge of $9.6 million in the second quarter of 2016.
Concentration of Credit Risk
The Company’s financial instruments that are exposed to credit risks consist primarily of cash, cash equivalents, restricted cash and accounts receivable. The Company maintains its cash, cash equivalents and restricted cash in bank accounts,

12


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 is subject to credit risk from its accounts receivable related to its product sales of lomitapide and metreleptin. The majority of the Company’s accounts receivable arise 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 does not recognize revenue for 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. 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. Inventory becomes obsolete when it has aged past its shelf-life, cannot be recertified and is no longer usable or able to be sold, or the inventory has been damaged. In such instances, a full reserve is taken against such inventory. Expired inventory is disposed of and the related costs are recognized as cost of product sales in the consolidated 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, amortization of acquired intangibles, as well as royalties payable to The Trustees of the University of Pennsylvania (“UPenn”) related to the sale of lomitapide and royalties payable to Amgen, Rockefeller University and Bristol-Myers Squibb (“BMS”) related to the sale of metreleptin.
Stock-Based Compensation
The Company accounts for its stock-based compensation to employees in accordance with ASC 718, Compensation-Stock Compensation and to non-employees in accordance with ASC 505-50, Equity Based Payments to Non-Employees. For service-based 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. 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 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 period for unvested awards. See Note 9 for further information about the Company’s stock option plans.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid instruments purchased with an original maturity of three months or less at the date of purchase.  As of September 30, 2016 and December 31, 2015, the Company held $32.4 million and $64.5 million in cash and cash equivalents, respectively, consisting of cash and money market funds.
Restricted Cash 
Restricted cash represents amounts deposited with Silicon Valley Bank to collateralize balances related to outstanding obligations under the SVB Loan and Security Agreement (as defined below). These amounts are restricted for all uses until the full and final payment of all obligations, as determined by Silicon Valley Bank in its sole and exclusive discretion. See Note 6 for further discussion.    
Recent Accounting Pronouncements – Not Yet Adopted
In May 2014, the FASB issued a comprehensive Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which amends revenue recognition principles and provides a single set of criteria for revenue recognition among all industries. This new standard has been subsequently amended by ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08, Revenue from Contracts with

13


Customers (Topic 606), ASU 2016-10, Revenue from Contracts with Customers (Topic 606), and ASU 2016-12, Revenue from Contracts with Customers (Topic 606). The new standard provides a five step framework whereby revenue is recognized when promised goods or services are transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosures pertaining to revenue recognition in both interim and annual periods. The standard is effective for interim and annual periods beginning after December 15, 2017, with early adoption one year prior to the effective date allowed, and allows for adoption using a full retrospective method, or a modified retrospective method. The Company plans to adopt this standard on January 1, 2018 and is currently assessing the method of adoption and the expected impact the new standard has on its financial position and results of operations.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern, which provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern within one year from the date the financial statements are issued for each reporting period. This new accounting guidance is effective for interim and annual periods ending after December 15, 2016. Early adoption is permitted. The Company does not expect the new guidance to have a significant effect on its consolidated financial statements, but may require further disclosure in its financial statements once adopted. 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  ASU 2016-02 requires lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous GAAP. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. There continues to be a differentiation between finance leases and operating leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU No. 2016-02 on its consolidated financial statements and related disclosures. 
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of related activity on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU No. 2016-09 on its consolidated financial statements and related disclosures. 
In September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The amendments in ASU 2016-13 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU No. 2016-13 on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The standard provides guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows, including beneficial interests in securitization, which would impact the presentation of the deferred purchase price from sales of receivables.  The standard is intended to reduce current diversity in practice.  Early adoption is permitted, including adoption in an interim period.  The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures and the timing of adoption. 

2. Fair Value of Financial Instruments
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 established 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.

14


Level 2 — Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly.
Level 3 — Inputs that are unobservable for the asset or liability.
The fair value measurements of the Company’s financial instruments at September 30, 2016 is summarized in the table below:
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance at
September 30
2016
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Cash
$
11,324

 
$

 
$

 
$
11,324

Money market funds
21,039

 

 

 
21,039

Restricted cash
26,048

 

 

 
26,048

Total assets
$
58,411

 
$

 
$

 
$
58,411

 
The fair value measurements of the Company’s financial instruments at December 31, 2015 is summarized in the table below:
 
 
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
2015
 
(in thousands)
Assets:
    
 
    
 
    
 
    
Cash
$
14,021

 
$

 
$

 
$
14,021

Money market funds
50,480

 

 

 
50,480

Restricted cash
25,529

 

 

 
25,529

Total assets
$
90,030

 
$

 
$

 
$
90,030

Term Loan
The carrying value of the Company’s long-term debt in default approximates fair value due its current classification and callable nature, and was $25.0 million at September 30, 2016 and December 31, 2015. The carrying value is computed pursuant to a discounted cash flow technique using the effective interest rate method based on a current market interest rate for the Company’s term loan, which are considered Level 2 inputs.
QLT Loan
Based on borrowing rates currently available to the Company with similar terms and remaining maturities, and considering the Company’s credit risk, the carrying value of the loan from QLT of $2.9 million approximates fair value at September 30, 2016. The carrying value is computed pursuant to a discounted cash flow technique using the effective interest rate method based on a current market interest rate for the Company’s loan, which are considered Level 2 inputs.
Convertible 2.0% Senior Notes
In August 2014, the Company issued $325.0 million of 2.0% convertible senior notes due August 15, 2019. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2015. The Company separately accounted for the liability and equity components of the Convertible Notes by allocating the proceeds between the liability component and equity component, as further discussed in Note 6. The fair value of the Convertible Notes, which differs from their carrying value, is influenced by interest rates, the Company’s stock price and stock price volatility and is determined by prices for the Convertible Notes observed in market fair value which are Level 2 inputs due to limited market trading. The estimated fair value of the Convertible Notes at September 30, 2016 was approximately $215.9 million.

15



3. Inventories
The components of inventory are as follows:
 
 
September 30,
 
December 31,
 
2016
 
2015
 
(in thousands)
Work-in-process
$
1,748

 
$
4,179

Finished goods
39,769

 
54,527

Total
$
41,517

 
$
58,706

 
The inventory reserve balance at September 30, 2016 and December 31, 2015 was $15.0 million and $2.4 million, respectively. During the nine months ended September 30, 2016, the Company recorded charges in the condensed consolidated statements of operations for excess and obsolete inventory of 16.3 million. Charges for excess and obsolete inventory were immaterial in the three months ended September 30, 2016 and the three and nine months ended September 30, 2015. Included in the excess and obsolete inventory charges in the nine months ended September 30, 2016, was a $7.6 million increase in the inventory reserve balance for certain MYALEPT inventory that was identified to be unsalable, and a $1.1 million charge related to certain JUXTAPID inventory that was fully reserved in the first quarter of 2016 and scrapped in the second quarter of 2016. The remaining excess and obsolete inventory charges in the nine months ended September 30, 2016 relate to materials on hand that are not expected to be utilized prior to expiration. The determination of excess or obsolete inventory requires the Company to estimate future demand for its products based on its internal sales forecasts which it then compares to inventory on hand after consideration of expiration dates. To the extent the Company’s actual sales or subsequent sale forecasts decrease, the Company could be required to record additional inventory reserves in future periods, which could have a material negative impact on its gross margin.
4. Goodwill and Intangible Assets
Goodwill.  Goodwill balances were as follows (in thousands):
 
Balance at December 31, 2015
$
9,600

Impairment
(9,600
)
Balance at September 30, 2016
$

In accordance with the relevant accounting guidance, goodwill is not amortized. However, it must be assessed for impairment using fair value measurement techniques on an annual basis or more frequently if facts and circumstances warrant such a review. All goodwill has been assigned to the Company’s single reporting unit, which is also the single operating segment by which the chief operating decision maker manages the Company.
 
Due to the significant sustained decline in the Company’s stock price in the second quarter of fiscal year 2016 and other quantitative and qualitative factors, such as the continued decline in JUXTAPID revenue, corroborated by the implied purchase consideration from the proposed merger with QLT, the Company performed an interim goodwill impairment test in accordance with ASC 350, Intangibles- Goodwill and Other (“ASC 350”) as of June 30, 2016. In the first step (“Step 1”) of the two-step impairment test, the Company compared the fair value of its reporting unit to its carrying value. The Company estimated the fair value of its single reporting unit using a discounted cash flow methodology. The discounted cash flow model incorporated the Company’s latest revenue guidance and long range operating expense projections over the patent lives of both lomitapide and metreleptin. These projections were further risk-adjusted and reconciled to the Company’s market capitalization and the implied purchase consideration in the proposed QLT merger. As a result of the Step 1 test, the fair value of the reporting unit was deemed to be lower than the carrying value of its net assets. As such, the Company failed the Step 1 test and proceeded with a second step (“Step 2”) impairment test.
    
The Step 2 test measures the goodwill impairment loss by allocating the estimated fair value of the reporting unit, as determined in Step 1, to the reporting units’ assets and liabilities, with the residual amount representing the implied fair value of goodwill. To the extent the implied fair value of goodwill is less than the carrying value, an impairment loss is recognized. In determining the fair value of its net assets, the Company made certain adjustments from the carrying value of its assets and

16


liabilities, including adjustments to inventory to reflect selling price less selling costs, convertible debt to reflect the fair value of the Convertible Notes, and valuation of lomitapide intangible assets that were not previously recorded. As a result of allocating the fair value of the reporting unit to the fair value of net assets, the Company determined that the implied fair value of goodwill was less than the carrying value and recorded an impairment of $9.6 million in the second quarter of 2016.
Intangible Assets.  Intangible asset balances were as follows (in thousands):
 
September 30, 2016
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
Purchased intangibles
$
242,200

 
$
(35,321
)
 
$
206,879

In-process research and development assets
20,900

 

 
20,900

Total intangible assets
$
263,100

 
$
(35,321
)
 
$
227,779

 
 
December 31, 2015
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
Purchased intangibles
$
242,200

 
$
(20,183
)
 
$
222,017

In-process research and development assets
20,900

 

 
20,900

Total intangible assets
$
263,100

 
$
(20,183
)
 
$
242,917

Amortization expense was $5.0 million and $15.1 million in the three and nine months ended September 30, 2016, respectively, and $5.1 million and $15.3 million in the three and nine months ended September 30, 2015, respectively.  Given the significant sustained decline in the Company’s stock price during the second quarter of 2016, the Company determined there were indicators of impairment for the intangible assets as of June 30, 2016. As a result, the Company tested the purchased intangibles to determine if they were recoverable under ASC 360, Property, Plant and Equipment (“ASC 360”). Based on the sum of the undiscounted cash flows of the related asset group, the Company concluded that the carrying amount of the purchased intangibles was recoverable and there was no impairment as of June 30, 2016. The Company reviewed the useful lives of the purchased intangibles as of June 30, 2016 and determined that the useful lives were still considered reasonable. The Company performed a quantitative impairment test on the in-process research and development assets, comparing its current fair value to its carrying value. The Company determined the fair value of the in-process research and development assets was greater than the carrying value as of June 30, 2016 and therefore there was no impairment.  No indicators of impairment were identified during the three months ended September 30, 2016.
As of September 30, 2016, technological feasibility had not been established for the in-process research and development assets; they have no alternative future use and, as such, continue to be accounted for as indefinite-lived intangible assets.
At September 30, 2016, the estimated amortization expense of purchased intangibles for future periods is as follows (in thousands): 
 
Years Ending December 31,
 
2016 (remaining 3 months)
$
5,046

2017
20,183

2018
20,183

2019
20,183

2020 and thereafter
141,284

Total intangible assets subject to amortization
$
206,879



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5. Other Comprehensive (Loss) Income
Other comprehensive (loss) income includes changes in stockholders' (deficit) equity that are excluded from net loss, such as foreign currency translation adjustments.
The following table summarizes accumulated other comprehensive loss, net of zero tax effect, for the nine months ended September 30, 2016 and September 30, 2015 (in thousands):
 
Foreign Currency
Translation Adjustment
 
Total Accumulated
Other
Comprehensive
Items
Balance at December 31, 2015
$
152

 
$
152

Other comprehensive loss
(808
)
 
(808
)
Balance at September 30, 2016
$
(656
)
 
$
(656
)
 
 
 
Foreign Currency
Translation Adjustment
 
Total Accumulated
Other
Comprehensive
Items
Balance at December 31, 2014
$
(263
)
 
$
(263
)
Other comprehensive loss
201

 
201

Balance at September 30, 2015
$
(62
)
 
$
(62
)
 
In preparing its financial statements for the quarter ended June 30, 2015, the Company determined that its accounting related to the elimination of intercompany profits attributable to sales of inventory between consolidated subsidiaries, including the associated exchange rate effect on these transactions, was not correct. The error in not correctly eliminating intercompany profits primarily affected cost of product sales and accumulated other comprehensive income and loss accounts, with a lesser effect on its inventory, which was corrected by the Company in the second quarter of 2015. The Company determined the effect of the error to be an understatement of cost of product sales of approximately $1.7 million for the year ended December 31, 2014 and an overstatement of cost of product sales of approximately $0.6 million for the three months ended March 31, 2015. Cost of product sales in the three months ended June 30, 2015 includes $1.1 million related to this error. 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, 2014 and for the three months ended March 31, 2015, 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.
6. Debt Financing
SVB Loan and Security Agreement
 
On January 9, 2015, the Company amended its Loan and Security Agreement with Silicon Valley Bank (the “SVB Loan and Security Agreement”) to provide for a $25.0 million term loan (the “2015 Term Loan Advance”) with per annum interest of 3.0%. The proceeds received from the 2015 Term Loan Advance were used by the Company to repay an aggregate of $4.0 million outstanding due to Silicon Valley Bank under the Company’s term loan and equipment line of credit under the SVB Loan and Security Agreement. The amendment provided for interest-only payments on the 2015 Term Loan Advance through January 31, 2017, and, starting on February 1, 2017, payment of principal in 30 equal monthly installments, plus accrued interest. The maturity date of the 2015 Term Loan Advance is the earlier of (a) July 1, 2019 and (b) the maturity date of the Convertible Notes. If the Company or Silicon Valley Bank terminates the 2015 Term Loan Advance prior to the maturity date, then the Company will owe a $0.3 million termination fee.  The 2015 Term Loan Advance is subject to (i) a final payment of $1.25 million upon maturity or prior payment thereof and (ii) if the 2015 Term Loan Advance is prepaid prior to its maturity date, a prepayment of 1.0% of the 2015 Term Loan Advance. The SVB Loan and Security Agreement requires the Company to comply with certain covenants, including the maintenance of a specified level of liquidity on a monthly basis and either a

18


minimum quarterly revenue level or a minimum quarterly free cash flow level, which such covenants are not required to be tested during the Forbearance Period (defined below). The Company also granted Silicon Valley Bank (i) a first priority 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, (ii) a second priority interest in the Company’s intellectual property related to MYALEPT, and (iii) a negative pledge on all intellectual property other than intellectual property related to MYALEPT. The SVB Loan and Security Agreement also provides for standard indemnification of Silicon Valley Bank, contains standard representations and warranties and provides that a material adverse change to the Company’s business will result in an event of default. 
On October 30, 2015, the Company notified Silicon Valley Bank that it had breached one or more covenants under the SVB Loan and Security Agreement and it is currently in default.  On November 9, 2015, the Company and Silicon Valley Bank entered into the Forbearance Agreement (the “Forbearance Agreement”), pursuant to which Silicon Valley Bank agreed not to take any action as a result of such default, including an agreement to waive the increase in the per annum interest rate under the loan from 3.0% to 8.0% until December 7, 2015 (the “Forbearance Period”), subject to certain conditions, including the deposit of cash into one or more accounts at Silicon Valley Bank to collateralize balances related to the outstanding obligations due to Silicon Valley Bank.  These cash collateral amounts are restricted for all uses until the full and final payment of all of the Company’s obligations to Silicon Valley Bank, as determined by Silicon Valley Bank in its sole and exclusive discretion.  On December 7, 2015, the Company and Silicon Valley Bank entered into an amendment (the “First Amendment”) to the Forbearance Agreement, pursuant to which Silicon Valley Bank agreed to extend the Forbearance Period through January 7, 2016.   On January 7, 2016, the Company and Silicon Valley Bank entered into a second amendment (the “Second Amendment”) to the Forbearance Agreement, pursuant to which Silicon Valley Bank agreed to extend the Forbearance Period through June 30, 2016. Pursuant to the terms of the Second Amendment, the Company and Silicon Valley Bank agreed to terminate the Revolving Line, for which the Company accrued a termination fee of $0.5 million in the three months ended March 31, 2016.  On February 26, 2016, the Company and Silicon Valley Bank entered into a third amendment (the “Third Amendment”) to the Forbearance Agreement, pursuant to which Silicon Valley Bank agreed to forbear exercising its rights that under the SVB Loan and Security Agreement as a result of the Company’s failure to deliver an unqualified opinion (without a going concern explanatory paragraph) of its independent auditors with its annual financial statements for the fiscal year ended December 31, 2015
On June 8, 2016, the Company and Silicon Valley Bank entered into a fourth amendment (the “Fourth Amendment”) to the Forbearance Agreement, pursuant to which Silicon Valley Bank agreed to forbear exercising its rights under the SVB Loan and Security Agreement as a result of the Company’s failure to deliver its quarterly financial statements for the fiscal quarter ended March 31, 2016 when due under the terms of the SVB Loan and Security Agreement. On June 14, 2016, the Company and Silicon Valley Bank entered into a fifth amendment (the “Fifth Amendment”) to the Forbearance Agreement, pursuant to which Silicon Valley Bank agreed to extend the Forbearance Period through September 30, 2016. In connection with the Fifth Amendment, the Company was required to deposit an additional $0.6 million with Silicon Valley Bank as cash collateral for the Company’s obligations under the SVB Loan and Security Agreement. On September 30, 2016, the Company and SVB entered into a sixth amendment to the Forbearance Agreement, pursuant to which Silicon Valley Bank agreed to extend the Forbearance Period through November 30, 2016.
The Forbearance Period is subject to early termination upon the occurrence of certain events, including the occurrence of additional events of default.  Upon the expiration of the Forbearance Period or the occurrence of a termination event, the Company would be required to repay all of the outstanding obligations, including, but not limited to, the $25.0 million outstanding principal of the 2015 Term Loan Advance and certain fees totaling $2.0 million.  As the obligations may be accelerated at the election of Silicon Valley Bank upon the expiration of the Forbearance Period, as amended, or earlier if a termination event occurs, these amounts have been presented as current liabilities on the condensed consolidated balance sheets.  Amounts deposited with Silicon Valley Bank to collateralize balances related to outstanding obligations under the SVB Loan and Security Agreement, which include the $25.0 million outstanding principal of the 2015 Term Loan Advance and $0.4 million related to a cash collateral account for letters of credit have been presented as restricted cash as of December 31, 2015. The cash collateral balance increased by an additional $0.6 million in the second quarter of 2016 pursuant to the Fifth Amendment and was presented as restricted cash as of September 30, 2016 on the condensed consolidated balance sheets. The Company plans to continue to engage in discussions with Silicon Valley Bank during the Forbearance Period regarding the loan and the defaults to seek a resolution of this matter.  The Company can provide no assurances that it will be able to resolve this matter, which could result in the Silicon Valley Bank loans under the SVB Loan and Security Agreement and QLT Loans (defined below) being accelerated and have a material negative impact on our cash flows and business.

19


Convertible 2.0% Senior Notes
In August 2014, the Company issued Convertible Notes with an aggregate principal amount of $325.0 million. The Company received net proceeds of approximately $316.6 million from the sale of the Convertible Notes, after deducting fees and expenses of approximately $8.4 million. The Company used approximately $26.1 million of the net proceeds from the sale of the Convertible Notes to pay the net cost of the convertible bond hedges, as described below (after such cost was partially offset by the proceeds to the Company from the sale of warrants in the warrant transactions described below) and used $35.0 million to repurchase shares of the Company’s common stock.
The Convertible Notes are governed by the terms of an indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as the Trustee. The Convertible Notes are senior unsecured obligations and bear interest at a rate of 2.0% per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2015. The Convertible Notes will mature on August 15, 2019, unless earlier repurchased or converted. The Convertible Notes will be convertible into shares of the Company’s common stock at an initial conversion rate of 24.2866 shares of common stock per $1,000 principal amount of the Convertible Notes, which corresponds to an initial conversion price of approximately $41.175 per share of the Company’s common stock. The Company can settle the conversion of the Convertible Notes through payment or delivery of cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at its election.
On or after February 15, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.
The indenture does not contain any financial covenants or restrict the Company’s ability to repurchase the Company’s securities, pay dividends or make restricted payments in the event of a transaction that substantially increases the Company’s level of indebtedness. The indenture contains customary terms and covenants and events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization involving the Company) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding Convertible Notes by written notice to the Company and the Trustee, may declare 100% of the principal of and accrued and unpaid interest, if any, on all of the Convertible Notes to be due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving the Company, 100% of the principal and accrued and unpaid interest, if any, on the Convertible Notes will become due and payable automatically. Notwithstanding the foregoing, the indenture provides that, upon the Company’s election, and for up to 180 days, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the indenture consists exclusively of the right to receive additional interest on the Convertible Notes.  If Silicon Valley Bank elects to accelerate the principal amount due under the SVB Loan and Security Agreement and the Company fails to pay such amount, the Trustee or holders of at least 25% of the aggregate principal amount of the Notes may deliver a notice of default to the Company. The Company’s failure to pay the amount due under the Loan and Security Agreement within 30 days following its receipt of such notice would be deemed an event of default under the indenture and, among other remedies, the Trustee or holders of at least 25% of the aggregate principal amount of the Notes could declare all unpaid principal of the Notes immediately due and payable.  The default provision, which applies to the failure to repay the outstanding 2015 Term Loan Advance, or other indebtedness, is not considered probable to occur as the Company has sufficient capital to repay the outstanding obligations under the Loan and Security Agreement if such amounts are accelerated by Silicon Valley Bank.
In accordance with accounting guidance for debt with conversion and other options, the Company separately accounted for the liability and equity components of the Convertible Notes by allocating the proceeds between the liability component and the embedded conversion option, or equity component, due to the Company’s ability to settle the Convertible Notes in cash, common stock, or a combination of cash and common stock at the option of the Company. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected the Company’s non-convertible debt borrowing rate for similar debt. The equity component of the Convertible Notes was recognized as a debt discount and represents the difference between the gross proceeds from the issuance of the Convertible Notes and the fair value of the liability of the Convertible Notes on their respective dates of issuance. The excess of the principal amount of the liability component over its carrying amount, or debt discount, is amortized to interest expense using the effective interest method over five years, or the life of the Convertible Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

20


 The Company’s outstanding Convertible Note balances as of September 30, 2016 consisted of the following (in thousands):
 
Liability component:
September 30,
2016
 
December 31,
2015
Principal
$
325,000

 
$
325,000

Less: deferred financing costs
(3,476
)
 
(4,212
)
Less: debt discount, net
(75,104
)
 
(91,006
)
Net carrying amount
$
246,420

 
$
229,782

Equity component
$
116,900

 
$
116,900

In connection with the issuance of the Convertible Notes, the Company incurred approximately $8.4 million of debt issuance costs, which primarily consisted of underwriting, legal and other professional fees, and allocated these costs to the liability and equity components based on the allocation of the proceeds. Of the total $8.4 million of debt issuance costs, $3.0 million were allocated to the equity component and recorded as a reduction to additional paid-in capital and $5.4 million were allocated to the liability component and recorded as a reduction to the liability balance on the balance sheet. The portion allocated to the liability component is amortized to interest expense over the expected life of the Convertible Notes using the effective interest method.
The Company determined that the expected life of the Convertible Notes was equal to the five year term on the Convertible Notes. The effective interest rate on the liability component is 11.53%. The following table sets forth total interest expense recognized related to the Convertible Notes during the three and nine months ended September 30, 2016 and 2015 (in thousands):
 
 
Three months ended 
 
Nine months ended
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Contractual interest expense
$
1,625

 
$
1,625

 
$
4,875

 
$
4,875

Amortization of debt issuance costs
254

 
226

 
736

 
653

Amortization of debt discount
5,479

 
4,887

 
15,903

 
14,113

Total
$
7,358

 
$
6,738

 
$
21,514

 
$
19,641

Future payments under the Convertible Notes as of September 30, 2016, are as follows (in thousands):
 
Years Ending December 31,
    
2016 (3 months remaining)
$

2017
6,500

2018
6,500

2019
331,500

 
344,500

Less amounts representing interest
(19,500
)
Less: deferred financing costs
(3,476
)
Less debt discount, net
(75,104
)
Net carrying amount of convertible notes
$
246,420

Under the terms of the indenture governing the Convertible Notes, the proposed transaction with QLT does not constitute a fundamental change, and holders will not have the right to require the Company to repurchase any Convertible Notes. Holders may surrender notes for conversion at any time from and after October 5, 2016 through the date that is fifty (50) trading days after the effective date of the merger. Prior to closing, the Company will enter into a supplemental indenture to the indenture governing the Convertible Notes, which will provide that each $1,000 principal amount of Convertible Notes will thereafter be convertible into the same number of Novelion common shares that a holder of the number of shares of Aegerion common stock equal to $1,000 divided by the conversion rate of the Convertible Notes at the effective time of the merger would be entitled to receive as merger consideration.

21


Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the Convertible Notes and in order to reduce the potential dilution to the Company’s common stock and/or offset cash payments due upon conversion of the Convertible Notes, the Company entered into convertible bond hedge transactions convertible into approximately 7.9 million shares of the Company’s common stock (or the value thereof), subject to adjustment, underlying the $325.0 million aggregate principal amount of the Convertible Notes. The convertible bond hedges have an exercise price of approximately $41.175 per share, subject to adjustment upon certain events, and are exercisable when and if the Convertible Notes are converted. If upon conversion of the Convertible Notes, the price of the Company’s common stock is above the exercise price of the convertible bond hedges, shares of the Company’s common stock and/or cash will be delivered with an aggregate value approximately equal to the difference between the price of the Company’s common stock at the conversion date and the exercise price, multiplied by the number of shares of the Company’s common stock related to the convertible bond hedges being exercised. The convertible bond hedges are separate transactions entered into by the Company and are not part of the terms of the Convertible Notes or the warrants, discussed below.
At the same time, the Company also entered into separate warrant transactions relating to, in the aggregate, approximately 7.9 million shares of the Company’s common stock, subject to customary adjustments but capped at a maximum of approximately 15.8 million shares of the Company’s common stock underlying the $325.0 million aggregate principal amount of the Convertible Notes. The initial exercise price of the warrants is $53.375 per share, subject to adjustment upon certain events. The warrants would separately have a dilutive effect to the extent that the market value per share of the Company’s common stock, as measured under the terms of the warrants, exceeds the applicable exercise price of the warrants. The Company received $60.5 million for these warrants and recorded this amount to additional paid-in capital.
As part of the Merger Agreement with QLT, the Company is required to use commercially reasonable efforts to enter into arrangements with the counterparties of the convertible bond hedge and warrant transactions to terminate and cancel such transactions upon completion of the merger.
Loan Agreement with QLT
 
On June 14, 2016, the Company entered into a loan and security agreement (the “QLT Loan Agreement”) with QLT concurrently with the execution of the Merger Agreement, pursuant to which QLT agreed to provide the Company with a term loan facility in an aggregate principal amount not to exceed $15 million. The Company borrowed $3 million in term loans (the “QLT Loans”) on June 15, 2016 and may also borrow up to an additional $3 million per month if and to the extent such amounts are necessary in order for it to maintain an unrestricted cash balance of $25 million, subject to the satisfaction of certain terms and conditions. The QLT Loans mature on the earliest of (i) July 1, 2019, (ii) the maturity date of the Convertible Notes, (iii) three business days after a termination of the Merger Agreement by the Company and (iv) 90 days after a termination of the Merger Agreement by QLT. Under the terms of the QLT Loan Agreement, the Company is subject to certain financial covenants consistent with the financial covenants contained in the SVB Loan and Security Agreement. Such financial covenants will only be tested if (i) the financial covenants under the SVB Loan and Security Agreement are then in effect (and not suspended) or (ii) the SVB Loan and Security Agreement has been terminated.
 
The Company’s obligations under the QLT Loan Agreement are secured by (i) a first priority security interest in the Company’s intellectual property related to MYALEPT and (ii) a second priority security interest in certain other assets securing the Company’s obligations under the SVB Loan and Security Agreement (excluding certain cash collateral accounts).
 
The Company’s obligations under the QLT Loan Agreement may be accelerated upon the occurrence of certain events of default, including a cross-default under the SVB Loan and Security Agreement or upon a material adverse change to the Company’s business. If the QLT Loans are prepaid prior to their maturity date, including at the Company’s election, a prepayment premium of 2.0% of the outstanding amount of the QLT Loans will be due prior to such prepayment. In connection with the QLT Loan Agreement, on June 14, 2016, the Company entered into a subordination agreement with QLT and Silicon Valley Bank (the “Subordination Agreement”), pursuant to which QLT’s liens and right to receive payments under the QLT Loan Agreement are fully subordinated to the SVB Loan and Security Agreement, other than with respect to certain intellectual property relating to MYALEPT and proceeds of dispositions thereof. Pursuant to the Subordination Agreement, upon the occurrence of certain events (including the termination of the Merger Agreement), subject to a 60-day standstill period, QLT may purchase the outstanding obligations owing to Silicon Valley Bank under the SVB Loan and Security Agreement to the extent that Silicon Valley is not exercising its rights against the collateral at such time.
 
The QLT Loans bear interest at a rate of 8.0% per annum, subject to increase as described below.  Until the payment in full of the Company’s obligations under the Silicon Valley Bank Loan Agreement, as amended, supplemented or otherwise modified, and the termination of the Silicon Valley Bank Loan Agreement, accrued interest on the QLT Loans will be added to

22


the aggregate principal amount of the QLT Loans.  If cash interest becomes payable under the QLT Loan Agreement but the Company is prohibited from making such cash payments under the terms of the Subordination Agreement, such interest rate will increase to 15.0% per annum.  If an event of default exists under the terms of the QLT Loan Agreement, an additional 5.0% per annum interest rate will be added to the then-applicable interest rate thereunder, unless the QLT Loans are already accruing interest at the increased rate of 15.0% per annum. As of September 30, 2016, the Company borrowed $3.0 million under the QLT Loan Agreement and had accrued interest of $0.01 million. As a result of the material adverse change provision, the outstanding borrowings and accrued interest have been classified as a current liability as of September 30, 2016.

 7. Accrued Liabilities
Accrued liabilities as of September 30, 2016 and December 31, 2015 consisted of the following: 
 
September 30,
2016
 
December 31,
2015
 
(in thousands)
Accrued employee compensation and related costs
$
7,574

 
$
10,315

Accrued professional fees
4,430

 
3,206

Accrued sales allowances
9,767

 
10,837

Accrued royalties
3,435

 
4,137

Accrued research and development costs
3,468

 
1,561

Accrued interest
875

 
2,502

Other accrued liabilities
10,861

 
6,545

Total
$
40,410

 
$
39,103


8. Restructuring
 
In February 2016, the Company’s Board of Directors approved a cost-reduction plan that eliminated approximately 80 positions from the Company’s workforce, representing a reduction in employees of approximately 25%. The reduction in force was substantially completed on February 10, 2016. 
In July 2016, the Board of Directors approved a strategic plan that included the intent to withdraw lomitapide from the European Union and certain other global markets, and the elimination of approximately 13% of the Company’s workforce. In connection with this restructuring plan, in the third quarter of 2016, the Company entered into a lease amendment to vacate the premises at 101 Main Street, Cambridge, MA as an additional cost-cutting measure, and the premises were vacated in September 2016. The Company completed its reduction in force during the third quarter of 2016, and expects to substantially complete the payment of employee separation and other material costs associated with the restructuring by the second quarter of 2017. The Company expects to complete the withdrawal of lomitapide from the European Union and certain other global markets by the end of 2016. This timeline is subject to change based on whether the Company chooses to enter into ongoing supply, license or other arrangements with suitable partners in such markets.
This cost-reduction plan is part of a broad program to significantly reduce the Company’s operating expenses and extend its cash position as lomitapide sales in the U.S. are impacted by the introduction of competitive therapies.  The positions impacted are across substantially all of the Company’s functions.  The Company accounted for these actions in accordance with ASC 420, Exit or Disposal Cost Obligations and ASC 712, Compensation- nonretirement compensation benefits.  
Restructuring charges of $2.4 million and $4.2 million were recorded during the three and nine months ended September 30, 2016, respectively, which consisted primarily of severance and benefits costs, and costs incurred in vacating its leased premises. No further significant charges are expected to be incurred related to this cost reduction plan.

23


The following table sets forth the components of the restructuring charge and payments made against the reserve for the nine months ended September 30, 2016:
 
 
Restructuring Charges
 
(in thousands)
Restructuring balance at December 31, 2015
$
40

Costs incurred
4,172

Cash paid
(3,529
)
Non-cash adjustments
283

Restructuring balance at September 30, 2016
$
966

9. Capital Structure
Preferred Stock
At September 30, 2016, the Company was authorized to issue 5,000,000 shares of $0.001 par value preferred stock. There were no shares issued and outstanding. Dividends on the preferred stock will be paid when, and if, declared by the Board of Directors.
Common Stock
At September 30, 2016, 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.
Treasury Stock
In August 2014, the Company’s Board of Directors authorized the Company to use a portion of the net proceeds of the Convertible 2.0% Senior Notes offering to repurchase up to an aggregate of $35.0 million of its common stock. In connection with the close of the transaction, the Company repurchased 1,147,540 shares of its common stock.
At September 30, 2016, the Company held 1,251,297 shares of common stock in treasury.
The Company will, at all times, reserve and keep available, out of its authorized but unissued shares of common stock, sufficient shares to effect the conversion of shares for stock options, restricted stock units and Convertible Notes.
 
10. Stock-Based Compensation
The Company issues stock options, restricted stock and RSUs with service conditions, which are generally the vesting periods of the awards. The Company has issued stock options and RSUs that vest upon the satisfaction of certain performance conditions. The Company also has issued RSUs that vest upon the satisfaction of certain market conditions.
Determining the Fair Value of Stock Awards and Restricted Stock Unit Awards
Stock Options
The Company measures the fair value of stock options with service-based and performance-based vesting criteria 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 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.
 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 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 Staff Accounting Bulletin ("SAB")

24


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 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 
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Expected stock price volatility
68.0
%
 
60.7
%
 
63.2
%
 
61.2
%
Risk-free interest rate
1.14
%
 
1.74
%
 
1.60
%
 
1.63
%
Expected life of options (years)
6.25

 
6.24

 
6.25

 
6.21

Expected dividend yield

 

 

 

The Company’s stock option activity for the nine months ended September 30, 2016 is as follows (in thousands, except per share amounts):
 
 
Number of
Stock Options
 
Weighted-
Average
Exercise Price
Per Share
 
Weighted
Average
Remaining
Contractual
Life (years)
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 2015
6,235

 
$
27.32

 
 
 
$
33

Granted
1,429

 
$
6.04

 
 
 
 
Exercised
(3
)
 
$
1.54

 
 
 
 
Forfeited/cancelled
(3,435
)
 
$
25.67

 
 
 
 
Outstanding at September 30, 2016
4,226

 
$
21.38

 
7.0
 
$
233

Vested and expected to vest at September 30, 2016
4,098

 
$
22.84

 
6.7
 
$
159

Exercisable at September 30, 2016
2,043

 
$
29.27

 
4.8
 
$

Restricted Stock Units
RSUs are generally subject to forfeiture if employment terminates prior to the satisfaction of the vesting conditions. The Company expenses the cost of RSUs with service-based vesting conditions, 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. Additionally, the Company grants RSUs that vest upon the achievement of a market condition. The fair value of RSUs with market-based vesting conditions is determined using a Monte Carlo simulation and the Company recognizes compensation expense over the derived service period.
The Company’s RSU activity for the nine months ended September 30, 2016 is as follows (in thousands, except per share amounts):
 
 
Number of
RSUs
 
Weighted-
Average
Grant  Date
Fair Value
 
Weighted
Average
Remaining
Contractual
Life (years)
Outstanding at December 31, 2015
616

 
$
23.45

 
1.6
Granted
741

 
$
2.46

 
 
Vested
(108
)
 
$
24.23

 
 
Forfeited/cancelled
(436
)
 
$
16.15

 
 
Outstanding at September 30, 2016
813

 
$
8.12

 
1.5


25


 Stock-based Compensation Expense
The Company recorded stock-based compensation expense in the Company’s consolidated statements of operations as follows:
 
 
Three Months Ended 
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Stock-based compensation expense by type of award:
    
 
    
 
    
 
    
Stock options
$
2,490

 
$
2,870

 
$
9,702

 
$
16,294

Restricted stock units
274

 
1,084

 
1,761

 
2,246

Less stock-based compensation capitalized to inventories
(84
)
 
(82
)
 
(316
)
 
(300
)
Total stock-based compensation expense included in costs and expenses
$
2,680

 
$
3,872

 
$
11,147

 
$
18,240

 
 
Three Months Ended 
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Selling, general and administrative
$
2,650

 
$
2,785

 
$
9,825

 
$
15,093

Research and development
30

 
1,087

 
1,322

 
3,147

Total stock-based compensation expense included in costs and expenses
$
2,680

 
$
3,872

 
$
11,147

 
$
18,240

Total unrecognized stock-based compensation cost related to unvested stock options and RSUs as of September 30, 2016 was approximately $17.1 million. This unrecognized cost is expected to be recognized over a weighted-average period of approximately 2.2 years. In addition, the Company has 21,762 outstanding unvested RSUs that contain performance and market criteria that impact the vesting of the award. Total unrecognized compensation related to those awards was approximately $0.2 million at September 30, 2016.
Pursuant to the terms of the Merger Agreement described in Note 1, upon the closing of the merger with QLT, the Company’s in-the-money stock options and all outstanding RSUs will be converted into the right to receive equivalent options and RSUs exercisable for or convertible into, respectively, Novelion common shares. The remainder of the Company’s equity-based awards would be cancelled upon the completion of the merger.
 
11. 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.
In August 2014, in connection with the issuance of the Convertible Notes, the Company entered into convertible bond hedges. The convertible bond hedges are not included for purposes of calculating the number of diluted shares outstanding, as their effect would be anti-dilutive. The convertible bond hedges are generally expected, but not guaranteed, to reduce the potential dilution upon conversion of the Convertible Notes. See Note 6 for additional information.
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 and if-converted methods. 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 sets forth potential common shares issuable upon the exercise of outstanding options, warrants, the vesting of RSUs and the conversion of the Convertible Notes (prior to consideration of the treasury stock and if-converted methods), which were excluded from the computation of diluted net loss per share because such instruments were anti-dilutive (in thousands):
 

26


 
As of September 30,
 
2016
 
2015
Stock options
4,226

 
6,792

Unvested restricted stock units
813

 
661

Warrants
7,893

 
7,893

Convertible notes
7,893

 
7,893

Total
20,825

 
23,239


12. 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. 
The Company recorded a provision for income taxes of $0.2 million and $0.7 million for the three and nine months ended September 30, 2016 and $0.3 million and $0.7 million in the three and nine months ended September 30, 2015, respectively. The provision for income taxes consists of current tax expense, which relates primarily to the Company’s profitable operations in its foreign tax jurisdictions, and a net deferred tax expense from the tax amortization of the indefinite-life intangible assets associated with the MYALEPT acquisition offset by the reversal of a deferred tax liability for goodwill that was impaired for financial statement purposes.
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% 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 September 30, 2016, the Company had no material uncertain tax positions.
13. Commitments and Contingencies
In late 2013, the Company received a subpoena from the DOJ, represented by the U.S. Attorney’s Office in Boston, requesting documents regarding the Company’s marketing and sale of JUXTAPID in the U.S., as well as related disclosures.  The Company believes the DOJ is seeking to determine whether it, or any of its current or former employees, violated civil and/or criminal laws, including but not limited to, the securities laws, the Federal False Claims Act, the Food and Drug Cosmetic Act, the Anti-Kickback Statute, and the Foreign Corrupt Practices Act.  The investigation is continuing.
In late 2014, the Company received a subpoena from the SEC requesting certain information related to its sales activities and disclosures related to JUXTAPID. The SEC also has requested documents and information on a number of other topics, including documents related to the investigations by government authorities in Brazil into whether the Company’s activities in Brazil violated Brazilian anti-corruption laws, and whether the Company’s activities in Brazil violated the U.S. Foreign Corrupt Practices Act.  The Company believes the SEC is seeking to determine whether the Company, or any of its current or former employees, violated securities laws.  The investigation is continuing. 
 
The Company believes the SEC and the DOJ are coordinating with one another concerning their investigations.  The Company has provided a broad range of information to the government in response to their requests, including materials related to its past disclosure statements related to the prevalence of HoFH and other disclosures, its U.S. marketing and promotional practices, and its activities in Brazil.    
The Company has reached preliminary agreements in principle with the DOJ and the SEC to resolve their investigations into the marketing and sales activities and disclosures related to JUXTAPID.
Under the terms of the preliminary agreement in principle with the DOJ, the Company would plead guilty to two misdemeanor misbranding violations of the Food, Drug and Cosmetic Act.  One count would be based on the Company’s alleged marketing of JUXTAPID with inadequate directions for use (21 U.S.C. §§ 352(f)), and the second count would involve an alleged failure to comply with a requirement of the JUXTAPID Risk Evaluation and Mitigation Strategies (“REMS”)

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program (21 U.S.C. §§ 352(y)). The Company would separately enter into a five-year deferred prosecution agreement with regard to charges that the Company violated the Health Insurance Portability and Accountability Act and engaged in obstruction of justice relating to the REMS program. The preliminary agreement in principle with the DOJ also requires the Company to enter into a civil settlement agreement with the DOJ to resolve alleged violations of the False Claims Act. Additionally, the Company would enter into a non-monetary consent decree with the Food and Drug Administration prohibiting future violations of law and may have to enter into a corporate integrity agreement with the Department of Health and Human Services as part of any final settlement with the DOJ. Under the preliminary agreement in principle, the Company will not be subject to mandatory exclusion from participation in federal health care programs under 42 U.S.C. § 1320a-7(a).
Under the terms of the preliminary agreement in principle with the SEC staff, the SEC’s Division of Enforcement will recommend that the SEC accept a settlement offer from the Company on a neither-admit-nor-deny basis that contains alleged negligent violations of Sections 17(a)(2) and (3) of the Securities Act of 1933, as amended, related to certain statements made by the Company in 2013 regarding the conversion rate of patients receiving JUXTAPID prescriptions, with remedies that include censure, an order prohibiting future violations of the securities laws and payment of a civil penalty.
The preliminary agreements in principle provide for a consolidated monetary package that covers payments due to both the DOJ and the SEC. The consolidated monetary package includes payments to the DOJ and the SEC totaling approximately $40 million in the aggregate (the “Settlement Payments”), payable over five years as follows: approximately $3 million upon finalization of the settlement with the DOJ and the SEC, approximately $3.7 million per year, payable quarterly, for three years following finalization of the settlement, and approximately $13 million per year, payable quarterly, in years four and five following finalization of the settlement. Certain outstanding amounts would accrue interest at a rate of 1.75% per annum. The Settlement Payments are subject to acceleration in the event of certain change of control transactions or the sale of the Company’s JUXTAPID or MYALEPT assets. The Company has reserved an aggregate of approximately $40 million for these matters. In addition, the Company accrued $0.4 million in the second quarter of 2016 and $0.3 million in the third quarter of 2016 to reflect its current estimates of the minimum liabilities for relator attorney fees and settlement, respectively.
The terms of the preliminary agreements in principle described above may change following further negotiations and other terms of the final settlement remain subject to further negotiation.  The preliminary agreement in principle with the DOJ is subject to approval of supervisory personnel within the DOJ and relevant federal and state agencies, and approval by a U.S. District Court judge of the criminal plea and sentence and the civil settlement agreement.  The preliminary agreement in principle with the SEC is subject to review by other groups in the SEC and approval by the Commissioners of the SEC. The preliminary agreements in principle do not cover the DOJ and SEC’s inquiries concerning the Company’s operations in Brazil, any potential claims by relators for attorneys’ fees, or any employment claims that may have been brought by relators. The Company continues to cooperate with the DOJ and the SEC with respect to their investigations. As part of this cooperation, the DOJ has requested documents and information related to donations the Company made in 2015 and 2016 to support 501(c)(3) organizations that provide financial assistance to patients. As part of this inquiry, the DOJ may pursue theories that will not be covered by the preliminary agreement in principle with the DOJ. Other pharmaceutical and biotechnology companies have disclosed similar inquiries regarding donations to 501(c)(3) organizations.
In addition, federal and state authorities in Brazil are each conducting investigations to determine whether there have been violations of Brazilian laws related to the possible illegal promotion of JUXTAPID in Brazil. In July 2016, the Ethics Council of the national pharmaceutical industry association, Interfarma, unanimously decided to fine the Company approximately $0.5 million for violations of the industry association’s Code of Conduct, to which the Company is bound due to its affiliation with Interfarma.  Although the Interfarma Code of Conduct provides that companies that violate the Code of Conduct are subject to only one penalty, the Board of Directors of Interfarma has decided to impose an additional penalty of suspension of the Company's membership, without suspension of its membership contribution, for a period of 180 days for the Company to demonstrate the implementation of effective measures to cease alleged irregular conduct, or exclusion of its membership in Interfarma if such measures are not implemented. The Company paid $0.5 million in the third quarter of 2016 related to this fine. Also in July 2016, the Company received an inquiry from a Public Prosecutor Office of the Brazilian State of Paraná asking it to respond to questions related to recent media coverage regarding JUXTAPID and its relationship with a patient association to which it has made donations for patient support.  At this time, the Company does not know whether the Public Prosecutor’s inquiry will result in the commencement of any formal proceeding against the Company, but if its activities in Brazil are found to violate any laws or governmental regulations, the Company may be subject to significant civil and administrative penalties imposed by Brazilian regulatory authorities and additional damages and fines. Under certain circumstances, the Company could be barred from further sales to federal and/or state governments in Brazil, including sales of JUXTAPID and/or MYALEPT, due to penalties imposed by Brazilian regulatory authorities or through civil actions initiated by federal or state public prosecutors. As of the filing date of this Form 10-Q, the Company cannot determine if a loss is probable as a result of the investigations and inquiry in Brazil and whether the outcome will have a material adverse effect on its business and, as a result, the Company has not recorded any amounts for a loss contingency.

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In January 2014, a putative class action lawsuit was filed against the Company and certain of its executive officers in the U.S. District Court for the District of Massachusetts alleging certain misstatements and omissions related to the marketing of JUXTAPID and the Company’s financial performance in violation of the federal securities laws. On March 11, 2015, the Court appointed co-lead plaintiffs and lead counsel. On April 1, 2015, the Court entered an order permitting and setting a schedule for co-lead plaintiffs to file an amended complaint within 60 days, and for defendants to file responsive pleadings, co-lead plaintiffs to file any opposition, and defendants to file reply briefs. Accordingly, co-lead plaintiffs filed an amended complaint on June 1, 2015. The amended complaint filed against the Company and certain of its former executive officers alleges that defendants made certain misstatements and omissions during the first three quarters of 2014 related to the Company’s revenue projections for JUXTAPID for 2014, as well as data underlying those projections, in violation of the federal securities laws. The Company filed a motion to dismiss the amended complaint for failure to state a claim on July 31, 2015.  On August 21, 2015, co-lead plaintiffs filed a putative second amended complaint, which alleges that the defendants made certain misstatements and omissions from April 2013 through October 2014 related to the marketing of JUXTAPID and the Company’s financial projections, as well as data underlying those projections.  On September 4, 2015, the Company moved to strike the second amended complaint for the co-lead plaintiffs’ failure to seek leave of court to file a second amended pleading, and briefing is complete with respect to the motion to strike.  Oral argument on the motion to strike was held on March 9, 2016.  On March 23, 2016, plaintiffs filed a motion for leave to amend.  The Company opposed this motion to amend, and following a hearing on April 29, 2016, the Court took defendants’ motion to strike and plaintiffs’ motion for leave to amend under advisement.  On May 13, 2016, co-lead plaintiffs and defendants filed a joint motion wherein the parties stipulated that co-lead plaintiffs could file a third amended pleading within 30 days of the motion, which the Court granted on May 18, 2016, thereby mooting defendants’ pending motion to strike the second amended pleading and co-lead plaintiffs’ motion for leave to file a second amended pleading.  The Court also entered a briefing schedule for defendants to file responsive pleadings, co-lead plaintiffs to file any opposition, and defendants to file reply briefs.  A third amended complaint was filed on June 27, 2016. On July 22, 2016, co-lead plaintiffs and defendants filed a joint motion to stay the briefing schedule while they pursued mediation, which the Court granted on August 10, 2016. As of the filing date of this Form 10-Q, the Company cannot determine if a loss is probable as a result of the class action lawsuit and whether the outcome will have a material adverse effect on its business and, as a result, the Company has not recorded any amounts for a loss contingency. 
On August 16, 2016, a complaint captioned Steinberg v. Aegerion Pharmaceuticals, Inc., et al., Case No. 1:16-cv-11668, was filed in the U.S. District Court for the District of Massachusetts against the Company, QLT, MergerCo and each member of the Company's board of directors (the “Federal Merger Action”). The Federal Merger Action was brought by Chaile Steinberg, who purports to be a stockholder of the Company, on her own behalf, and seeks certification as a class action on behalf of all Company's stockholders. The Steinberg complaint alleges, among other things, that the August 8, 2016 Form S-4 Registration Statement filed in connection with the proposed transaction with QLT is materially misleading. The Steinberg complaint asserts claims arising under Sections 14(a) and 20(a) of the Exchange Act and seeks, among other things, to enjoin the proposed transaction, to rescind it or to award rescissory damages should it be consummated and an award of attorneys’ fees and expenses. The Company believes that the claims asserted in the Federal Merger Action are without merit and the Company has not recorded any amount for a loss contingency in respect of such matter.
On October 3, 2016, a complaint captioned Flanigon v. Aegerion Pharmaceuticals, Inc., et al., C.A. 12794, was filed in the Delaware Court of Chancery (the “Delaware Merger Action”). The Delaware Merger Action was brought by Timothy Flanigon, who purports to be a stockholder of the Company, on his own behalf, and also sought certification as a class action on behalf of all Company stockholders. The Delaware Merger Action alleged, among other things, that the Company's board of directors breached its fiduciary duties in connection with the proposed transaction by agreeing to an inadequate exchange ratio and engaging in a flawed sales process. The Delaware Merger Action further alleged that QLT and MergerCo aided and abetted the alleged breaches. In addition, the Delaware Merger Action alleged that the September 28, 2016 Amendment No. 2 to Form S-4 Registration Statement filed in connection with the proposed transaction is materially misleading. The Flanigon complaint sought, among other things, to enjoin the proposed transaction, to rescind it or to award rescissory damages should it be consummated and an award of attorneys’ fees and expenses. Also on October 3, 2016, plaintiff in the Delaware Merger Action filed motions seeking expedited discovery and a preliminary injunction. On October 21, 2016, the Delaware Merger Action was dismissed without prejudice.
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, 2015, and Management’s Discussion and Analysis of Financial Condition and Results of Operation included in our 2015 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

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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 proposed transaction with QLT, including the timing and financial and strategic costs and benefits thereof and the loan arrangements with QLT in connection therewith; the commercial potential for, and market acceptance of, our products; our estimates as to the potential number of patients with the diseases for which our products are approved; our expectations with respect to reimbursement of our products in the United States; our plans to withdraw lomitapide from, or alternatively to license or partner lomitapide in, the European Union and certain other global markets; our expectations with respect to pricing and reimbursement approvals required for lomitapide in Japan, Canada and Colombia and other countries in which we receive, or have received, marketing approval and plan to commercialize lomitapide; our expectations with respect to named patient sales of our products in Brazil and in other countries where such sales are permitted; the potential for and possible timing of approval of our products in countries where we have not yet obtained approval; our plans for further clinical development of our products; our expectations regarding future regulatory filings for our products, including planned marketing approval applications with respect to metreleptin in the European Union and a planned application to expand the indication for metreleptin in the United States, subject to discussions with the FDA; our plans for commercial marketing, sales, manufacturing and distribution of our products; our expectations with respect to the impact of competition on our future operations and results; our beliefs with respect to our intellectual property portfolio for our products and the extent to which it protects us; our expectations regarding the availability of data and marketing exclusivity for our products in the United States, the European Union, Japan and other countries; our view of ongoing government investigations, including the terms of preliminary agreements in principle with the DOJ and the SEC and potential outcomes of the ongoing DOJ and SEC investigations, stockholder litigation and investigations in Brazil, and the possible impact and additional consequences of each on our business; our forecasts regarding sales of our products, our future expenses, our cash position and the timing of any future need for additional capital to fund operations; and our ability to work with Silicon Valley Bank to obtain a further forbearance or waiver of our breach of certain covenants of our loan agreement with Silicon Valley Bank and to otherwise avoid an acceleration of our debt 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 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 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 adult patients with HoFH. On September 28, 2016, we received marketing authorization for lomitapide in Japan for HoFH. Pricing and reimbursement approval of lomitapide has not yet been received in many of the countries in which lomitapide is approved. As a result of this and other factors, on July 20, 2016, we announced our intent to withdraw lomitapide from the EU and certain other global markets by the end of 2016, unless we earlier enter into supply, license or other arrangements with suitable partners in such markets. Lomitapide is also sold on a named patient basis in Brazil as a result of the approval of lomitapide in the U.S. and in a limited number of other countries as a result of the approval of lomitapide in the U.S. or the EU.
We acquired our second product, metreleptin, from Amylin Pharmaceuticals, LLC (“Amylin”) and AstraZeneca Pharmaceuticals LP, an affiliate of Amylin, in January 2015. Metreleptin, a recombinant analog of human leptin, is currently marketed in the U.S. under the brand name MYALEPT® (metreleptin) for injection (“MYALEPT”). MYALEPT received marketing approval from the FDA in February 2014 as an adjunct to diet as replacement therapy to treat the complications of leptin deficiency in patients with congenital or acquired generalized lipodystrophy (“GL”). Metreleptin is also sold, or approved for sale, on a named patient basis in Brazil, Argentina, France and Italy as a result of the approval of metreleptin in the U.S.
On June 14, 2016, we entered into a definitive merger agreement under which we will be merged with an indirect wholly-owned subsidiary of QLT.  We and QLT are working to complete the merger and expect the merger to close before the

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end of 2016. See “Risk Factors” in Part II Item 1A of this report and Note 1, “Description of Business and Significant Accounting Policies” of the notes to the unaudited condensed consolidated financial statements.
We expect that our near-term efforts will be focused on:
managing our costs and expenses to better align with our revenues, which have been significantly negatively impacted by the introduction of PCSK9 inhibitor products and the corresponding significant impact on JUXTAPID sales in the U.S.;
maintaining market acceptance of JUXTAPID as a treatment for adult HoFH patients in the U.S., particularly given the introduction of PCSK9 inhibitor products, which has had a significant adverse impact on sales of JUXTAPID in the U.S.;
continuing to support sales of lomitapide as a treatment for HoFH in Brazil, on a named patient basis, and in other key countries where such sales are permitted, particularly in light of the approval of Amgen’s PCSK9 inhibitor product in Brazil in April 2016, the potential availability of that and other PCSK9 inhibitors on a named patient sales basis in Brazil and other countries, the economic and political challenges and ongoing government investigations in Brazil, and the ongoing court proceedings in Brazil reviewing the regulatory framework for named patient sales;
building and maintaining market acceptance for MYALEPT in the U.S. for the treatment of complications of leptin deficiency in GL patients, and supporting named patient sales of metreleptin in GL in Brazil, particularly in light of local economic and political challenges and ongoing governmental investigations, and other key countries where such sales are permitted as a result of the U.S. approval;
completing the merger with QLT and executing on our decision to withdraw lomitapide from the EU and certain other global markets by the end of 2016, unless we earlier enter into supply, license or other arrangements with suitable partners in such markets;
continuing to support patient access to and reimbursement for our products in the U.S. without significant restrictions, particularly given the introduction of PCSK9 inhibitor products in the U.S., which has impacted reimbursement of JUXTAPID in the U.S;
gaining pricing and reimbursement approvals for lomitapide in key markets outside the U.S., including Japan, where lomitapide has received marketing approval and we plan to commercialize lomitapide;  
gaining regulatory and pricing and reimbursement approvals to market our products in countries in which our products are not currently approved and/or reimbursed and we elect to commercialize such products, including filing a Marketing Authorization Application (“MAA”) with the European Medicines Agency (“EMA”) seeking marketing approval of metreleptin in the EU as a treatment for complications of leptin deficiency in GL patients and a subset of partial lipodystrophy (“PL”) patients, in connection with which we have committed to the EMA’s Pediatric Committee (“PDCO”) to conduct an additional trial in pediatric GL patients as a condition to approval of metreleptin in such patients, and seeking approval of metreleptin the U.S. for a subset of PL based on the existing clinical data package for metreleptin, subject to discussions with the FDA; 
minimizing the number of patients who are eligible to receive but decide not to commence treatment with our products, or who discontinue treatment, including with lomitapide, due to tolerability issues, and with metreleptin, due to its route of administration as an injection, through activities such as patient support programs, to the extent permitted in a particular country;
pre-launch and commercial activities to support the launch of lomitapide for HoFH in Japan, subject to the receipt of pricing and reimbursement approval;
evaluating the potential for future clinical development of metreleptin in additional indications, including a subset of PL if we are unable to secure approval for such indication with the current metreleptin clinical data package;
engaging in possible further development efforts related to our existing products, and assessment, and possible acquisition of, potential new product opportunities targeted at rare diseases where we believe we can leverage our infrastructure and expertise;

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resolving the ongoing U.S. DOJ and SEC investigations in accordance with the terms of the preliminary agreements in principle, managing other ongoing government investigations, and managing and defending ourselves in ongoing and potential future litigation and investigations that may arise following the preliminary agreements in principle with the SEC and DOJ investigations or any final resolution of the SEC and DOJ investigations;
resolving on acceptable terms the ongoing investigations and inquiry by government authorities in Brazil regarding sales and marketing of JUXTAPID in Brazil;
defending ourselves against and resolving on acceptable terms the ongoing securities class action litigation; and
defending challenges to the patents or our claims of exclusivity for lomitapide in the U.S., including against two separate inter partes review (“IPR”) petitions against two of the lomitapide U.S. dosing patents which were filed with the Patent Trial and Appeal Board (“PTAB”) of the U.S. Patent and Trademark Office in August 2015 and instituted by the PTAB in March 2016, and against potential generic submissions with the FDA with respect to lomitapide, which could occur beginning December 21, 2016.
 
The introduction of PCSK9 inhibitors in the U.S. has negatively impacted sales of JUXTAPID and we expect this negative trend to continue.  This impact results from several factors, including: healthcare professionals switching some existing JUXTAPID patients to a PCSK9 inhibitor product; healthcare professionals trying most new adult HoFH patients on a PCSK9 inhibitor product before trying JUXTAPID; the provision of free PCSK9 drug to adult HoFH patients by the companies that are commercializing PCSK9 inhibitor products, which such companies may have ceased, but which historically has had a significant negative impact on the rate at which new patients start treatment on JUXTAPID and has caused more patients than we expected to discontinue JUXTAPID and switch their treatment to PCSK9 inhibitor products; and actions by insurance companies, managed care organizations and other private payers in the U.S. that have required, or may require in the future, HoFH patients to demonstrate an inability to achieve an adequate LDL-C response on PCSK9 inhibitor products before access to JUXTAPID is approved, or may impose other hurdles to access or other significant restrictions or limitations on reimbursement, or may require switching of JUXTAPID patients to PCSK9 inhibitor products. Many U.S. insurance companies, managed care organizations and other private payers now require that HoFH patients demonstrate that they are not able to achieve an adequate response in LDL-C reduction on PCSK9 inhibitor products before providing reimbursement for JUXTAPID. For patients currently taking JUXTAPID, several U.S. pharmacy benefits managers (“PBMs”) are using a prior authorization requiring current JUXTAPID patients to "step through" the less expensive PCSK9 inhibitor product, and additional PBMs and payers may follow this practice.  We have been engaging with PBMs to discuss and negotiate potential agreements to limit these so-called "step edits"; these agreements may require us to provide discounts and other price protections, which would impact our net revenues from JUXTAPID. We believe that many of the PCSK9 inhibitor switches from current lomitapide patients have been at the direction of the prescribing physician.  Ultimately, the physician may decide to switch the adult HoFH patient back to JUXTAPID if the patient does not reach a goal of LDL-C response while being treated with a PCSK9 inhibitor product.  It is unknown how many adult HoFH patients may be switched back to JUXTAPID or the period of time in which this would take place.  We expect physicians will continue to consider using JUXTAPID for those adult HoFH patients for whom PCSK9 inhibitor products are not sufficiently effective.  We expect that the introduction of PCSK9 inhibitor products in commercial markets outside of the U.S. will have similarly negative effects on sales, including named patient sales, of lomitapide outside the U.S., particularly in Brazil and Canada, where a PCSK9 inhibitor product has been approved by the local regulatory authorities, as well as in Japan, where PCSK9 inhibitor products have been approved and launched prior to the anticipated launch of lomitapide in Japan. If the continued negative impact of PCSK9 inhibitors is greater than we expect, it may make it more difficult for us to generate revenue and achieve profitability.
 
In the near-term, we expect that the majority of our revenues will continue to be derived from sales of our products in the U.S. We also expect to generate revenues from sales of lomitapide in those countries outside the U.S. in which we have or expect to receive marketing approval and elect to commercialize lomitapide, and are able to obtain pricing and reimbursement approval at acceptable levels, particularly in Japan. We also expect to generate revenues from both our products in a limited number of other countries where they are, or may in the future be, available on a named patient sales basis as a result of existing approvals in the U.S. or EU. We expect that named patient sales of lomitapide in Brazil in the near term will continue to be our second largest source of revenues for lomitapide, on a country-by-country basis. We have received named patient sales orders for metreleptin in Argentina in the first, second and third quarters of 2016 and in Brazil in the second and third quarters of 2016. We expect net product sales from named patient sales to fluctuate quarter-over-quarter significantly more than sales in the U.S. because named patient sales are derived from unsolicited requests from prescribers. In some countries, including Brazil, orders for named patient sales are for multiple months of therapy which can lead to unevenness in orders. For example, in the first and third quarter of 2015, we recorded the largest orders for lomitapide since named patient sales began in Brazil. The sales to Brazil in the second and fourth quarters of 2015 were significantly lower than in the first and third quarters

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of 2015. In the first quarter of 2016, we did not receive any orders for lomitapide in Brazil, causing sales to Brazil in the first quarter of 2016 to be significantly lower than in the first quarter of 2015.  However, we did receive orders for lomitapide in Brazil in the second and third quarters of 2016, varying in size. Thus, we continue to expect that net product sales from named patient sales may fluctuate quarter-over-quarter as a result of government actions and economic pressures.  We believe the investigations in Brazil have contributed to 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 São Paulo after a patient has obtained access to lomitapide through the judicial process. See Part II, Item 1 – “Legal Proceedings” for further information regarding these investigations and other legal proceedings.  Similarly, we have faced, and may continue to face, a reluctance of some physicians to prescribe lomitapide, and some patients to take or stay on lomitapide, while the investigations are ongoing. In the second quarter of 2015, and in the second quarter of 2016, we observed a significant increase in patients discontinuing therapy in Brazil, and we believe that the increases are due in part to the investigations. These discontinuations may negatively impact re-orders of lomitapide in Brazil in future quarters. As noted above, revenues from named patient sales in Brazil may also be negatively affected by the potential availability of PSCK9 inhibitor products on a named patient sales basis or a commercial basis, particularly in light of the approval of Amgen’s PCSK9 inhibitor product in April 2016 by the Brazilian Health Surveillance Agency (“ANVISA”), the regulatory agency responsible for reviewing marketing authorization applications in Brazil. We also believe the investigations in Brazil may be impacting prescriptions and the timing of potential named patient orders of metreleptin.
During the three and nine months ended September 30, 2016, we generated approximately $35.4 million and $115.6 million of revenues from net product sales of both lomitapide and metreleptin, respectively. During the three and nine months ended September 30, 2015, we generated approximately$67.3 million and $190.9 million of revenues from net product sales of both lomitapide and metreleptin, respectively. As of September 30, 2016 and December 31, 2015, we had approximately $32.4 million and $64.5 million in cash and cash equivalents, respectively.
On May 11, 2016, we reached preliminary agreements in principle with the DOJ and the SEC to resolve certain aspects of their ongoing investigations.  Under the terms of the preliminary agreement in principle with the DOJ, we would plead guilty to two misdemeanor misbranding violations of the Food, Drug and Cosmetic Act.  One count would be based on our alleged marketing of JUXTAPID with inadequate directions for use (21 U.S.C. §§ 352(f)), and the second count would involve an alleged failure to comply with a requirement of the JUXTAPID Risk Evaluation and Mitigation Strategies (“REMS”) program (21 U.S.C. §§ 352(y)). We would separately enter into a five-year deferred prosecution agreement with regard to charges that we violated the Health Insurance Portability and Accountability Act and engaged in obstruction of justice relating to the REMS program. The preliminary agreement in principle with the DOJ also requires us to enter into a civil settlement agreement with the DOJ to resolve alleged violations of the False Claims Act. Additionally, we would enter into a non-monetary consent decree with the Food and Drug Administration prohibiting future violations of law and may have to enter into a corporate integrity agreement with the Department of Health and Human Services as part of any final settlement with the DOJ. Under the preliminary agreement in principle, we will not be subject to mandatory exclusion from participation in federal health care programs under 42 U.S.C. § 1320a-7(a).
Under the terms of the preliminary agreement in principle with the SEC staff, the SEC’s Division of Enforcement will recommend that the SEC accept a settlement offer from us on a neither-admit-nor-deny basis that contains alleged negligent violations of Sections 17(a)(2) and (3) of the Securities Act of 1933, as amended, related to certain statements that we made in 2013 regarding the conversion rate of patients receiving JUXTAPID prescriptions, with remedies that include censure, an order prohibiting future violations of the securities laws and payment of a civil penalty.
The preliminary agreements in principle provide for a consolidated monetary package that covers payments due to both the DOJ and the SEC. The consolidated monetary package includes payments to the DOJ and the SEC totaling approximately $40 million in the aggregate (the “Settlement Payments”), payable over five years as follows: approximately $3 million upon finalization of the settlement with the DOJ and the SEC, approximately $3.7 million per year, payable quarterly, for three years following finalization of the settlement, and approximately $13 million per year, payable quarterly, in years four and five following finalization of the settlement. Certain outstanding amounts would accrue interest at a rate of 1.75% per annum.  The Settlement Payments are subject to acceleration in the event of certain change of control transactions or the sale of JUXTAPID or MYALEPT assets. We have reserved an aggregate of approximately $40 million for these matters. In addition, we accrued $0.4 million in the second quarter of 2016 and $0.3 million in the third quarter of 2016 to reflect our current estimates of the minimum liabilities for relator attorney fees and settlement, respectively.

The terms of the preliminary agreements in principle described above may change following further negotiations and other terms of the final settlement remain subject to further negotiation.  The preliminary agreement in principle with the DOJ is subject to approval of supervisory personnel within the DOJ and relevant federal and state agencies, and approval by a U.S. District Court judge of the criminal plea and sentence and the civil settlement agreement.  The preliminary agreement in principle with the SEC is subject to review by other groups in the SEC and approval by the Commissioners of the SEC. The

33


preliminary agreements in principle do not cover the DOJ and SEC’s inquiries concerning the Company’s operations in Brazil, any potential claims by relators for attorneys’ fees, or any employment claims that may have been brought by relators.  See Part II, Item 1 – “Legal Proceedings” for further information regarding these investigations and other legal proceedings.
 
In July 2016, we announced a restructuring under which we reduced our global workforce by approximately 13% and intend to withdraw lomitapide from the EU and certain other global markets.  The goal of the reconfiguration is to reduce 2017 operating expenses by between $25 and $35 million relative to the previously stated 2016 operating expense guidance of between $145 and $155 million. In connection with this restructuring plan, in the third quarter of 2016, we entered into a lease amendment to vacate the premises at 101 Main Street, Cambridge, MA as an additional cost-cutting measure, and the premises were vacated in September 2016. We incurred aggregate charges of approximately $2.4 million in the third quarter of 2016 and we expect to substantially complete the payment of employee separation and other material costs associated with the restructuring by the second quarter of 2017. We expect to complete the withdrawal of lomitapide from the EU and certain other global markets by the end of 2016, unless we earlier enter into supply, license or other arrangements with suitable partners in such markets. The July 2016 restructuring followed a reduction in personnel announced in February 2016 that was intended to reduce compensation expenses by approximately $10 million, the result of a comprehensive business review intended to improve financial performance, increase operational efficiencies and strengthen our value proposition. The February reduction in force was substantially completed on February 10, 2016, and resulted in termination of approximately 80 employees, representing approximately 25% of our workforce.  We incurred expenses of approximately $1.8 million as a result of the February restructuring, consisting primarily of severance and benefits costs, all of which has been paid out as of the end of the third quarter.
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;
Goodwill, purchased tangible assets and intangibles;
Accrued expenses;
Stock-based compensation; and
Income taxes
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 2015 Form 10-K.

34


Revenue Recognition
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.
Lomitapide
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 are currently prerequisites to the shipment of product to a patient in the U.S. Revenue from sales in the U.S. covered by the patient’s private insurance plan or government payer is 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 defer revenue until the product has been received by the patient.
We also record 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 sales under these named patient programs once the product is shipped through to the government authority or institution. In the event the payer’s creditworthiness has not been established, we recognize revenue on a cash basis if all other revenue recognition criteria have been met.
 
We record distribution and other fees paid to our distributors as a reduction of revenue, unless we receive an identifiable and separate benefit for the consideration and we can reasonably estimate the fair value of the benefit received. If both conditions are met, we record the consideration paid to the distributor as an operating expense. At this time, neither condition has been met and therefore, these fees paid to distributors are recorded as a reduction of revenue. We record revenue net of estimated discounts and rebates, including those provided to Medicare, Medicaid, Tricare and other government programs in the U.S. and other countries. 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 reasonably estimated at the time of delivery. These allowances are adjusted to reflect known changes in the factors that may impact such allowances in the quarter those changes are known.
 
We also provide financial support to 501(c)(3) organizations that assist patients in the U.S. in accessing treatment for certain diseases and conditions. These organizations provide charitable services to patients according to eligibility criteria defined independently by the organization. We record donations made to 501(c)(3) organizations as selling, general and administrative expense. Any payments received from a 501(c)(3) organization that has received a donation from us for the treatment of HoFH are recorded as a reduction of selling, general and administrative expense rather than as revenue. Effective January 2015, we also offer a branded co-pay assistance program for certain patients in the U.S. with HoFH who are on JUXTAPID therapy. The branded co-pay assistance program assists commercially insured patients who have coverage for JUXTAPID, and is intended to reduce each participating patient’s portion of the financial responsibility for JUXTAPID’s purchase price up to a specified dollar amount of assistance. We record revenue net of amounts paid under the branded specific co-pay assistance program for each patient. 
Metreleptin
In the U.S., MYALEPT is only available through an exclusive third-party distributor that takes title to the product upon shipment. MYALEPT is not available in retail pharmacies. The distributor may contractually hold inventory for no more than 21 business days. We recognize revenue for these sales once the product is received by the patient as we are currently unable to reasonably estimate the rebates owed to certain government payers at the time of receipt by the distributor. Prior authorization and confirmation of coverage level by the patient’s private insurance plan or government payer are currently prerequisites to the shipment of product to a patient in the U.S. Revenue from sales in the U.S. covered by the patient’s private insurance plan or government payer is recognized once the product has been received by the patient.
We also record revenue on sales in Brazil and other countries where metreleptin is available on a named patient basis and is 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 metreleptin, the limited number of patients, the short period from product sale to delivery to the end-customer and the limited contractual return rights,

35


these distributors typically only hold inventory to supply specific orders for the product. We generally recognize revenue for sales under these named patient programs once the product is shipped through to the government authority or institution. In the event the payer’s creditworthiness has not been established, we recognize revenue on a cash basis if all other revenue recognition criteria have been met.
We record distribution and other fees paid to our distributor as a reduction of revenue, unless we receive an identifiable and separate benefit for the consideration and we can reasonably estimate the fair value of the benefit received. If both conditions are met, we record the consideration paid to the distributor as an operating expense. At this time, neither condition has been met and therefore, these fees paid to our distributor are recorded as a reduction of revenue. We record revenue from sales of MYALEPT net of estimated discounts and rebates, including those provided to Medicare and Medicaid in the U.S. Allowances for government rebates and discounts are established based on the actual payer information, which is reasonably estimable 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.
 
As discussed above, we also provide financial support to 501(c)(3) organizations that assist patients in the U.S. in accessing treatment for certain diseases and conditions. These organizations provide charitable services to patients according to eligibility criteria defined independently by the organization. We record donations made to 501(c)(3) organizations as selling, general and administrative expense. Any payments received from 501(c)(3) organizations that have received a donation from us are recorded as a reduction of selling, general and administrative expense rather than as revenue. We also offer co-pay assistance for patients in the U.S. with GL who are on MYALEPT therapy. The co-pay assistance program assists commercially insured patients who have coverage for MYALEPT, and is intended to reduce each participating patient’s portion of the financial responsibility for MYALEPT’s purchase price up to a specified dollar amount of assistance. We record revenue net of amounts paid under the MYALEPT co-pay assistance program for each patient. 
The following table summarizes combined activity for lomitapide and metreleptin in each of the product revenue allowance and reserve categories during the nine months ended September 30, 2016 (in thousands):
 
Government
Rebates
 
Contractual
Discounts
 
Other
Incentives
 
Total
Balance at December 31, 2015
$
10,837

 
$

 
$
112

 
$
10,949

Provision related to current period sales
15,374

 
3,604

 
866

 
19,844

Adjustments related to prior period sales
32

 

 

 
32

Payments made
(16,476
)
 
(3,604
)
 
(804
)
 
(20,884
)
Balance at September 30, 2016
$
9,767

 
$

 
$
174

 
$
9,941

 

 Inventories
Inventories are stated at the lower of cost or market price with cost determined on a first-in, first-out basis. Inventories are reviewed periodically to identify slow-moving or obsolete inventory based on sales activity, both projected and historical, as well as product shelf-life. 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 consolidated statements 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 our products 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. Inventory becomes obsolete when it has aged past its shelf-life, cannot be recertified and is no longer usable or able to be sold, or the inventory has been damaged. In such instances, a full reserve is taken against such inventory.
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 inventory on hand after

36


consideration of expiration dates.  The inventory reserve balance at September 30, 2016 and December 31, 2015 was $15.0 million and $2.4 million, respectively. To the extent our actual sales or subsequent sale forecasts decrease, we could be required to record additional inventory reserves in future periods, which could have a material negative impact on its gross margin.
Goodwill, Purchased Intangibles and Tangible Assets
We have recorded goodwill as a result of the January 2015 acquisition of MYALEPT, purchased tangible assets and intangibles representing product rights, and in-process research and development assets. When identifiable intangible assets are acquired, we determine fair values of these assets as of the acquisition date.  Discounted cash flow models are typically used in these valuations and the models require the use of significant estimates and assumptions including but not limited to:
the probability of obtaining marketing approval and/or achieving relevant development milestones for a drug candidate;
projecting regulatory approvals;
estimating future cash flows from product sales resulting from completed products; and
developing appropriate discount rates and probability rates.
Purchased intangible assets with definite useful lives are amortized to their estimated residual values over their estimated useful lives and reviewed for impairment if certain events occur. Impairment testing and assessments of remaining useful lives are also performed when a triggering event occurs that could indicate a potential impairment. Such test first entails comparison of the carrying value of the intangible asset to the undiscounted cash flows expected from that asset. If impairment is indicated by this test, the intangible asset is written down by the amount by which the discounted cash flows expected from the intangible asset exceeds its carrying value. In conjunction with the interim goodwill impairment test described below, we determined there were indicators of impairment for the purchased intangibles. As a result, we tested the purchased intangible assets to see if they were recoverable by looking at the undiscounted cash flows of the related asset group. We concluded that the purchased intangible assets were recoverable and there was no impairment as of June 30, 2016. For the third quarter, the Company performed a qualitative assessment of the purchased intangible assets and, based on the assessment, determined that no indicators of impairment existed and the assets were not impaired at September 30, 2016.
In-process research and development assets are accounted for as indefinite-lived intangible assets and are maintained on our consolidated balance sheet until either the project underlying such an asset is completed or the asset becomes impaired. If the asset becomes impaired or is abandoned, the carrying value of the related intangible asset is written down to its fair value, and an impairment charge is recorded in the period in which the impairment occurs. If a project is completed, the carrying value of the related intangible asset is amortized as a part of cost of product revenues over the remaining estimated life of the asset beginning in the period in which the project is completed. In-process research and development assets are tested for impairment on an annual basis as of October 31, and more frequently if indicators are present or changes in circumstances suggest that impairment may exist. In conjunction with the interim goodwill impairment test described below, we performed a quantitative impairment test for the in-process research and development assets and noted there was no impairment as of June 30, 2016. For the third quarter, the Company performed a qualitative assessment of the in-process research and development assets and, based on the assessment, determined that no indicators of impairment existed and the assets were not impaired at September 30, 2016.
Purchased tangible assets are accounted for as either inventory or clinical and compassionate use materials classified as other assets on our consolidated balance sheet. Inventory will be maintained on our consolidated balance sheet until the inventory is sold, donated as part of compassionate use program, used for clinical development, or determined to be in excess of expected requirements. Inventory that is sold or determined to be in excess of expected requirements will be recognized as cost of product sales in our consolidated statement of operations, inventory that is donated as part of our compassionate use program will be recognized as a selling, general and administrative expense in the consolidated statement of operations, and inventory used for clinical development will be recognized as research and development expense in the consolidated statement of operations. Other assets will be maintained on our consolidated balance sheet until these assets are consumed. If the asset becomes impaired or is abandoned, the carrying value is written down to its fair value, and an impairment charge is recorded in the period in which the impairment occurs.
 
Goodwill represents the excess of purchase price over fair value of net assets acquired in a business combination accounted for by the acquisition method of accounting and is not amortized, but subject to impairment testing at least annually or when a triggering event occurs that could indicate a potential impairment. We test our goodwill annually for impairment each October 31 unless a triggering event occurs that could indicate a potential impairment. We are organized as a single

37


reporting unit. We may first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is “more likely than not” that the fair value of the reporting unit is less than its carrying amount and whether the two-step impairment test on goodwill is required. If, based upon qualitative factors, it is “more likely than not” that the fair value of a reporting unit is greater than its carrying amount, we will not be required to proceed to a two-step impairment test on goodwill. However, we also have the option to proceed directly to a two-step impairment test on goodwill. In the first step, or Step 1, of the two-step impairment test, we compare the fair value of our reporting unit to our carrying value. If the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired and we are not required to perform further testing. If the carrying value of the net assets exceeds the fair value, then we must perform the second step, or Step 2, of the two-step impairment test in order to determine the implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.
 
The fair value of our reporting unit is estimated using a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. We evaluate the reasonableness of the fair value calculation of our reporting unit by reconciling the total fair value to our total market capitalization, taking into account an appropriate control premium. The determination of a control premium requires the use of judgment and is based primarily on comparable industry and deal-size transactions, related synergies and other benefits. When we are required to perform a Step 2 analysis, determining the fair value of our net assets and our off-balance sheet intangibles used in Step 2 requires us to make judgments and involves the use of significant estimates and assumptions.

Due to the significant sustained decline in our stock price in the second quarter of 2016 and other quantitative and qualitative factors, such as the continued decline in JUXTAPID revenue, corroborated by the implied purchase consideration from the proposed merger with QLT, we performed an interim goodwill impairment test. We performed a Step 1 analysis as of June 30, 2016, which indicated the carrying value of our net assets exceeded the fair value of the company. As a result, we proceeded with a Step 2 impairment test to determine the implied fair value of goodwill. The Step 2 test measures the goodwill impairment loss by allocating the estimated fair value of the reporting unit, as determined in Step 1, to the reporting units’ assets and liabilities, with the residual amount representing the implied fair value of goodwill. To the extent the implied fair value of goodwill is less than the carrying value, an impairment loss is recognized. The valuation of our reporting unit used our latest revenue projections and long range operating expense projections over the patent lives of both lomitapide and metreleptin. These projections were further risk-adjusted and reconciled to our market capitalization and the implied purchase consideration in the proposed QLT merger.  We assessed a range of different weighted average cost of capital assumptions, from 13% to 16%, in order to determine an appropriate discount rate. In determining the fair value of our net assets, we made certain adjustments from the carrying value of our assets and liabilities, including adjustments to inventory to reflect selling price less selling costs, convertible debt to reflect the fair value of the Convertible Notes, and valuation of lomitapide intangible assets that were not previously recorded. As a result of allocating the fair value of our reporting unit to the fair value of our net assets, we determined that the implied fair value of goodwill was less than the carrying value and recorded an impairment of $9.6 million in the second quarter of 2016. See Note 4, “Goodwill and Intangible Assets,” to the unaudited condensed consolidated financial statements for discussion of the interim goodwill impairment test that we performed as of June 30, 2016.     
 
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 consolidated 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 clinical research organizations and investigative sites in connection with clinical studies and professional service fees. If our previous estimates of accrued liabilities are 5% too high or too low, this may result in an adjustment to our total accrued expenses in future periods of approximately $2.0 million.
 
Income Taxes
Our provision for income taxes is comprised of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current year. We provide for deferred income taxes resulting from temporary differences between financial and taxable income. Such differences arise primarily from tax net

38


operating loss and credit carryforwards, depreciation, stock-based compensation expense, accruals, reserves and the treatment of convertible notes.
We assess the recoverability of any tax assets recorded on the balance sheet and provide any necessary valuation allowances as required. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative income in the most recent fiscal years, changes in the business in which we operate and our forecast of future taxable income. In determining future taxable income, assumptions utilized include the amount of state, federal and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying business. Such assessment is completed on a jurisdiction by jurisdiction basis. In future periods, we may determine that it is more likely than not that some or all of our deferred tax assets are realizable and in such periods we may reduce some or all of our valuation allowance against our deferred tax assets. The reduction of our valuation allowance on our deferred tax assets could have a material effect on our financial statements.
 
We provide for income taxes during interim periods based on the estimated effective tax rate for the full fiscal year. We record a cumulative adjustment to the tax provision in an interim period in which a change in the estimated annual effective tax rate is determined.
 
Stock-Based Compensation
We issue stock options, restricted stock and restricted stock units (“RSUs”) with service conditions, which are generally the vesting periods of the awards. We also issue stock options that vest upon the satisfaction of certain performance conditions. We also issue stock options and RSUs that vest upon the satisfaction of certain market 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. For stock awards with service-based vesting conditions, compensation expense is recognized net of estimated forfeitures using the ratable method over the requisite service period, which is typically the vesting period. For stock 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 stock awards that vest upon the achievement of a market condition, we recognize compensation expense over the derived service period. For stock 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 stock awards subject to service-based and performance-based conditions, we calculate the estimated fair value of the awards using the Black-Scholes option-pricing model. As of September 30, 2016, we had 21,762 outstanding unvested RSUs that contain performance or market criteria that impacts the vesting of the award. The Black-Scholes option-pricing model requires the input of subjective assumptions, including stock price volatility and the expected life of stock options. For stock awards and RSUs that vest upon achievement of a market condition, we calculate the estimated fair value of the stock-based awards using a Monte Carlo simulation. A Monte Carlo simulation requires the input of assumptions, including our stock price, and the volatility of our stock price, and was developed to reflect the impact of the market condition on the value of the awards.
For RSUs with service-based vesting conditions, we determine the fair value of the RSUs to be the fair value of our common stock underlying the RSUs at the date of grant.
We do not have sufficient history to estimate the volatility of our common stock price or the expected life of our options based on our specific evidence. Our expected stock price volatility is based on an average of our own historical volatility and that of several peer companies. We utilize a weighted average method using our own volatility data for the time that we have been public, along with similar data for peer companies that are publicly traded. For purposes of identifying peer companies, we considered characteristics such as industry, length of trading history, and stage of life cycle. We will continue to use a weighted average method until the historical volatility of our common stock is relevant to measure expected volatility for future option grants. The assumed dividend yield is based on our expectation of not paying dividends in the foreseeable future. We determine the average expected life of stock options according to the “simplified method” as described in Staff Accounting Bulletin (“SAB”) 110, which is the mid-point between the vesting date and the end of the contractual term. We determine the risk-free interest rate by reference to implied yields available from five-year and seven-year U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant. We have performed a historical analysis of both options

39


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 
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Expected stock price volatility
68.0
%
 
60.7
%
 
63.2
%
 
61.2
%
Risk-free interest rate
1.14
%
 
1.74
%
 
1.60
%
 
1.63
%
Expected life of options (years)
6.25

 
6.24

 
6.25

 
6.21

Expected dividend yield

 

 

 

Results of Operations
Comparison of the Three Months Ended September 30, 2016 and 2015
The following table summarizes the results of our operations for each of the three-month periods ended September 30, 2016 and 2015, together with the changes in those items in dollars and as a percentage:
 
Three Months Ended September 30,
 
 
 
 
 
2016
 
2015
 
Change
 
%
Net product sales
$
35,387

 
$
67,303

 
$
(31,916
)
 
(47
)%
Cost of product sales
13,838

 
14,486

 
(648
)
 
(4
)%
Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative
27,827

 
43,923

 
(16,096
)
 
(37
)%
Research and development
9,940

 
11,282

 
(1,342
)
 
(12
)%
Provision for contingent litigation
126

 

 
126

 
100
 %
Restructuring
2,421

 

 
2,421

 
100
 %
Total operating expenses
40,314

 
55,205

 
(14,891
)
 
(27
)%
Loss from operations
(18,765
)
 
(2,388
)
 
(16,377
)
 
686
 %
Interest expense, net
(7,720
)
 
(7,113
)
 
(607
)
 
9
 %
Other income, net
165

 
30

 
135

 
450
 %
Loss before provision for income taxes
(26,320
)
 
(9,471
)
 
(16,849
)
 
178
 %
Provision for income taxes
(246
)
 
(294
)
 
48

 
(16
)%
Net loss
$
(26,566
)
 
$
(9,765
)
 
(16,801
)
 
172
 %
Net Product Sales
 
Three Months Ended September 30,
 
2016
 
2015
 
(in thousands)
Lomitapide
$
21,982

 
$
58,828

Metreleptin
13,405

 
8,475

Total net product sales
$
35,387

 
$
67,303

Lomitapide
We generated revenues from net product sales of lomitapide of $22.0 million in the three months ended September 30, 2016, a decrease of $36.8 million, or 63%, as compared to the same period in 2015. The significant decrease in net product sales in the quarter ended September 30, 2016 is primarily attributable to a lower patient base as a result of the introduction of

40


PCSK9 inhibitor products in the U.S. in the fall of 2015, partially offset by an increase in international revenue in the third quarter of 2016.
We continue to see revenues from net product sales of lomitapide in the U.S. decline significantly in 2016 as compared to 2015, due primarily to the launch of PCSK9 inhibitor products. Also, the launch of higher strength lomitapide capsules in the third quarter of 2015 has reduced net product sales in 2016 for sales to those patients who take more than one capsule of lomitapide per day in the absence of higher strength capsules utilized to achieve the higher daily dose. We have factored the launch of higher strength capsules and this reduction in net product sales into our financial expectations for the remainder of 2016.  
 
We expect that named patient sales in Brazil for lomitapide and metreleptin will continue to be our largest source of revenues, on a country-by-country basis, in the short-term, outside the U.S. However, we expect that net product sales from named patient sales in Brazil will fluctuate quarter-over-quarter given that orders for named patient sales are typically for multiple months of therapy which can lead to an unevenness in orders. Future revenues from named patient sales in Brazil may also be negatively affected by the significant increase in discontinuations of patients on lomitapide that we observed in Brazil beginning in the second quarter of 2015, ongoing government investigations in Brazil, and potentially by the availability of PCSK9 inhibitor products on a named patient sales or commercial basis, particularly in light of the approval by ANVISA of Amgen Inc.’s PCSK9 inhibitor product in April 2016, and the ongoing court proceedings in Brazil reviewing the regulatory framework for named patient sales. In addition, net product sales from named patient sales of both products in Brazil may fluctuate quarter-over-quarter as a result of negative media coverage, government actions, economic pressures and political instability.
Metreleptin
We generated revenues from net product sales of metreleptin of approximately $13.4 million in the three months ended September 30, 2016, an increase of $4.9 million, or 58%, compared to the same period in 2015. The increase in net product sales was primarily due to an increase in the volume of sales of metreleptin in the U.S. and a significant shipment to Japan in the third quarter of 2016. We expect net product sales of metreleptin to continue to increase in 2016 due to an increase in the number of patients and maintenance of patients on metreleptin in the U.S. and named patient sales of metreleptin outside the U.S., including in Brazil. The expected increase in net product sales of metreleptin is highly dependent on our ability to continue to find GL patients and to build market acceptance for metreleptin in the U.S. In addition, given the significantly higher launch price of MYALEPT set by us in the first quarter of 2015 compared to AstraZeneca’s original launch price, we have paid, and expect to continue to pay, significant Medicaid rebates for MYALEPT, which will have a negative impact on our net product sales in future quarters. The degree of such impact on our overall financial performance will depend on the percentage of MYALEPT patients that have Medicaid as their primary insurance coverage and the quantity of units ordered per patient. 
Cost of Product Sales
We recorded cost of product sales of $13.8 million in the three months ended September 30, 2016, a decrease of $0.6 million, or 4%, as compared to the same period in 2015. Cost of sales includes the cost of inventory sold, amortization of acquired product rights, which result from the acquisition of Myalept, manufacturing and supply chain costs, product shipping and handling costs, provisions for excess and obsolete inventory, as well as estimated royalties payable related to the sale of lomitapide and metreleptin. The decrease in cost of product sales in the third quarter of 2016 is primarily due to a quarter over quarter decrease in the provision for excess and obsolete inventory, royalty expense associated with a $36.8 million decrease in sales of lomitapide, and a decrease in third-party logistics fees. This was partially offset by increased royalties and other costs of sales associated with a $4.9 million increase in sales of metreleptin.
We expect cost of product sales of lomitapide in the U.S., excluding any charges for excess and obsolete inventory, to continue to decline in 2016 due to the expected decline of net product sales in the U.S. and to fluctuate outside the U.S. primarily based on named patient sales in Brazil. We expect cost of product sales of metreleptin, excluding any charges for excess and obsolete inventory, to increase throughout 2016 due to the expected increases in net product sales of metreleptin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $27.8 million in the three months ended September 30, 2016, a decrease of $16.1 million, or 37%, as compared to the same period in 2015. The $16.1 million decrease was primarily attributable to a $8.9 million decrease in salary and employee-related costs as a result of the reductions in force completed in the first and third quarter of 2016, a $5.5 million decrease in legal fees due to increased costs in the prior year associated with

41


ongoing litigation, and a $2.7 million decrease in corporate and outside service costs related to a charitable contribution made in the third quarter of the prior year.
We expect that our selling, general and administrative expenses will decrease in 2016 as compared to 2015 due primarily to the reductions in force in February 2016 and July 2016.
Research and Development Expenses
Research and development expenses were $9.9 million in the three months ended September 30, 2016, a decrease of $1.4 million, or 12%, as compared to the same period in 2015. The $1.4 million decrease was primarily attributable to a $0.7 million decrease in salary and employee-related costs as a result of the reductions in force completed in the first and third quarter of 2016 and a $1.0 million decrease in contract manufacturing costs due to the timing of our manufacturing activities during the year.
We expect research and development expenses to decrease slightly for the remainder of 2016 as compared to 2015 as a result of the reductions in force in February 2016 and July 2016 and the related reduction in expense.  We will continue to incur expenses related to our clinical development and regulatory activities to support a marketing authorization approval for lomitapide in HoFH in Japan; continuation of the observational cohort and vascular imaging post-marketing studies related to lomitapide initiated in 2014; clinical development and regulatory activities related to our planned application for marketing approval in the EU for MYALEPT for  GL and a subset of PL patients, including a planned additional trial in pediatric GL patients under the age of six years old; planned filings and activities related to obtaining approval of MYALEPT for a subset of PL in the U.S. and for GL and a subset of PL in certain other markets; and initiation and continuation of certain post-marketing requirements related to MYALEPT. 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 $7.7 million in the three months ended September 30, 2016, an increase of $0.6 million as compared to the same period in 2015. Interest expense primarily relates to the amortization of the debt discount and interest incurred in relation to the issuance in August 2014 of the Convertible Notes, for which interest is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2015. 
Other Income (Expense), net
Other income, net was $0.2 million in the three months ended September 30, 2016, an increase of $0.2 million, as compared to the same period in 2015. Other income (expense), net relates to unrealized and realized foreign currency charges incurred related to our foreign operations.
Provision for Income Taxes
Our provision for income taxes was $0.2 million for the three-month period ended September 30, 2016, a decrease of $0.1 million from the same period in 2015. The provision for income taxes consists of current tax expense, which relates primarily to our profitable operations in our foreign tax jurisdictions, and a net deferred tax expense from the tax amortization of the indefinite-life intangible assets associated with the MYALEPT acquisition offset by the reversal of a deferred tax liability for goodwill that was impaired for financial statement purposes.

Comparison of the Nine Months Ended September 30, 2016 and 2015
The following table summarizes the results of our operations for each of the nine-month periods ended September 30, 2016 and 2015, together with the changes in those items in dollars and as a percentage:

42


 
Nine Months Ended September 30,
 
 
 
 
 
2016
 
2015
 
Change
 
%
 
(in thousands)
 
 
 
 
Net product sales
$
115,633

 
$
190,884

 
$
(75,251
)
 
(39
)%
Cost of product sales
51,867

 
40,321

 
11,546

 
29
 %
Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative
107,942

 
133,523

 
(25,581
)
 
(19
)%
Research and development
30,495

 
33,551

 
(3,056
)
 
(9
)%
Provision for contingent litigation
28,509

 

 
28,509

 
100
 %
Impairment of goodwill
9,600

 

 
9,600

 
100
 %
Restructuring
4,172

 

 
4,172

 
100
 %
Total operating expenses
180,718

 
167,074

 
13,644

 
8
 %
Loss from operations
(116,952
)
 
(16,511
)
 
(100,441
)
 
608
 %
Interest expense, net
(22,371
)
 
(21,113
)
 
(1,258
)
 
6
 %
Other income, net
1,126

 
1,631

 
(505
)
 
(31
)%
Loss before provision for income taxes
(138,197
)
 
(35,993
)
 
(102,204
)
 
284
 %
Provision for income taxes
(732
)
 
(747
)
 
15

 
(2
)%
Net loss
$
(138,929
)
 
$
(36,740
)
 
(102,189
)
 
278
 %
Net Product Sales
 
Nine Months Ended September 30,
 
2016
 
2015
 
(in thousands)
Lomitapide
$
79,226

 
$
173,227

Metreleptin
36,407

 
17,657

Total net product sales
$
115,633

 
$
190,884

Lomitapide
We generated revenues from net product sales of lomitapide of $79.2 million in the nine months ended September 30, 2016, a decrease of $94.0 million, or 54%, as compared to the same period in 2015. The significant decrease in net product sales in the nine months ended September 30, 2016 is primarily attributable to a lower patient base as a result of the introduction of PCSK9 inhibitor products in the U.S. in the fall of 2015.
We continue to see revenues from net product sales of lomitapide in the U.S. decline significantly in 2016 as compared to 2015, due primarily to the launch of PCSK9 inhibitor products. Also, the launch of higher strength lomitapide capsules in the third quarter of 2015 has net product sales in 2016 for sales to those patients who currently take more than one capsule of lomitapide per day in the absence of higher strength capsules utilized to achieve the higher daily dose. We have factored the launch of higher strength capsules and this potential reduction in net product sales into our financial expectations for the remainder of 2016.  
We expect that named patient sales in Brazil for lomitapide and metreleptin will continue to be our largest source of revenues, on a country-by-country basis, in the short-term, outside the U.S. However, we expect that net product sales from named patient sales in Brazil will fluctuate quarter-over-quarter given that orders for named patient sales are typically for multiple months of therapy which can lead to an unevenness in orders. Future revenues from named patient sales in Brazil may also be negatively affected by the significant increase in discontinuations of patients on lomitapide that we observed in Brazil since 2015, ongoing government investigations in Brazil, and potentially by the availability of PCSK9 inhibitor products on a named patient sales or commercial basis, particularly in light of the approval by ANVISA of Amgen’s PCSK9 inhibitor product in April 2016, and the ongoing court proceedings in Brazil reviewing the regulatory framework for named patient sales. In addition, net product sales from named patient sales may fluctuate quarter-over-quarter as a result of negative media coverage, government actions, economic pressures and political instability.

43


Metreleptin
We generated revenues from net product sales of metreleptin of approximately $36.4 million in the nine months ended September 30, 2016, an increase of $18.7 million, or 106%, compared to the same period in 2015. The increase in net product sales was primarily due to increased sales in the U.S., a shipment in Japan in the third quarter of 2016, and a shipment in Brazil in the second quarter of 2016, which was the first time we shipped metreleptin in Brazil. We expect net product sales of metreleptin to continue to increase in 2016 due to an expected increase in the number of patients and maintenance of patients on metreleptin in the U.S. and named patient sales of metreleptin outside the U.S., including Brazil. The expected increase in net product sales of metreleptin is highly dependent on our ability to continue to find GL patients and to build market acceptance for metreleptin in the U.S. In addition, given the significantly higher launch price of MYALEPT set by us in the first quarter of 2015 compared to AstraZeneca’s original launch price, we have paid, and expect to continue to pay, significant Medicaid rebates for MYALEPT, which will have a negative impact on our net product sales in future quarters. The degree of such impact on our overall financial performance will depend on the percentage of MYALEPT patients that have Medicaid as their primary insurance coverage and the quantity of units ordered per patient. 
Cost of Product Sales
We recorded cost of product sales of $51.9 million in the nine months ended September 30, 2016, an increase of $11.6 million, or 29%, as compared to the same period in 2015. Cost of sales includes the cost of inventory sold, amortization of acquired product rights, which result from the acquisition of Myalept, manufacturing and supply chain costs, product shipping and handling costs, provisions for excess and obsolete inventory, as well as estimated royalties payable related to the sale of lomitapide and metreleptin. The increase in cost of product sales is largely attributable to excess and obsolete charges of $7.6 million related to certain inventory originally acquired in the MYALEPT acquisition that was identified to be unsalable in the second quarter of 2016. The increase is also attributable to reserves taken related to the withdrawal of lomitapide from the European Union and certain other global markets. Metreleptin cost of product sales included a $2.6 million increase in royalty expense associated with increased product sales, while royalty expense associated with lomitapide decreased by $4.5 million and third-party logistics fees decreased by $2.5 million due to declining sales.
We expect cost of product sales of lomitapide in the U.S., excluding any charges for excess and obsolete inventory, to decline in 2016 due to the expected decline of net product sales in the U.S. and to fluctuate outside the U.S. primarily based on named patient sales in Brazil. We expect cost of product sales of metreleptin, excluding any charges for excess and obsolete inventory, to increase throughout 2016 due to the expected increases in net product sales of metreleptin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $107.9 million in the nine months ended September 30, 2016, a decrease of $25.6 million, or 19%, as compared to the same period in 2015. The $25.6 million decrease was primarily attributed to a $20.2 million decrease in salary and employee-related costs and a $5.3 million decrease in stock-based compensation fees as a result of the reductions in force completed in the first and third quarters of 2016, as well as a $5.8 million decrease in outside corporate service costs incurred in the prior year related to the Myalept acquisition. This was partially offset by a $3.5 million increase in consulting for current year corporate initiatives.
We expect that our selling, general and administrative expenses will decrease in 2016 as compared to 2015 due primarily to the reductions in force in February 2016 and July 2016.
Research and Development Expenses
Research and development expenses were $30.5 million in the nine months ended September 30, 2016, a decrease of $3.1 million, or 9%, as compared to the same period in 2015. The $3.1 million decrease was primarily attributable to a decrease in contract manufacturing due to timing of our manufacturing activities in the current year, and outside services of $2.2 million and a decrease in stock-based compensation of $1.8 million, partially offset by an increase in severance of $1.1 million.
We expect research and development expenses to decrease slightly in 2016 as compared to 2015 as a result of the reductions in force in February and July 2016 and the related reduction in expense.  We will continue to incur expenses related to our clinical development and regulatory activities to support a marketing authorization approval for lomitapide in HoFH in Japan; continuation of the observational cohort and vascular imaging post-marketing studies related to lomitapide initiated in 2014; clinical development and regulatory activities related to our planned application for marketing approval in the EU for MYALEPT for  GL and a subset of PL patients, including a planned additional trial in pediatric GL patients under the age of six years old; planned filings and activities related to obtaining approval of MYALEPT for a subset of PL in the U.S. and for GL and a subset of PL in certain other markets; and initiation and continuation of certain post-marketing requirements related to

44


MYALEPT. 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.
Provision for Contingent Litigation
In May 2016, we reached preliminary agreements in principle with the DOJ and the SEC to resolve certain aspects of their ongoing investigations. We increased our existing reserve related to the investigations by approximately $29 million, including accrued interest, bringing the aggregate reserve for these matters to approximately $41 million. The increased principal reserve amount of approximately $28 million was recorded in the first quarter of 2016. See Part II, Item 1 – “Legal Proceedings” for further information regarding these investigations and other legal proceedings.
Impairment of Goodwill
 
Due to the significant sustained decline in our stock price in the second quarter of 2016 and other qualitative factors, such as the decrease in our forecasts related to JUXTAPID revenue, corroborated by the implied purchase consideration from the proposed merger with QLT, we performed an interim goodwill impairment test. As a result of our impairment test, we wrote off the goodwill balance of $9.6 million in the second quarter of 2016. See Note 4, “Goodwill and Intangible Assets,” to the unaudited condensed consolidated financial statements for discussion of the interim goodwill impairment test that we performed as of June 30, 2016.
Restructuring
A restructuring charge of $4.2 million was recorded during the nine months ended September 30, 2016, which consisted primarily of severance and benefits costs as a part of a reduction in force of approximately 25% of employees in February 2016 and approximately 13% of employees in July 2016, and costs associated with the vacating of office space at our headquarters in Cambridge in the third quarter of 2016. No further significant charges are expected to be incurred related to this cost reduction plan. See Note 8, “Restructuring,” to the unaudited condensed consolidated financial statements for further discussion.
Interest Expense, net
Interest expense was $22.4 million in the nine months ended September 30, 2016, an increase of $1.3 million as compared to the same period in 2015. Interest expense primarily relates to the amortization of the debt discount and interest incurred in relation to the issuance in August 2014 of the Convertible Notes, for which interest is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2015.
Other Income (Expense), net
Other income, net was $1.1 million in the nine months ended September 30, 2016, a decrease of $0.5 million, as compared to the same period in 2015. Other income (expense), net relates to unrealized and realized foreign currency charges incurred related to our foreign operations.
Provision for Income Taxes
Our provision for income taxes for the nine months ended September 30, 2016 did not change from the same period in 2015. During the nine months ended September 30, 2016, the provision for income taxes consists of current tax expense, which relates primarily to our profitable operations in our foreign tax jurisdictions, and a net deferred tax expense from the tax amortization of the indefinite-life intangible assets associated with the MYALEPT acquisition offset by the reversal of a deferred tax liability for goodwill that was impaired for financial statement purposes. 

45


Liquidity and Capital Resources
Since our inception in 2005, we have funded our operations primarily through proceeds from the issuance of convertible notes, public issuances of common stock, revenue from the sales of lomitapide and metreleptin, proceeds from our long-term debt and the private placement of convertible preferred stock. We have incurred losses since inception, and except for the third and fourth quarters of 2014, the second and third quarters of 2015 and the second quarter of 2016, have generated negative cash flows from operations each quarter since inception.
During the three and nine months ended September 30, 2016, we generated $35.4 million and $115.6 million of revenues from net product sales, respectively. During the three and nine months ended September 30, 2015, we generated $67.3 million and $190.9 million of revenues from net product sales, respectively. As of September 30, 2016 and December 31, 2015, we had $32.4 million and $64.5 million in cash and cash equivalents on hand, respectively.
In January 2015, we amended our Loan and Security Agreement with Silicon Valley Bank to provide for a $25.0 million term loan (the “2015 Term Loan Advance”), as well as a revolving line of credit (the “Revolving Line”) of up to $15.0 million subject to a borrowing base. We used $4.0 million of the proceeds received from the 2015 Term Loan Advance to repay the aggregate of all amounts outstanding due to Silicon Valley Bank under our existing financing arrangements.  The Revolving Line was terminated in January 2016 pursuant to the amendment to the Forbearance Agreement discussed below.
On October 30, 2015, we notified Silicon Valley Bank that we had breached one or more covenants under the SVB Loan and Security Agreement and we are currently in default.  On November 9, 2015, we and Silicon Valley Bank entered into a Forbearance Agreement (the “Forbearance Agreement”), pursuant to which Silicon Valley Bank agreed not to take any action as a result of such default, including an agreement to waive the increase in the per annum interest rate under the loan from 3.0% to 8.0% until December 7, 2015 (the “Forbearance Period”), subject to certain conditions, including the deposit of cash into one or more accounts at Silicon Valley Bank to collateralize balances related to the outstanding obligations due to Silicon Valley Bank.  These cash collateral amounts are restricted for all uses until the full and final payment of all of our obligations to Silicon Valley Bank, as determined by Silicon Valley Bank in its sole and exclusive discretion.  On December 7, 2015, we and Silicon Valley Bank entered into an amendment (the “First Amendment”) to the Forbearance Agreement, pursuant to which Silicon Valley Bank agreed to extend the Forbearance Period through January 7, 2016.  On January 7, 2016, we and Silicon Valley Bank entered into a second amendment (the “Second Amendment”) to the Forbearance Agreement, pursuant to which Silicon Valley Bank agreed to extend the Forbearance Period through June 30, 2016. Pursuant to the terms of the Second Amendment, we and Silicon Valley Bank agreed to terminate the Revolving Line, for which we accrued a termination fee of $0.5 million as of March 31, 2016.  On February 26, 2016, we and Silicon Valley Bank entered into a third amendment (the “Third Amendment”) to the Forbearance Agreement, pursuant to which Silicon Valley Bank agreed to forbear exercising its rights under the SVB Loan and Security Agreement as a result of our failure to deliver an unqualified opinion (without a going concern explanatory paragraph) of our independent auditors with our annual financial statements for the fiscal year ended December 31, 2015.  On June 8, 2016, we and Silicon Valley Bank entered into a fourth amendment (the “Fourth Amendment”) to the Forbearance Agreement, pursuant to which Silicon Valley Bank agreed to forbear exercising its rights under the SVB Loan and Security Agreement as a result of our failure to deliver our quarterly financial statements for the fiscal quarter ended March 31, 2016 when due under the terms of the SVB Loan and Security Agreement. On June 14, 2016, we and Silicon Valley Bank entered into a fifth amendment (the “Fifth Amendment”) to the Forbearance Agreement, pursuant to which Silicon Valley Bank agreed to extend the Forbearance Period through September 30, 2016. In connection with the Fifth Amendment, we were required to deposit an additional $0.6 million with Silicon Valley Bank as cash collateral for our obligations under the SVB Loan and Security Agreement. On September 30, 2016, we entered into a sixth amendment to the Forbearance Agreement with Silicon Valley Bank, pursuant to which Silicon Valley Bank agreed to extend the Forbearance Period through November 30, 2016.
The Forbearance Period is subject to early termination upon the occurrence of certain events, including the occurrence of additional events of default.   Upon the expiration of the Forbearance Period or the occurrence of a termination event, we would be required to repay all of the outstanding obligations, including, but not limited to, the $25.0 million outstanding principal of the 2015 Term Loan Advance and certain fees totaling $2.0 million.  As our obligations may be accelerated at the election of Silicon Valley Bank upon the expiration of the Forbearance Period, or earlier if a termination event occurs, these amounts have been presented as current liabilities on the consolidated balance sheet.  Amounts deposited with Silicon Valley Bank to collateralize balances related to outstanding obligations under the SVB Loan and Security Agreement, which include the $25.0 million outstanding principal of the 2015 Term Loan Advance and $0.4 million related to a cash collateral account for letters of credit have been presented as restricted cash as of December 31, 2015. The cash collateral balance increased by an additional $0.6 million in the second quarter of 2016 pursuant to the Fifth Amendment and was presented as restricted cash as of September 30, 2016 on the condensed consolidated balance sheets. We plan to continue to engage in discussions with Silicon Valley Bank during the Forbearance Period regarding the loan and the defaults to seek a resolution of this matter.  We can

46


provide no assurances that we will be able to resolve this matter, which could result in the loans under the SVB Loan and Security Agreement and QLT Loans (defined below) being accelerated and have a material negative impact on our cash flows and business.
On June 14, 2016, we entered into a loan and security agreement (the “QLT Loan Agreement”) with QLT concurrently with the execution of the Merger Agreement, pursuant to which QLT agreed to provide us with a term loan facility in an aggregate principal amount not to exceed $15 million. We borrowed $3 million in term loans on June 15, 2016 and may also borrow up to an additional $3 million per month if and to the extent such amounts are necessary in order for us to maintain an unrestricted cash balance of $25 million, subject to the satisfaction of certain terms and conditions (the “QLT Loans”). The QLT Loans mature on the earliest of (i) July 1, 2019, (ii) the maturity date of the Convertible Notes, (iii) three business days after a termination of the Merger Agreement by us and (iv) 90 days after a termination of the Merger Agreement by QLT. Under the terms of the QLT Loan Agreement, we are subject to certain financial covenants consistent with the financial covenants contained in the SVB Loan and Security Agreement. Such financial covenants will only be tested if (i) the financial covenants under the SVB Loan and Security Agreement are then in effect (and not suspended) or (ii) the SVB Loan and Security Agreement has been terminated. Our obligations under the QLT Loan Agreement are secured by (i) a first priority security interest in our intellectual property related to MYALEPT and (ii) a second priority security interest in certain other assets securing our obligations under the SVB Loan and Security Agreement (excluding certain cash collateral accounts). Our obligations under the QLT Loan Agreement may be accelerated upon the occurrence of certain events of default, including a cross-default under the SVB Loan and Security Agreement. If the QLT Loans are prepaid prior to their maturity date, including at our election, a prepayment premium of 2.0% of the outstanding amount of the QLT Loans will be due prior to such prepayment. In connection with the QLT Loan Agreement, on June 14, 2016, we entered into a subordination agreement with QLT and Silicon Valley Bank (the “Subordination Agreement”), pursuant to which QLT’s liens and right to receive payments under the QLT Loan Agreement are fully subordinated to the SVB Loan and Security Agreement, other than with respect to certain intellectual property relating to MYALEPT and proceeds of dispositions thereof. Pursuant to the Subordination Agreement, upon the occurrence of certain events (including the termination of the Merger Agreement), subject to a 60-day standstill period, QLT may purchase the outstanding obligations owing to Silicon Valley Bank under the SVB Loan and Security Agreement to the extent that Silicon Valley is not exercising its rights against the collateral at such time.    
Cash Flows
The following table sets forth the major sources and uses of cash and cash equivalents for the periods set forth below:

 
Nine Months Ended September 30,
 
2016
 
2015
 
(in thousands)
Net cash provided by/(used in):
 
 
 
Operating activities
$
(33,113
)
 
$
24,097

Investing activities
(1,540
)
 
(326,207
)
Financing activities
2,212

 
(1,794
)
Effect of exchange rates on cash
303

 
(295
)
Net decrease in cash and cash equivalents
$
(32,138
)
 
$
(304,199
)

Net cash used in operating activities was $33.1 million in the nine months ended September 30, 2016. For the nine months ended September 30, 2016, the cash used in operations was primarily related to the net loss of $138.9 million offset by non-cash expenses, including non-cash interest expense of $16.7 million, the amortization of intangible assets acquired of $15.1 million, provision for inventory excess and obsolescence of 16.3 million and stock-based compensation of $11.1 million. Additionally, for the nine months ended September 30, 2016, cash used in operations reflected changes in net working capital which included an increase in contingent litigation accrual of $28.5 million, accounts receivable of $5.7 million, and prepaid expenses and other assets of $2.9 million. This was partially offset by decreases in accounts payable of $0.9 million.
Net cash provided by operating activities was $24.1 million in the nine months ended September 30, 2015. For the nine months ended September 30, 2015, the cash provided by operations was primarily related to the net loss of $36.7 million offset by non-cash expenses, including stock compensation of $18.2 million, non-cash interest expense of $15.7 million and the

47


amortization of intangible assets acquired of $15.3 million. Additionally, for the nine months ended September 30, 2015, the cash provided by operations included decreases in inventories of $3.7 million and increases in accrued expenses and other liabilities of $8.9 million, offset by increases in prepaid expenses and other assets of $3.4 million.
Cash used in investing activities for the nine months ended September 30, 2016 of $1.5 million was due to additions of property and equipment. Cash used in investing activities for the nine months ended September 30, 2015 of $326.2 million was primarily for the acquisition of MYALEPT for $325.0 million. 
Cash provided by financing activities for the nine months ended September 30, 2016 of $2.2 million was primarily due to proceeds from our loan with QLT, partially offset by increases in our restricted cash and payment of debt issuance costs. Cash used in financing activities for the nine months ended September 30, 2015 of $1.8 million primarily consisted of proceeds from long-term debt associated with amended term loan with SVB of $25.0 million and $3.0 million of proceeds from exercises of stock options offset by principal repayment of $4.0 million of long-term debt and increase in restricted cash used as collateral for the amended term loan with SVB of $25.5 million.
Future Funding Requirements
In the future, we likely 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 our products;
the success of our commercialization efforts and the level of revenues we generate from sales of our products in the U.S., which, with respect to JUXTAPID, has been significantly negatively impacted by the introduction of PCSK9 inhibitor products and the corresponding significant impact on JUXTAPID revenues;
our ability to complete the merger with QLT and on the timeline we have anticipated;
the level of revenue we receive from named patient sales of our products 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. approval of such products or EU approval of lomitapide, particularly in light of the regulatory approval of Amgen’s PCSK9 inhibitor product in Brazil in April 2016, the potential availability of that and other PCSK9 inhibitor products on a named patient sales or commercial basis in Brazil, and the ongoing court proceedings in Brazil reviewing the regulatory framework for named patient sales;
our ability to obtain pricing and reimbursement approval of lomitapide in the key countries in which lomitapide is approved and where we elect to commercialize, at acceptable prices, and on a timely basis, and without significant restrictions, discounts, caps or other cost containment measures, particularly in markets where lomitapide does not have orphan drug designation at all or at the time of pricing and reimbursement negotiations;  
the extent of the negative impact of the introduction of PCSK9 inhibitor products on sales of lomitapide;
the cost of building and maintaining the sales and marketing capabilities necessary for the commercialization of our products for their targeted indications in the market(s) in which each has received regulatory approval and we elect to commercialize such products, to the extent reimbursement and pricing approvals are obtained, and certain other key international markets, if approved;
pre-launch and commercial activities to support the launch of lomitapide in HoFH in Japan, subject to the receipt of reimbursement approval; 
the timing and costs of clinical development and regulatory activities to support the potential approval of metreleptin in the EU as a treatment for complications of leptin deficiency in GL patients and a subset of PL patients, in connection with which we have committed to the PDCO to conduct an additional trial in pediatric GL patients as a condition to approval of metreleptin in such patients;  
the timing and costs of future business development opportunities;
the timing and cost of seeking regulatory approvals and potential future clinical development of metreleptin in additional indications and possible lifecycle management opportunities for lomitapide;

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the cost of filing, prosecuting and enforcing patent claims, including our efforts to defend two of our lomitapide dosing patents in the ongoing IPRs and efforts to prepare for potential generic submissions for lomitapide with FDA, which could occur beginning in December 2016, and subsequent efforts to defend and enforce our patents if such a generic submission occurs;  
the costs of our manufacturing-related activities and the other costs of commercializing our products;
the costs associated with finalizing and complying with the preliminary agreements in principle we have reached with the DOJ and SEC and other ongoing government investigations and litigation, including: the payment of the settlement amounts in connection with the DOJ and SEC investigations, as described above; the negotiation and implementation, as applicable, of the corporate integrity agreement, FDA consent decree and deferred prosecution agreement as provided in the preliminary agreements in principle with the DOJ and the SEC;  whether we are successful in our efforts to defend ourselves in, or to settle on acceptable terms, ongoing or future litigation; and responding to additional investigations or litigation which may follow the preliminary agreements in principle or final settlement of the DOJ and SEC investigations; 
the levels, timing and collection of revenue received from sales of our products in the future;
the timing and costs of satisfying our debt obligations, including interest payments and any amounts due upon the maturity of such debt, including under our Convertible Notes, the QLT Loans and 2015 Term Loan Advance;
the cost of our observational cohort studies and other post-marketing commitments to the FDA and EU, and the costs of post-marketing commitments in any other countries where our products are ultimately approved; and
the timing and cost of other clinical development activities.
In May 2016, we filed a shelf registration statement on Form S-3 with the SEC that will permit 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. 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. For the year ended December 31, 2015 and the first nine months of 2016, we have generated revenues of $239.9 million and $115.6 million, respectively, the majority of which are from net product sales of lomitapide, which we expect to decline significantly in 2016.  In connection with the acquisition of MYALEPT in January 2015, we used a substantial amount of our then existing cash and cash equivalents.  Additionally, on October 30, 2015, we notified Silicon Valley Bank that we breached one or more covenants under the Loan and Security Agreement and we are currently in default, as described further in Note 6 within the notes to the unaudited condensed consolidated financial statements.  Silicon Valley Bank and/or QLT could accelerate the amounts due by us if we default under the terms of our debt arrangements with QLT or the Forbearance Agreement, as amended, and we may need to raise additional capital.  In addition, holders of the Convertible Notes have the right to require us to repurchase their notes for cash upon the occurrence of a fundamental change at a repurchase price equal to 100% of the respective principal amount, plus accrued and unpaid interest, if any. Further, upon conversion of the Convertible Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than cash in lieu of any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.  If we are unable to obtain such financing at all or on acceptable terms when we need it, we will have to delay, reduce or cease operations. Any of these outcomes would harm our business, financial condition and operating results.
Contractual Obligations and Commitments
On July 19, 2016, we entered into a Fifth Amendment to Lease (the “Lease Amendment”), with an effective date as of July 12, 2016, by and between the Company and RREEF America REIT II Corp. PPP (the “Landlord”), which amends the Lease, with an effective date as of January 1, 2011, by and between the Company and the Landlord, as such lease has been amended from time to time (as so amended and together with the Lease Amendment, the “Lease”). Under the terms of the Lease Amendment, we paid to the Landlord a termination fee of $0.8 million. As of September 30, 2016, our total future conditional cash obligation over the remaining term of the Lease is approximately $0.2 million.
There have been no other material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 15, 2016.

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Off-Balance Sheet Arrangements
We have a lease for office space for our headquarters in Cambridge, Massachusetts, which expires in 2019. 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.
In August 2014, we issued $325.0 million of 2.0% Convertible Notes due August 15, 2019. The Convertible Notes have a fixed annual interest rate of 2.0% and we, therefore, do not have economic interest rate exposure on the Convertible Notes. However, the fair value of the Convertible Notes is exposed to interest rate risk. We do not carry the Convertible Notes at fair value but present the fair value of the principal amount for disclosure purposes. Generally, the fair value of the Convertible Notes will increase as interest rates fall and decrease as interest rates rise. These Convertible Notes are also affected by the price and volatility of our common stock and will generally increase or decrease as the market price of our common stock changes. As of September 30, 2016, the fair value of the Convertible Notes was estimated by us to be $215.9 million.
 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.
 
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, due to material weaknesses identified in the 2015 Form 10-K, our disclosure controls and procedures as of September 30, 2016 are not 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 timely and accurately 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 and accurate decisions regarding required disclosure.
 
Previously Identified Material Weaknesses
As previously disclosed in the 2015 Form 10-K, management concluded that, as of December 31, 2015, the Company’s internal control over financial reporting was not effective based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. For a discussion of the material weaknesses in internal control over financial reporting, please see “Controls and Procedures” in Part II, Item 9A of the 2015 Form 10-K.
 
Remediation Status
As more fully discussed in the 2015 Form 10-K, to remediate the material weaknesses referenced above, the Company has implemented or plans to implement the remediation initiatives described in Part II, Item 9A of the 2015 Form 10-K and will continue to evaluate the remediation and plans to implement additional measures in the future.
 
Changes in Internal Control Over Financial Reporting
During the three months ended September 30, 2016, management continued to implement certain remediation initiatives discussed in Part II, Item 9A of the 2015 Form 10-K. However, there were no material changes to the Company’s internal control over financial reporting during the third quarter of 2016 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
In late 2013, we received a subpoena from the DOJ, represented by the U.S. Attorney’s Office in Boston, requesting documents regarding our marketing and sale of JUXTAPID in the U.S., as well as related disclosures. We believe the DOJ is seeking to determine whether we, or any of our current or former employees, violated civil and/or criminal laws, including, but not limited to, the securities laws, the Federal False Claims Act, the Food and Drug Cosmetic Act, the Anti-Kickback Statute, and the FCPA.  The investigation is continuing.
In late 2014, we received a subpoena from the SEC requesting certain information related to our sales activities and disclosures related to JUXTAPID. The SEC also has requested documents and information on a number of other topics, including documents related to the investigations by government authorities in Brazil into whether our activities in Brazil violated Brazilian anti-corruption laws, and whether our activities in Brazil violated the U.S. Foreign Corrupt Practices Act. We believe the SEC is seeking to determine whether we, or any of our current or former employees, violated securities laws. The investigation is continuing.

We believe the SEC and the DOJ are coordinating with one another concerning their investigations.  We have provided a broad range of information to the government in response to their requests, including materials related to our past disclosure statements related to the prevalence of HoFH and other disclosures, our U.S. marketing and promotional practices, and our activities in Brazil.

We have reached preliminary agreements in principle with the DOJ and the SEC to resolve their investigations into the marketing and sales activities and disclosures relating to JUXTAPID. Under the terms of the preliminary agreement in principle with the DOJ, we would plead guilty to two misdemeanor misbranding violations of the Food, Drug and Cosmetic Act.  One count would be based on our alleged marketing of JUXTAPID with inadequate directions for use (21 U.S.C. §§ 352(f)), and the second count would involve an alleged failure to comply with a requirement of the JUXTAPID Risk Evaluation and Mitigation Strategies (“REMS”) program (21 U.S.C. §§ 352(y)). We would separately enter into a five-year deferred prosecution agreement with regard to charges that the Company violated the Health Insurance Portability and Accountability Act and engaged in obstruction of justice relating to the REMS program. The preliminary agreement in principle with the DOJ also requires us to enter into a civil settlement agreement with the DOJ to resolve alleged violations of the False Claims Act. Additionally, we would enter into a non-monetary consent decree with the Food and Drug Administration prohibiting future violations of law and may have to enter into a corporate integrity agreement with the Department of Health and Human Services as part of any final settlement with the DOJ. Under the preliminary agreement in principle, we will not be subject to mandatory exclusion from participation in federal health care programs under 42 U.S.C. § 1320a-7(a).

Under the terms of the preliminary agreement in principle with the SEC staff, the SEC’s Division of Enforcement will recommend that the SEC accept a settlement offer from us on a neither-admit-nor-deny basis that contains alleged negligent violations of Sections 17(a)(2) and (3) of the Securities Act of 1933, as amended, related to certain statements we made in 2013 regarding the conversion rate of patients receiving JUXTAPID prescriptions, with remedies that include censure, an order prohibiting future violations of the securities laws and payment of a civil penalty.


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The preliminary agreements in principle provide for a consolidated monetary package that covers payments due to both the DOJ and the SEC. The consolidated monetary package includes payments to the DOJ and the SEC totaling approximately $40 million in the aggregate (the “Settlement Payments”), payable over five years as follows: approximately $3 million upon finalization of the settlement with the DOJ and the SEC, approximately $3.7 million per year, payable quarterly, for three years following finalization of the settlement, and approximately $13 million per year, payable quarterly, in years four and five following finalization of the settlement. Certain outstanding amounts would accrue interest at a rate of 1.75% per annum.  The Settlement Payments are subject to acceleration in the event of certain change of control transactions or the sale of JUXTAPID or MYALEPT assets. We have reserved an aggregate of approximately $40 million for these matters. In addition, we accrued $0.4 million in the second quarter of 2016 and $0.3 million in the third quarter of 2016 to reflect our current estimates of the minimum liabilities for relator attorney fees and settlement, respectively.
. The terms of the preliminary agreements in principle described above may change following further negotiations and other terms of the final settlement remain subject to further negotiation.  The preliminary agreement in principle with the DOJ is subject to approval of supervisory personnel within the DOJ and relevant federal and state agencies, and approval by a U.S. District Court judge of the criminal plea and sentence and the civil settlement agreement.  The preliminary agreement in principle with the SEC is subject to review by other groups in the SEC and approval by the Commissioners of the SEC.
The preliminary agreements in principle do not cover the DOJ and SEC’s inquiries concerning our operations in Brazil, any potential claims by relators for attorneys’ fees, or any employment claims that may been brought by relators. We continue to cooperate with the DOJ and the SEC with respect to their investigations. As part of this cooperation, the DOJ has requested documents and information related to donations we made in 2015 and 2016 to 501(c)(3) organizations that provide financial assistance to patients. As part of this inquiry, the DOJ may pursue theories that will not be covered by the preliminary agreement in principle with the DOJ. Other pharmaceutical and biotechnology companies have disclosed similar inquiries regarding donations to 501(c)(3) organizations. In addition, federal and state authorities in Brazil are each conducting investigations to determine whether there have been violations of Brazilian laws related to the possible illegal promotion of JUXTAPID in Brazil. In July 2016, the Ethics Council of the national pharmaceutical industry association, Interfarma, unanimously decided to fine us approximately $0.5 million for violations of the industry association’s Code of Conduct, to which we are bound due to our affiliation with Interfarma. Although the Interfarma Code of Conduct provides that companies that violate the Code of Conduct are subject to only one penalty, the Board of Directors of Interfarma has decided to impose an additional penalty of suspension of our membership, without suspension of our membership contribution, for a period of 180 days for us to demonstrate the implementation of effective measures to cease alleged irregular conduct, or exclusion of our membership in Interfarma if such measures are not implemented. We paid $0.5 million related to this fine during the third quarter of 2016. Also in July 2016, we received an inquiry from a Public Prosecutor Office of the Brazilian State of Paraná asking us to respond to questions related to recent media coverage regarding JUXTAPID and our relationship with a patient association to which we have made donations for patient support.  At this time, we do not know whether the Public Prosecutor’s inquiry will result in the commencement of any formal proceeding against the Company, but if our activities in Brazil are found to violate any laws or governmental regulations, we may be subject to significant civil and administrative penalties imposed by Brazilian regulatory authorities and additional damages and fines. Under certain circumstances, we could be barred from further sales to federal and/or state governments in Brazil, including sales of JUXTAPID and/or MYALEPT, due to penalties imposed by Brazilian regulatory authorities or through civil actions initiated by federal or state public prosecutors. As of the filing date of this Form 10-Q, we cannot determine if a loss is probable as a result of the investigations

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and inquiry in Brazil and whether the outcome will have a material adverse effect on our business and, as a result, we have not recorded any amounts for a loss contingency.

In January 2014, a putative class action lawsuit was filed against us and certain of our former executive officers in the U.S. District Court for the District of Massachusetts alleging certain misstatements and omissions related to the marketing of JUXTAPID and our financial performance in violation of the federal securities laws. On March 11, 2015, the Court appointed co-lead plaintiffs and lead counsel. On April 1, 2015, the Court entered an order permitting and setting a schedule for co-lead plaintiffs to file an amended complaint within 60 days, and for defendants to file responsive pleadings, co-lead plaintiffs to file any opposition, and defendants to file reply briefs. Accordingly, co-lead plaintiffs filed an amended complaint on June 1, 2015. The amended complaint filed against us and certain of our former executive officers alleges that defendants made certain misstatements and omissions during the first three quarters of 2014 related to our revenue projections for JUXTAPID sales for 2014, as well as data underlying those projections, in violation of the federal securities laws. We filed a motion to dismiss the amended complaint for failure to state a claim on July 31, 2015.  On August 21, 2015, co-lead plaintiffs filed a putative second amended complaint, which alleges that the defendants made certain misstatements and omissions from April 2013 through October 2014 related to the marketing of JUXTAPID and our financial projections, as well as data underlying those projections.  On September 4, 2015, we moved to strike the second amended complaint for the co-lead plaintiffs’ failure to seek leave of court to file a second amended pleading, and briefing is complete with respect to the motion to strike.  Oral argument on the motion to strike was held on March 9, 2016.    On March 23, 2016, plaintiffs filed a motion for leave to amend.  The Company opposed this motion to amend, and following a hearing on April 29, 2016, the Court took defendants’ motion to strike and plaintiffs’ motion for leave to amend under advisement.  On May 13, 2016, co-lead plaintiffs and defendants filed a joint motion wherein the parties stipulated that co-lead plaintiffs could file a third amended pleading within 30 days of the motion, which the Court granted on May 18, 2016, thereby mooting defendants’ pending motion to strike the second amended pleading and co-lead plaintiffs’ motion for leave to file a second amended pleading.  The Court also entered a briefing schedule for defendants to file responsive pleadings, co-lead plaintiffs to file any opposition, and defendants to file reply briefs.  A third amended complaint was filed on June 27, 2016. On July 22, 2016, co-lead plaintiffs and defendants filed a joint motion to stay the briefing schedule while they pursued mediation, which the Court granted on August 10, 2016. As of the filing date of this Form 10-Q, we cannot determine if a loss is probable as a result of the class action lawsuit and whether the outcome will have a material adverse effect on our business and, as a result, we have not recorded any amounts for a loss contingency.

On August 16, 2016, a complaint captioned Steinberg v. Aegerion Pharmaceuticals, Inc., et al., Case No. 1:16-cv-11668, was filed in the U.S. District Court for the District of Massachusetts against Aegerion, QLT, MergerCo and each member of the Aegerion board of directors (the “Federal Merger Action”). The Federal Merger Action was brought by Chaile Steinberg, who purports to be a stockholder of Aegerion, on her own behalf, and seeks certification as a class action on behalf of all Aegerion stockholders. The Steinberg complaint alleges, among other things, that the August 8, 2016 Form S-4 Registration Statement filed in connection with the proposed transaction with QLT is materially misleading. The Steinberg complaint asserts claims arising under Sections 14(a) and 20(a) of the Exchange Act and seeks, among other things, to enjoin the proposed transaction, to rescind it or to award rescissory damages should it be consummated and an award of attorneys’ fees and expenses. We believe that the claims asserted in the Federal Merger Action are without merit and we have not recorded any amount for a loss contingency in respect of such matter.


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On October 3, 2016, a complaint captioned Flanigon v. Aegerion Pharmaceuticals, Inc., et al., C.A. 12794, was filed in the Delaware Court of Chancery (the “Delaware Merger Action”). The Delaware Merger Action was brought by Timothy Flanigon, who purports to be a stockholder of Aegerion, on his own behalf, and also sought certification as a class action on behalf of all Aegerion stockholders. The Delaware Merger Action alleged, among other things, that our board of directors breached its fiduciary duties in connection with the proposed transaction by agreeing to an inadequate exchange ratio and engaging in a flawed sales process. The Delaware Merger Action further alleged that QLT and MergerCo aided and abetted the alleged breaches. In addition, the Delaware Merger Action alleged that the September 28, 2016 Amendment No. 2 to Form S-4 Registration Statement filed in connection with the proposed transaction is materially misleading. The Flanigon complaint sought, among other things, to enjoin the proposed transaction, to rescind it or to award rescissory damages should it be consummated and an award of attorneys’ fees and expenses. Also on October 3, 2016, plaintiff in the Delaware Merger Action filed motions seeking expedited discovery and a preliminary injunction. On October, 21, 2016, the Delaware Merger Action was dismissed without prejudice.
 Item 1A.     Risk Factors
Risks Associated with Product Development and Commercialization
Our business depends on the success of lomitapide. We may not be able to meet expectations with respect to sales of lomitapide and revenues from such sales, and if we are not able to meet such expectations, we may not be able to attain or maintain positive cash flow and profitability in the time periods we anticipate, or at all.
    
Our business depends on the successful commercialization of lomitapide. Lomitapide was launched in the U.S. in January 2013, under the brand name, JUXTAPID® (lomitapide) capsules (“JUXTAPID”), 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”). In July 2013, the 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. On September 28, 2016, we announced that we received marketing authorization approval from the Japanese Ministry of Health, Labor and Welfare (“MHLW”) for JUXTAPID for the treatment of HoFH in Japan. Lomitapide is also approved for the treatment of HoFH in Canada, Mexico, Taiwan, South Korea, Israel, Norway, Iceland, and Liechtenstein. In April 2016, INVIMA, the regulatory agency responsible for reviewing marketing authorization applications in Colombia, approved JUXTAPID 20mg capsules in Colombia. Pricing and reimbursement approval of lomitapide has not yet been received in many of the countries in which the product is approved. As a result of this and other factors, on July 20, 2016, we announced our intent to withdraw lomitapide from the EU and certain other global markets by the end of 2016, unless we enter into supply, license or other arrangements with suitable partners in such markets. We also sell lomitapide, on a named patient basis, in Brazil as a result of the approval of lomitapide in the U.S. and in a limited number of other countries as a result of the approval of lomitapide in the U.S. or the EU. We expect that named patient sales in Brazil in the near term will continue to be our largest source of revenues from lomitapide sales 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

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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. We anticipate that we will continue to incur significant costs associated with commercializing lomitapide and in connection with our ongoing clinical efforts and post-marketing commitments for lomitapide. Our ability to meet expectations with respect to sales of lomitapide and revenues from such sales, and to attain profitability and maintain 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 maintain market acceptance for lomitapide among healthcare professionals and patients in the U.S. in the treatment of adult HoFH, particularly given the introduction of PCSK9 inhibitor products, which has had a significant adverse impact on sales of lomitapide in the U.S., and to gain such market acceptance in the other countries where lomitapide is approved and being commercialized, or may in the future receive approval and be commercialized;
the degree to which both physicians and HoFH 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 and being commercialized 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;
the degree to which HoFH 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, the safety and side effect profile, and the availability of other therapies; 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;
the extent of the negative impact of the introduction of PCSK9 inhibitor products on sales of JUXTAPID in the U.S., which has caused a significant number of  JUXTAPID patients to discontinue JUXTAPID and switch to a PCSK9 inhibitor product, and has significantly decreased the rate at which new HoFH patients start treatment with lomitapide;
the provision of free PCSK9 inhibitor drug to adult HoFH patients by the companies that are commercializing PCSK9 inhibitor products, which such companies may have ceased, but which historically has had a negative impact on the rate at which new patients start treatment on lomitapide and has caused more patients than we expected to discontinue lomitapide and switch their treatment to PCSK9 inhibitor products;
the number of adult HoFH patients treated with a PCSK9 inhibitor who physicians decide to switch to lomitapide if a patient does not achieve target LDL-C response goals, and the timeline of such transitions, neither of which we can reasonably predict;

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the expected negative impact of the availability of PCSK9 inhibitor products on sales of lomitapide outside the U.S., including in Japan after our anticipated launch, and