Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2017
1. Description of Business and Basis of Presentation
Organization
Novelion Therapeutics Inc. is a rare disease biopharmaceutical company dedicated to developing new standards of care for individuals living with rare diseases. Novelion has global operations,
two
commercial products, lomitapide and metreleptin, and
one
orphan drug-designated product candidate, zuretinol acetate (“zuretinol”). Lomitapide, which is marketed in the United States ("U.S.") under the brand name JUXTAPID (lomitapide) capsules, is approved in the U.S. 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”). Lomitapide is also approved in the European Union (“EU”), under the brand name LOJUXTA, for the treatment of adult patients with HoFH, as well as in Japan, Canada, and a small number of other countries. Metreleptin, a recombinant analog of human leptin, is currently marketed in the U.S. under the brand name MYALEPT (metreleptin for injection). MYALEPT is approved in the U.S. as an adjunct to diet as replacement therapy to treat the complications of leptin deficiency in patients with congenital or acquired generalized lipodystrophy (“GL”). Zuretinol is an oral synthetic retinoid that is in late stage development for the treatment of inherited retinal disease (“IRD”) caused by underlying mutations in RPE65 and LRAT genes, comprising LCA and RP.
On November 29, 2016, Novelion completed the Merger. The
nine months ended September 30, 2017
represent the combined operations of the Company and Aegerion. For periods prior to the closing of the Merger on November 29, 2016, the discussion in this Form 10-Q relates to the historical business and operations of Novelion. Certain portions of this Form 10-Q may contain information that may no longer be material to the Company's business related to Aegerion’s historical operations. Any comparison of pre-Merger Aegerion revenues and operations with the Company may not be helpful to an understanding of the Company's results for the
nine months ended September 30, 2017
or future periods.
At
September 30, 2017
, the Company had unrestricted cash of
$70.5 million
, but incurred a net loss of
$102.1 million
during the
nine months ended September 30, 2017
, and used
$39.1 million
in cash to fund operating activities during the
nine months ended September 30, 2017
. Of the
$39.1 million
of cash used in the nine months,
$11.1 million
was used for the payment of restructuring, merger-related and annual charges. The Company expects to fund its current and planned operating requirements principally through its cash flows from operations, as well as its existing cash resources, and other potential financing methods, including utilizing equity. The Company believes that its existing funds, when combined with cash generated from operations, are sufficient to satisfy its operating needs and its working capital, milestone payments, capital expenditure, debt service requirements and litigation settlements expenditure for at least the next twelve months. The Company may, from time to time, also seek additional funding, primarily designed to fund potential additional indications for metreleptin, through strategic alliances and additional equity and/or debt financings or from other sources, should it identify a significant new opportunity.
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 unaudited 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, 2017
. This Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes in the Company’s Form 10-K for the year ended
December 31, 2016
(“2016 Form 10-K”).
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company operates in
one
segment, pharmaceuticals.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting periods presented. Significant estimates and assumptions are required when determining the fair value of contingent assets and liabilities, the valuation of the Convertible Notes (as defined in Note 6), and the valuation of the assets and liabilities acquired in a business combination including inventory and intangible assets. Significant estimates and assumptions are also required in the determination of stock-based compensation and income tax. Our estimates often are based on complex judgments, probabilities and assumptions that we believe to be reasonable but that are inherently uncertain and unpredictable. For any given individual estimate or assumption made by us, there may also be other estimates or assumptions that are reasonable. Actual results may differ from estimates made by management. Changes in estimates are reflected in reported results in the period in which they become known.
Recently Adopted Accounting Standards
In the first quarter of 2017, the Company adopted Accounting Standards Update (“ASU”) No. 2016-09,
Compensation - Stock Compensation (Topic 718)
(“ASU 2016-09”). 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. The adoption of this ASU did not have a material impact to the Company’s condensed consolidated financial statements.
In the first quarter of 2017, the Company adopted ASU No. 2015-11,
Simplifying the Measurement of Inventory
(“ASU 2015-11”). ASU 2015-11 states that an entity should measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of this ASU did not have a material impact to the Company’s condensed consolidated financial statements.
New Accounting Standards Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”). ASU 2014-09 represents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This ASU sets forth a new five-step revenue recognition model which replaces most existing revenue recognition guidance including industry-specific guidance.
In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers
(Topic 606): Deferral of the Effective Date,
which defers the effective date of ASU 2014-09 by one year, but permits companies to adopt one year earlier if they choose (i.e. the original effective date). As such, ASU 2014-09 will be effective for annual and interim reporting periods beginning after December 15, 2017. In March and April 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net)
and ASU No. 2016-10
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,
respectively, which clarify the guidance on reporting revenue as a principal versus agent, identifying performance obligations and accounting for intellectual property licenses. In addition, in May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, which amends certain narrow aspects of Topic 606, and in December 2016, the FASB issued ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
, which amends certain narrow aspects of Topic 606.
ASU 2014-09 and related ASUs may be adopted using either the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company expects to adopt ASU 2014-09 and related ASUs on January 1, 2018. In the fourth quarter of 2016, the Company engaged an external third party to assist with the adoption, has made significant progress in its assessment, and is continuing to evaluate the impact of the expected adoption of ASU 2014-09 and related ASUs on its consolidated financial statements and processes. The Company expects to complete its assessment, identify and implement the necessary changes to its business processes, systems and controls to support revenue recognition and disclosures under the new standard in 2017, and at this time does not anticipate a significant impact to its financial statements upon adoption of the new standard. However, the assessment is ongoing and further analysis may identify a more significant impact.
On February 25, 2016, the FASB issued ASU No. 2016-02,
Leases
("ASU 2016-02"), its new standard on accounting for leases. The new guidance will require organizations that lease assets (referred to as lessees) for terms of more than 12 months, to recognize on the balance sheet the assets and liabilities associated with the rights and obligations created by those leases. Consistent with current guidance, the recognition, measurement, and presentation of the expenses and cash flows associated with a particular lease will depend on its classification as a capital or operating lease. However, unlike current GAAP, which only requires capital leases to be reflected on the balance sheet, ASU 2016- 02 will require both types of leases to be recognized on the balance sheet. ASU 2016-02 also aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification ("ASC") No. 606,
Revenue from Contracts with Customers,
and will require lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage the associated exposure. ASU 2016-02 will be effective for annual periods beginning after December 15, 2018, and interim periods within those annual reporting periods. The Company is currently assessing the impact ASU 2016-02 will have on its consolidated financial statements.
On August 26, 2016, the FASB issued ASU No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments
("ASU 2016-15")
,
which amends the guidance in ASC No. 230 on the classification of certain items in the statement of cash flows. The primary purpose of ASU 2016-15 is to reduce the diversity in practice by making amendments that add or clarify the guidance on eight specific cash flow issues. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. ASU 2016-15 should be applied retrospectively to all periods presented, but may be applied prospectively from the earliest date practicable if retrospective application would be impracticable. The Company is currently assessing the impact ASU 2016-15 will have on its consolidated financial statements.
On November 17, 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230), Restricted Cash
("ASU 2016-18"). ASU 2016-18 states that a statement of cash flows should explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, and all updates should be applied using a retrospective transition method. The Company is currently evaluating the impact ASU 2016-18 will have on its consolidated statement of cash flows and does not anticipate that the adoption of ASU 2016-18 will have a material effect on the consolidated financial statements or related disclosures.
Share Consolidation
On December 16, 2016, the Company completed a one-for-five (1:5) consolidation of all of its issued and outstanding common shares, for all common shares outstanding as of such date (the “Consolidation”), resulting in a reduction in the issued and outstanding common shares from approximately
92,653,562
to approximately
18,530,323
as of that date. Each shareholder’s percentage ownership in the Company and proportional voting power remained unchanged after the Consolidation, except for minor changes resulting from the treatment of fractional shares. In connection with the Consolidation, the conversion rate of the Convertible Notes was automatically adjusted from
24.9083
common shares per
$1,000
principal amount of such Convertible Notes to
4.9817
common shares per
$1,000
principal amount of such Convertible Notes. All share and per-share data included in this Form 10-Q give effect to the Consolidation unless otherwise noted.
Revenue Recognition
The Company currently applies the revenue recognition guidance in accordance with FASB ASC Subtopic No. 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.
The Company’s net revenues represent total revenues less allowances for estimated discounts and rebates. These allowances are characterized as a reduction of revenue at the time product is shipped to the distributor. The allowances are established by management and are based on contractual terms, historical trends and the levels of inventory remaining in the distribution channel, as well as expectations about the market for the product.
Lomitapide
In the U.S., JUXTAPID is only available for distribution through a specialty pharmacy. Until the November 2017 transition to the new specialty pharmacy described in the following paragraph, the product was shipped directly to the patient and prior authorization and confirmation of coverage level by a patient’s private insurance plan or government payer were prerequisites to
shipment. Revenue from sales in the U.S. covered by the patient’s private insurance plan or government payer was recognized once the product had been received by the patient. For uninsured amounts billed directly to the patient, revenue was recognized at the time of cash receipt as collectability was not reasonably assured at the time the product was received by the patient. To the extent amounts were billed in advance of delivery to the patient, the Company deferred revenue until the product was received by the patient.
In the second quarter of 2017, to improve distribution efficiency, the Company signed a letter of intent for the distribution of JUXTAPID with the same specialty pharmacy that distributes MYALEPT in the U.S. The agreement was signed and finalized in October 2017 and the transition of this distribution model was completed in November 2017. Subsequent to completion of the transition, revenue from the sales of JUXTAPID in the U.S. has been recognized upon product shipment to the distributor (sell-in).
The Company also records revenue on sales in countries where lomitapide is available on a named patient basis, typically paid for by a government authority or institution. In many cases, these sales are processed through a third-party distributor that takes title to the product upon acceptance. Because of factors such as the pricing, 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 recognizes revenue for sales under these named patient programs upon product acceptance by the third-party distributor. 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 distributors as a reduction of revenue. Revenue is recorded net of estimated discounts and rebates, primarily including those provided to Medicare and Medicaid. 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. To date, such adjustments have not been significant.
From time to time, the Company may provide financial support to patient assistance programs operated by independent charitable 501(c)(3) organizations which assist patients in the U.S. in accessing treatment for HoFH. These patient assistance programs assist HoFH patients according to eligibility criteria defined independently by the charitable organization. The Company records donations made to these patient assistance programs as selling, general and administrative expense. Any payments received from these patient assistance programs on behalf of a patient are recorded as a reduction of selling, general and administrative expense rather than as revenue. As of
September 30, 2017
,
no
contributions have been made by the Company.
The Company also offers a branded co-pay assistance program for eligible patients with commercial insurance in the U.S. 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
Sales of metreleptin are facilitated through third-party distributors that take title to the product upon acceptance. Because of factors such as pricing, 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 recognizes revenue for sales upon product acceptance by the third-party distributor. 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. Revenue in the U.S. is recorded from sales of MYALEPT net of estimated discounts and rebates, primarily including those provided to Medicare and Medicaid. Allowances for government rebates and discounts are established based on the actual payer information and the government-mandated discounts applicable to government funded programs, which is reasonably estimable at the time of delivery. These allowances are adjusted to reflect known changes in the factors that may impact such estimates in the quarter those changes are known. To date, such adjustments have not been significant.
In the second quarter of 2017, to improve distribution efficiency, the Company signed a letter of intent for the distribution of JUXTAPID with the same specialty pharmacy that distributes MYALEPT in the U.S. The agreement was signed and finalized in October 2017 and the transition to the new distribution model was completed in November 2017. Prior to the second quarter
of 2017, due to insufficient historical data to reasonably estimate the gross-to-net adjustments for rebates related to payors and insurance providers at the time of receipt by the distributor, the Company accounted for MYALEPT shipments using a deferred revenue recognition model (sell-through). Under the deferred revenue recognition model, the Company did not recognize revenue upon product shipment. For product shipments, the Company invoiced the distributor, recorded deferred revenue at the gross invoice sales price, classified the cost basis of the product held by the distributor as a separate component of inventory, and recognized revenue when delivered to the patient.
Beginning in the second quarter of 2017, the Company determined that there was sufficient history to reasonably estimate expected rebates, and, to align its existing and anticipated revenue streams of products sold within the U.S., began recognizing sales of MYALEPT upon product shipment to the distributor (sell-in). For the three-month period ended June 30, 2017, the Company recognized a one-time increase in net revenue of
$2.3 million
resulting from this change in estimate, representing previously deferred product sales.
From time to time, the Company may provide financial support to patient assistance programs operated by independent charitable 501(c)(3) organizations which assist eligible patients in the U.S. in accessing treatment for GL. These patient assistance programs assist GL patients according to eligibility criteria defined independently by the organization. The Company records donations made to these patient assistance programs as selling, general and administrative expense. Any payments received from these patient assistance programs on behalf of a patient are recorded as a reduction of selling, general and administrative expense rather than as revenue. As of
September 30, 2017
,
no
contributions have been made by the Company.
The Company also offers a branded co-pay assistance program for eligible patients with commercial insurance in the U.S. who are on MYALEPT therapy. The branded 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 branded specific co-pay assistance program for each patient.
2. Acquisition
On
November 29, 2016
, the Company completed the Merger and each share of Aegerion’s common stock was exchanged for
1.0256
Novelion common shares. Immediately after the acquisition, the Company had approximately
18,530,323
common shares outstanding; former shareholders of Novelion held approximately
68%
of the Company, and former stockholders of Aegerion held approximately
32%
of the Company.
The Merger was accounted for as a business combination under the acquisition method, with Novelion as the accounting acquirer and Aegerion as the “acquired” company. The acquisition consideration in connection with the Merger was approximately
$62.4 million
, which the Company allocated to various tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values, which were finalized during the third quarter of 2017.
The following supplemental unaudited pro forma information presents the financial results as if the Merger had occurred on
January 1, 2016
for the three and nine months ended
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
(in millions, except for per share information)
|
September 30, 2016
|
|
September 30, 2016
|
Net revenues
|
$
|
35.4
|
|
|
$
|
115.6
|
|
Net loss
|
(32.5
|
)
|
|
(171.9
|
)
|
Basic and diluted loss per share
|
$
|
(3.08
|
)
|
|
$
|
(16.27
|
)
|
This supplemental pro forma information has been prepared for comparative purposes and does not purport to reflect what the Company’s results of operations would have been had the acquisition occurred on
January 1, 2016
, nor does it project the future results of operations of the Company or reflect the expected realization of any cost savings associated with the acquisition. The actual results of operations of the Company may differ significantly from the pro forma adjustments reflected here due to many factors. The unaudited supplemental pro forma financial information includes various assumptions, including those related to the provisional purchase price allocation of the assets acquired and the liabilities assumed from Aegerion.
3. Inventories
The components of inventory are as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Work-in-process
|
$
|
21,926
|
|
|
$
|
20,219
|
|
Finished goods
|
33,935
|
|
|
54,502
|
|
Total
|
55,861
|
|
|
74,721
|
|
Less: Inventories - current
|
(15,711
|
)
|
|
(15,718
|
)
|
Inventories - non-current
|
$
|
40,150
|
|
|
$
|
59,003
|
|
As part of the Merger, the Company acquired
$76.8 million
of inventory. A portion of this inventory is classified as non-current at September 30, 2017 based on its forecasted consumption exceeding one year. During the three and
nine months ended September 30, 2017
, the charge for excess or obsolete inventory in the unaudited condensed consolidated statements of operations was
$17.3 million
and
$18.9 million
, respectively, which is derived from projected sales activities, respective product shelf-life and their respective fair value. There was
no
charge for excess or obsolete inventory in the unaudited condensed consolidated statements of operations during the three and
nine months ended September 30, 2016
.
4. Intangible Assets
The Company acquired its definite-lived intangible assets as part of the Merger. The intangible assets are amortized over their estimated useful lives and reviewed for impairment when events and changes in circumstances indicate that the carrying amount may not be recoverable. The Company performed its annual impairment assessment as of
December 31, 2016
and determined there was
no
impairment.
In the third quarter of 2017, as a result of changes in the Company's sales forecasts, it was determined that a recoverability test under ASC 360,
Property, Plant and Equipment
(“ASC 360”) was required. As a result, the Company tested the purchased intangibles to determine if they were recoverable. Based on the sum of the undiscounted cash flows of the related asset groups, the Company concluded that the carrying amount of the purchased intangibles was recoverable and there was
no
impairment as of
September 30, 2017
. Additionally, the Company reviewed the useful lives of the purchased intangibles as of
September 30, 2017
and believes the useful lives are still considered reasonable.
Intangible asset balances as of
September 30, 2017
and
December 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
Developed technology - JUXTAPID
|
$
|
42,300
|
|
|
$
|
(3,279
|
)
|
|
$
|
39,021
|
|
Developed technology - MYALEPT
|
210,158
|
|
|
(17,633
|
)
|
|
192,525
|
|
Total intangible assets
|
$
|
252,458
|
|
|
$
|
(20,912
|
)
|
|
$
|
231,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
Developed technology - JUXTAPID
|
$
|
42,300
|
|
|
$
|
(328
|
)
|
|
$
|
41,972
|
|
Developed technology - MYALEPT
|
210,158
|
|
|
(1,806
|
)
|
|
208,352
|
|
Total intangible assets
|
$
|
252,458
|
|
|
$
|
(2,134
|
)
|
|
$
|
250,324
|
|
Amortization expense was
$6.3 million
and
$18.8 million
for the
three and nine months ended September 30, 2017
, respectively.
At
September 30, 2017
, the estimated amortization expense of purchased intangibles for future periods is as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2017 (remaining 3 months)
|
$
|
6,275
|
|
2018
|
25,096
|
|
2019
|
25,096
|
|
2020
|
25,096
|
|
2021 and thereafter
|
149,983
|
|
Total intangible assets subject to amortization
|
$
|
231,546
|
|
5. Accrued Liabilities
Accrued liabilities as of
September 30, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
(in thousands)
|
Accrued employee compensation and related costs
|
$
|
6,741
|
|
|
$
|
7,920
|
|
Accrued sales allowances
|
12,074
|
|
|
7,849
|
|
Other accrued liabilities
|
22,117
|
|
|
21,411
|
|
Total
|
$
|
40,932
|
|
|
$
|
37,180
|
|
6. Convertible Notes, net
The Convertible Notes are senior unsecured obligations of Aegerion. The Convertible Notes bear interest at a rate of
2.0%
per year, payable semi-annually in arrears on February 15 and August 15, and have an effective interest rate of
16.42%
, established as of the consummation of the Merger. The Convertible Notes will mature on August 15, 2019, unless earlier repurchased or converted.
The outstanding Convertible Notes balances as of
September 30, 2017
and
December 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Principal
|
$
|
324,998
|
|
|
$
|
324,998
|
|
Less: debt discount, net
|
(75,209
|
)
|
|
(99,414
|
)
|
Net carrying amount of Convertible Notes
|
$
|
249,789
|
|
|
$
|
225,584
|
|
The following table sets forth total interest expense recognized related to the Convertible Notes during the three and
nine months ended September 30, 2017 and 2016
, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 30, 2017
|
|
September 30, 2016
|
|
September 30, 2017
|
|
September 30, 2016
|
Contractual interest expense
|
$
|
1,625
|
|
|
$
|
—
|
|
|
$
|
4,875
|
|
|
$
|
—
|
|
Amortization of debt discount
|
8,399
|
|
|
—
|
|
|
24,205
|
|
|
—
|
|
Total
|
$
|
10,024
|
|
|
$
|
—
|
|
|
$
|
29,080
|
|
|
$
|
—
|
|
Future minimum payments under the Convertible Notes are as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2017 (3 months remaining)
|
$
|
—
|
|
2018
|
6,500
|
|
2019
|
331,498
|
|
|
337,998
|
|
Less amounts representing interest
|
(13,000
|
)
|
Less debt discount, net
|
(75,209
|
)
|
Net carrying amount of Convertible Notes
|
$
|
249,789
|
|
7. 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. A fair value hierarchy for those instruments measured at fair value is established 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.
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, 2017
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, 2017
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
30,038
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,038
|
|
Restricted cash
|
503
|
|
|
—
|
|
|
—
|
|
|
503
|
|
Total assets
|
$
|
30,541
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,541
|
|
The fair value measurements of the Company’s financial instruments at
December 31, 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 December 31, 2016
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
68,234
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
68,234
|
|
Restricted cash
|
390
|
|
|
—
|
|
|
—
|
|
|
390
|
|
Total assets
|
$
|
68,624
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
68,624
|
|
The fair value of the Convertible Notes, which differs from their carrying values, is influenced by interest rates, the Company’s share price and share price volatility and is determined by prices for the Convertible Notes observed in market trading which are Level 2 inputs. The estimated fair value of the Convertible Notes at
September 30, 2017
and
December 31, 2016
was
$261.5 million
and
$240.4 million
, respectively. See Note 6 -
Convertible Notes, net
for further information.
The Company’s financial instruments that are exposed to credit risks consist primarily of cash, cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities. To limit the Company’s credit exposure, cash and cash equivalents are deposited with high-quality financial institutions in accordance with its treasury policy goal to preserve capital and maintain liquidity. The Company’s treasury policy limits investments to certain money market securities issued by governments, financial institutions and corporations with investment-grade credit ratings, and places restrictions on maturities and concentration by issuer. The Company maintains its cash, cash equivalents and restricted cash in bank accounts, which, at times, exceed federally insured limits. The Company has not experienced any credit losses in these accounts and does not believe it is exposed to any significant credit risk on these funds.
The Company 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 material credit losses.
8. Restructuring
During the
three and nine months ended September 30, 2017
, the Company incurred less than
$0.1 million
and
$2.5 million
, respectively, in restructuring charges primarily related to the consolidation of similar positions during the integration of the business subsequent to the Merger. The Company accounted for these actions in accordance with ASC 420,
Exit or Disposal Cost Obligations
. The restructuring charges consisted primarily of severance and benefits costs. No significant additional charges are anticipated relating to this restructuring plan.
The following table sets forth the components of the restructuring charge and payments made against the reserve for the
nine months ended September 30, 2017
:
|
|
|
|
|
|
Restructuring Charges
|
|
(in thousands)
|
Restructuring balance at December 31, 2016
|
$
|
—
|
|
Costs incurred
|
2,541
|
|
Cash paid
|
(2,651
|
)
|
Other adjustments
|
282
|
|
Restructuring balance at September 30, 2017
|
$
|
172
|
|
9. Basic and Diluted Net Loss per Common Share
Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period.
Diluted net loss per common share is computed by dividing the net loss by the weighted-average number of unrestricted common shares and dilutive common share equivalents outstanding for the period, determined using the treasury-stock and if-converted methods. Since the Company has had net losses for all periods presented, all potentially dilutive securities were determined to be 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 restricted stock units 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):
|
|
|
|
|
|
|
|
As of September 30,
|
|
2017
|
|
2016
|
Stock options
|
1,838
|
|
|
498
|
|
Unvested restricted stock units
|
705
|
|
|
46
|
|
Warrants
|
14,515
|
|
|
—
|
|
Convertible notes
|
1,619
|
|
|
—
|
|
Total
|
18,677
|
|
|
544
|
|
10. 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
$0.5 million
and
$0.8 million
for the three and
nine months ended September 30, 2017
and a recovery of
$0.1 million
for the three and
nine months ended September 30, 2016
, 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 U.S. alternative minimum tax.
The realization of deferred income tax assets is dependent on the generation of sufficient taxable income during future periods in which temporary differences are expected to reverse. Where the realization of such assets does not meet the more likely than not criterion, the Company applies a valuation allowance against the deferred income tax asset under consideration. The valuation allowance is reviewed periodically and if the assessment of the more likely than not criterion changes, the valuation allowance is adjusted accordingly. As of
September 30, 2017
, the Company has a full valuation allowance applied against
its
Canadian, U.S. and Switzerland deferred tax assets.
11. Segment information
The Company currently operates in
one
business segment, pharmaceuticals, and is focused on the development and commercialization of
two
commercial products. The Company's CEO is the Company's chief operating decision maker ("CODM"). The Company does not operate any separate lines of business or separate business entities with respect to its products. Accordingly, the Company does not accumulate discrete financial information with respect to separate service lines and does not have separately reportable segments. Enterprise-wide disclosures about net revenues and long-lived assets by geographic area and information relating to major customers are presented below.
Net Revenues
The following table summarizes total net revenue from external customers by product and by geographic region, based on the location of the customer, for the
three months ended September 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Brazil
|
|
Other Foreign Countries
|
|
Total
|
|
(in thousands)
|
Lomitapide
|
$
|
10,304
|
|
|
$
|
—
|
|
|
$
|
4,888
|
|
|
$
|
15,192
|
|
Metreleptin
|
11,311
|
|
|
96
|
|
|
2,070
|
|
|
13,477
|
|
Total
|
$
|
21,615
|
|
|
$
|
96
|
|
|
$
|
6,958
|
|
|
$
|
28,669
|
|
The following table summarizes total net revenue from external customers by product and by geographic region, based on the location of the customer, for the
nine months ended September 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Brazil
|
|
Other Foreign Countries
|
|
Total
|
|
(in thousands)
|
Lomitapide
|
$
|
32,236
|
|
|
$
|
5,939
|
|
|
$
|
13,755
|
|
|
$
|
51,930
|
|
Metreleptin
|
37,652
|
|
|
5,082
|
|
|
4,866
|
|
|
47,600
|
|
Total
|
$
|
69,888
|
|
|
$
|
11,021
|
|
|
$
|
18,621
|
|
|
$
|
99,530
|
|
Net revenues generated from customers outside of the U.S. and Brazil, as listed in the column “Other Foreign Countries,” was primarily derived from revenues in Argentina, Canada, Colombia, Greece, and Japan.
The total net revenues from customers in Canada for the
three and nine months ended September 30, 2017
was approximately
$0.6 million
and
$1.6 million
, respectively, which related to the sales of lomitapide, and are included in the column “Other Foreign Countries.”
Significant Customers
For the
three months ended September 30, 2017
,
two
customers accounted for
75%
of the Company’s net revenues, and for the
nine months ended September 30, 2017
,
two
customers accounted for
70%
of the Company's net revenues.
Two
customers accounted for
64%
of the Company’s
September 30, 2017
accounts receivable balance, and
one
customer accounted for
29%
of the Company's
December 31, 2016
accounts receivable balance.
Long-lived Assets
The Company’s long-lived assets are primarily comprised of intangible assets. As of
September 30, 2017
,
100%
of the Company's intangible assets were held by Aegerion. Of that,
65%
of the intangible assets were attributable to Aegerion's U.S. business, with the remaining
35%
attributable to Aegerion's European holding company.
12. Commitments and Contingencies
Upon the Merger, the Company assumed certain assets and liabilities, which had balances at
September 30, 2017
as follows (in thousands):
|
|
|
|
|
Insurance Proceeds Receivable
|
|
Class action lawsuit insurance proceeds
|
$
|
22,000
|
|
|
|
|
Provision for Legal Settlement
|
|
|
Class action lawsuit settlement
|
$
|
(22,250
|
)
|
SEC settlement
|
(4,100
|
)
|
DOJ settlement
|
(36,700
|
)
|
Total provision for legal settlement
|
$
|
(63,050
|
)
|
In late 2013, the Company's subsidiary, Aegerion, received a subpoena from the U.S. Department of Justice (the "DOJ"), represented by the U.S. Attorney’s Office in Boston, requesting documents regarding its marketing and sale of JUXTAPID in the U.S., as well as related public disclosures. In late 2014, Aegerion received a subpoena from the U.S. Securities and Exchange Commission (the "SEC") requesting certain information related to Aegerion’s sales activities and disclosures related to JUXTAPID. The SEC also requested documents and information on a number of other topics, including documents related to the investigations by government authorities in Brazil into whether Aegerion’s activities in Brazil violated Brazilian anti-corruption laws, and whether Aegerion’s activities in Brazil violated the Foreign Corrupt Practices Act ("FCPA").
In May 2016, Aegerion reached preliminary agreements in principle with the DOJ and the SEC to resolve their investigations into U.S. commercial activities and disclosures relating to JUXTAPID. On September 22, 2017, Aegerion entered into a series of final agreements (the "Settlement") to resolve investigations being conducted by the DOJ and the SEC regarding these topics. The terms of the final agreements were substantially similar to the preliminary agreements in principle.
In connection with the SEC investigation, Aegerion consented to the entry of a final judgment, on September 25, 2017, in connection with a complaint filed by the SEC without admitting or denying the allegations set forth in the complaint (the "SEC Judgment"). The complaint alleged negligent violations of Sections 17(a)(2) and (3) of the Securities Act of 1933, as amended, related to certain statements made by Aegerion in 2013 regarding the conversion rate for JUXTAPID prescriptions. The SEC Judgment provides that Aegerion must pay a civil penalty in the amount of
$4.1 million
, to be paid in installments over
three
years, plus interest on any unpaid balance at a rate of
1.75%
per annum. Of the
$4.1 million
,
$2.3 million
is recorded as a short-term liability and
$1.8 million
is recorded as a long-term liability. Aegerion’s payment of this civil penalty is subject to acceleration in the event of certain change of control transactions or certain transfers of Aegerion’s rights in JUXTAPID or MYALEPT. Aegerion’s payment schedule is also subject to acceleration in the event that Aegerion fails to satisfy its payment obligations under the SEC Judgment. The SEC Judgment was approved by a U.S. District Court judge on September 25, 2017.
In connection with the DOJ investigation, on September 22, 2017, Aegerion entered into a Plea Agreement ("DOJ Plea Agreement"), a Deferred Prosecution Agreement ("DPA"), a Civil Settlement, certain State Settlement Agreements, and a Consent Decree of Permanent Injunction (“FDA Consent Decree”). Under the DOJ Plea Agreement, Aegerion agreed to plead guilty to
two
misdemeanor misbranding violations of the Federal Food, Drug, and Cosmetic Act. The DOJ Plea Agreement requires Aegerion to pay a criminal fine in the amount of
$6.2 million
, to be paid in installments over
three
years, plus interest on any unpaid balance at a rate of
1.75%
per annum. Aegerion agreed to pay, in the form of a forfeiture payment, an additional
$1 million
at the time the Court accepts the DOJ Plea Agreement. Of the total
$7.2 million
of expected criminal fine,
$3.5 million
is recorded as a short-term liability and
$3.7 million
is recorded as a long-term liability. The DOJ Plea Agreement also requires that the Company and Aegerion regularly review and certify compliance with the DOJ Plea Agreement and the FDA Consent Decree. In the event of any material change in Aegerion’s economic circumstances that might affect its ability to pay the fine, Aegerion must notify the Court. In the event that Aegerion fails to satisfy its obligations under the agreement, Aegerion could be subject to additional criminal penalties or prosecution. The DOJ Plea Agreement has not been approved by the U.S. District Court judge. Final approval by the District Court Judge is required in order for the DOJ Plea Agreement to take effect. On October 18, 2017, the District Court judge requested briefing by the parties on why the Court should accept the DOJ Plea Agreement and expressed concern that the Plea Agreement does not allow the Court to alter the sentence.
On September 22, 2017, Aegerion also entered into the DOJ Civil Settlement Agreement to resolve allegations by the DOJ that false claims for JUXTAPID were submitted to governmental healthcare programs. The DOJ Civil Settlement Agreement requires Aegerion to pay a civil settlement in the amount of
$28.8 million
, which includes
$2.7 million
designated for certain U.S. states relating to Medicaid expenditures for JUXTAPID, to be paid in installments over
three
years. Of the
$28.8 million
,
$4.6 million
is recorded as a short-term liability and
$24.2 million
is recorded as a long-term liability. Aegerion’s payment of this civil settlement amount is subject to acceleration in the event of certain change of control transactions or certain transfers of Aegerion’s rights in JUXTAPID or MYALEPT. The DOJ Civil Settlement Agreement is subject to approval by a U.S. District Court judge and may be terminated by Aegerion or the DOJ if Aegerion’s agreed-upon guilty plea pursuant to the DOJ Plea Agreement is not accepted by the Court, or the Court does not impose the agreed-upon sentence for whatever reason, or if the Court does not accept the DPA. In the event that Aegerion fails to satisfy its obligations under the DOJ Civil Settlement Agreement, Aegerion could be subject to additional penalties or litigation.
Aegerion also agreed to enter into the State Settlement Agreements to resolve claims under state law analogues to the federal False Claims Act. The terms of the State Settlement Agreements are substantially similar to those set forth in the DOJ Civil Settlement Agreement. As noted above, participating states will receive up to
$2.7 million
in the aggregate from the
$28.8 million
amount paid pursuant to the DOJ Civil Settlement Agreement.
Aegerion continues to cooperate with the DOJ and the SEC with respect to their investigations into the conduct of other individuals regarding commercial activities and disclosures related to JUXTAPID. As part of this cooperation, the DOJ requested
documents and information related to donations Aegerion made in 2015 and 2016 to 501(c)(3) organizations that provide financial assistance to patients. In connection with this inquiry, the DOJ may pursue theories that were not resolved pursuant to the Settlement. Other pharmaceutical and biotechnology companies have disclosed similar inquiries regarding donations to patient assistance programs operated by independent charitable 501(c)(3) organizations. Additionally, the Settlement does not resolve the DOJ and SEC inquiries concerning Aegerion’s operations in Brazil.
Investigations in Brazil
In addition, federal and state authorities in Brazil are conducting an investigation to determine whether there have been violations of Brazilian laws related to the promotion of JUXTAPID in Brazil. In June 2017, the Federal Public Prosecutor of the State of São José dos Campos requested that a Brazilian federal court provide federal investigators with access to the bank records of certain individuals and entities, including Aegerion Brasil Serviços de Promoção e Administracão de Vendas Ltda. ("Aegerion Brazil"), certain former Aegerion Brazil employees, a Brazilian patient association, and certain Brazilian physicians. The Court has not yet ruled on the Federal Public Prosecutor’s request. In July 2016, the Ethics Council of Interfarma fined Aegerion Brazil approximately
$0.5 million
for violations of the industry association’s Code of Conduct, to which Aegerion Brazil is bound due to its affiliation with Interfarma. Also, the Board of Directors of Interfarma imposed an additional penalty of suspension of Aegerion Brazil’s membership, without suspension of Aegerion Brazil’s membership contribution, for a period of
180
days for Aegerion Brazil 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. Aegerion Brazil paid approximately
$0.5 million
related to this fine during the third quarter of 2016. In March 2017, after the suspension period ended, Interfarma’s Board of Directors decided to reintegrate Aegerion Brazil, enabling it to participate regularly in Interfarma activities, subject to meeting certain obligations. Also in July 2016, Aegerion Brazil 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 Aegerion made donations for patient support. At this time, the Company does not know whether the inquiries of the Public Prosecutors in Paraná or São José dos Campos will result in the commencement of any formal proceeding against Aegerion, but if Aegerion’s activities in Brazil are found to violate any laws or governmental regulations, Aegerion may be subject to significant civil lawsuits to be filed by the Public Prosecution office, and administrative penalties imposed by Brazilian regulatory authorities and additional damages and fines. Under certain circumstances, Aegerion 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 Quarterly Report, 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,
no
amounts have been recorded for a loss contingency.
Shareholder Class Action Lawsuit
In January 2014, a putative class action lawsuit was filed against Aegerion and certain of its 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 Aegerion’s financial performance in violation of the federal securities laws. The case is captioned
KBC Asset Management NV et al. v. Aegerion Pharmaceuticals, Inc. et al.
, No. 14-cv-10105-MLW. On March 11, 2015, the Court appointed co-lead plaintiffs and lead counsel. Co-lead plaintiffs filed an amended complaint on June 1, 2015. Aegerion 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. On September 4, 2015, Aegerion moved to strike the second amended complaint for the co-lead plaintiffs’ failure to seek leave of court to file a second amended pleading. 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. Aegerion 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. Through mediation, the co-lead plaintiffs and defendants reached an agreement in principle to settle the litigation on November 29, 2016. On January 17, 2017, the co-lead plaintiffs filed a stipulation of settlement with the Court that contained the settlement terms as agreed upon by the parties, including that Aegerion and its insurance carriers would contribute
$22.3 million
to a settlement fund for the putative class. The insurance carriers agreed to cover
$22.0 million
of this amount, with Aegerion responsible for the remainder of
$0.3 million
. On June 29, 2017, the Court entered an order preliminarily approving the settlement. Aegerion and its insurance carriers have contributed their respective portions of the settlement fund as of July 14, 2017. Class members had until October 31, 2017, to object to or file objections or postmark requests to opt-out of the settlement. No class members filed objections to the settlement by the October 31 deadline. A fairness hearing is scheduled for November 30,
2017. The proposed settlement remains subject to a number of procedural steps and is subject to final approval by the Court. There is also the possibility that significant numbers of class members may object to or have elected to opt-out of the proposed settlement. Aegerion has the right to terminate the settlement if a certain percentage of class members elect to opt out of the settlement. Accordingly, we express no opinion as to the outcome of this matter. The Company previously recorded a liability of
$22.3 million
and an insurance proceeds receivable of
$22.0 million
, representing the current balances at September 30, 2017.