XNAS:AEGR Aegerion Pharmaceuticals Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

Commission File Number 001-34921

 

 

AEGERION PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   20-2960116

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

101 Main Street, Suite 1850

Cambridge, Massachusetts 02142

(Address of principal executive offices, including zip code)

(617) 500-7867

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

The number of shares outstanding of the registrant’s Common Stock as of August 1, 2012 was 25,468,619.

 

 

 


Table of Contents

AEGERION PHARMACEUTICALS, INC.

INDEX

 

          Page  

Part I. Financial Information

     3   

Item 1.

  

Unaudited Financial Statements

     3   
  

Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

     3   
  

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011, and the Period from February 4, 2005 (Inception) to June 30, 2012

     4   
  

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2012 and 2011, and the Period from February 4, 2005 (Inception) to June 30, 2012

     5   
  

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011, and the Period from February 4, 2005 (Inception) to June 30, 2012

     6   
  

Notes to Unaudited Condensed Consolidated Financial Statements

     8   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     16   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     25   

Item 4.

  

Controls and Procedures

     26   

Part II. Other Information

     26   

Item 1.

  

Legal Proceedings

     26   

Item 1A

  

Risk Factors

     26   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     50   

Item 3.

  

Defaults Upon Senior Securities

     51   

Item 4.

  

Mine Safety Disclosure

     51   

Item 5.

  

Other Information

     51   

Item 6.

  

Exhibits

     52   

Signatures

     53   

Exhibits & Certifications

  

Note: Aegerion is a registered trademark of Aegerion Pharmaceuticals, Inc. All other trademarks are property of their respective owners.

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Aegerion Pharmaceuticals, Inc.

(A Development Stage Company)

Condensed Consolidated Balance Sheets

(unaudited)

 

     June 30,
2012
    December 31,
2011
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 64,711,246      $ 26,368,080   

Marketable securities

     35,907,306        46,794,687   

Prepaid expenses and other current assets

     793,650        913,845   
  

 

 

   

 

 

 

Total current assets

     101,412,202        74,076,612   
  

 

 

   

 

 

 

Restricted cash

     104,892        104,892   

Property and equipment, net

     652,115        526,353   

Other assets

     93,915        860,302   
  

 

 

   

 

 

 

Total assets

   $ 102,263,124      $ 75,568,159   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 2,233,637      $ 2,798,283   

Current portion of long-term debt

     1,111,111        1,875,002   

Accrued liabilities

     4,876,589        4,727,103   
  

 

 

   

 

 

 

Total current liabilities

     8,221,337        9,400,388   
  

 

 

   

 

 

 

Long-term debt

     8,888,889        8,124,998   

Other liabilities

     115,713        841,432   
  

 

 

   

 

 

 

Total liabilities

     17,225,939        18,366,818   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, $0.001 par value, 125,000,000 shares authorized at June 30, 2012 and December 31, 2011; 25,179,291 and 21,304,049 shares issued at June 30, 2012 and December 31, 2011, respectively; 25,075,534 and 21,200,292 shares outstanding at June 30, 2012 and December 31, 2011, respectively

     25,179        21,304   

Treasury stock, at cost; 103,757 shares at June 30, 2012 and December 31, 2011

     (373     (373

Additional paid-in-capital

     241,076,368        187,685,380   

Deficit accumulated during the development stage

     (156,049,371     (130,456,973

Accumulated other comprehensive items

     (14,618     (47,997
  

 

 

   

 

 

 

Total stockholders’ equity

     85,037,185        57,201,341   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 102,263,124      $ 75,568,159   
  

 

 

   

 

 

 

See accompanying notes.

 

3


Table of Contents

Aegerion Pharmaceuticals, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Operations

(Unaudited)

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
   

Period from
February 4,

2005 (inception)

to June 30,

 
     2012     2011     2012     2011     2012  

Operating Expenses:

          

Research and development

   $ 5,449,170      $ 5,329,531      $ 10,084,012      $ 8,779,472      $ 84,384,273   

General and administrative

     7,747,755        3,013,555        12,858,899        6,351,069        51,370,492   

Restructuring costs

     546,205        —          1,376,723        —          2,288,697   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     13,743,130        8,343,086        24,319,634        15,130,541        138,043,462   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (13,743,130     (8,343,086     (24,319,634     (15,130,541     (138,043,462

Interest expense

     (199,477     (331,803     (527,225     (444,330     (8,538,771

Interest income

     28,110        70,171        69,153        137,696        2,994,865   

Change in fair value of warrant liability

     —          —          —          —          (262,741

Other than temporary impairment on securities

     —          —          —          —          (2,465,759

Other income/(expense), net

     (12,756     —          (814,692     —          208,317   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (13,927,253     (8,604,718     (25,592,398     (15,437,175     (146,107,551

Benefit from income taxes

     —          —          —          —          1,793,129   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (13,927,253     (8,604,718     (25,592,398     (15,437,175     (144,314,422

Less: Accretion of preferred stock dividends and other deemed dividends

     —          —          —          —          (23,663,413
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (13,927,253   $ (8,604,718   $ (25,592,398   $ (15,437,175   $ (167,977,835
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders per common share - basic and diluted

   $ (0.63   $ (0.49   $ (1.18   $ (0.87  
  

 

 

   

 

 

   

 

 

   

 

 

   

Weighted-average common shares outstanding - basic and diluted

     22,186,303        17,729,216        21,716,239        17,685,622     
  

 

 

   

 

 

   

 

 

   

 

 

   

See accompanying notes.

 

4


Table of Contents

Aegerion Pharmaceuticals, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
   

Period from

February 4,

2005 (inception)

to June 30,

 
     2012     2011     2012     2011     2012  

Net loss

   $ (13,927,253   $ (8,604,718   $ (25,592,398   $ (15,437,175   $ (167,977,835

Other comprehensive income (loss):

          

Foreign currency translation

     (18,642     —          12,764        —          (7,607

Net unrealized gain/(loss) on available-for-sale investments

     (4,474     71,250        21,036        176,250        (7,011
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (13,950,369   $ (8,533,468   $ (25,558,598   $ (15,260,925   $ (167,992,453
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

5


Table of Contents

Aegerion Pharmaceuticals, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months
Ended June 30,
   

Period From

February 4,

2005 (Inception)
to June 30,

 
     2012     2011     2012  

Operating activities

      

Net loss

   $ (25,592,398   $ (15,437,175   $ (144,314,422

Adjustments to reconcile net loss to net cash used in operating activities:

      

Depreciation

     72,712        9,500        205,385   

Amortization of premium on marketable securities

     477,290        —          839,309   

Noncash stock-based compensation

     4,262,138        2,649,709        16,795,533   

Noncash interest expense

     97,766        91,886        4,517,096   

Noncash rent expense

     17,134        85,761        123,890   

Noncash restructuring costs

     1,094,443        —          1,710,055   

Mark to market of warrant liability

     —          —          262,741   

Loss on extinguishment of debt

     766,172        —          766,172   

Other non-cash losses

     30,874        —          1,748,749   

Changes in assets and liabilities:

      

Restricted cash

     —          (104,892     (104,892

Prepaid expenses and other current assets

     161,710        (441,875     (1,791,694

Other assets

     —          (25,609     (66,626

Accounts payable

     (565,450     (1,145,214     1,220,573   

Other accrued liabilities

     157,058        369,823        5,414,568   

Other liabilities

     11,000        —          11,000   
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (19,009,551     (13,948,086     (112,662,563
  

 

 

   

 

 

   

 

 

 

Investing activities

      

Purchases of property and equipment

     (199,301     (153,625     (934,514

Purchases of marketable securities

     (15,238,693     —          (102,763,972

Maturities of marketable securities

     25,670,000        —          36,720,000   

Sales of marketable securities

     —          —          27,572,470   
  

 

 

   

 

 

   

 

 

 

Net cash provided by/(used in) investing activities

     10,232,006        (153,625     (39,406,016
  

 

 

   

 

 

   

 

 

 

Financing activities

      

Deferred financing fees

     (72,867     (189,800     (1,428,176

Debt extinguishment fee

     (875,000     —          (1,400,000

Proceeds from issuances of convertible notes

     —          —          22,063,642   

Proceeds from issuances of debt financing

     10,000,000        10,000,000        37,525,000   

Payment of debt financing

     (10,000,000     —          (27,527,534

Payment of subscription receivable

     —          —          200   

Proceeds from exercises of stock options

     1,044,412        145,452       1,427,865   

Proceeds from issuances of stock, net of offering expenses

     47,047,623       47,585,448       186,167,519   

Repurchase of common stock

     —          —          (373
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     47,144,168        57,541,100        216,828,143   
  

 

 

   

 

 

   

 

 

 

Exchange rate effect on cash

     (23,457     —          (48,318
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     38,343,166        43,439,389        64,711,246   

Cash and cash equivalents, beginning of period

     26,368,080        44,100,897        —     
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 64,711,246      $ 87,540,286      $ 64,711,246   
  

 

 

   

 

 

   

 

 

 

 

6


Table of Contents
     Six Months
Ended June 30,
    

Period From

February 4,

2005 (Inception)

to June 30,

 
     2012      2011      2012  

Supplemental disclosures of cash flow information

        

Deferred charge due on maturity of Hercules term loan

   $ —         $ 775,000       $ 775,000   
  

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ 462,764       $ 352,444       $ 3,965,421   
  

 

 

    

 

 

    

 

 

 

See accompanying notes.

 

7


Table of Contents

Aegerion Pharmaceuticals, Inc.

(A Development Stage Company)

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2012

1. Description of Business and Significant Accounting Policies

Organization and Basis of Presentation

Aegerion Pharmaceuticals, Inc. (the “Company” or “Aegerion”) is an emerging biopharmaceutical company focused on the development and commercialization of novel, life-altering therapeutics to treat debilitating and often fatal rare diseases. The Company’s current focus is on developing its lead compound, lomitapide. The Company is in its development stage as defined by the FASB (“Financial Accounting Standards Board”) Accounting Standards Codification (“ASC”) 915, Development Stage Entities. The Company’s activities since inception have consisted principally of acquiring product and technology rights, raising capital, establishing facilities and performing research and development activities. Since inception, the Company has incurred significant losses from operations, and expects losses to continue for the foreseeable future during its development phase. The Company’s success depends primarily on the successful development and regulatory approval of its product candidates. From February 4, 2005 (inception) through June 30, 2012, the Company had a deficit accumulated during the development stage of $156.0 million. The Company believes that its existing cash, cash equivalents and marketable securities will be sufficient to cover its cash flow requirements through the first quarter of 2014.

The Company has established wholly-owned subsidiaries in France, Bermuda and the United Kingdom.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States 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, 2012. This Form 10-Q should be read in conjunction with the audited financial statements and accompanying notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”).

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

The Company has reclassified certain prior period amounts to conform to the current period presentation. In 2012, the Company began allocating certain overhead costs across its functional areas and as a result reclassified certain amounts in the prior year from general and administrative expenses to research and development expenses.

Use of Estimates

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

Cash equivalents

The Company considers all highly liquid investments purchased with original maturities at the date of purchase of three months or less to be cash equivalents. These investments are carried at cost, which approximates fair value.

Restricted cash

During the first quarter of 2011, the Company entered into a lease for new office space and relocated its principal executive offices to Cambridge, Massachusetts. Restricted cash of $0.1 million at June 30, 2012 represents the collateralized outstanding letter of credit associated with this lease. The funds are invested in a certificate of deposit. The letter of credit permits draws by the landlord to cure defaults by the Company under the lease.

 

8


Table of Contents

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, marketable securities, accounts payable, accrued liabilities, and long-term debt. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The carrying amount of accounts payable and accrued liabilities are generally considered to be representative of their respective fair values because of the short-term nature of those instruments. The stated interest rate on the Company’s debt is based on market rates for similar types of debt instruments. Accordingly, the carrying value of the Company’s long-term debt approximates fair value.

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. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

   

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

 

   

Level 2 — Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly. The Company’s Level 2 assets consist of U.S. government agency securities, corporate debt securities, certificates of deposit and commercial paper. The carrying amounts of these marketable securities are generally considered to be representative of their respective fair values based upon pricing of securities with similar investment characteristics and holdings.

 

   

Level 3 — Inputs that are unobservable for the asset or liability. The Company does not have any Level 3 assets.

As of June 30, 2012 and December 31, 2011, the Company held par value $35.7 million and $46.2 million, respectively, of investments in marketable securities. The Company’s cash equivalents are classified within Levels 1 and 2 of the fair value hierarchy and the Company’s investments in marketable securities are classified within Level 2 of the fair value hierarchy using inputs that are observable for the asset or liability. The fair value measurements of the Company’s financial instruments at June 30, 2012 and December 31, 2011 are summarized in the tables below:

 

     Quoted Prices  in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance at
June 30,
2012
 

Assets:

           

Cash and cash equivalents

   $ 64,711,246       $ —         $ —         $ 64,711,246   

U.S. government agency securities

     —           18,341,375         —           18,341,375   

Corporate debt securities

     —           14,566,575         —           14,566,575   

Certificates of deposit

     —           2,999,356         —           2,999,356   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 64,711,246       $ 35,907,306       $ —         $ 100,618,552   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9


Table of Contents
     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,
2011
 

Assets:

           

Cash and cash equivalents

   $ 25,117,637       $ 1,250,443       $ —         $ 26,368,080   

Corporate debt securities

     —           21,377,504         —           21,377,504   

U.S. government agency securities

     —           13,824,797         —           13,824,797   

Commercial paper

     —           8,594,848         —           8,594,848   

Certificates of deposit

     —           2,997,538         —           2,997,538   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 25,117,637       $ 48,045,130       $ —         $ 73,162,767   
  

 

 

    

 

 

    

 

 

    

 

 

 

2. Cash, Cash Equivalents and Marketable Securities

As of June 30, 2012, the Company held $64.7 million in cash and cash equivalents consisting of cash and money market funds. As of December 31, 2011, the Company held $26.4 million in cash and cash equivalents consisting of $25.1 million in cash and money market funds and $1.3 million in a U.S. government agency bond. As of June 30, 2012 and December 31, 2011, the Company held $35.9 million and $46.8 million of marketable securities, respectively. The marketable securities are classified as available-for-sale and as such, are reported at fair value on the Company’s balance sheet. Unrealized holding gains and losses are reported within accumulated other comprehensive items as a separate component of stockholders’ equity. If a decline in the fair value of a marketable security below the Company’s cost basis is determined to be other than temporary, such marketable security is written down to its estimated fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. The cost of securities sold is based on the specific identification method.

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

 

10


Table of Contents

Marketable securities consisted of the following as of June 30, 2012 and December 31, 2011, respectively.

 

     As of June 30, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

Corporate debt securities

   $ 14,571,826       $ 1,500       $ (6,751   $ 14,566,575   

U.S. government agency securities

     18,342,491         292         (1,408     18,341,375   

Certificates of deposit

     3,000,000         —           (644     2,999,356   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 35,914,317       $ 1,792       $ (8,803   $ 35,907,306   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     As of December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

Corporate debt securities

   $ 21,403,049       $ 1,231       $ (26,776   $ 21,377,504   

U.S. government agency securities

     13,824,674         2,123         (2,000     13,824,797   

Commercial paper

     8,595,191         8         (351     8,594,848   

Certificates of deposit

     3,000,000         —           (2,462     2,997,538   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 46,822,914       $ 3,362       $ (31,589   $ 46,794,687   
  

 

 

    

 

 

    

 

 

   

 

 

 

At June 30, 2012, the Company’s securities held in an unrealized loss position are not considered to be other-than-temporarily impaired, as the Company has the ability to hold such investments until their forecasted recovery to fair value.

The estimated fair value and amortized cost of our marketable securities by contractual maturity as of June 30, 2012 and December 31, 2011 are summarized as follows:

 

     As of June 30, 2012      As of December 31, 2011  
     Fair Value      Amortized
Cost
     Fair Value      Amortized
Cost
 

Due in one year or less

   $ 24,911,871       $ 24,917,812       $ 46,794,687       $ 46,822,914   

Due after one year through five years

     10,995,435         10,996,505         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 35,907,306       $ 35,914,317       $ 46,794,687       $ 46,822,914   
  

 

 

    

 

 

    

 

 

    

 

 

 

3. Debt Financing

On March 28, 2012, the Company entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Silicon Valley Bank (“Silicon Valley Bank”), pursuant to which Silicon Valley Bank made a term loan to the Company in the principal amount of $10.0 million. The Loan and Security Agreement provides for interest-only payments through February 28, 2013, with per annum interest of 6.75% and a final payment of $200,000. The Company also paid Silicon Valley Bank a commitment fee of $20,000 and associated legal fees of Silicon Valley Bank amounting to approximately $23,000. The proceeds of the term loan were used by the Company to repay the Company’s then outstanding $10.0 million loan from Hercules Technology II, L.P. and Hercules Technology III, L.P. (collectively, “the Hercules Funds”).

The Loan and Security Agreement provides that the Company shall repay the principal balance of the term loan in 36 equal monthly installments starting on March 1, 2013 and continuing through February 1, 2016. The remaining term loan principal balance and all accrued but unpaid interest will be due and payable on February 1, 2016. At its option, the Company may prepay all or any part of the outstanding term loan subject to a prepayment premium.

In connection with the Loan and Security Agreement, the Company granted Silicon Valley Bank a security interest in all of the Company’s personal property now owned or hereafter acquired, excluding intellectual property (and a negative pledge on intellectual property). The Loan and Security Agreement also provides for standard indemnification of Silicon Valley Bank and contains representations, warranties and certain covenants of the Company, including the agreement by the Company to maintain a specified level of liquidity, below which the Company would be required to pledge up to $5.0 million to Silicon Valley Bank.

As a result of these transactions, in the first quarter of 2012, the Company recorded other expense of $766,172, primarily representing the write off of related deferred financing costs, the acceleration of recognition of debt extinguishment fees and the prepayment premium payable to the Hercules Funds.

 

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4. Capital Structure

Preferred Stock

At June 30, 2012, 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 June 30, 2012, the Company was authorized to issue 125,000,000 shares of $0.001 par value common stock. Dividends on the common stock will be paid when, and if, declared by the Board of Directors. Each holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held.

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

At December 31, 2011, Hercules Technology Growth Capital, Inc., or Hercules, held a warrant to purchase 107,779 shares of common stock at an exercise price of $6.68 per share. During the first quarter of 2012, Hercules exercised this warrant, resulting in the Company issuing 65,944 net shares of its common stock to Hercules.

Public Offering

In June 2012, the Company sold 3,400,000 shares of common stock at a public offering price of $14.75 per share, resulting in proceeds to the Company of approximately $47.0 million, net of underwriting discounts and commissions and other estimated offering expenses.

In July 2012, the underwriters exercised their overallotment option to purchase an additional 393,085 shares at a public offering price of $14.75 per share, resulting in proceeds to the Company of approximately $5.5 million, net of underwriting discounts and commissions and other estimated offering expenses.

5. Accrued Liabilities

Accrued liabilities consist of the following:

 

     June 30,
2012
     December 31,
2011
 

Accrued compensation

   $ 1,618,583       $ 1,179,902   

Accrued research and development costs

     1,368,997         2,316,811   

Accrued professional fees

     938,387         351,954   

Accrued restructuring costs

     293,117         296,362   

Accrued state and local taxes

     157,316         164,138   

Other accrued liabilities

     500,189         417,936   
  

 

 

    

 

 

 

Total

   $ 4,876,589       $ 4,727,103   
  

 

 

    

 

 

 

 

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6. Stock Option Plan

The Company determines the fair value of the option awards using the Black-Scholes option pricing model. The fair value of stock options will be expensed over the requisite service period. Stock-based compensation expense relates to stock options and restricted stock granted to employees and non-employees and has been reported in the Company’s statements of operations as follows:

 

     Three Months
Ended June 30,
     Six Months
Ended June 30,
 
     2012      2011      2012      2011  

Research and development

   $ 409,755       $ 345,971       $ 972,750       $ 492,221   

General and administrative

     1,739,784         1,041,899         3,289,388         2,157,488   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,149,539       $ 1,387,870       $ 4,262,138       $ 2,649,709   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of option awards is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011  

Expected stock price volatility

     84.9     85.0     84.7     85.0

Risk free interest rate

     1.11     1.95     1.19     2.17

Expected life of options (years)

     6.13        6.14        6.21        6.13   

Expected annual dividend per share

   $ 0.00      $ 0.00      $ 0.00      $ 0.00   

The Company’s stock option activity for the six months ended June 30, 2012 is as follows:

 

     Options Outstanding  
     Number
of Shares
    Weighted-
Average
Exercise Price
     Weighted-
Average
Remaining
Contractual Life (Years)
 

Balance at December 31, 2011

     2,964,851      $ 9.45         8.85   

Options granted

     1,789,830        15.11         9.67   

Options exercised

     (342,430     3.05         6.99   

Options forfeited/cancelled

     (327,424     14.16         —     
  

 

 

      

Balance at June 30, 2012

     4,084,827      $ 12.09         9.00   
  

 

 

      

As of June 30, 2012, the Company had approximately $28.4 million of unrecognized compensation expense related to unvested stock options and restricted stock. The Company expects this compensation expense to be recognized over a weighted average period of 3.3 years. In addition, the Company has $8.8 million of unrecognized compensation expense related to unvested stock options that contain performance criteria. The expense for each such option will be recognized only if the performance criteria are achieved or are deemed probable to be achieved.

7. Basic and Diluted Net Loss Attributable to Common Stockholders per Common Share

Basic net loss per common share is calculated by dividing the net loss applicable to common stockholders 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 applicable to common stockholders by the weighted-average number of unrestricted common shares and dilutive common share equivalents outstanding for the period, determined using the treasury-stock method.

 

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     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011  

Net loss attributable to common stockholders

   $ (13,927,253   $ (8,604,718   $ (25,592,398   $ (15,437,175

Weighted average common shares outstanding — basic and diluted

     22,186,303        17,729,216        21,716,239        17,685,622   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders per common share — basic and diluted

   $ (0.63   $ (0.49   $ (1.18   $ (0.87
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     As of June 30,  
     2012      2011  

Stock Options

     4,084,827         2,468,367   

Unvested restricted stock

     56,905         —     

Warrant

     —           107,779   
  

 

 

    

 

 

 

Total

     4,141,732         2,576,146   
  

 

 

    

 

 

 

8. Restructuring

In October 2011, the Company initiated plans to consolidate facilities and related administrative functions into its Cambridge headquarters by the end of 2011. As a result, the Company closed its Bedminster, New Jersey facility effective December 31, 2011, and reduced headcount by five positions. The Company accounted for these actions in accordance with ASC 420, Exit or Disposal Cost Obligations.

Included in the restructuring charges are employee severance and outplacement service costs for five former employees, primarily in general and administrative positions, the net present value of the remaining lease obligation for the Company’s Bedminster, New Jersey facility and a net write off of fixed assets, primarily computer equipment and leasehold improvements, that were no longer in use after vacating the facility, the expense for which was recognized during the quarter ended December 31, 2011.

In addition, the Company accelerated the vesting of 137,136 stock options granted in 2008, 2009 and 2010 to the former employees upon the termination of their employment. As such, the Company recognized expense related to those stock options in accordance with ASC 718, Compensation – Stock Compensation. The Company is recording as expense the value of the modification over the remaining service periods for each of the employees.

 

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The following table summarizes the Company’s restructuring charges recorded to date:

 

     Three Months
Ended June  30,
2012
     Six Months
Ended June  30,
2012
    Cumulative to
Date
 

Stock option modification

   $ 445,410       $ 1,094,443      $ 1,674,337   

Severance and outplacement services

     100,601         300,950        465,924   

Abandonment of facilities

     194         1,330        92,393   

Write off (recovery) of fixed assets

     —           (20,000     56,043   
  

 

 

    

 

 

   

 

 

 
   $ 546,205       $ 1,376,723      $ 2,288,697   
  

 

 

    

 

 

   

 

 

 

In January 2012, the Company entered into a sublease agreement for the Bedminster, New Jersey facility for the remaining term of the lease. In determining the abandonment of facilities charge, the Company considered its sublease arrangement for the facility, including sublease terms and the sublease rates.

The following table summarizes the cash components of the Company’s restructuring charges, which is included in accrued liabilities in the accompanying condensed consolidated balance sheets:

 

     Severance     Abandonment
of Facilities
    Total  

Balance at December 31, 2011

   $ 164,974      $ 131,388      $ 296,362   

Costs incurred

     300,950        339        301,289   

Payments made

     (282,711     (21,823     (304,534
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 183,213      $ 109,904      $ 293,117   
  

 

 

   

 

 

   

 

 

 

9. Subsequent Event

In July 2012, the Company entered into an arrangement with Silicon Valley Bank, pursuant to which the Company received a line of credit of up to $750,000 to finance, subject to the terms of the Loan and Security Agreement, as amended, the purchase of certain types of equipment acquired by the Company during the two years ended December 31, 2012. As of August 9, 2012, the Company has financed approximately $527,000 under this arrangement.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included in our audited financial statements and notes thereto for the year ended December 31, 2011, and Management’s Discussion and Analysis of Financial Condition and Results of Operation included in our 2011 Form 10-K to which the reader is directed for additional information.

All statements included or incorporated by reference into this report other than statements or characterizations of historical fact, are forward-looking statements. Forward-looking statements are often identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “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 report include our statements regarding: the potential for approval and launch of lomitapide, and our expectations regarding the possible timing of such events; our expectations as to the commercial potential for lomitapide, including our estimates as to the number of patients and potential market size in relevant indications; our plans for commercial marketing, sales, manufacturing and distribution; our plans for future clinical trials, and the potential timing of such events; our expectations with respect to the impact of competition on our future operations and results, our beliefs with respect to our intellectual property portfolio and the extent to which it protects us; and our forecasts regarding the timing of any future need for additional capital to fund operations. The forward-looking statements contained in this report 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 the “Risk Factors” section in Part II, Item 1A of this report. It is not possible for us to predict all risks, or the extent to which any factor, or combination of factors may impact our operations or results. Our actual results could differ materially and adversely from those expressed in any forward-looking statement in this report or in our other filings with the SEC. Except as required by law, we undertake no obligation to update or revise our forward-looking statements whether as the result of new events, additional information or otherwise.

Overview

We are an emerging biopharmaceutical company focused on the development and commercialization of novel, life altering therapeutics to treat debilitating and often fatal rare diseases. Our initial focus is on therapeutics to treat severe inherited lipid disorders. Lipids are naturally occurring molecules, such as cholesterol and triglycerides, which are transported in the blood. Elevated levels of cholesterol, or hypercholesterolemia, and elevated levels of triglycerides, or hypertriglyceridemia, can dramatically increase the risk of experiencing a potentially life-threatening cardiovascular event or other serious medical issue, such as a heart attack or stroke in the case of hypercholesterolemia or acute pancreatitis in the case of hypertriglyceridemia. We are initially developing our first product candidate, lomitapide, as an oral, once-a-day treatment for patients with a rare inherited lipid disorder called homozygous familial hypercholesterolemia, or HoFH. HoFH patients are unable to clear low density lipoprotein cholesterol, known as LDL-C, or “bad cholesterol”, from the body efficiently, resulting in extremely elevated LDL-C levels in the blood. As a result, these patients are at a very high risk of experiencing life-threatening cardiovascular events, and typically have a substantially reduced life span relative to unaffected individuals.

In the first quarter of 2012, we submitted a New Drug Application, or NDA, to the United States Food and Drug Administration, or FDA, and a Marketing Authorization Application, or MAA, to the European Medicines Agency, or EMA, requesting approval to market lomitapide as an adjunct to a low-fat diet and other lipid-lowering therapies, to reduce cholesterol in adult patients with HoFH. In March 2012, the EMA accepted the MAA for review with a review start date of March 20, 2012. In April 2012, the FDA accepted the NDA as being sufficiently complete to accept the filing for a full review. The FDA has informed us that the NDA will be subject to standard review. Based on meetings with the FDA and EMA, we submitted the NDA and MAA using the 56-week results from our 78-week pivotal Phase III trial of lomitapide in the treatment of adult patients with HoFH. The 56-week results of the trial were announced in May 2011. We completed the trial in late 2011, and in January 2012, we announced the 78-week results of the trial which were consistent with the 56-week results.

We are a development stage company with a limited operating history. To date, we have primarily focused on developing our lead compound, lomitapide. We have funded our operations to date primarily from the private placement of convertible preferred stock, convertible debt, venture debt, bank debt and the proceeds from our 2010 initial public offering, or IPO, and our 2011 and 2012 follow-on public offerings, or FPOs.

We have incurred losses in each year since our inception in February 2005. Our net losses were approximately $25.6 million, $39.5 million, $14.3 million and $12.2 million for the six months ended June 30, 2012, and the years ended December 31, 2011, 2010 and 2009, respectively. As of June 30, 2012, we had an accumulated deficit of approximately $156.0 million. Substantially all of our operating losses resulted from costs incurred in connection with our development programs and from general and administrative costs associated with our operations.

 

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We expect that our near-term efforts will be focused on gaining regulatory approval of lomitapide in adult HoFH in the U.S. and EU and making filings for regulatory approval in other international markets; preparing for the commercialization of lomitapide as a treatment for adult HoFH in the U.S. and EU and initiating such activities if lomitapide is approved; initiating activities related to our planned clinical development program in Japan; and preparing for our planned clinical study in pediatric HoFH patients. In light of these near-term efforts, we have decided to delay the planned timeline for the initiation of a clinical study of lomitapide in FC to 2013. If, in the future, we elect to develop lomitapide for broader patient populations, such as for those patients with heterozygous familial hypercholesterolemia, or HeFH, who have severely elevated LDL-C, levels despite current therapies or who are statin-intolerant, or for non-FC patients with severe hypertriglyceridemia, we would plan to do so selectively either on our own or by establishing alliances with one or more pharmaceutical company collaborators, depending on, among other factors, the applicable indications, the related development costs and our available resources. In addition, in the long-term, after we achieve our goals with respect to launch of lomitapide, if approved, we plan to evaluate opportunities to leverage our infrastructure and expertise by acquiring rights to other product candidates targeted at life-threatening or substantially debilitating rare diseases.

Financial Overview

Revenue

To date, we have not generated any revenue from the sale of any products, and we do not expect to generate significant revenue unless or until we obtain marketing approval of lomitapide and commercialize the product.

Research and Development Expenses

Since our inception, our research and development activities have primarily focused on the clinical development of lomitapide and regulatory activities directed at gaining approval of lomitapide in HoFH. We recognize both internal and external research and development expenses as they are incurred. Our research and development expenses have consisted primarily of:

 

   

salaries and related expenses for personnel;

 

   

fees paid to contract research organizations, or CROs, in conjunction with independently monitoring our clinical trials and acquiring and evaluating data in conjunction with our clinical trials, including all related fees, such as for investigator grants, patient screening, laboratory work and statistical compilation and analysis;

 

   

costs related to production of clinical materials and process development efforts, including fees paid to contract manufacturers;

 

   

costs related to upfront and milestone payments under in-licensing agreements;

 

   

costs related to compliance with regulatory requirements in the United States, the European Union and other foreign jurisdictions;

 

   

consulting fees paid to third parties; and

 

   

costs related to stock options or other stock-based compensation granted to personnel in development functions.

The following table summarizes our research and development expenses by project for the three and six month periods ended June 30, 2012 and 2011.

 

     Three Months
Ended June 30,
     Six Months
Ended June 30,
 
     2012      2011      2012      2011  
     (in thousands)  

Lomitapide

   $ 5,424       $ 5,330       $ 10,059       $ 8,479   

Implitapide

     25         —           25         300   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,449       $ 5,330       $ 10,084       $ 8,779   
  

 

 

    

 

 

    

 

 

    

 

 

 

We expect the level of total research and development expenses for the full year 2012 will be substantially similar to the level of research and development expenses for the full year 2011 resulting primarily from: increases in expenses due primarily to our manufacturing validation campaigns, regulatory work and related activities in connection with our NDA and MAA filings for lomitapide, increases in headcount in medical affairs, establishing phamacovigilance systems for lomitapide, and evaluating an alternative presentation of lomitapide that would allow administration to children who have difficulty swallowing capsules in our planned pediatric study in

 

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HoFH; offset by expected decreases in clinical trial expenses as compared to 2011 due primarily to our decision to delay the planned timeline for initiation of a clinical study of lomitapide in FC to 2013 and our pivotal trial for lomitapide being substantially completed at the end of 2011. Due to the numerous risks and uncertainties associated with the timing and costs to conduct clinical trials and activities related thereto, we cannot determine these future expenses with certainty and the actual range may vary significantly from our forecasts.

Our research and development expenditures are subject to numerous uncertainties in timing and cost to completion. Completion of clinical trials may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

 

   

the number of trials required for approval;

 

   

the number of sites included in the trials;

 

   

the length of time required to enroll suitable patients;

 

   

the number of patients that participate in the trials;

 

   

the number of doses that patients receive;

 

   

the drop-out or discontinuation rates of patients;

 

   

the duration of patient follow-up;

 

   

the number of analyses and tests performed during the trial;

 

   

the phase of development the product candidate is in; and

 

   

the efficacy and safety profile of the product candidate.

We have not received marketing approval for lomitapide from the FDA, the EMA, or any other foreign regulatory authority. Obtaining marketing approval is an extensive, lengthy, expensive and uncertain process, and the FDA, the EMA or any other foreign regulatory authority may delay, limit or deny approval of lomitapide for many reasons, or may require additional data, studies or trials.

Our expenses related to clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed fee or unit price. Payments under the contracts depend on factors such as the successful enrollment of patients or the completion of clinical trial milestones. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.

As a result of the uncertainties discussed above, we are unable to determine with certainty the duration and completion costs of our development projects or when and to what extent we will receive revenue from the commercialization and sale of lomitapide.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation for employees in executive and operational functions, including finance, human resources, information technology, sales and marketing and legal. Other significant costs include stock compensation costs and professional fees for accounting and legal services, including expenses associated with obtaining and maintaining patents.

We expect that our general and administrative expenses will increase with the continued development of lomitapide, activities in anticipation of potential launch of lomitapide, and the commercialization of lomitapide, if approved. These increases will likely include increased costs for sales and marketing personnel, including sales representatives and reimbursement case managers, as well as set-up costs associated with the establishment of our commercial distribution channel for lomitapide prior to approval.

 

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Interest Income and Interest Expense

Interest income consists of interest earned on our cash, cash equivalents and marketable securities. Interest expense consists primarily of cash and non-cash interest costs related to our outstanding debt. Non-cash interest expense consists of the amortization of capitalized costs incurred in connection with the issuance of debt. We amortize these costs over the life of our debt agreements as interest expense in our statements of operations.

Net Operating Losses and Tax Carryforwards

As of December 31, 2011, we had approximately $105.8 million of federal and state net operating loss carryforwards. We also had federal and state research and development tax credit carryforwards of approximately $11.4 million available to offset future taxable income. These federal and state net operating loss and federal and state tax credit carryforwards will begin to expire at various dates beginning in 2025, if not utilized. The Tax Reform Act of 1986 provides for a limitation on the annual use of net operating loss and research and development tax credit carryforwards following certain ownership changes that could limit our ability to utilize these carryforwards. We have not completed a study to assess whether an ownership change has occurred, or whether there have been multiple ownership changes since our inception, due to the significant costs and complexities associated with such study. Accordingly, we expect our ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be utilized against future taxes. As a result, we may not be able to take full advantage of these carryforwards for federal and state tax purposes.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. 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.

While our significant accounting policies are more fully described in Note 1 to our financial statements and in our audited financial statements and notes for the year ended December 31, 2011 included in our 2011 Form 10-K to which the reader is directed for additional information, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.

Accrued Expenses

As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with applicable vendor personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued expenses include:

 

   

fees paid to CROs in connection with clinical trials;

 

   

fees paid to investigative sites in connection with clinical trials;

 

   

fees paid to contract manufacturers in connection with the production of lomitapide, including fill/finish capabilities; and

 

   

professional service fees.

We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust the accrual accordingly. If we do not identify costs that we have begun to incur or if

 

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we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. We do not anticipate the future settlement of existing accruals to differ materially from our estimates.

Valuation of Financial Instruments

We regularly invest excess operating cash in deposits with major financial institutions, money market funds, notes issued by the U.S. government, as well as fixed income investments and U.S. bond funds, both of which can be readily purchased and sold using established markets. The carrying amounts of these marketable securities are generally considered to be representative of their respective fair values based upon pricing of securities with similar investment characteristics and holdings. We believe that the market risk arising from our holdings of these financial instruments is mitigated as many of these securities are government backed or of high credit quality.

Restructuring Costs

In October 2011, we initiated plans to consolidate facilities and related administrative functions into our Cambridge headquarters by the end of 2011. The reorganization included a reduction in workforce, closure of a facility and disposal of certain assets. These restructuring charges were accounted for in accordance with Accounting Standards Codification, or ASC, 420, Exit or Disposal Cost Obligations and ASC 718, Compensation – Stock Compensation. See “Results of Operations” below for a further discussion of our restructuring actions.

Stock-Based Compensation

We recognize as compensation expense the fair value, for accounting purposes, of stock options, restricted stock awards and other stock-based compensation issued to employees and directors. For service type awards, compensation expense is typically recognized over the requisite service period, which is the vesting period. For awards that vest or begin vesting upon achievement of a performance condition, the compensation expense is recognized beginning in the period when management has determined it is probable the performance condition will be achieved.

Equity instruments issued to non-employees are recorded at their fair value for accounting purposes. The compensation expense is recognized as expense over the related service period.

For equity awards that have previously been revalued, any incremental increase in the fair value 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-based measure of the modified award on the date of modification over the fair-value-based measure of the original award immediately before the modification. Stock-based compensation expense includes stock options granted to employees and non-employees and has been reported in our statements of operations as follows:

 

     Three Months
Ended June 30,
     Six Months
Ended June 30,
 
     2012      2011      2012      2011  
     (in thousands)  

Research and development

   $ 410       $ 346       $ 973       $ 492   

General and administrative

     1,740         1,042         3,289         2,158   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,150       $ 1,388       $ 4,262       $ 2,650   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition, restructuring costs for the three and six month periods ending June 30, 2012 contain stock-based compensation expense of $0.4 million and $1.1 million, respectively, related to the acceleration of vesting of certain stock options.

We calculate the fair value of stock-based compensation awards using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the input of subjective assumptions, including stock price volatility and the expected life of stock options. As a recently public company, we do not have sufficient history to estimate the volatility of our common stock price or the expected life of our options. We calculate expected volatility based on reported data for selected reasonably similar publicly traded companies, or guideline peer group, for which the historical information is available. We will continue to use the guideline peer group volatility information until the historical volatility of our common stock is relevant to measure expected volatility for future option grants. The assumed dividend yield is based on our expectation of not paying dividends in the foreseeable future. We determine the average expected life of stock options

 

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according to the “simplified method” as described in Staff Accounting Bulletin 110, which is the mid-point between the vesting date and the end of the contractual term. We determine the risk-free interest rate by reference to implied yields available from five-year and seven-year U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant. We estimate forfeitures based on our historical analysis of actual stock option forfeitures. The assumptions used in the Black-Scholes option-pricing model for the year ended December 31, 2011 are set forth in our 2011 Form 10-K.

There is a high degree of subjectivity involved when using option-pricing models to estimate stock-based compensation. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee stock-based awards is determined using an option-pricing model, the calculated value may not be indicative of the fair value observed in a market transaction between a willing buyer and willing seller. If factors change and we employ different assumptions when valuing our options, the compensation expense that we record in the future may differ significantly from what we have historically reported.

Results of Operations

Comparison of the Three Months Ended June 30, 2012 and June 30, 2011

The following table summarizes the results of our operations for each of the three-month periods ended June 30, 2012 and 2011, together with the changes in those items in dollars and as a percentage:

 

     Three Months
Ended June 30,
    Increase/(decrease)  
     2012     2011     $     %  
     (in thousands)        

Operating expenses:

        

Research and development

   $ 5,449      $ 5,329      $ 120        2.3

General and administrative

     7,748        3,014        4,734        157.1   

Restructuring costs

     546        —          546        —     
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     13,743        8,343        5,400        64.7   
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (13,743     (8,343     (5,400     64.7   

Interest expense

     (199     (332     133        (40.1

Interest income

     28        70        (42     (60.0

Other expense, net

     (13     —          (13     —     
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (13,927   $ (8,605   $ (5,322     61.9
  

 

 

   

 

 

   

 

 

   

Revenue

We did not recognize any revenue for the three months ended June 30, 2012, or the three months ended June 30, 2011.

Research and Development Expenses

Research and development expenses were $5.4 million for the three months ended June 30, 2012, compared with $5.3 million for the three months ended June 30, 2011. The $0.1 million increase for the three months ended June 30, 2012 was primarily due to a $0.7 million increase in compensation costs and a $0.4 million increase in consulting and outside services expenses, offset in part by a $1.0 million decrease in clinical trial costs. The increase in compensation costs and consulting and outside services expenses was primarily due to an increase in headcount and other resources devoted to regulatory work and related activities in connection with our NDA and MAA filings.

General and Administrative Expenses

General and administrative expenses were $7.7 million for the three months ended June 30, 2012, as compared to $3.0 million for the three months ended June 30, 2011. The $4.7 million increase was primarily due to a $2.8 million increase in compensation and related costs, a $0.7 million increase in stock-based compensation expense, a $0.7 million increase in consulting and outside service expenses, a $0.3 million increase in professional service expenses and a $0.2 million increase in facility expenses. These increases were primarily due to the build-out of the general and administrative functions and investment in resources for the anticipated commercial launch of lomitapide.

 

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Restructuring Costs

Restructuring costs of $0.5 million for the three months ended June 30, 2012, were related to the closure of our Bedminster, New Jersey facility. In October 2011, we initiated plans to consolidate facilities and related administrative functions into our Cambridge headquarters by the end of 2011. As a result, we closed our Bedminster, New Jersey office effective December 31, 2011 and reduced headcount by five positions.

Included in the restructuring charges are $0.1 million of employee severance and outplacement services costs for five employees, primarily in general and administrative positions.

In addition, we accelerated the vesting of 137,136 total stock options granted in 2008, 2009 and 2010 to the former employees upon the termination of their employment. As such, we recognized expense related to those stock options based on the fair value of the stock options at the date of the modification of each award. We are expensing the value of the modification over the remaining service periods for each of the employees. We recorded $0.4 million of non-cash restructuring charges related to these modifications in the three months ended June 30, 2012.

In January 2012, we entered into a sublease agreement for the Bedminster, New Jersey facility for the remaining term of the lease. In determining the ongoing facilities charge, we considered our sublease arrangement for the facility, including sublease terms and the sublease rates.

Interest Expense

Interest expense was $0.2 million for the three months ended June 30, 2012 compared with $0.3 million for the three months ended June 30, 2011.

Interest Income

Interest income was $0.03 million for the three months ended June 30, 2012, compared with $0.07 million for the three months ended June 30, 2011.

Comparison of the Six Months Ended June 30, 2012 and June 30, 2011

The following table summarizes the results of our operations for each of the six-month periods ended June 30, 2012 and 2011, together with the changes in those items in dollars and as a percentage:

 

     Six Months
Ended June 30,
    Increase/(decrease)  
     2012     2011     $     %  
     (in thousands)        

Operating expenses:

        

Research and development

   $ 10,084      $ 8,780      $ 1,304        14.9

General and administrative

     12,859        6,351        6,508        102.5   

Restructuring costs

     1,377        —          1,377        —     
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     24,320        15,131        9,189        60.7   
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (24,320     (15,131     (9,189     60.7   

Interest expense

     (527     (444     (83     18.7   

Interest income

     69        138        (69     (49.8

Other expense, net

     (814     —          (814     —     
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (25,592   $ (15,437   $ (10,155     65.8
  

 

 

   

 

 

   

 

 

   

 

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Revenue

We did not recognize any revenue for the six months ended June 30, 2012, or the six months ended June 30, 2011.

Research and Development Expenses

Research and development expenses were $10.1 million for the six months ended June 30, 2012, compared with $8.8 million for the six months ended June 30, 2011. The $1.3 million increase for the six months ended June 30, 2012 was primarily due to a $1.9 million increase in compensation costs, a $0.5 million increase in stock-based compensation expense and a $0.4 million increase in consulting and outside service expenses, offset in part by a $1.4 million decrease in clinical and preclinical development expenses as our trials for lomitapide were concluded in 2011. The increases in compensation costs, stock-based compensation expense and consulting and outside service expenses were primarily due to an increase in headcount and resources devoted to regulatory work and related activities in connection with our NDA and MAA filings.

General and Administrative Expenses

General and administrative expenses were $12.9 million for the six months ended June 30, 2012, as compared to $6.4 million for the six months ended June 30, 2011. The $6.5 million increase was primarily due to a $4.1 million increase in compensation and related costs, a $1.1 million increase in stock-based compensation expense, a $0.7 million increase in consulting and outside service expenses and a $0.6 million increase in legal and professional service expenses. These increases were primarily due to the build-out of the general and administrative functions and investment in resources for the anticipated commercial launch of lomitapide.

Restructuring Costs

Restructuring costs of $1.4 million for the six months ended June 30, 2012, were related to the closure of our Bedminster, New Jersey facility. In October 2011, we initiated plans to consolidate facilities and related administrative functions into our Cambridge headquarters by the end of 2011. As a result, we closed our Bedminster, New Jersey office effective December 31, 2011 and reduced headcount by five positions.

Included in the restructuring charges are $0.3 million of employee severance and outplacement services costs for five employees, primarily in general and administrative positions.

In addition, we accelerated the vesting of 137,136 total stock options granted in 2008, 2009 and 2010 to the former employees upon the termination of their employment. As such, we recognized expense related to those stock options based on the fair value of the stock options at the date of the modification of each award. We are expensing the value of the modification over the remaining service periods for each of the employees. We recorded $1.1 million of non-cash restructuring charges related to these modifications in the six months ended June 30, 2012

In January 2012, we entered into a sublease agreement for the Bedminster, New Jersey facility for the remaining term of the lease. In determining the ongoing facilities charge, we considered our sublease arrangement for the facility, including sublease terms and the sublease rates.

Interest Expense

Interest expense was $0.5 million for the six months ended June 30, 2012 compared with $0.4 million for the six months ended June 30, 2011.

Interest Income

Interest income was $0.07 million for the six months ended June 30, 2012, compared with $0.1 million for the six months ended June 30, 2011.

Other Expense

Other expense, net was $0.8 million for the six months ended June 30, 2012, primarily attributable to charges incurred in relation to the early repayment of our $10.0 million loan to the Hercules Funds.

Liquidity and Capital Resources

Since our inception in 2005, we have funded our operations primarily through proceeds from the private placement of convertible preferred stock, convertible debt, venture debt, bank debt and the proceeds from our IPO and FPOs. To date, we

 

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have not generated any revenue from the sale of products. We have incurred losses and generated negative cash flows from operations since inception. As of June 30, 2012, our cash and cash equivalents totaled $64.7 million and our marketable securities totaled $35.9 million.

In June 2012, we sold 3,400,000 shares of common stock at a public offering price of $14.75 per share, resulting in proceeds to us of approximately $47.0 million, net of underwriting discounts and commissions and other estimated offering expenses. In July 2012, the underwriters exercised their overallotment option to purchase an additional 393,085 shares at a public offering price of $14.75 per share, resulting in proceeds to us of approximately $5.5 million, net of underwriting discounts and commissions and other estimated offering expenses.

On March 28, 2012, we entered into a Loan and Security Agreement with Silicon Valley Bank, pursuant to which Silicon Valley Bank made a term loan to us on March 28, 2012 in the principal amount of $10.0 million. The Loan and Security Agreement provides for interest-only payments through February 28, 2013, with per annum interest of 6.75% and a final payment of $200,000. We also paid Silicon Valley Bank a commitment fee of $20,000 and associated legal fees of Silicon Valley Bank amounting to approximately $23,000. The proceeds of the term loan were used to repay our existing loan from the Hercules Funds.

The Loan and Security Agreement with Silicon Valley Bank provides that we shall repay the principal balance of the term loan in 36 equal monthly installments starting on March 1, 2013 and continuing through February 1, 2016. The remaining term loan principal balance and all accrued but unpaid interest will be due and payable on February 1, 2016. At our option, we may prepay all or any part of the outstanding term loan subject to a prepayment premium (defined in the Loan and Security Agreement).

Cash Flows

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

 

     Six months
ended June  30,
 
     2012     2011  
     (in thousands)  

Net cash provided by (used in):

    

Operating activities

   $ (19,010   $ (13,948

Investing activities

     10,232        (154

Financing activities

     47,144        57,541   

Effect of exchange rates on cash

     (23     —     
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

   $ 38,343      $ 43,439   
  

 

 

   

 

 

 

Net cash used in operating activities amounted to $19.0 million and $13.9 million for the six months ended June 30, 2012 and 2011, respectively. The primary use of cash in both periods was to fund our net operating losses, primarily related to the development of lomitapide.

Net cash provided by investing activities was approximately $10.2 million for the six months ended June 30, 2012, primarily due to net maturities of marketable securities. Net cash used in investing activities was approximately $0.2 million for the six months ended June 30, 2011 due to the purchase of property and equipment.

Net cash provided by financing activities was approximately $47.1 million for the six months ended June 30, 2012. The cash provided by financing activities for the six months ended June 30, 2012, primarily consisted of $47.0 million from the June 2012 FPO, $10.0 million of proceeds received from the Silicon Valley Bank Loan and $1.0 million of proceeds from the exercise of stock options. These sources of cash were offset in part by $10.0 million used to pay off outstanding debt and $0.9 million of loan termination costs. The cash provided by financing activities for the six months ended June 30, 2011 consisted of approximately $47.6 million of proceeds from the June 2011 FPO, $10.0 million proceeds received from the issuance of debt and $0.1 million of proceeds from the exercise of stock options, offset in part by the payment of approximately $0.2 million of deferred financing fees.

 

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Future Funding Requirements

We may need to raise additional capital to fund our operations and to develop and commercialize lomitapide. Our future capital requirements may be substantial, and will depend on many factors, including:

 

   

the decisions of the FDA and EMA with respect to our applications for marketing approval of lomitapide for the treatment of patients with HoFH in the United States and the European Union; the costs of activities related to the regulatory approval process; and the timing of approvals, if received;

 

   

the timing and cost of our anticipated clinical program of lomitapide in Japan for the treatment of adult patients with HoFH;

 

   

the timing and cost of an anticipated clinical trial to evaluate lomitapide for treatment of pediatric and adolescent patients (> 8 to < 18 years of age) with HoFH, and the cost and timing of such a trial;

 

   

the cost of establishing the sales and marketing capabilities necessary to be prepared for a potential commercial launch of lomitapide in HoFH, if approved;

 

   

the cost of filing, prosecuting and enforcing patent claims;

 

   

the costs of our manufacturing-related activities;

 

   

the costs associated with commercializing lomitapide if we receive marketing approval;

 

   

subject to receipt of marketing approval, the levels, timing and collection of revenue received from sales of approved products, if any, in the future; and

 

   

the timing and cost of our anticipated clinical trial of lomitapide for the treatment of adult patients with FC.

In November 2011, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission, which became effective in December 2011. This shelf registration statement permits us to offer, from time to time, any combination of common stock, preferred stock, debt securities and warrants of up to an aggregate of $125.0 million. In June 2012, we completed an underwritten public offering of 3,400,000 shares of common stock at a price to the public of $14.75 pursuant to our Form S-3 registration statement. The net proceeds to us from this offering were approximately $47.0 million, after deducting underwriting discounts and commissions and other estimated offering expenses. In July 2012, the underwriters exercised their overallotment option to purchase an additional 393,085 shares of common stock. The net proceeds to us from the issuance and sale of the over-allotment shares were approximately $5.5 million, after deducting underwriting discounts and commissions and other estimated offering expenses. We may also pursue opportunities to obtain additional external financing in the future through debt financing, lease arrangements related to facilities and capital equipment, collaborative research and development agreements, and license agreements.

If we are unable to obtain additional financing, we may be required to reduce the scope of our planned development, or sales and marketing efforts, which could harm our business, financial condition and operating results. The source, timing and availability of any future financing will depend principally upon equity and debt market conditions, interest rates and, more specifically, on our continued progress in our regulatory, development and commercial activities, and the extent of our commercial success. There can be no assurance that external funds will be available on favorable terms, if at all. To date, we have not generated any revenue from our development stage product candidates. We do not know when, or if, we will generate any revenue. We do not expect to generate significant revenue unless or until we obtain marketing approval of lomitapide and commercialize the product. We expect our continuing operating losses to result in increases in cash used in operations at least in 2012 and 2013 and potentially in subsequent years. Based on our current operating plan, we anticipate our existing cash, cash equivalents and marketable securities will be sufficient to enable us to maintain our currently planned operations, including our continued product development through the first quarter of 2014.

Off-Balance Sheet Arrangements

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. We do not have any derivative financial instruments.

 

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

Changes to Internal Controls Over Financial Reporting

There has been no change in internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

We are not currently subject to any material legal proceedings.

 

Item 1A. Risk Factors

We currently depend entirely on the success of our lead compound, lomitapide. We may not receive marketing approval for, or successfully commercialize, lomitapide for any indication.

We have no drug products for sale currently. Our business currently depends entirely on the successful development and commercialization of our product candidate, lomitapide. We have submitted an NDA and MAA for approval to market lomitapide in the United States and European Union, as an adjunct to a low-fat diet and other lipid-lowering therapies, to reduce cholesterol in adult patients with HoFH. The FDA has informed us that the NDA will be subject to standard review. We have not yet demonstrated an ability to obtain marketing approval for any product candidate. We are not permitted to market lomitapide or any other product candidate in the United States until we receive approval of an NDA from the FDA, or in any foreign countries until we receive the requisite approval from such countries. Obtaining approval of an NDA or MAA or any other filing for approval in a foreign country, is an extensive, lengthy, expensive and uncertain process, and the FDA or other regulatory authority may reject a filing or delay, limit or deny approval of lomitapide for many reasons, including:

 

   

we may not be able to demonstrate to the satisfaction of the FDA and regulatory authorities outside the United States that lomitapide is safe and effective for any indication;

 

   

the results of clinical trials may not meet the level of statistical significance or clinical significance required by the FDA and regulatory authorities outside the United States for approval;

 

   

the FDA or regulatory authorities outside the United States may disagree with the number, design, size, conduct or implementation of our clinical trials; may not find the data from preclinical studies and clinical trials sufficient to demonstrate that lomitapide’s clinical and other benefits outweigh its safety risks; or may disagree with our interpretation of data from preclinical studies or clinical trials and require that we conduct one or more additional trials;

 

   

the FDA or regulatory authorities outside the United States may not accept data generated at our clinical trial sites;

 

   

the FDA advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional preclinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;

 

   

the FDA or regulatory authorities outside the United States may require additional preclinical or clinical studies or other data prior to granting approval, and we may not be able to generate the required data on a timely basis if at all;

 

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the FDA or regulatory authorities outside the United States may impose limitations on approved labeling of lomitapide, such as requiring genotyping or otherwise narrowing the diagnosis criteria for HoFH thus limiting intended users;

 

   

the FDA may require a more onerous risk evaluation and mitigation strategy, or REMS, plan than we have proposed, as a condition of approval, or may otherwise disagree with our proposals to address risk mitigation and management;

 

   

the FDA or EMA may identify deficiencies in the manufacturing processes or in the facilities of our third party contract manufacturers, or may require us to manufacture additional registration batches or change our process or specifications;

 

   

we may not be able to validate our manufacturing process to the satisfaction of the FDA or EMA, or the FDA may not agree with our validation plan; or

 

   

the FDA or regulatory authorities outside the United States may change approval policies or adopt new regulations.

It is possible that the FDA or EMA may not consider the 56-week results of our 78-week single-arm, dose titration, open-label pivotal Phase III clinical trial of lomitapide in patients with HoFH to be sufficient for approval of lomitapide for this indication, or may not consider low density lipoprotein cholesterol, known as LDL-C lowering alone sufficient for approval without a showing of clinical outcome. For example, because the FDA normally requires two pivotal clinical trials to approve an NDA, the FDA may require that we conduct a second Phase III clinical trial if the FDA does not find the results of our pivotal Phase III trial to be sufficiently persuasive. Although the FDA and EMA have informed us that they are not opposed to our submitting an NDA and EMA based on the 56-week results of our 78-week Phase III clinical trial, it is possible that, the FDA or EMA may require us to conduct a second Phase III clinical trial, possibly using a different design. We have provided the 78-week safety data to the FDA. We expect to provide the 78-week safety and efficacy data to the EMA in the course of the EMA’s review of our MAA. While the 78-week data were consistent with the 56-week data, a requirement to include the 78-week efficacy data in an amendment to the NDA prior to approval might result in a delay in potential approval. If the FDA or EMA requires additional studies or trials, we would incur increased costs and delays in the marketing approval process, and may require us to expend more resources than we have available.

We are seeking marketing approval for lomitapide for the treatment of HoFH based on achieving surrogate endpoints in pivotal clinical testing, as opposed to demonstrating improved clinical outcomes. The absence of outcome data may limit market acceptance by physicians and patients of lomitapide, if approved.

Finally, any final labeling may be approved with limitations. For example, the FDA has stated that a phenotypic HoFH definition of patients with average fasting LDL-C greater than 300 mg/dL on maximally tolerated lipid lowering therapy closely resembles the severe refractory heterozygous familial hypercholesterolemia, or HeFH, population. The FDA or other regulatory authorities may require a narrow diagnosis criteria for HoFH which may reduce the addressable population. As a result, some of the patients who meet the phenotypic definition of HoFH may ultimately be considered to be outside the HoFH population, reducing the estimated addressable patients, and it may be more difficult for us to achieve or maintain profitability.

The FDA advisory committee may render an opinion on the NDA for lomitapide which is negative or may delay approval or limit lomitapide’s marketability and may confirm the FDA’s concerns, if any, or raise new concerns.

The FDA has informed us that it plans to convene an advisory committee in the fourth quarter of 2012 to review the NDA for lomitapide. The FDA is not bound by the recommendation of an advisory committee, which is composed of clinicians, statisticians and other experts, but it generally follows such recommendations. The advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional preclinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions. This may delay and increase the cost of the review process. Any delay in obtaining, or an inability to obtain, marketing approval could prevent us from commercializing lomitapide, generating revenue and achieving profitability.

 

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In earlier preclinical studies and clinical trials, lomitapide was associated with undesirable side effects, such as adverse gastrointestinal events, elevated liver enzymes and increases in mean hepatic fat levels. Patients in our pivotal Phase III clinical trial of lomitapide for the treatment of HoFH also experienced such undesirable side effects. Lomitapide may continue to cause such side effects or have other properties that could delay or prevent its marketing approval or result in adverse limitations in any approved labeling or on distribution and use of the product.

Undesirable side effects caused by lomitapide or any other product candidate that we develop could cause us, regulatory authorities or institutional review boards to interrupt, delay or halt clinical trials and could result in the delay or denial of marketing approval by the FDA or other regulatory authorities. In earlier studies conducted by us, researchers at the University of Pennsylvania, and Bristol Myers Squibb, or BMS, lomitapide was associated with undesirable side effects. We have also observed some of these side effects, in some cases, to a lesser extent, in our pivotal Phase III clinical trial of lomitapide for the treatment of patients with HoFH.

For example, in early Phase I and Phase II clinical trials of lomitapide conducted by BMS and the University of Pennsylvania, doses between 25 mg and 100 mg were associated with a very high rate of gastrointestinal adverse events, such as diarrhea, nausea and vomiting. Although we believe that the high rate of discontinuations in these early Phase I and Phase II clinical trials due to gastrointestinal adverse events resulted primarily from the failure to employ a dose escalation regimen, which is the gradual increase in dosing over time to allow the body to adapt to the impact of a higher dose, within the setting of a rigorous low-fat diet, this may not be the case. Patients in our pivotal Phase III clinical trial of lomitapide for the treatment of HoFH, where dose escalation has been employed, have also experienced adverse gastrointestinal events, but to a lesser extent than those experienced in earlier clinical trials. Even if lomitapide gains marketing approval, if marketing experience or future clinical trials demonstrate an increased risk of gastrointestinal side effects, lomitapide may not gain market acceptance over other drugs approved for the treatment of the same indications that do not have such side effects, and could be subject to adverse regulatory action by the FDA or foreign regulatory authorities.

A subset of patients in earlier Phase I and Phase II clinical trials of lomitapide experienced increased levels of liver enzymes, alanine transaminase, or ALT, and/or aspartate transaminase, or AST, an indicator of liver cell damage and, in some cases, liver toxicity. Increases in liver enzymes observed in these earlier clinical trials were typically greater with higher doses of lomitapide, but occurred in some cases at lower doses. For example, in a Phase II clinical trial of lomitapide for the treatment of patients with HoFH, clinically significant elevations in ALT, either alone or in combination with AST, were observed in three of six patients. In one patient, the dose of lomitapide was temporarily reduced per protocol, after which the transaminases returned to lower levels. The patient subsequently was able to resume the earlier, higher dose and continue to be escalated to the maximum dose. In the other two patients, transient elevations in ALT or ALT and AST returned to lower levels with continued treatment. In our pivotal Phase III clinical trial of lomitapide for the treatment of patients with HoFH, four patients experienced ALT and/or AST elevations of between five and eleven times the upper limit of normal. Of these four patients, three underwent a temporary dose reduction, and maintained study drug at a stable dose. One patient discontinued treatment for a period of seven weeks, after which time treatment was reinstated, and the patient was able to maintain a stable dose and complete the trial per protocol. No patients were removed from the 78-week trial due to liver function test elevations.

A subset of patients in earlier Phase I and Phase II clinical trials of lomitapide also experienced increases in mean hepatic fat levels. Although increases in hepatic fat in earlier clinical trials were typically greater with higher doses of lomitapide, increases also occurred in some cases at lower doses. For example, in a completed 12 week Phase II clinical trial of lomitapide, mean hepatic fat levels increased from week zero to week four, but then plateaued. In our pivotal Phase III clinical trial of lomitapide for the treatment of patients with HoFH, 22 patients who had hepatic fat measurements taken experienced an increase in hepatic fat from a mean of 1.0% to 9.0% at 26 weeks of treatment. Of the 23 patients that completed 78 weeks of treatment, 21 patients had hepatic fat measurements available for weeks 56 and 78. These 21 patients had a mean hepatic fat level of 7.3% at 56 weeks, and 8.2% at 78 weeks. The threshold for mild steatosis, a condition of hepatic fat accumulation, is in the range of 5 to 6% fat. Some studies suggest that patients who have hepatic steatosis that results from pre-existing conditions, such as obesity and type 2 diabetes, may be at an increased risk for more severe long-term liver consequences, such as hepatic inflammation and fibrosis. However, the consequences of hepatic steatosis that results from other factors, are unclear.

If lomitapide is approved, and marketing experience or future clinical trials demonstrate hepatic fat accumulation, significantly elevated liver enzymes or other liver-related side effects, lomitapide may not gain market acceptance over other drugs approved for the treatment of the same indications that do not have such side effects, and could be subject to adverse regulatory action by the FDA or foreign regulatory authorities.

In a two year dietary carcinogenicity study of lomitapide in mice, statistically significant increased incidences of tumors in the small intestine and liver were observed. The relationship of these findings in mice is uncertain with regard to

 

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human safety for a number of reasons including the fact that they did not occur in a dose-related manner, and liver tumors are common spontaneous findings in the strain of mice used in this study. In a two year oral carcinogenicity study of lomitapide in rats, there were no statistically significant increases in the incidences of any tumors. We submitted the results of both studies to the FDA in March 2011. As a result of these carcinogenicity data or carcinogenicity data from ongoing clinical trials, marketing approval could be delayed, limited or withdrawn.

Even if lomitapide or any other product candidate that we develop receives marketing approval, we or others may later identify additional safety information or known side effects or new undesirable side effects caused by the product, and, in that event, a number of potentially significant negative consequences could result, including:

 

   

regulatory authorities may suspend or withdraw their approval of the product;

 

   

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

 

   

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

 

   

regulatory authorities may issue negative publicity regarding the affected product, including safety communications;

 

   

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

 

   

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

 

   

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate, and could substantially increase commercialization costs.

We do not have a significant amount of manufacturing experience with lomitapide, and on-going validation and refinement of manufacturing processes could result in delays in regulatory approval or launch.

Given the rare nature of HoFH, we have not had to manufacture a significant amount of lomitapide drug substance for our clinical trials. As a result, we have only limited experience with the manufacturing process which was transferred to us from BMS during Phase II development. In producing our registration batches and in refining our commercial manufacturing process, we have tightened specifications for drug substance such that, if the FDA approves the specifications, the commercial drug substance will differ from the material used in the Phase III trial and from certain of our registration batches in certain physical parameters and specifications that we do not believe are clinically meaningful. The FDA and EMA may not agree with our assessment as to the nature of the changes, and may require us to change our specifications or to conduct bioequivalency studies. There is also the possibility that the FDA may require that we produce additional registration batches or that the FDA or EMA may require that additional manufacturing work be completed prior to approval, or may, in the course of inspection of manufacturing facilities, identify issues required to be resolved prior to approval. Any of these events, if they were to occur, might delay approval of lomitapide or result in significant additional expenses or both. There is no guarantee we will be able to satisfy the requirements of the FDA or EMA. We will have to manufacture three consecutive lots of drug substance and drug product that meet certain validation criteria, including a requirement that the product have been manufactured in accordance with cGMP, in order to validate our manufacturing process. If any of our validation batches fails, or if the FDA or EMA does not agree with our specifications or we are unable to reproducibly meet the specifications contained in the NDA or MAA, we may have to manufacture additional validation batches which may, depending on the timing of such events if they were to occur, result in a delay in having product available for commercial distribution, if lomitapide is approved, and we may incur significant additional costs in connection with such activities. In light of the FDA’s designation of our NDA for standard review, our goal is to be in a position to complete all three validation batches prior to NDA approval. We may not be successful in this effort. We have proposed to the FDA a validation plan for our manufacturing process which would give us the option to conduct concurrent validation which permits the concurrent release and commercial distribution, once lomitapide is approved, of each successful validation batch once completed. The FDA may not agree with our validation plan, and, even if our NDA is approved, may require us to wait to distribute product commercially until all three successful consecutive validation batches have been completed. Any delay or technical hurdle in our validation work may delay approval or the availability of product for launch, and may result in additional expense.

 

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The numbers of patients suffering from HoFH is small, and has not been established with precision. If the actual number of patients is smaller than we estimate or if any approval that we obtain is based on a narrower definition of these patient populations, our revenue and ability to achieve profitability will be adversely affected, possibly materially.

There is no patient registry or other method of establishing with precision the actual number of patients with HoFH in any geography. Medical literature has historically reported the prevalence rate of genotypic HoFH as one person in a million. However, we believe that many physicians use a broader definition of HoFH that includes patients diagnosed through phenotypic criteria. In 2010, we commissioned L.E.K. Consulting LLC, or LEK, to prepare a commercial assessment of the HoFH market for us. In its report, LEK estimated that the total number of patients likely to seek treatment with symptoms consistent with HoFH in each of the United States and, collectively Germany, the United Kingdom, France, Italy, and Spain, which we refer to as the European Union Five, is approximately 3,000 patients, or a combined total of approximately 6,000 patients. LEK’s estimates, however, include severe HeFH patients whose levels of LDL-C are not controlled by current therapies. These patients may be phenotypically indistinct from HoFH patients. The indication in the proposed label included in our NDA for lomitapide is HoFH. The total addressable market opportunity for lomitapide for the treatment of patients with HoFH will ultimately depend upon, among other things, the diagnosis criteria, if any, included in the final label for lomitapide, if it is approved, acceptance by the medical community, patient access, product pricing, and reimbursement. If the actual number of HoFH patients is lower than we believe or if any approval that we obtain is based on a narrower definition of these patient populations, then the potential markets for lomitapide for these indications will be smaller than we anticipate. For example, the FDA has stated that a HoFH definition of patients with average fasting LDL-C greater than 300 mg/dL on maximally tolerated lipid lowering therapy closely resembles the severe refractory heterozygous familial hypercholesterolemia population. As a result, some of the patients who meet this definition may ultimately be considered to be outside the HoFH population, reducing the estimated addressable patients, and, as a result, it may be more difficult for us to achieve or maintain profitability.

In addition, we are currently seeking approval of lomitapide initially for the treatment of patients with HoFH who are 18 years of age or older. To support approval for younger patients, we plan to initiate a Phase III clinical trial of lomitapide for the treatment of pediatric and adolescent patients (> 8 to < 18 years of age) with HoFH in 2013, but we do not expect to submit a supplemental NDA to expand our labeling to include this patient population prior to 2015. As a result, any FDA approval would, at least initially, be limited to use for treating adult patients with lomitapide. This will limit our initial product revenue, and may make it more difficult for us to achieve or maintain profitability.

We will not be permitted to promote lomitapide for uses that are not approved by the FDA or regulatory authorities in a given country, as reflected in the approved labeling or other prescribing information.

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

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

The market for lipid lowering therapeutics is large and competitive with many applicable drug classes. However, lomitapide, if approved, will be focused, at least initially, on HoFH, a niche orphan market where lomitapide will be positioned for use in combination with existing approved therapies, such as statins, to provide incremental efficacy in this currently underserved patient population. We believe that lomitapide will face distinct competition for the treatment of HoFH. Although there are no MTP-I compounds currently approved by the FDA for the treatment of hyperlipidemia, we are aware of other MTP-I compounds in early stage clinical trials, and of other pharmaceutical companies that are developing the following product candidates that may compete with lomitapide in the treatment of HoFH:

 

   

Mipomersen—Isis Pharmaceuticals, Inc., or Isis, and its collaboration partner, Genzyme Corporation, or Genzyme, now part of Sanofi-Aventis, or Sanofi, are developing an antisense apolipoprotein B-100 inhibitor, mipomersen, as a weekly subcutaneous injection for lowering high cholesterol, LDL-C and apolipoprotein B. Isis and Genzyme have completed four Phase III clinical trials for this product candidate. Genzyme submitted an MAA to the EMA in July 2011 seeking approval of mipomersen for the treatment of HoFH and severe HeFH in the European Union. Genzyme submitted an NDA to the FDA in March 2012 seeking approval for mipomersen for the treatment of HoFH in the United States.

 

   

PCSK9 Defects—Several companies, including Regeneron Pharmaceuticals, Inc. or Regeneron, in collaboration with Sanofi, Roche Holding AG, Amgen and Alnylam, are developing molecules that attempt to mimic the impact observed in patients with defects in their PCSK9 gene. Such patients have lower LDL-C levels and an

 

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observed reduction in cardiovascular events, and some believe that medicines that duplicate this behavior may effectively reduce LDL-C levels with a similar benefit. In 2011, Regeneron and Sanofi announced positive results from Phase II clinical trials of its anti-PCSK9 antibody in patients with HeFH and primary hypercholesterolemia. In July 2012, Regeneron and Sanofi announced commencement of patient enrollment for a 22,000 patient Phase III clinical program to evaluate its anti-PCSK9 antibody in several patient populations including those with HeFH and primary hypercholesterolemia and indicated that the product could receive approval as early as 2015.

If we obtain marketing approval of lomitapide for the treatment of patients with HoFH in the United States, and Genzyme and Isis obtain marketing approval of mipomersen for the treatment of patients with HoFH in the United States, lomitapide would compete in the same market with mipomersen. If Isis and Genzyme obtain marketing approval of mipomersen for the treatment of patients with HoFH in any country prior to us, they could obtain a competitive advantage associated with being the first to market.

In connection with obtaining marketing approval for mipomersen, Isis and Genzyme will also obtain orphan drug exclusivity for mipomersen, but we do not believe that orphan drug exclusivity for mipomersen would have an adverse effect on our business as mipomersen and lomitapide are different drugs under FDA rules, and any exclusivity applicable to either drug will not apply to the other drug. Thus, because mipomersen is a different drug than lomitapide, we could obtain both approval and orphan drug exclusivity for lomitapide even if Isis and Genzyme have already obtained orphan drug exclusivity for mipomersen. Isis and Genzyme could obtain both approval and orphan drug exclusivity for mipomersen even if we have already obtained orphan drug exclusivity for lomitapide.

Similarly, in the European Union, notwithstanding the fact that the EMA has granted lomitapide orphan drug designation for the treatment of FC, if a competitor subsequently obtains approval and market exclusivity for its orphan designated drug for the treatment of FC, our marketing application for FC would not be accepted, and we would be excluded from the market only if lomitapide was a “similar medicinal product” to our competitor’s product. In the European Union, a drug is a “similar medicinal product” if it contains a “similar active substance” or substances and is intended for the same therapeutic indication. A “similar active substance” is an identical active substance, or an active substance with the same principal molecular structural features and which acts via the same mechanism.

We are also aware of the following products that are approved or being developed to treat FC and conditions similar to FC:

 

   

DGAT-1 Inhibition—Novartis International AG, or Novartis, is developing an inhibitor of diacylglycerol acyltransferase-1 (DGAT-1) for the treatment of FC, and In June 2012 initiated a Phase III clinical trial of its product candidate, LCQ908, in this indication.

 

   

Glybera ® (alipogene tipavovec)—In July 2012, Glybera, a gene therapy, was approved by the EMA as a treatment for lipoprotein lipate deficiency (LPLD), a very rare inherited condition that is associated with increased levels of chylomicrons.

Many of our potential competitors have substantially greater financial, technical and human resources than we do, and significantly greater experience in the discovery and development of drug candidates, obtaining FDA and other regulatory approvals of products and the commercialization of those products. Accordingly, our competitors may be more successful than we may be in obtaining FDA and other marketing approvals for drugs and achieving widespread market acceptance. Our competitors’ drugs may be more effective, or more effectively marketed and sold, than any drug we may commercialize, and may render lomitapide or any other product candidate that we develop obsolete or non-competitive before we can recover the expenses of developing and commercializing the product. We anticipate that we will face intense and increasing competition as new drugs enter the market and advanced technologies become available. Finally, the development of new treatment methods for the diseases we are targeting could render lomitapide or any other product candidate that we develop non-competitive or obsolete.

We may not be able to generate enough revenue to cover our operating costs due to pricing or demand issues for lomitapide.

In 2007, the FDA granted lomitapide “orphan drug” status for the treatment of HoFH. “Orphan drug” designation is generally given to drugs that treat a rare disease or condition, defined, in part, as a patient population of fewer than 200,000 in the United States. There is no patient registry or other method of establishing with precision the actual number of patients with HoFH in any geography. Medical literature has historically reported the prevalence rate of genotypic HoFH as one person in a million. We believe that many physicians use a broader definition of HoFH that includes patients diagnosed through phenotypic criteria. In a report that we commissioned, LEK estimated that the total number of patients with

 

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symptoms consistent with HoFH in each of the United States and the European Union Five is approximately 3,000 patients, or a combined total of approximately 6,000 patients. LEK’s estimates, however, include severe HeFH patients whose levels of LDL-C are not controlled by current therapies. These patients may be phenotypically indistinct from HoFH patients. The indication in the proposed label included in our NDA for lomitapide is HoFH. The FDA or EMA may define the HoFH population in ways that further narrow the patient population, including by requiring genetic testing. The total addressable market opportunity for lomitapide for the treatment of patients with HoFH will ultimately depend upon, among other things, the diagnosis criteria included in the final label for lomitapide, if it is approved, acceptance by the medical community, patient access, product pricing, the presence of competitive products, and reimbursement.

Regardless, with such a small potential patient market, we will need to set and charge a price for lomitapide that is significantly higher than that of most pharmaceuticals in order to generate enough revenue to fund our operating costs. The on-going sovereign debt crisis and the macroeconomic climate in the European Union may adversely affect our ability to set and charge a sufficiently high price to generate adequate revenue in those markets. In addition, we may face pricing pressure in the United States, European Union and other territories as a result of prices charged for competitive products.

We are planning to provide lomitapide in countries, such as France, that allow use of a drug before it has obtained marketing approval in such country. If approval is granted for such use of lomitapide in any country, we may provide lomitapide free of charge in such country, at least initially. We plan to do this in France if our planned “cohort” ATU filing is approved. If we seek reimbursement for lomitapide in any such country, a price level will be negotiated for lomitapide. Such negotiations may not result in a price acceptable to us, in which case we may elect to not pursue distribution of lomitapide in such country prior to approval or we may curtail distribution. Further, any negotiated price may adversely affect the market prices in other countries or jurisdictions where we may sell lomitapide if it is lower than the price that would have otherwise been set in such geographies.

If our estimate regarding the number of patients in the United States or the European Union is too high, or if our estimates of patient adherence to lomitapide use, or if our estimates about the achievable per-dose price for lomitapide are too high, or if reimbursement is not available or available only to limited levels, we may not be able to generate sufficient revenue to meet our operating costs in the timeframe that we expect, or at all.

Failures or delays in the commencement or completion of clinical testing could result in increased costs to us and delay, prevent or limit our ability to generate revenue

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

 

   

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

 

   

delays in reaching or failing to reach agreement on acceptable terms with prospective contract research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

   

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

 

   

difficulties obtaining institutional review board, or IRB, approval to conduct a clinical trial at a prospective site;

 

   

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

 

   

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

 

   

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

Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRBs at the sites where the IRBs are overseeing a trial, or a data safety monitoring board overseeing the clinical trial at issue, or other regulatory authorities due to a number of factors, including:

 

   

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

 

   

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

 

   

unforeseen safety issues or lack of effectiveness; and

 

   

lack of adequate funding to continue the clinical trial.

 

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Enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize lomitapide or any other product candidate that we develop and affect the prices we may obtain.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for lomitapide or any other product candidate that we develop, restrict or regulate post-approval activities and affect our ability to profitably sell lomitapide or any other product candidate for which we obtain marketing approval.

Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of lomitapide, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for drugs. In addition, this legislation authorized Medicare Part D prescription drug plans to use formularies where they can limit the number of drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products, and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.

More recently, in March 2010, President Obama signed into law the Health Care Reform Law, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Effective October 1, 2010, the Health Care Reform Law revised the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states. Further, beginning in 2011, the new law imposed a significant annual fee on companies that manufacture or import branded prescription drug products. We do not know the full effects that the Health Care Reform Law will have on our commercialization efforts, if lomitapide is approved. Although it is too early to determine the effect of the Health Care Reform Law, the law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

Even if lomitapide or any other product candidate that we develop receives marketing approval, we will continue to face extensive regulatory requirements and the product may still face future development and regulatory difficulties.

Even if marketing approval is obtained, a regulatory authority may still impose significant restrictions on a product’s indications, conditions for use, distribution or marketing or impose ongoing requirements for potentially costly post-market surveillance, post-approval studies or clinical trials. For example, any labeling ultimately approved by the FDA for lomitapide, if it is approved for marketing, may include restrictions on use, such as limitations on how HoFH is defined and diagnosed or limiting lomitapide to second-line therapy. In addition, the labeling may include restrictions based upon evidence of hepatic fat accumulation, liver function test elevations, gastrointestinal distress, phospholipidosis or carcinogenicity. Lomitapide will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, advertising, distribution, promotion, recordkeeping and submission of safety and other post-market information, including adverse events, and any changes to the approved product, product labeling, or manufacturing process. The FDA has significant post-market authority, including, for example, the authority to require labeling changes based on new safety information, and to require post-market studies or clinical trials to evaluate serious safety risks related to the use of a drug. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current Good Manufacturing Practice, or cGMP, and other regulations.

We have included a proposal for a REMS program and a patient registry as part of our NDA submission for lomitapide in the treatment of HoFH. The FDA has the authority to require a more stringent REMS plan or patient registry as part of an NDA or after approval. In particular, the FDA may require that the REMS plan address the FDA’s concern that lomitapide

 

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not be used in broader patient populations with less severely elevated lipid levels because of the potentially different risk/benefit profile of the drug. For example, the FDA has stated that a phenotypic HoFH definition of patients with average fasting LDL-C greater than 300 mg/dL on maximally tolerated lipid lowering therapy closely resembles the severe refractory heterozygous familial hypercholesterolemia population.

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

 

   

issue warning letters or untitled letters;

 

   

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

 

   

suspend or withdraw marketing approval;

 

   

suspend any ongoing clinical trials;

 

   

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

 

   

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

 

   

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

 

   

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

Even if lomitapide or any other product candidate that we develop receives marketing approval in the United States, we may never receive approval or commercialize lomitapide or any other product candidate outside of the United States.

In order to market any product outside of the United States, we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials and commercial sales, pricing and distribution of the product. Approval procedures vary among countries, and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The marketing approval process in other countries may include all of the risks detailed above regarding FDA approval in the United States as well as other risks. In particular, in many countries outside the United States, it is required that a product receives pricing and reimbursement approval before the product can be commercialized. This can result in substantial delays in such countries.

Marketing approval in one country does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one country may have a negative effect on the regulatory process in others. Failure to obtain marketing approval in other countries or any delay or setback in obtaining such approval would impair our ability to develop foreign markets for lomitapide. Similarly, any significant differences between the requirements imposed by the FDA and EMA with respect to regulatory approval of lomitapide might delay approval or launch in the United States and the European Union. Any such differences may reduce our target market and limit the full commercial potential of lomitapide. Many countries are undertaking cost-containment measures that could affect pricing or reimbursement of lomitapide.

If we receive marketing approval for lomitapide or any other product candidate, our sales will be limited unless the product achieves broad market acceptance for these indications.

The commercial success of lomitapide and any other product candidate for which we obtain marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of the product by the medical community, including physicians, patients and healthcare payors. The degree of market acceptance of any approved product will depend on a number of factors, including:

 

   

the scope of approved indication and limitations or warnings contained in the product’s approved labeling;

 

   

distribution and use restrictions imposed by the FDA or other regulatory authorities or agreed to by us as part of a REMS plan or other risk management plan;

 

   

demonstration of clinical safety and efficacy compared to other products;

 

   

the prevalence and severity of any adverse side effects;

 

   

the relative convenience and ease of administration;

 

   

availability of alternative treatments, including, in the case of lomitapide, a number of competitive products already approved for the treatment of hyperlipidemia or expected to be commercially launched in the near future;

 

   

pricing and cost effectiveness;

 

   

the effectiveness of the sales, marketing and distribution strategies;

 

   

our ability to obtain sufficient third-party coverage or reimbursement; and

 

   

the willingness of patients to pay out of pocket in the absence of third-party coverage.

 

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We are seeking marketing approval for lomitapide for the treatment of HoFH based on achieving surrogate endpoints in pivotal clinical testing, as opposed to demonstrating improved clinical outcomes. The absence of outcome data on lomitapide, if approved, may limit market acceptance by physicians, patients and third party payors.

If lomitapide or any other product candidate that we develop is approved, but does not achieve an adequate level of acceptance by physicians, healthcare payors and patients, we may not generate sufficient revenue from the product, and we may not become or remain profitable. In addition, our efforts to educate the medical community and third-party payors on the benefits of the product may require significant resources, and may never be successful.

The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. If we are found to have promoted off-label uses, we may become subject to significant liability.

The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling or other prescribing information. In particular, any labeling approved by the FDA for lomitapide may include restrictions on use, such as limitations on how HoFH is defined and diagnosed or limiting lomitapide to second-line therapy. The FDA may impose further requirements or restrictions on the distribution or use of lomitapide as part of a REMS plan. We have included a proposal for a REMS program as part of our NDA submission for lomitapide in the treatment of HoFH. If we receive marketing approval for lomitapide, physicians may nevertheless prescribe lomitapide to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.

It will be difficult for us to profitably sell lomitapide or any other product for which we obtain marketing approval if reimbursement for the product is limited.

Market acceptance and sales of lomitapide or any other product candidate that we develop will depend on reimbursement policies and may be affected by healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that reimbursement will be available for lomitapide or any other product that we develop and, if reimbursement is available, the level of reimbursement. Reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. Obtaining reimbursement for lomitapide at all or at levels satisfactory to us may be particularly difficult because of the higher prices often associated with drugs directed at orphan populations, and the pricing of therapies, such as apheresis, or competitive products that may be deemed to be interchangeable or clinically equivalent to lomitapide by payers. In addition, third-party payors are likely to impose strict requirements for reimbursement in order to limit off label use of a higher priced drug. If reimbursement is not available or is available only to limited levels, we may not be able to successfully commercialize lomitapide or any other product candidate that we develop.

If we are unable to establish sales and marketing capabilities to market and sell lomitapide, we may be unable to generate product revenue.

We have begun hiring a sales and marketing team in the United States and the European Union, but we do not currently have a fully developed organization for the sale, marketing or distribution of pharmaceutical products. We have not yet demonstrated an ability to commercialize any product candidate. In order to market any products that may be approved by the FDA or any other regulatory authority, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. If lomitapide is approved by the FDA or the EMA, we plan to continue building a commercial infrastructure to launch lomitapide in the United States and the European Union, as the case may be, with a relatively small specialty sales force. The establishment and development of our commercial infrastructure will be expensive and time consuming, and we may not be able to successfully develop this capability. We expect to incur expenses prior to product launch in recruiting and hiring a sales force and developing a marketing and sales infrastructure. If the commercial launch of lomitapide is delayed as a result of FDA or EMA requirements or other reasons, we would incur these expenses prior to being able to realize any revenue from product sales. Even if we are able to

 

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effectively hire a sales force and develop a marketing and sales infrastructure, our sales force may not be successful in commercializing lomitapide or any other product candidate that we develop. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate product revenue and may not become profitable.

We are evaluating markets outside the United States and European Union to determine in which geographies we might choose to commercialize lomitapide ourselves, if approved, and in which geographies we might choose to collaborate with third parties. To the extent we rely on third parties to commercialize lomitapide, if marketing approval is obtained, we may receive less revenue than if we commercialized the product ourselves. In addition, we would have less control over the sales efforts of any third parties involved in our commercialization efforts. In the event we are unable to collaborate with a third-party marketing and sales organization to commercialize lomitapide, for certain geographies, our ability to generate product revenue may be limited internationally.

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

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

Changes in regulatory requirements and guidance or unanticipated events during our clinical trials may occur, as a result of which we may need to amend clinical trial protocols. Amendments may require us to resubmit our clinical trial protocols to IRBs for review and approval, which may impact the cost, timing or successful completion of a clinical trial. If we experience delays in completion of, or if we terminate, any of our clinical trials of lomitapide populations, the commercial prospects for lomitapide may be harmed.

If we pursue development of lomitapide for broader patient populations, we likely will be subject to stricter regulatory requirements, product development will be more costly and commercial pricing for any approved indication would likely be lower.

Although we have no near-term plans to develop lomitapide for the treatment of any indications other than HoFH and FC, we believe that lomitapide may be useful for the treatment of elevated lipid levels in broader patient populations. Our potential development and commercialization of lomitapide in these broader patient populations would be more costly than for HoFH and FC, and would be subject to development and commercialization risks that are not applicable to HoFH and FC.

Clinical development of lomitapide in broader patient populations would involve clinical trials with larger numbers of patients possibly taking the drug for longer periods of time. This would be costly and could take many years to complete. In addition, we believe that the FDA and, in some cases, the EMA would require a clinical outcomes study, for example, demonstrating a reduction in cardiovascular events in broader patient populations, either prior to or after the submission of an application for marketing approval for these broader indications. Clinical outcomes studies are particularly expensive and time consuming to conduct because of the larger number of patients required to establish that the drug being tested has the desired effect. It may also be more difficult for us to demonstrate the desired outcome in these studies than to achieve validated surrogate endpoints, such as the primary efficacy endpoint of our pivotal Phase III clinical trial of lomitapide for the treatment of patients with HoFH of percent change in LDL-C levels from baseline. In addition, in considering approval of lomitapide for broader patient populations with less severely elevated lipid levels, the FDA and other regulatory authorities may place greater emphasis on the side effect and risk profile of the drug in comparison to the drug’s efficacy and potential clinical benefit than in smaller, more severely afflicted patient populations. These factors may make it more difficult for us to achieve marketing approvals of lomitapide for these broader patient populations.

If we are able to successfully develop and obtain marketing approval of lomitapide in these broader patient populations, we likely will not be able to obtain the same pricing level that we secure for use of lomitapide for orphan indications. The pricing of some drugs intended for orphan populations is often related to the size of the patient population, with smaller patient populations often justifying higher prices. If the pricing for lomitapide is lower in broader patient populations, we

 

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may not be able to maintain higher pricing in the population of more severely afflicted patients. This would lead to a decrease in revenue from sales to more severely afflicted patients, and could make it more difficult for us to achieve or maintain profitability.

In addition, if one of our product candidates receives marketing approval for a broader indication than its orphan designation, we may not be able to maintain any orphan drug exclusivity that we obtain or such orphan drug exclusivity may be circumvented by a third-party competitor.

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

We have obtained orphan drug designation for lomitapide in the United States for the treatment of HoFH. In March 2011, the FDA granted lomitapide orphan drug designation for the treatment of FC. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, defined, in part, as a patient population of fewer than 200,000 in the United States.

In the United States, the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the FDA from approving another application, including a full NDA, to market the same drug for the same orphan indication, except in very limited circumstances. For purposes of small molecule drugs, the FDA defines “same drug” as a drug that contains the same active molecule and is intended for the same use as the drug in question. A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.

The EMA grants orphan drug designation to promote the development of products that may offer therapeutic benefits for life-threatening or chronically debilitating conditions affecting not more than five in 10,000 people in the European Union. Orphan drug designation from the EMA provides ten years of marketing exclusivity following drug approval, subject to reduction to six years if the designation criteria are no longer met. In October 2010, we withdrew our application to the EMA for orphan drug designation for lomitapide for the treatment of HoFH based on guidance we received from the EMA that lomitapide is not eligible for orphan drug designation for this indication since the EMA views the relevant condition, for orphan drug purposes, to include HoFH and HeFH. The EMA has granted lomitapide orphan drug designation for the treatment of FC. Our failure to obtain orphan drug designation for lomitapide for the treatment of HoFH in the European Union means that we will not have the benefit of the orphan drug market exclusivity for this indication in the European Union, and, as a result, will need to rely on our intellectual property rights and other exclusivity provisions. Our European patents directed towards the composition of matter of lomitapide are scheduled to expire in 2016, and may additionally qualify for a supplemental certificate that would provide extended patent protection for up to five years after patent expiration upon marketing approval in the European Union. In addition, lomitapide qualifies as a new chemical entity in the European Union. In the European Union, new chemical entities qualify for eight years of data exclusivity upon marketing authorization and an additional two years of market exclusivity. This data exclusivity, if granted, prevents regulatory authorities in the European Union from assessing a generic application for eight years, after which generic marketing authorization can be submitted but not marketed for two years. If we do not obtain protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent terms and obtaining data exclusivity for our product candidates, our business may be materially harmed.

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

In June 2007, the FDA instituted a partial clinical hold with respect to clinical trials of longer than six months duration for our MTP-I product candidates. Although the partial clinical hold was lifted with respect to lomitapide, it remains in effect with respect to implitapide. The FDA may still have the same concerns that resulted in this clinical hold.

In June 2007, we received notice from the FDA of a partial clinical hold with respect to clinical trials of longer than six months duration for our MTP-I product candidates. The FDA issued such notices to all sponsors of MTP-I compounds. At that time, the FDA did not apply this partial clinical hold to our pivotal Phase III clinical trial of lomitapide for the treatment of patients with HoFH. In connection with the partial clinical hold, the FDA requested that we collect additional preclinical

 

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data to assess the risk for pulmonary phospholipidosis, with long-term use of these compounds. We understand that the FDA has undertaken a broader initiative to understand phospholipidosis in those drugs commonly evidencing this phenomenon, typically characterized as cationic (positively charged) and lipophilic (soluble in lipids). MTP-I compounds are both cationic and lipophilic.

In connection with the partial clinical hold, the FDA requested that we conduct a three month, repeat-dose rat toxicology study that included a recovery group and a sufficient number of active doses to establish the level of exposure at which there is no biologically or statistically significant increase in the frequency or severity of pulmonary phospholipidosis, which is commonly referred to as the no observable adverse effect level. The FDA also requested an electron microscopy lung tissue analysis. We submitted the requested preclinical data for lomitapide in December 2008, and the FDA removed the partial clinical hold with respect to lomitapide in February 2010. The partial clinical hold remains in effect with respect to implitapide, an MTP-I product candidate that we have rights to through a license from Bayer Healthcare AG.

If we decide to advance the clinical development of implitapide, we may have to perform additional preclinical studies to satisfy the FDA’s concerns related to pulmonary phospholipidosis which may result in significant increases in estimated time and expense of development. Furthermore, notwithstanding that the FDA has removed the partial clinical hold with respect to lomitapide, if the FDA has further or renewed concerns regarding pulmonary phospholipidosis, it could raise this issue as part of the NDA review process for lomitapide, which could delay or prevent marketing approval of lomitapide or result in adverse limitations in any approved labeling or on distribution and use of the product.

Recent federal legislation and actions by state and local governments may permit re-importation of drugs from foreign countries into the United States, including foreign countries where the drugs are sold at lower prices than in the United States, which could materially adversely affect our operating results and our overall financial condition.

We may face competition in the United States for lomitapide or any other product candidate, if approved, from lower priced products from foreign countries that have placed price controls on pharmaceutical products. This risk may be particularly applicable to drugs such as lomitapide that are formulated for oral delivery and expected to command a premium price. The MMA contains provisions that may change U.S. importation laws and expand pharmacists’ and wholesalers’ ability to import lower priced versions of an approved drug and competing products from Canada, where there are government price controls. These changes to U.S. importation laws will not take effect unless and until the Secretary of Health and Human Services certifies that the changes will pose no additional risk to the public’s health and safety, and may result in a significant reduction in the cost of products to consumers. The Secretary of Health and Human Services has not yet announced any plans to make this required certification.

A number of federal legislative proposals have been made to implement the changes to the U.S. importation laws without any certification, and to broaden permissible imports in other ways. Even if the changes do not take effect, and other changes are not enacted, imports from Canada and elsewhere may continue to increase due to market and political forces, and the limited enforcement resources of the FDA, U.S. Customs and Border Protection and other government agencies. For example, Pub. L. No. 112-74, which was signed into law in December 2011 and provides appropriations for the Department of Homeland Security for the 2012 fiscal year, expressly prohibits U.S. Customs and Border Protection from using funds to prevent individuals from importing from Canada less than a 90-day supply of a prescription drug for personal use, when the drug otherwise complies with the Federal Food, Drug, and Cosmetic Act. Further, several states and local governments have implemented importation schemes for their citizens, and, in the absence of federal action to curtail such activities, we expect other states and local governments to launch importation efforts.

The importation of foreign products that compete with lomitapide or any other product candidate for which we obtain marketing approval could negatively impact our revenue and profitability, possibly materially.

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

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

 

   

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

 

   

impairment of our business reputation and exposure to adverse publicity;

 

   

increased warnings on product labels;

 

   

withdrawal of clinical trial participants;

 

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costs of related litigation;

 

   

distraction of management’s attention from our primary business;

 

   

substantial monetary awards to patients or other claimants;

 

   

loss of revenue; and

 

   

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

We have obtained product liability insurance coverage for our clinical trials with a $10.0 million annual aggregate coverage limit. However, our insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If and when we obtain marketing approval for lomitapide or any other product candidate, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain this product liability insurance on commercially reasonable terms. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. The cost of any product liability litigation or other proceedings, even if resolved in our favor, could be substantial. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

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

We plan to seek approval to market lomitapide ourselves in certain countries outside the United States, and to enter into agreements with third parties for the commercialization of lomitapide in other international markets. If we do so, we would be subject to additional risks related to entering into international business relationships, including:

 

   

differing regulatory requirements for drug approvals in foreign countries;

 

   

potentially reduced protection for intellectual property rights;

 

   

the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a foreign market, with low or lower prices, rather than buying them locally;

 

   

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

   

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

 

   

compliance with tax, employment, immigration and labor laws for employees traveling abroad;

 

   

foreign taxes;

 

   

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

 

   

workforce uncertainty in countries where labor unrest is more common than in the United States;

 

   

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

 

   

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

These and other risks of international business relationships may materially adversely affect our ability to attain or sustain profitable operations.

 

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

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

 

   

The federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid.

 

   

The federal False Claims Act imposes criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government.

 

   

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

 

   

The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services.

 

   

The federal transparency requirements under the Health Care Reform Law requires manufacturers of drugs, devices, biologics, and medical supplies to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests.

 

   

Analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by state governments and non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures and drug pricing.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations could be costly. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations, including activities conducted by our sales team, are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

We are transitioning our business to focus on the commercialization of our products, and we may require third-party relationships to enable this transition, which may have an adverse effect on our business.

We will need to continue to transition from a company with a development focus to a company capable of supporting commercial activities. We may not be successful in such a transition. We have not yet demonstrated an ability to obtain marketing approval for or commercialize a product candidate. As a result, we may not be as successful as companies that have previously obtained marketing approval for drug candidates and commercially launched drugs. To maximize the commercial potential of lomitapide, if approved, we may need to find collaborative partners to help market and sell the product in certain geographic locations outside of the United States and the major market countries in the European Union. If we do secure such collaborations, we will be reliant on one or more of these strategic partners to generate revenue on our behalf.

There are risks involved with both establishing our own sales and marketing capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

 

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Factors that may inhibit our efforts to commercialize our products include:

 

   

our inability to recruit and retain adequate numbers of effective sales and marketing personnel;

 

   

the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products;

 

   

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

 

   

unforeseen costs and expenses associated with creating an independent sales and marketing organization.

If we enter into arrangements with third parties to perform sales, marketing or distribution services, our product revenues or the profitability of these product revenues to us are likely to be lower than if we were to market and sell any products that we develop ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell and market our product candidates or doing so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.

Risks Related to Our Intellectual Property

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

Our lomitapide patent portfolio consists of five issued U.S. patents and issued patents in parts of Europe, Canada, Israel, Australia, New Zealand and Japan and pending applications in the U.S., Europe, Australia, Japan, Canada, India and South Korea, all of which have been licensed to us in a specific field. The issued U.S. patents are scheduled to expire between 2013 and 2027. The U.S. patent covering the composition of matter of lomitapide is scheduled to expire in 2015. The non-U.S. patents directed to the composition of matter of lomitapide are scheduled to expire in 2016. Our commercial success will depend significantly on our ability to obtain additional patents and protect our existing patent position as well as our ability to maintain adequate protection of other intellectual property for our technologies, product candidates and any future products in the United States and other countries. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. Our ability to use the patents and patent applications licensed to us and described above to protect our business will also depend on our ability to comply with the terms of the applicable licenses and other agreements. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries.

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

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

 

   

we will be able to successfully commercialize our products before some or all of our relevant patents expire;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

Depending upon the timing, duration and specifics of FDA marketing approval, if any, of lomitapide, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. Our U.S. composition of matter patent for lomitapide is scheduled to expire in 2015, and we plan to seek patent term extension for this patent or one of our other patents related to lomitapide. We also plan to apply for restorations or extensions of the term of certain patents outside the U.S. in those countries where such a mechanism is available. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced, possibly materially.

In addition, we believe that lomitapide is a new chemical entity in the United States and may be eligible for data exclusivity under the Hatch-Waxman Amendments. A drug can be classified as a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety. Under sections 505(c)(3)(E)(ii) and 505(j)(5)(F)(ii) of the FDCA, as amended, a new chemical entity that is granted marketing approval may, even in the absence of patent protections, be eligible for five years of data exclusivity in the United States following marketing approval, which period is reduced to four years if certain patents covering the new chemical entity or its method of use are challenged by a generic applicant. This data exclusivity, if granted, would preclude submission during the exclusivity period of 505(b)(2) applications or abbreviated new drug applications submitted by another company that references the new chemical entity application. In the European Union, new chemical entities qualify for eight years of data exclusivity upon marketing authorization and an additional two years of market exclusivity. This data exclusivity, if granted, prevents regulatory authorities in the European Union from assessing a generic application for eight years, after which generic marketing authorization can be submitted but not marketed for two years. If we are not able to gain or exploit the period of data exclusivity, we may face significant competitive threats to our commercialization of these compounds from other manufacturers, including the manufacturers of generic alternatives. Further, even if our compounds are considered to be new chemical entities and we are able to gain the prescribed period of data exclusivity, another company nevertheless could also market another version of the drug if such company can complete a full NDA with a complete human clinical trial process and obtain marketing approval of its product.

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

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

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

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

 

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

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

 

   

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

 

   

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

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

 

   

incur substantial monetary damages;

 

   

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

 

   

be precluded from manufacturing or selling our product candidates.

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

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

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

Risks Related to Our Dependence on Third Parties

We currently depend on a single third-party manufacturer to produce our clinical drug supplies and intend to rely upon third-party manufacturers to produce commercial supplies of lomitapide. This may increase the risk that we will not have sufficient quantities of lomitapide or such quantities at an acceptable cost, which could delay, prevent, or impair our clinical development and commercialization of lomitapide.

We currently have no manufacturing facilities and limited personnel with manufacturing experience. We rely on a contract manufacturer to produce drug substance for lomitapide, and another contract manufacturer for drug product, for our clinical trials, and plan to rely on those contract manufacturers for commercial supplies, if lomitapide is approved for marketing by the applicable regulatory authorities. We currently purchase our supplies of drug product and drug substance from our contract manufacturers on a purchase order basis, and do not yet have a long-term commercial supply agreement in place. We also do not have agreements in place for redundant supply or second source for lomitapide. Any performance

 

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failure on the part of our existing or future manufacturers could delay further clinical development or marketing approval of lomitapide or commercialization of lomitapide. If for some reason our current contract manufacturer cannot perform as agreed, we may be required to replace that manufacturer. Although we believe there are a number of potential replacements that could manufacture the clinical and commercial supply of lomitapide, we may incur added costs and delays in identifying and qualifying any such replacements. Furthermore, although we generally do not begin a clinical trial unless we have a sufficient supply of a product candidate for the trial, any significant delay in the supply of a product candidate for an ongoing trial due to the need to replace a third-party manufacturer could delay completion of the trial.

If we are unable to arrange for third-party manufacturing, or are unable to do so on commercially reasonable terms, we may not be able to successfully market lomitapide or complete development of lomitapide. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured lomitapide ourselves, including:

 

   

reliance on the third party for regulatory compliance and quality assurance;

 

   

the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control; and

 

   

the possibility of termination or nonrenewal of the agreement by the third party (including merger and acquisition activity, bankruptcy filing, and strategic shifts), based on its own business priorities, at a time that is costly or damaging to us.

In addition, the FDA and other regulatory authorities require that product candidates be manufactured according to cGMP. Any failure by our third-party manufacturers to comply with cGMP or failure to reproducibly scale up and validate our manufacturing processes could lead to a delay in or failure to obtain marketing approval of lomitapide or any other product candidate that we develop. In addition, such failure could be the basis for action by the FDA or EMA to withdraw approvals for product candidates previously granted to us and for other regulatory action, including seizure, injunction or other civil or criminal penalties.

If we receive marketing approval of lomitapide, we currently expect to continue to rely upon third-party manufacturers to produce commercial supplies of the product. Accordingly, our manufacturers of clinical supplies may need to increase their scale of production to meet our projected needs for commercial manufacturing or we may need to identify additional commercial scale manufacturers.

Lomitapide and any other product candidate that we develop may compete with other products and product candidates for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that are both capable of manufacturing for us and willing to do so. We may not be able to identify, or reach agreement with, commercial scale manufacturers on commercially reasonably terms, or at all. If we are unable to do so, we will need to develop our own commercial-scale manufacturing capabilities, which would: delay commercialization of lomitapide, if approved, possibly materially; require a capital investment by us that could be quite costly; and increase our operating expenses.

If our existing third-party manufacturers, or the third parties that we engage in the future to manufacture a product for commercial sale or for our clinical trials, should cease to continue to do so for any reason, we likely would experience significant delays in obtaining sufficient quantities of product for us to meet commercial demand or to advance our clinical trials while we identify and qualify replacement suppliers. If for any reason we are unable to obtain adequate supplies of lomitapide or any other product candidate that we develop or the drug substances used to manufacture it, it will be more difficult for us to compete effectively, generate revenue, and further develop our products. In addition, if, following approval, if any, we are unable to assure a sufficient quantity of the drug for patients with rare diseases or conditions, we may lose any orphan drug exclusivity to which the product otherwise would be entitled.

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

We plan to market, sell and distribute lomitapide for HoFH, if approved, directly in the United States and Europe and several other countries using our own marketing and sales resources. We plan to use third parties to provide warehousing, shipping and other distribution services on our behalf in those countries. We may selectively seek to establish collaborations to reach patients with HoFH in geographies that we do not believe we can cost-effectively address with our own sales and marketing capabilities. If we are unable to establish our capabilities to sell, market and distribute lomitapide, if approved by the FDA and other regulatory authorities, either through our own capabilities or by entering into agreements with others, or to enter into collaborations in those countries we do not believe we can cost-effectively address with our own sales and marketing capabilities, we may not be able to successfully sell lomitapide. We cannot guarantee that we will be able to

 

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establish and maintain our own capabilities or to enter into and maintain any distribution agreements with third-parties on acceptable terms, if at all. Furthermore, our expenses associated with building up and maintaining the sales force and distribution capabilities around the world may be disproportionate compared to the revenues we may be able to generate on sales of lomitapide. We cannot guarantee that we will be successful in commercializing lomitapide.

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

We do not have the ability to independently conduct clinical trials, and we rely on third parties such as CROs, medical institutions, academic institutions, and clinical investigators to perform this function. Our reliance on these third parties for clinical development activities reduces our control over these activities. However, if we sponsor clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial, even if we use a CRO. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for conducting, recording, and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the data they provide is compromised due to the failure to adhere to regulatory requirements or our clinical trial protocols, or for other reasons, our development programs may be extended, delayed or terminated, marketing approvals for lomitapide or any other product candidate may be delayed or denied, and we may be delayed or precluded in our efforts to successfully commercialize lomitapide or any other product candidate for targeted indications.

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

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

Lomitapide has been licensed to us by UPenn. We currently have no drug research or discovery capabilities. Accordingly, if we are to expand our product candidate pipeline, we will need to acquire or license existing compounds from third parties. In addition, our right to use lomitapide is limited to specified patient populations, such as patients with HoFH, severe hypercholesterolemia or severe hypertriglyceridemia. Accordingly, if we wished to expand the development of lomitapide to address other indications, we would need to expand our license agreement with UPenn and potentially acquire rights from BMS. We will face significant competition in seeking to acquire or license promising drug compounds. Many of our competitors for such promising compounds may have significantly greater financial resources and more extensive experience in preclinical testing and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products, and thus, may be a more attractive option to a potential licensor than us. If we are unable to acquire or license additional promising drug compounds, we will not be able to expand our product candidate pipeline.

Risks Related to Employee Matters and Managing Growth

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

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

We expect to continue hiring qualified personnel. Recruiting and retaining qualified personnel will be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of certain personnel from universities and research institutions. Failure to succeed in clinical trials may make it more challenging to recruit and retain qualified development personnel.

 

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In addition, as a result of becoming a public company, we need to continue to establish and maintain effective disclosure and financial controls and make changes in our corporate governance practices. Failure to maintain adequate controls could impact the quality and integrity of our financial statements and cause us reputational harm.

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

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

We currently have approximately 60 employees, and we expect to experience significant growth in the number of our employees and the scope of our operations. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Our management may need to divert a disproportionate amount of its attention away from our day-to-day activities, and devote a substantial amount of time to managing these growth activities. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. The physical expansion of our operations may lead to significant costs, and may divert financial resources from other projects, such as the development of lomitapide. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate or increase our revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize lomitapide and compete effectively will depend, in part, on our ability to effectively manage any future growth.

Risks Related to Our Financial Position and Capital Requirements

We have incurred significant operating losses since our inception, and anticipate that we will incur continued losses for the foreseeable future.

We are a development stage company with a limited operating history. To date, we have primarily focused on developing our lead compound, lomitapide. We have funded our operations to date primarily through proceeds from the private placement of convertible preferred stock, convertible debt, venture debt, bank debt, the proceeds from our initial public offering and the proceeds from our June 2011 and June 2012 public offerings. We have incurred losses in each year since our inception in February 2005. As of June 30, 2012, we had an accumulated deficit of approximately $156.0 million. Substantially all of our operating losses resulted from costs incurred in connection with our development programs and from general and administrative costs associated with our operations.

The losses we have incurred to date, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. We expect our expenses to increase in the near-term as a result of spending on preparations for a possible global commercial launch of lomitapide; completion of our manufacturing validation campaigns; hiring of additional key personnel in the United States and Europe; preparations for an anticipated advisory committee for lomitapide in the fourth quarter of 2012; plans to conduct a clinical development program to support an application for anticipated marketing approval of lomitapide in Japan in adult patients with HoFH; the possible initiation of a clinical study of lomitapide in the treatment of pediatric and adolescent patients (³ 8 to < 18 years of age) with HoFH in 2013; and the possible initiation of a trial of lomitapide in FC in 2013. If we obtain marketing approval for lomitapide, we will likely incur significant sales, marketing, and outsourced manufacturing expenses, as well as continued research and development expenses. In addition, we have incurred, and expect to continue to incur, additional costs associated with operating as a public company. As a result, we expect to continue to incur significant operating losses at least in 2012 and 2013 and potentially in subsequent years. Because of the numerous risks and uncertainties associated with developing and commercializing pharmaceutical products, we are unable to predict with certainty the extent of any future losses or when we will become profitable, if at all.

 

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

Our ability to become profitable depends upon our ability to generate revenue. To date, we have not generated any revenue from any product, including our lead compound, lomitapide, and we do not know when, or if, we will generate any revenue. We do not expect to generate significant revenue unless or until we obtain marketing approval of, and commercialize lomitapide. Our ability to generate revenue depends on a number of factors, including our ability to:

 

   

obtain approval of lomitapide in the United States and European Union in the treatment of HoFH, and the timing of such approvals;

 

   

establish sales and marketing capabilities to effectively market and sell lomitapide in the United States and the European Union;

 

   

successfully launch lomitapide in the United States and European Union, if approved;

 

   

obtain market acceptance by patients and physicians for lomitapide as a treatment for HoFH;

 

   

obtain reimbursement and pricing for lomitapide sufficient to allow us to sell lomitapide on a competitive and profitable basis; and

 

   

contract for the manufacture of commercial quantities of lomitapide at acceptable cost levels if marketing approval is received.

Even if lomitapide is approved for commercial sale in one or both of the initial indications that we are pursuing, the diagnosis criteria in the final label may define the patient populations narrowly thus limiting intended users, or lomitapide may not gain market acceptance or achieve commercial success. In addition, we anticipate incurring significant costs associated with commercializing any approved product. We may not achieve profitability soon after generating product revenue, if ever. If we are unable to generate product revenue, we will not become profitable, and may be unable to continue operations without continued funding.

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

We may need to raise additional capital to fund our operations, and to develop and commercialize lomitapide. Our future capital requirements may be substantial and will depend on many factors including:

 

   

the decisions of the FDA and EMA with respect to our applications for marketing approval of lomitapide for the treatment of patients with HoFH in the United States and the European Union; the costs of activities related to the regulatory approval process; and the timing of approvals, if received;

 

   

the timing and cost of an anticipated clinical trial to evaluate lomitapide for treatment of pediatric and adolescent patients (> 8 to < 18 years of age) with HoFH;

 

   

the cost of establishing the sales and marketing capabilities necessary to be prepared for a potential commercial launch of lomitapide in HoFH, if approved;

 

   

the timing and cost of our planned clinical development program of lomitapide in Japan;

 

   

the cost of filing, prosecuting and enforcing patent claims;

 

   

the costs of our manufacturing-related activities;

 

   

the costs associated with commercializing lomitapide if we receive marketing approval;

 

   

subject to receipt of marketing approval, the levels, timing and collection of revenue received from sales of approved products, if any, in the future; and

 

   

the timing and cost of our anticipated clinical trial of lomitapide for the treatment of adult patients with FC.

In November 2011, we filed a shelf registration statement on Form S-3 with the SEC, which became effective in December 2011. This shelf registration statement permits us to offer, from time to time, any combination of common stock, preferred stock, debt securities and warrants of up to an aggregate of $125,000,000. In June 2012, we completed an underwritten public offering of 3,400,000 shares of common stock at a price to the public of $14.75 per share pursuant to our Form S-3 registration statement. The net proceeds to us from this offering were approximately $47.0 million, after deducting underwriting discounts and commissions and other estimated offering expenses. In July 2012, the underwriters exercised their overallotment option to purchase an additional 393,085 shares of common stock. The net proceeds to us from the issuance and sale of the over-allotment shares were approximately $5.5 million, after deducting underwriting discounts and commissions and other estimated offering expenses. In March 2012, we entered into a Loan and Security Agreement with Silicon Valley Bank, pursuant to which Silicon Valley Bank made a term loan to us in the principal amount of $10.0 million.

 

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The Loan and Security Agreement provides for interest-only payments through February 28, 2013, with per annum interest of 6.75% and a final payment of $200,000. We also paid Silicon Valley Bank a commitment fee of $20,000. We used the proceeds of the term loan to fully repay our existing loan from Hercules Technology II, L.P. and Hercules Technology III, L.P. The Loan and Security Agreement provides that we will repay the principal balance of the term loan in 36 monthly installments starting on March 1, 2013 and continuing through February 1, 2016. The remaining term loan principal balance and all accrued but unpaid interest will be due and payable on February 1, 2016. We may prepay all or any part of the outstanding term loan subject to a prepayment premium (defined in the Loan and Security Agreement) at our option. In connection with the Loan and Security Agreement, we granted Silicon Valley Bank a security interest in all of our personal property now owned or hereafter acquired, excluding intellectual property (and a negative pledge on intellectual property). The Loan and Security Agreement also provides for standard indemnification of Silicon Valley Bank and contains representations, warranties and certain covenants (including the agreement by us to maintain a specified level of liquidity). In July 2012, we entered into an arrangement with Silicon Valley Bank under the Loan and Security Agreement, pursuant to which we received a line of credit of up to $750,000 to finance, subject to the terms of the Loan and Security Agreement, the purchase of certain types of equipment acquired by us during the two years ended December 31, 2012. As of August 9, 2012, we have financed approximately $527,000 under this arrangement.

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

Based on our current operating plan, we anticipate that our existing cash and cash equivalents will be sufficient to enable us to maintain our currently planned operations, including our continued product candidate development, at least through the first quarter of 2014. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate.

Additional financing may not be available when we need it or may not be available on terms that are favorable to us. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. If adequate funds are not available to us on a timely basis, or at all, we may be required to:

 

   

terminate or delay clinical trials or other development activities for lomitapide for one or more indications for which we are developing lomitapide; or

 

   

alter or scale back our continued establishment of sales and marketing capabilities or other activities that may be necessary to commercialize lomitapide.

If we are unable to obtain additional financing, we may be required to reduce the scope of our planned development, sales and marketing efforts, which could harm our business, financial condition and operating results. The source, timing and availability of any future financing will depend principally upon equity and debt market conditions, interest rates and, more specifically, on our continued progress in our regulatory, development and commercial activities, and the extent of our commercial success. There can be no assurance that external funds will be available on favorable terms, if at all.

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

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

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

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

 

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Risks Related to the Securities Markets and Investment in Our Common Stock

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

Our stock price is volatile, and from October 22, 2010, the first day of trading of our common stock, to June 30, 2012, the trading prices of our stock have ranged from $9.00 to $25.92 per share. This is in part because there has been a public market for our common stock only since our initial public offering in October 2010, and our stock could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including the following:

 

   

the response of the FDA and EMA to our NDA and MAA, respectively, for approval of lomitapide in the treatment of HoFH;

 

   

decisions made by the FDA advisory committee in connection with its review of the NDA for lomitapide and related activities;

 

   

the timing of regulatory approvals related to these indications;

 

   

issuance of new securities;

 

   

failure of lomitapide, if approved, to achieve commercial success;

 

   

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

 

   

fluctuations in stock market prices and trading volumes of similar companies;

 

   

general market conditions and overall fluctuations in U.S. equity markets;

 

   

low trading volume;

 

   

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

 

   

variations in our quarterly operating results;

 

   

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

 

   

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

 

   

changes in accounting principles;

 

   

sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

 

   

additions or departures of key personnel;

 

   

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

 

   

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

 

   

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

 

   

other risks and uncertainties described in these risk factors.

In addition, the stock market in general, and the market for small pharmaceutical and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business and financial condition.

Our directors and management exercise significant control over our company, which will limit your ability to influence corporate matters.

Our executive officers, directors, 5% stockholders and their affiliates collectively control approximately 45% of our outstanding common stock. As a result, these stockholders, if they act together, will be able to influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of our company that other stockholders may desire and might negatively affect the market price of our common stock.

 

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

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

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

We have never declared or paid any cash dividend on our common stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

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

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

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

As of June 30, 2012, there were:

 

   

4,084,827 shares subject to outstanding options under our 2006 Stock Option and Award Plan and 2010 Stock Option and Incentive Plan;

 

   

56,905 shares of restricted common stock subject to vesting; and

 

   

an aggregate of 958,804 shares reserved for future issuance under our 2010 Stock Option and Incentive Plan.

Under our 2010 Stock Option and Incentive Plan, the shares reserved for issuance under the plan are automatically increased on an annual basis in accordance with a pre-determined formula. As a result, on January 1, 2012 an additional 848,012 shares were added to the aggregate number of shares reserved for future issuance under the plan.

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

Some of our existing stockholders have demand and piggyback rights to require us to register with the SEC up to approximately 6.5 million shares of our common stock. If we register these shares of common stock, the stockholders would be able to sell those shares freely in the public market.

We also registered approximately 6.0 million shares of our common stock that are subject to outstanding stock options and reserved for issuance under our equity plans. These shares can be freely sold in the public market upon issuance, subject to vesting restrictions.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

 

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Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosure

Not applicable.

 

Item 5. Other Information

None.

 

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Table of Contents
Item 6. Exhibits

 

  23.1   Consent of L.E.K. Consulting LLC, attached as Exhibit 23 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on December 6, 2010, and incorporated herein by reference.
  31.1*   Certification of Marc D. Beer, Chief Executive Officer of the Company, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
  31.2*   Certification of Mark J. Fitzpatrick, Chief Financial Officer of the Company, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
  32.1**   Certification of Marc D. Beer, Chief Executive Officer of the Company, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
  32.2**   Certification of Mark J. Fitzpatrick, Chief Financial Officer of the Company, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
101.INS   XBRL Instance Document.
101.SCH   XBRL Taxonomy Extension Schema Document.
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Filed herewith
** Furnished Herewith

 

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SIGNATURES

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

 

  AEGERION PHARMACEUTICALS, INC.
 

(Registrant)

Date: August 9, 2012   By:  

/S/    MARC D. BEER      

    Marc D. Beer
   

Chief Executive Officer

 

(principal executive officer)

Date: August 9, 2012   By:  

/S/    MARK J. FITZPATRICK      

    Mark J. Fitzpatrick
   

Chief Financial Officer

 

(principal financial officer)

 

53

XNAS:AEGR Aegerion Pharmaceuticals Inc Quarterly Report 10-Q Filling

Aegerion Pharmaceuticals Inc XNAS:AEGR Stock - Get Quarterly Report SEC Filing of Aegerion Pharmaceuticals Inc XNAS:AEGR stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

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