Notes to Unaudited Condensed Consolidated Financial Statements
1. Description of Business and Basis of Presentation
Organization
Novelion Therapeutics Inc. (“Novelion” or the “Company”) is a rare disease biopharmaceutical company dedicated to developing new standards of care for individuals living with rare diseases. Novelion has international operations and
two
commercial products, metreleptin and lomitapide, which are commercialized and developed through its indirect, wholly-owned subsidiary, Aegerion Pharmaceuticals, Inc. (“Aegerion”). Metreleptin, a recombinant analog of human leptin, is currently marketed in the U.S. under the brand name MYALEPT (metreleptin for injection). MYALEPT is approved in the U.S. as an adjunct to diet as replacement therapy to treat the complications of leptin deficiency in patients with congenital or acquired generalized lipodystrophy (“GL”). In July 2018, metreleptin, under the brand name MYALEPTA, was approved in the EU as a treatment for the complications of leptin deficiency in patients with congenital or acquired GL in adults and children two years of age and above and familial or acquired Partial Lipodystrophy (“PL”) in adults and children 12 years of age and above. Lomitapide, which is marketed in the U.S. under the brand name JUXTAPID (lomitapide) capsules (“JUXTAPID”), is approved in the U.S. as an adjunct to a low-fat diet and other lipid-lowering treatments, including low-density lipoprotein (“LDL”) apheresis where available, to reduce low-density lipoprotein cholesterol (“LDL-C”), total cholesterol (“TC”), apolipoprotein B (“apo B”) and non-high-density lipoprotein cholesterol (“non-HDL-C”) in adult patients with homozygous familial hypercholesterolemia (“HoFH”). Lomitapide is approved in the European Union (“EU”), under the brand name LOJUXTA (lomitapide) hard capsules (“LOJUXTA”) for the treatment of adult patients with HoFH, where it is commercialized by Aegerion’s licensee, Amryt Pharma plc (“Amryt”). In December 2016, Aegerion launched JUXTAPID as a treatment for HoFH in Japan and on February 5, 2019, Aegerion entered into a license agreement with Recordati Rare Diseases Inc. (“Recordati”) for the commercialization of JUXTAPID in Japan. Additionally, both metreleptin and lomitapide are sold, on a named patient basis, in certain countries outside of the U.S., such as Brazil, where such sales are permitted based on the approval of metreleptin and lomitapide in the U.S. or EU.
Basis of Presentation and Principles of Consolidation
The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying Unaudited Condensed Consolidated Financial Statements include all adjustments (including normal recurring accruals) considered necessary for fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. Operating results for the current interim period are not necessarily indicative of the results that may be expected for the fiscal year ending
December 31, 2019
. This Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes in the Company’s Form 10-K for the year ended
December 31, 2018
(“2018 Form 10-K”).
The accompanying Unaudited Condensed Consolidated Financial Statements include operations of Novelion and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.
Going Concern
The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As presented in the Unaudited Condensed Consolidated Financial Statements for the
three months ended March 31, 2019
, the Company incurred a net loss of
$31.8 million
. Aegerion has a significant level of indebtedness, consisting as of
March 31, 2019
of (1)
$302.5 million
principal amount of
2%
convertible notes due August 15, 2019 (the “Convertible Notes”), as described in Note 9,
Convertible Notes, net
, (2)
$74.4 million
in outstanding principal (including paid in kind fees and interest) under Aegerion’s secured term loans (the “Bridge Loans”), as described in Note 8,
Loan Facilities
, which will mature on June 30, 2019, and (3) approximately
$35.7 million
principal amount of existing secured term loan owed by Aegerion to Novelion (the “Intercompany Loan”), which is also described in more detail in Note 8. The secured term loan owed to Novelion by Aegerion has been eliminated in consolidation. These loan arrangements involve certain restrictions, including with respect to cash usage, which are described in Note 8.
The Company’s anticipated operating cash usage and maturities of outstanding debt, and restrictions on intercompany cash payments, as described in Note 8,
Loan Facilities
, raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the Unaudited Condensed Consolidated Financial Statements are issued.
In an effort to mitigate some of the conditions that raise substantial doubt about the Company’s ability to continue as a going concern, the Company committed to a cost-reduction plan, including the reduction in workforce announced and implemented in August 2018. In November 2018, the Company announced that Aegerion had engaged advisors (who advised on the Bridge Credit Agreement, as defined later) to, among other things, undertake a comprehensive review of Aegerion’s capital structure, and that Novelion and Aegerion have engaged advisors, respectively, to independently explore and advise each respective company on all available financial and strategic options available to it, such as a restructuring of Aegerion’s Convertible Notes (including a restructuring that would likely involve a debt for equity exchange, which may be highly dilutive to existing Novelion shareholders), a sale or merger of Novelion or Aegerion, or the sale or other disposition of certain businesses or assets (any of which, along with the failure to execute one or more transactions, is likely to cause Aegerion, and may cause Novelion, to seek the protections of applicable bankruptcy laws allowing for corporations to seek to restructure their debts and other affairs under a reorganization) (which collective review we refer to as our review of “strategic alternatives”).
Although the Company believes its cost-reduction plan, together with the funds from the Bridge Loans and the proceeds from the License Agreement with Recordati (defined later), will provide the Company and Aegerion with sufficient financing to meet its immediate operational needs and obligations into June 2019, there is no guarantee that Aegerion will be able to successfully refinance or restructure its Convertible Notes, the Bridge Loans, or the Intercompany Loan, or that either Novelion or Aegerion will be able to otherwise raise capital or receive funding to continue to operate as a standalone business beyond June 30, 2019, the maturity date of the Bridge Loans. The Company cannot provide any assurance that the ongoing financial and strategic alternatives review will result in any particular alternative or transaction or funding. Further, effecting such a refinancing, or other wholesale recapitalization or other strategic alternative, if available, will be critical for the Company to continue to execute on its commercial strategy and pursue its goals and objectives, but will require considerable resources to consummate, which the Company may not have available. The forward-looking statements in this Form 10-Q assume that the Company is able to receive additional funding as a result of the financial and strategic review process, which is highly speculative. As such, the Company cannot conclude that such plans will be effectively implemented, or that such financing or strategic alternatives will be available.
Should the Company be unable to execute its plans on an effective and timely basis, the Company’s business, results of operations, liquidity and financial condition would be materially and negatively affected, and the Company would be unable to continue as a going concern. Further, given the quantum and near-term maturity of Aegerion’s outstanding debt obligations, the implementation of one or more transactions to effect a comprehensive refinancing, wholesale recapitalization or other strategic alternatives, if available, or the failure to complete any such transaction or transactions on a timely basis or at all, will likely require Aegerion, and could require Novelion, to seek the protections of applicable bankruptcy laws allowing for corporations to seek to restructure their debts and other affairs under a reorganization. The Unaudited Condensed Consolidated Financial Statements do not include any adjustments that might result from the outcome of this uncertainty.
In addition, the NASDAQ Global Select Market (“NASDAQ”), on which the Company’s common shares are listed and traded, has listing requirements that include a $1.00 minimum closing bid price requirement and a minimum public float requirement of $15.0 million. NASDAQ will issue a deficiency notice if an issuer is in violation of a listing standard for a period of 30 consecutive days. The Company’s common shares have from time to time traded below $1.00 and its public float has from time to time fallen below $15.0 million during the
three months ended March 31, 2019
. If its stock trades below $1.00, or its public float stays below the minimum public float, for 30 consecutive days, or if the Company fails to satisfy other listing requirements, NASDAQ may elect, subject to any potential cure periods, to initiate a process that could delist the Company’s common shares from trading on NASDAQ.
Use of Estimates
The preparation of Unaudited Condensed Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Unaudited Condensed Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting periods presented. The Company’s estimates often are based on complex judgments, probabilities and assumptions that we believe to be reasonable but that are inherently uncertain and unpredictable. For any given individual estimate or assumption made by us, there may also be other estimates or assumptions that are reasonable. Actual results may differ from estimates made by management. Changes in estimates are reflected in reported results in the period in which they become known.
Recently Adopted Accounting Standards
In 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,
Leases
(“ASU 2016-02”), which amends a number of aspects of lease accounting and requires entities to recognize right-of-use assets and liabilities on the balance sheet for leases with lease terms of more than 12 months. In July 2018, the FASB issued ASU No. 2018-11,
Leases
(Topic 842): Targeted Improvements
(“ASU 2018-11”), which offers a transition option to entities adopting Accounting Standards Codification (“ASC”) 842. Under ASU 2018-11, entities can elect to apply ASC 842 using a modified retrospective adoption approach resulting in a cumulative effect adjustment to retained earnings/(accumulated deficit) at the beginning of the year in which the new lease standard is adopted, rather than adjustments to the earliest comparative period presented in their financial statements.
The Company adopted ASU 2016-02 effective January 1, 2019, using the modified retrospective method permitted. As such, the adoption of ASU 2016-02 will not change the classification of any of the existing leases as of the transition date, and the prior period results are not adjusted or restated and continue to be reported in accordance with ASC Topic 840:
Leases
(“Topic 840”). In addition, the Company elected the package of practical expedients permitted under the transition guidance, which, among other things, allowed the Company to combine lease and non-lease components for all of the leases. The Company also elected not to record leases with an initial term of 12 months or less on the Unaudited Condensed Consolidated Balance Sheet and has recognized the associated lease payments in the Unaudited Condensed Consolidated Statement of Operation on a straight-line basis over the lease term.
Upon the adoption of this standard, the Company recorded operating lease right-of-use assets and corresponding operating lease liabilities, each of approximately
$1.8 million
as of January 1, 2019, which are included in the Unaudited Condensed Consolidated Balance Sheet. The adoption of this standard did not materially impact the Company’s Unaudited Condensed Consolidated Statement of Operation and Unaudited Condensed Consolidated Statement of Cash Flows as of the adoption date and for the periods presented. Refer to Note 7,
Leases
, for further discussion.
2. Revenue Recognition
The Company applies the revenue recognition guidance in accordance with FASB ASC Topic 606,
Revenue from Contracts with Customers
(“ASC Topic 606”). The Company’s net revenues are primarily derived from product sales; the Company’s remaining revenues are derived from the royalties on product sales made by its sublicensees in the EU, Japan and other territories. The following summarizes the revenue recognition for the respective revenue streams.
Product Sales Revenues
The Company recognizes revenue from sales of metreleptin and lomitapide at the point in time when control transfers, typically upon transfer of product to the carrier or delivery of product to customers. Revenue is recognized net of estimated discounts, rebates, and any taxes collected from customers which are subsequently remitted to governmental authorities. Payment terms vary by contract, but payment is typically due within 30 to 120 days of delivery to the customer. Generally, the period between when the Company transfers or delivers the products and when payments are received is in one year or less; as such, the Company deems it unnecessary to assess whether a significant financing component exists and does not adjust the transaction price for the time value of money.
Variable Consideration
Product sales revenues are recognized at the net sales price (“transaction price”) which includes estimated reserves for variable consideration, upon the transfer of control of the Company’s products. Variable consideration primarily includes government rebates, prompt payment discounts and distribution service fees. Estimates of variable consideration are made at contract inception and historical experience, market trends, industry data, and statutory requirements are considered when determining such estimates. Variable consideration is included in the transaction price to the extent it is probable that a significant reversal of revenue will not occur. The Company reassesses variable consideration at the end of each reporting period as additional information becomes available with the variance recorded to product sales revenue.
Government Rebates
: The Company is subject to government mandated rebates for Medicare, Medicaid, Tricare and other government programs in the U.S. and other countries. These rebates are estimated based on actual payer information. The Company records an accrued liability for unpaid rebates related to products for which control has been transferred to distributors.
The following table summarizes combined activity for the government rebates incurred in connection with the product sales of MYALEPT and JUXTAPID for the period indicated:
|
|
|
|
|
|
Amount
|
|
(in thousands)
|
Balance as of December 31, 2018
|
$
|
19,637
|
|
Provision
|
7,494
|
|
Payments
|
(11,637
|
)
|
Balance as of March 31, 2019
|
$
|
15,494
|
|
Prompt Payment Discounts
: The Company provides discounts to certain distributors if they pay for product within a defined period of time after title transfers, which terms are explicitly stated in the contract. These discounts are recorded as a reduction of revenue upon receipt of full payment from such distributors.
Distributor Service Fees
: Certain distributors provide distribution services to the Company for a fee, and the costs associated with these services are generally recorded as a reduction of revenue.
Other Incentives
: The Company offers other incentives that vary by contract; these incentives take into account specific relevant factors and are analyzed for revenue recognition purposes on a case by case basis.
Other Revenues
The Company has entered into agreements where the Company licenses certain rights to its products to sublicensees and earns royalties from product sales made by the sublicensees and milestone payments upon the achievement of certain levels of sales. Under ASC Topic 606, the Company recognizes royalty revenue and sales-related milestone payments, when applicable, at the later of (1) the time that the subsequent sale or usage occurs, or (2) the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).
On February 5, 2019, Aegerion entered into a license agreement with Recordati for the commercialization of JUXTAPID
®
in Japan. Refer to Note 3,
License Agreement
, for further discussion and the revenue recognition related to this transaction.
3. License Agreement
On February 5, 2019 (the “Effective Date”), Aegerion entered into a license agreement (the “License Agreement”) with Recordati for the commercialization of JUXTAPID in Japan. Under the terms of the License Agreement, and subject to the conditions set forth therein, Aegerion granted to Recordati an exclusive license in Japan, for the current marketed indication for HoFH. During the term of the License Agreement, Recordati also has an exclusive right of first negotiation to any new indications for JUXTAPID in Japan that may be developed by Aegerion and the right to grant sub-licenses and to manufacture and commercialize JUXTAPID, under specific circumstances.
Pursuant to the terms of the License Agreement, and subject to the conditions set forth therein, Recordati is required to make the following payments to Aegerion: (i)
$25.0 million
as a one-time upfront payment on the Effective Date (which was paid to Aegerion in the first quarter of 2019), (ii)
$5.0 million
as a one-time payment within
45
days following the date on which the Japan marketing authorization for JUXTAPID is successfully transferred to Recordati (the “Completion Date”), (iii) quarterly royalty payments, during the term of the License Agreement, equal to
22.5%
of all net sales of JUXTAPID in Japan, and (iv)
20%
of all other sublicense revenues received by Recordati or any of its affiliates.
In addition, pursuant to the terms of the License Agreement, Aegerion may receive from Recordati commercial milestone payments (up to a total of
$80.0 million
) for net sales in Japan, conditioned and based upon the achievement of certain net sales levels in Japan, the first
$12.5 million
installment of which becomes payable at the end of the first quarter in which cumulative net sales in Japan reach
$70.0 million
, and which are payable in incremental installments thereafter at the end of each quarter in which cumulative net sales in Japan increase by
$70.0 million
(in incremental payments of
$12.5 million
until cumulative net sales reach
$280.0 million
and then in incremental installments of
$5.0 million
for each incremental
$70.0 million
of revenues until cumulative net sales reach
$700.0 million
).
Further, pursuant to Aegerion’s current license agreement with UPenn, UPenn is entitled to receive
15%
of the
$25 million
upfront payment,
15%
of the marketing authorization transfer milestone and any subsequent sales milestone payments received from Recordati and
25%
of royalty payments received by Aegerion from Recordati under the License Agreement.
A portion of the upfront payment and the entire marketing authorization transfer fee was and/or will be used to repay the outstanding debt Aegerion has. Refer to Note 8,
Loan Facilities
, for further information.
Aegerion and Recordati have also entered into a customary supply agreement under which Aegerion will supply JUXTAPID to Recordati (or its affiliate) at cost plus an agreed upon markup for an initial term of
two years
with automatic renewal for successive
two
year terms, and a customary transitional services agreement under which Aegerion will continue to perform certain commercialization and administrative services on Recordati’s behalf until the Completion Date (during which time, in lieu of paying royalties and cost-plus supply and transitional services during this period, Aegerion will retain
40%
of the net sales of JUXTAPID in Japan and remit the remaining
60%
of net sales to Recordati) and certain other customary transitional services (if so requested by Recordati) at mutually agreed hourly rates for a term not to exceed
six months
from the Completion Date.
Aegerion and Recordati have made customary representations and warranties and have agreed to certain other customary covenants, including confidentiality, limitation of liability and indemnity provisions. The initial term of the License Agreement continues until the latest of: (i) expiration of the last valid claim of the licensed patents covering JUXTAPID in Japan, (ii) expiration of data or regulatory exclusivity in relation to JUXTAPID in Japan, or (c) ten years from the Completion Date. Thereafter the term of the License Agreement will automatically renew for a single five-year term, and then thereafter for successive five-year terms unless either party provides written notice at least 18 months prior to the end of the then current renewal term. Either party may terminate the License Agreement for cause if the other party materially breaches or defaults in the performance of its obligations, and, if curable, such material breach remains uncured for 90 days (15 days for non-payment).
The Company assessed the License Agreement in accordance with ASC Topic 606 and concluded that this agreement is within the scope of ASC Topic 606. At the date of agreement inception, three performance obligations, consisting of (1) the license (inclusive of the Japan marketing authorization for JUXTAPID and other related intellectual property), (2) the anticipated JUXTAPID supply on hand at the Completion Date, and (3) the supply of JUXTAPID to Recordati, were identified. Revenue for each of the performance obligations will be recognized at a point in time, as further discussed below:
|
|
•
|
License: The consideration for the license performance obligation consists of the
$30.0 million
in one-time, fixed payments as well as a reduction related to the
60%
of net sales benefit to Recordati during the transition period, from the Effective Date through the Completion Date (“the Transition Period”). Revenue allocated to the license will be recognized at the later of the delivery of the license or the Japan marketing authorization for JUXTAPID, and the
60%
of net sales benefit to Recordati are accounted for as a reduction of revenue as Recordati does not transfer a distinct good or service to Aegerion during the Transition Period. As of March 31, 2019, the
$25.0 million
received from Recordati was recognized as deferred revenue as the Japan marketing authorization for JUXTAPID has not yet been delivered. The deferred revenue has been reduced by
$0.8 million
, which represents the
60%
of net sales benefit owed to Recordati for the period ended March 31, 2019.
|
|
|
•
|
JUXTAPID supply on hand at the Completion Date: The consideration for JUXTAPID supply on hand at the Completion Date, pursuant to the transitional services agreement, will be variable consideration dependent on the inventory on hand at the Completion Date multiplied by the cost plus markup. Revenue allocated to the JUXTAPID supply on hand at the Completion Date will be recognized when such supply is made available to Recordati at the manufacturing facility engaged by Aegerion.
|
|
|
•
|
Supply of JUXTAPID to Recordati: The consideration for the supply of JUXTAPID to Recordati will be variable consideration dependent on the inventory ordered pursuant to the supply agreement multiplied by the cost plus markup. Revenue allocated to the JUXTAPID supply will be recognized when such supply is made available to Recordati at the manufacturing facility engaged by Aegerion.
|
4. Inventories
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
|
(in thousands)
|
Work-in-process
|
$
|
28,527
|
|
|
$
|
26,676
|
|
Finished goods
|
22,962
|
|
|
22,271
|
|
Total
|
51,489
|
|
|
48,947
|
|
Less: Inventories - current
|
(13,407
|
)
|
|
(12,745
|
)
|
Inventories - non-current
|
$
|
38,082
|
|
|
$
|
36,202
|
|
Non-current inventories primarily consist of the active pharmaceutical ingredients on hand and work-in-process. Additionally, a portion of finished goods is classified as non-current as of
March 31, 2019
and
December 31, 2018
based on forecasted consumption exceeding one year. There was
no
charge for excess or obsolete inventory during the
three months ended March 31, 2019
and an immaterial charge for excess or obsolete inventory in the Unaudited Condensed Consolidated Statement of Operations during the
three months ended March 31, 2018
.
5. Intangible Assets
The intangible assets are amortized over their estimated useful lives, which are the remaining patent lives of approximately
7
-
9
years, and reviewed for impairment when events and changes in circumstances indicate that the carrying amount may not be recoverable. During the
three months ended March 31, 2019 and 2018
, there were
no
impairment charges recorded.
Additionally, the Company reviewed the useful lives of the intangibles as of
March 31, 2019
and believes the useful lives are still reasonable.
Intangible asset balances as of
March 31, 2019
and
December 31, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Effect of Currency Translation
|
|
Net Carrying Value
|
|
(in thousands)
|
Developed technology - metreleptin
|
$
|
210,158
|
|
|
$
|
(49,357
|
)
|
|
$
|
(17
|
)
|
|
$
|
160,784
|
|
Developed technology - lomitapide
|
42,300
|
|
|
(9,181
|
)
|
|
—
|
|
|
33,119
|
|
Total intangible assets
|
$
|
252,458
|
|
|
$
|
(58,538
|
)
|
|
$
|
(17
|
)
|
|
$
|
193,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
(in thousands)
|
Developed technology - metreleptin
|
$
|
210,158
|
|
|
$
|
(44,084
|
)
|
|
$
|
166,074
|
|
Developed technology - lomitapide
|
42,300
|
|
|
(8,198
|
)
|
|
34,102
|
|
Total intangible assets
|
$
|
252,458
|
|
|
$
|
(52,282
|
)
|
|
$
|
200,176
|
|
Amortization expense was
$6.3 million
for each of the
three months ended March 31, 2019 and 2018
.
As of
March 31, 2019
, the estimated amortization expense related to intangibles for future periods is as follows:
|
|
|
|
|
|
|
|
Amount
|
Years Ending December 31,
|
(in thousands)
|
2019 (remaining 9 months)
|
$
|
18,823
|
|
2020
|
25,095
|
|
2021
|
25,095
|
|
2022
|
25,095
|
|
2023
|
25,095
|
|
Thereafter
|
74,700
|
|
Total intangible assets subject to amortization
|
$
|
193,903
|
|
6. Accrued Liabilities
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
|
(in thousands)
|
Accrued employee compensation and related costs
|
$
|
2,585
|
|
|
$
|
2,166
|
|
Accrued professional fees
|
3,217
|
|
|
2,071
|
|
Accrued sales allowances
|
15,494
|
|
|
19,637
|
|
Accrued royalties
|
4,683
|
|
|
5,112
|
|
Other accrued liabilities
|
14,476
|
|
|
15,209
|
|
Total
|
$
|
40,455
|
|
|
$
|
44,195
|
|
7. Leases
The Company leases office space in the U.S. and foreign countries for its headquarters and operational offices.
The Company’s U.S. operational office, which was located in Cambridge, Massachusetts, expired April 30, 2019. In April 2019, the Company entered
two
12
-month term leases for its U.S. operational offices, one located in Cambridge, Massachusetts, and one located in Boston, Massachusetts. The aggregate lease payment amounts for these
two
leases over the lease term are approximately
$0.4 million
. The international lease agreements expire at various dates through the year 2025. In addition, the Company leases certain office facilities, office equipment as well as vehicles on behalf of certain employees in the European regions.
As of
March 31, 2019
, the right-of-use assets associated with the Company’s operating leases were
$1.3 million
, which were recorded in other non-current assets as reflected on the Company’s Unaudited Condensed Consolidated Balance Sheet. The corresponding lease liabilities for the operating leases were
$1.3 million
as of
March 31, 2019
, of which
$0.6 million
represents as short-term lease liability and
$0.7 million
represents as long-term lease liability, and they were recorded in accrued liabilities and other non-current liabilities, respectively, as reflected on the Company’s Unaudited Condensed Consolidated Balance Sheet as of
March 31, 2019
. The right-of-use assets represent the Company’s right to use an underlying asset during the lease term and the related lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Both the right-of-use assets and the corresponding liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, when determining the lease liabilities, the Company estimated the incremental borrowing rate based on the interest rate from the Bridge Loans entered in November 2018. The discount rate is calculated as the midpoint between the incremental borrowing rate and the implied yields available from U.S. Treasury securities equal to the original lease term.
The Company’s lease agreements generally do not contain purchase options. Certain leases have renewal options that can be exercised at the discretion of the Company, and the Company only includes renewal option in the lease term when it is reasonably certain to exercise such option.
As of
March 31, 2019
, the weighted average remaining lease term on the Company’s existing leases was
2.8 years
, and the weighted average discount rate used to calculate the lease liabilities was
6.0%
. The non-cash lease expense for the Company’s leases totaled
$0.6 million
for the
three months ended March 31, 2019
.
The following table summarizes the components of the lease expenses for the
three months ended March 31, 2019
. The variable lease expenses generally include common area maintenance, rent adjustment based on index and real estate taxes. All the lease expenses are recorded as operating expenses in the Unaudited Condensed Consolidated Statement of Operations as of
March 31, 2019
. Cash paid for amounts included in the measurement of the operating lease liabilities for the
three months ended March 31, 2019
was
$0.6 million
.
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
(in thousands)
|
Operating lease expense
|
$
|
661
|
|
Variable lease expense
|
83
|
|
Total lease expense
|
$
|
744
|
|
As of
March 31, 2019
, the estimated minimum lease payments for the next five years and thereafter is as follows:
|
|
|
|
|
|
|
Amount
|
Year Ending December 31,
|
|
(in thousands)
|
2019 (remaining 9 months)
|
|
545
|
|
2020
|
|
450
|
|
2021
|
|
209
|
|
2022
|
|
136
|
|
2023
|
|
96
|
|
Thereafter
|
|
40
|
|
Total lease payments
|
|
1,476
|
|
Less: Present value adjustment using incremental borrowing rate
|
|
141
|
|
Present value of operating lease liabilities
|
|
1,335
|
|
As of
December 31, 2018
, prior to the adoption of ASU 2016-02, the estimated minimum lease payments for the next five years and thereafter is as follows:
|
|
|
|
|
|
|
|
Amount
|
Years Ending December 31,:
|
|
(in thousands)
|
2019
|
|
$
|
1,246
|
|
2020
|
|
432
|
|
2021
|
|
190
|
|
2022
|
|
134
|
|
2023
|
|
97
|
|
Thereafter
|
|
41
|
|
Total
|
|
$
|
2,140
|
|
8. Loan Facilities
Short-term debt consists of the following as of
March 31, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
New Money Loans
|
Roll Up Loans
|
Total
|
|
(in thousands)
|
Short-term principal and commitment fee
|
$
|
51,000
|
|
$
|
22,500
|
|
$
|
73,500
|
|
Exit fee payable
|
1,500
|
|
—
|
|
1,500
|
|
Accrued unpaid interest
|
2,207
|
|
179
|
|
2,386
|
|
Unamortized debt issuance costs
|
(220
|
)
|
—
|
|
(220
|
)
|
Debt discount
|
(242
|
)
|
—
|
|
(242
|
)
|
Repayment of short-term principal, including exit fee
|
(2,996
|
)
|
—
|
|
(2,996
|
)
|
Total short-term debt
|
$
|
51,249
|
|
$
|
22,679
|
|
$
|
73,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
New Money Loans
|
Roll Up Loans
|
Total
|
|
(in thousands)
|
Short-term principal and commitment fee
|
$
|
51,000
|
|
$
|
22,500
|
|
$
|
73,500
|
|
Exit fee payable
|
1,500
|
|
—
|
|
1,500
|
|
Accrued unpaid interest
|
826
|
|
66
|
|
892
|
|
Unamortized debt issuance costs
|
(1,054
|
)
|
—
|
|
(1,054
|
)
|
Debt discount
|
(1,161
|
)
|
—
|
|
(1,161
|
)
|
Total short-term debt
|
$
|
51,111
|
|
$
|
22,566
|
|
$
|
73,677
|
|
Bridge Loans
On November 8, 2018, Aegerion entered into a bridge credit agreement (the “Bridge Credit Agreement”) with certain funds managed by Highbridge Capital Management, who are investors in the Company’s common shares, and Athyrium Capital Management, as lenders (the “Bridge Lenders”), and Cantor Fitzgerald Securities, as agent (the “Bridge Agent”), under which Aegerion borrowed from the Bridge Lenders new secured first lien term loans in cash in an original aggregate principal amount of
$50.0 million
(“New Money Loans”) and
$22.5 million
of new secured term loans that were funded, on behalf of Aegerion, to repurchase and retire an equal amount of Convertible Notes, at par, held by certain funds managed by the Bridge Lenders (the “Roll Up Loans”). The Roll Up Loans and the New Money Loans comprise the Bridge Loans referenced above.
The Bridge Loans mature on the earliest to occur of (i) certain restructuring or bankruptcy events, (ii) June 30, 2019, and (iii) the acceleration after occurrence of an event of default. In January 2019, the maturity date of the Bridge Loans was extended to June 30, 2019, upon the exercise of Aegerion’s option and the satisfaction by Aegerion of the conditions stated in the Bridge Credit Agreement. In connection with the extension of the maturity date, Aegerion repaid
$3.0 million
of New Money Loans principal, including exit fee, and paid an extension fee in the amount of
$1.5 million
to the Bridge Lenders.
The New Money Loans accrue interest at the rate of
11.00%
per annum and the Roll Up Loans accrue interest at the rate of
2.00%
per annum. Following an event of default and so long as an event of default is continuing, the interest rate on each of the New Money Loans and the Roll Up Loans would increase by
2.00%
per annum. Interest on the New Money Loans and the Roll Up Loans accrue and compound quarterly in arrears and will not be payable in cash until the maturity date or any earlier time that the Bridge Loans become due and payable under the Bridge Credit Agreement. Aegerion incurred a commitment fee equal to
2.00%
of the New Money Loans, which will be paid in kind and is included in the outstanding principal amount of the New Money Loans. The New Money Loans may be prepaid, in whole or in part, by Aegerion at any time subject to payment of an exit fee (including at maturity) equal to
3.00%
of the commitments with respect to New Money Loans.
As of
March 31, 2019
, the aggregate principal amount outstanding of the New Money Loans was
$51.7 million
, including
$1.0 million
of commitment fee,
$1.4 million
of exit fee and
$2.2 million
of the accrued unpaid interest. The aggregate principal amount outstanding of the Roll Up Loans was
$22.7 million
, with
$0.2 million
of accrued unpaid interest. In connection with the issuance of the Bridge Loans, the Company incurred approximately
$3.2 million
of debt issuance costs, which primarily consisted of underwriting, legal and other professional fees. Of the total
$3.2 million
of debt issuance costs,
$1.0 million
is the pro-rata portion associated with the Roll Up Loans, and it was expensed upon the consummation of the transaction. The remaining $2.2 million is associated with the New Money Loans and is being amortized over the expected life of the New Money Loans using the effective interest method.
Aegerion’s obligations under the Bridge Credit Agreement are guaranteed by each domestic subsidiary of Aegerion other than Aegerion Securities Corporation, a Massachusetts corporation (the “Guarantors”), and secured by a lien on substantially all of the assets of Aegerion and the Guarantors, including a pledge of
65%
of Aegerion’s and the Guarantors’ first-tier foreign subsidiaries’ equity interests and substantially all of the intellectual property and related rights in respect of MYALEPT and JUXTAPID, subject to certain contractual limitations and exclusions set forth in the Bridge Credit Agreement and related documentation. The liens on the assets of Aegerion and the Guarantors granted to secure Aegerion’s obligations to the Bridge Lenders with respect to New Money Loans are senior to the liens granted to secure Aegerion’s obligations to Novelion with respect to the Intercompany Loan. The liens on the assets of Aegerion and the Guarantors granted to secure Aegerion’s obligations to the Bridge Lenders with respect to Roll Up Loans are junior to the liens granted to secure Aegerion’s obligations to Novelion with respect to the Intercompany Loan. Upon consummation of certain restructuring transactions consented to by the Bridge Lenders in their discretion, the liens securing the Roll Up Loans will be terminated and released, and the Roll Up Loans will be treated as unsecured obligations of Aegerion,
pari passu
with the other obligations of Aegerion with respect to the Convertible Notes.
The Bridge Credit Agreement includes affirmative and negative covenants binding on Aegerion and its subsidiaries, including prohibitions on the incurrence of additional indebtedness, granting of liens, certain asset dispositions, investments and restricted payments, in each case, subject to certain exceptions set forth in the Bridge Credit Agreement. The Bridge Credit Agreement also includes customary events of default for a transaction of this type, and includes (i) a cross-default to the occurrence of any event of default under material indebtedness of Aegerion, including the Convertible Notes or the Intercompany Loan, and (ii) Novelion or any of its subsidiaries being subject to bankruptcy or other insolvency proceedings. Upon the occurrence of an event of default, the Bridge Lenders may declare all of the outstanding Bridge Loans and other obligations under the Bridge Credit Agreement to be immediately due and payable and exercise all rights and remedies available to the Bridge Lenders under the Bridge Credit Agreement and related documentation.
Pursuant to the terms of the Bridge Credit Agreement and after taking into account amounts payable to UPenn, as discussed in Note 3,
License Agreement
, Aegerion retained
$15.0 million
of the remaining upfront payment, of which
$12.0 million
is to be used in accordance with a proceeds reinvestment budget (which primarily relates to the development activities related to MYALEPT as a potential treatment for PL in the U.S.), and the balance is to be used in accordance with a general budget of Aegerion, in each case, subject to certain restrictions.
Forty-two percent
of the remaining net cash proceeds (less amounts owed to UPenn and amounts paid as transaction costs) was paid to Novelion to repay a portion of the outstanding Intercompany Loan comprising the portion of the loan that the Bridge Lenders agreed would not be contested and
58%
was paid to the Bridge Lenders to repay a portion of the outstanding Bridge Loans. In addition, the
$5.0 million
marketing authorization transfer fee and royalty payments, less amounts owed to UPenn, will be paid to Novelion to repay a portion of the outstanding Intercompany Loan comprising the portion of the loan that the Bridge Lenders agreed would not be contested and the Bridge Lenders to repay a portion of the outstanding Bridge Loans, on a
42%
and
58%
basis, respectively.
In connection with the Amended and Restated Intercompany Loan Agreement (defined below) and the Bridge Credit Agreement, Aegerion was required to enter into separate deposit account control agreements with each of the lenders in order to perfect each lender’s security interest in the cash collateral in Aegerion’s operating account. In the event of a default under either loan agreement, subject to the terms of the subordination agreement with the Bridge Lenders and Bridge Agent (the “Bridge Intercreditor Agreement”), the respective lender would have the right to take control of the operating account and restrict Aegerion’s access to the operating account and the funds therein.
In addition to the repurchase and cancellation of certain Convertible Notes with the proceeds of the Roll Up Loans, Aegerion used proceeds of the New Money Loans to repay, at par, (a) the amounts outstanding under the Shareholder Term Loan Agreement described below, in an aggregate principal amount of approximately
$21.2 million
, and (b) principal prepayments of the Intercompany Loan in an amount of
$3.5 million
, in 2018. The Intercompany Loan has been eliminated in the Unaudited Condensed Consolidated Financial Statements.
Shareholder Term Loan Agreement
On March 15, 2018, Aegerion entered into a loan and security agreement with affiliates of Broadfin Capital, LLC and Sarissa Capital Management LP (the “Shareholder Term Loan Agreement”), pursuant to which the lenders made a single-draw term loan to Aegerion in an aggregate amount of $
20.0 million
(the “Shareholder Term Loans”), and secured by substantially all of Aegerion’s assets. The lenders or their affiliates were also investors in the Company’s common shares, and two members of our Board of Directors at that time were affiliates of the lenders.
In connection with the Shareholder Term Loan Agreement, the lenders of the Shareholder Term Loans were issued warrants (“Warrants”) to purchase approximately
1.8 million
Novelion common shares. The Warrants have an exercise price equal to
$4.40
per share, representing the volume weighted average price of Novelion common shares for the
20
trading days ended March 14, 2018, and have a term of
four years
. The Company applied the Black-Scholes option pricing model to estimate the fair value of the Warrants, with the following assumptions: (a) the risk-free rates based on the U.S. Treasury yield curve, for a term of four years; (b) the volatility based on the historical and implied volatility of the Company's publicly traded common shares as of March 15, 2018; and (c) no dividend would be payable.
The Company allocated the proceeds received from the Shareholder Term Loans between the Shareholder Term Loans and the Warrants on a relative fair value basis at the time of the Shareholder Term Loans’ issuance. The relative fair value of the Shareholder Term Loans was determined to be
$16.6 million
, using the Black-Derman-Toy interest rate lattice model. The remainder of the proceeds, or
$3.4 million
, was allocated to the Warrants, which was accounted for as additional paid-in-capital. The Company accrued unpaid interest and recorded amortization of debt issuance costs, which was recognized as interest expense, in the Unaudited Condensed Consolidated Statement of Operations during the
three months ended March 31, 2018
.
The Company determined that the acceleration of the maturity date upon the occurrence of a Convertible Notes restructuring was an embedded derivative, which required bifurcation and was separately ascribed with a fair value. The fair value of the embedded derivative liability on the Shareholder Term Loans issuance date was calculated by determining the fair value of the Shareholder Term Loans with and without the acceleration of the maturity date upon an occurrence of a Convertible Notes restructuring, using the same methodology and inputs in determining the fair value of the Shareholder Term Loans. The difference between the two fair values was determined to be the fair value of the embedded derivative liability. Accordingly, the Company initially recorded a derivative liability of
$0.9 million
as a reduction to debt payable, and the derivative liability was revalued on each reporting date, prior to the repayment of the Shareholder Term Loans in November 2018.
In connection with the entry into the Bridge Loans in November 2018, as discussed above, the Shareholder Term Loans were paid in full in 2018. At the time of repayment, the outstanding principal of the Shareholder Term Loans totaled approximately
$21.2 million
, including paid in kind interest that had been added to the principal of the Shareholder Term Loans. There were no other penalties associated with the repayments.
Intercompany Loan
In connection with the entry into the Shareholder Term Loan Agreement, on March 15, 2018 Aegerion and Novelion entered into an amended and restated senior secured term loan agreement, which has a maturity date of July 1, 2019 (the “Amended and Restated Intercompany Loan Agreement”), which amends and restates the secured loan facility between Aegerion and Novelion that was first entered into in connection with the Intercompany Loan prior to the acquisition of Aegerion. As of
March 31, 2019
, the principal amount owing from Aegerion to Novelion under the Intercompany Loan was approximately
$35.7 million
. The Intercompany Loan has been eliminated in the Unaudited Condensed Consolidated Financial Statements.
The Intercompany Loan is not subordinated to the Roll Up Loans and the Bridge Lenders have agreed not to challenge
$19.4 million
of the Intercompany Loan amount outstanding as of
March 31, 2019
. Under the terms of the Bridge Intercreditor Agreement, the liens securing the Roll Up Loans rank junior to the liens securing the Intercompany Loan.
9. Convertible Notes, net
The Convertible Notes are senior unsecured obligations of Aegerion. The Convertible Notes bear interest at a rate of
2.0%
per year, payable semi-annually in arrears on February 15 and August 15, and had an effective interest rate of
16.42%
, established as of the consummation of the Company’s acquisition of Aegerion until the effective interest rate became
17.56%
as a result of the retirement of a portion of the Convertible Notes in November 2018, as discussed in Note 8,
Loan Facilities
. The Convertible Notes will mature on August 15, 2019, unless earlier repurchased, converted or renegotiated. As of
March 31, 2019
, at least one shareholder of the Company holds Convertible Notes.
The outstanding Convertible Notes balances as of
March 31, 2019
and
December 31, 2018
consist of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
(in thousands)
|
Principal
|
$
|
302,498
|
|
|
$
|
302,498
|
|
Less: debt discount
|
(16,973
|
)
|
|
(27,683
|
)
|
Net carrying amount
|
$
|
285,525
|
|
|
$
|
274,815
|
|
The following table sets forth total interest expense recognized related to the Convertible Notes during the
three months ended March 31, 2019 and 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
(in thousands)
|
Contractual interest expense
|
$
|
1,512
|
|
|
$
|
1,625
|
|
Amortization of debt discount
|
10,710
|
|
|
9,113
|
|
Total
|
$
|
12,222
|
|
|
$
|
10,738
|
|
Future minimum payments under the Convertible Notes are as follows:
|
|
|
|
|
|
|
|
Amount
|
|
(in thousands)
|
Principal
|
$
|
302,498
|
|
Interest
|
3,025
|
|
Total Due on August 15, 2019
|
$
|
305,523
|
|
10. Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy for those instruments measured at fair value is established that distinguishes between fair value measurements based on market data (observable inputs) and those based on the Company’s own assumptions (unobservable inputs). This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1
— Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2
— Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly.
Level 3
— Inputs that are unobservable for the asset or liability.
The fair value measurements of the Company’s financial instruments as of
March 31, 2019
are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Balance at March 31, 2019
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
4,997
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,997
|
|
The fair value measurements of the Company’s financial instruments as of
December 31, 2018
are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Balance at December 31, 2018
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
6,998
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,998
|
|
The fair value of the Convertible Notes, which differs from their carrying values, is influenced by interest rates, the Company’s share price and share price volatility and is determined by prices for the Convertible Notes observed in market trading which are Level 2 inputs. The estimated fair value of the Convertible Notes at
March 31, 2019
and
December 31, 2018
was
$206.3 million
and
$250.7 million
, respectively. See Note 9,
Convertible Notes, net
, for further information.
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, the Bridge Loans and the Intercompany Loan, as mentioned in Note 8,
Loan Facilities
. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, the Bridge Loans and the Intercompany Loan approximate fair value due to their immediate or short-term maturities.
These financial instruments are also exposed to credit risks. To limit the Company’s credit exposure, cash and cash equivalents are deposited with high-quality financial institutions in accordance with its treasury policy goal to preserve capital and maintain liquidity. The Company’s treasury policy limits investments to certain money market securities issued by governments, financial institutions and corporations with investment-grade credit ratings, and places restrictions on maturities and concentration by issuer. The Company maintains its cash, cash equivalents and restricted cash in bank accounts, which, at times, exceeds federally insured limits. The Company has not experienced any credit losses in these accounts and does not believe it is exposed to any significant credit risk on these funds.
The Company is subject to credit risk from its accounts receivable related to product sales of metreleptin and lomitapide. The majority of the Company’s accounts receivable arises from product sales and primarily represents amounts due from distributors, named patients, and other entities. The Company monitors the financial performance and creditworthiness of its customers to properly assess and respond to changes in their credit profiles, and provides reserves against accounts receivable for estimated losses that may result from a customer’s inability to pay. To date, the Company has not incurred any material credit losses.
11. Basic and Diluted Net Loss per Common Share
Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period.
Diluted net loss per common share is computed by dividing the net loss by the weighted-average number of unrestricted common shares and dilutive common share equivalents outstanding for the period, determined using the treasury-stock and if-converted methods. Since the Company has had net losses for all periods presented, all potentially dilutive securities were determined to be anti-dilutive. Accordingly, basic and diluted net loss per common share are equal.
The following table sets forth potential common shares issuable upon the exercise of outstanding options, warrants, the vesting of restricted stock units and the conversion of the Convertible Notes (prior to consideration of the treasury stock and if-converted methods), which were excluded from the computation of diluted net loss per common share because such instruments were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
2019
|
|
2018
|
|
(in thousands)
|
Stock options
|
2,060
|
|
|
2,066
|
|
Unvested restricted stock units
|
93
|
|
|
610
|
|
Warrants
|
1,819
|
|
|
1,819
|
|
Convertible notes
|
1,507
|
|
|
1,619
|
|
Total
|
5,479
|
|
|
6,114
|
|
The outstanding warrants as of
March 31, 2019
and 2018 were issued in connection with the Shareholder Term Loan Agreement entered on March 15, 2018, as described in Note 8,
Loan Facilities
.
12. Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. The Company provides a valuation allowance when it is more likely than not that deferred tax assets will not be realized
.
The Company recorded a benefit from income taxes of
$0.2 million
for the
three months ended March 31, 2019
and a provision for income taxes of
$0.2 million
for the
three months ended March 31, 2018
. The benefit from income taxes for the
three months ended March 31, 2019
consists of current tax expense, which relates primarily to the Company’s profitable operations in its foreign tax jurisdictions, and deferred tax benefit, which relates to the cumulative effect of foreign currency translation. The provision for income taxes for the three months ended
March 31, 2018
consists of current tax expense, which relates primarily to the Company’s profitable operations in its foreign tax jurisdictions, and deferred tax expense.
The realization of deferred income tax assets is dependent on the generation of sufficient taxable income during future periods in which temporary differences are expected to reverse. Where the realization of such assets does not meet the more likely
than not criterion, the Company applies a valuation allowance against the deferred income tax asset under consideration. The valuation allowance is reviewed periodically and if the assessment of the more-likely-than-not criterion changes, the valuation allowance is adjusted accordingly. As of
March 31, 2019
, the Company has a full valuation allowance applied against its Canadian, U.S., and foreign deferred tax assets.
13. Segment information
The Company currently operates in
one
business segment, pharmaceuticals, and is focused on the development and commercialization of
two
commercial products. The Company’s interim Chief Executive Officer is currently the Company’s chief operating decision maker (“CODM”). The Company does not operate any separate lines of business or separate business entities with respect to its products. Accordingly, the Company does not accumulate discrete financial information with respect to separate service lines and does not have separately reportable segments. Enterprise-wide disclosures about net revenues and long-lived assets by geographic area and information relating to major customers are presented below.
Net Revenues
The following table summarizes total net revenues from external customers by product and by geographic region, based on the location of the customer, for the
three months ended March 31, 2019 and 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
U.S.
|
|
Japan
|
|
Germany
|
|
Brazil
|
|
Other Foreign Countries
|
|
Total
|
|
(in thousands)
|
Metreleptin
|
$
|
11,434
|
|
|
$
|
39
|
|
|
$
|
3,232
|
|
|
$
|
—
|
|
|
$
|
3,274
|
|
|
$
|
17,979
|
|
Lomitapide
|
9,092
|
|
|
2,122
|
|
|
51
|
|
|
—
|
|
|
2,956
|
|
|
14,221
|
|
Total
|
$
|
20,526
|
|
|
$
|
2,161
|
|
|
$
|
3,283
|
|
|
$
|
—
|
|
|
$
|
6,230
|
|
|
$
|
32,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
U.S.
|
|
Japan
|
|
Germany
|
|
Brazil
|
|
Other Foreign Countries
|
|
Total
|
|
(in thousands)
|
Metreleptin
|
$
|
9,768
|
|
|
$
|
—
|
|
|
$
|
454
|
|
|
$
|
1,170
|
|
|
$
|
2,702
|
|
|
$
|
14,094
|
|
Lomitapide
|
8,624
|
|
|
1,852
|
|
|
32
|
|
|
—
|
|
|
2,882
|
|
|
13,390
|
|
Total
|
$
|
18,392
|
|
|
$
|
1,852
|
|
|
$
|
486
|
|
|
$
|
1,170
|
|
|
$
|
5,584
|
|
|
$
|
27,484
|
|
Net revenues generated from customers outside of the U.S., Japan, Germany and Brazil, as listed in the column “Other Foreign Countries,” were primarily derived from Colombia and France during the
three months ended March 31, 2019
and from Colombia and Turkey during the
three months ended March 31, 2018
.
Significant Customers
For the
three months ended March 31, 2019
,
one
customer accounted for
64%
of the Company’s net revenues and accounted for
44%
of the Company’s
March 31, 2019
accounts receivable balance. For the
three months ended March 31, 2018
,
one
customer accounted for
67%
of the Company’s net revenues and
57%
of the Company’s
March 31, 2018
accounts receivable balance.
Long-lived Assets
The Company’s long-lived assets are primarily comprised of intangible assets and property and equipment. As of
March 31, 2019
and
December 31, 2018
,
100%
of the Company’s intangible assets were held by the Company’s indirect wholly owned subsidiary, Aegerion. Of that,
64%
and
65%
of the intangible assets were attributable to Aegerion’s U.S. business, with the remaining intangible assets attributable to Aegerion’s European holding company, as of
March 31, 2019
and
December 31, 2018
, respectively.
As of
March 31, 2019
and
December 31, 2018
,
60%
and
66%
, respectively, of the Company’s property and equipment resided in the Company’s U.S. subsidiaries, with the remaining assets residing in the Company’s Canadian and other foreign subsidiaries.
14. Commitments and Contingencies
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company’s views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company’s loss contingency accrual would be recorded in the period in which such determination is made.
DOJ/SEC Investigations
In late 2013, Aegerion received a subpoena from the Department of Justice (the “DOJ”), represented by the U.S. Attorney’s Office in Boston, requesting documents regarding its marketing and sale of JUXTAPID in the U.S., as well as related public disclosures (the “DOJ investigation”). In late 2014, Aegerion received a subpoena from the Securities and Exchange Commission (“SEC”) requesting certain information related to Aegerion’s sales activities and disclosures related to JUXTAPID. The SEC also requested documents and information on a number of other topics, including documents related to the investigations by government authorities in Brazil into whether Aegerion’s activities in Brazil violated Brazilian anti-corruption laws, and whether Aegerion’s activities in Brazil violated the Foreign Corrupt Practices Act (“FCPA”). As a result of the SEC’s investigation, Aegerion consented to the entry of a final judgment, on September 25, 2017, in connection with a complaint filed by the SEC without admitting or denying the allegations set forth in the complaint (“the SEC Judgment”). The complaint alleged negligent violations of Sections 17(a)(2) and (3) of the Securities Act of 1933, as amended, related to certain statements made by Aegerion in 2013 regarding the conversion rate for JUXTAPID prescriptions.
The SEC Judgment, which was approved by a U.S. District Court judge on September 25, 2017, provides that Aegerion must pay a civil penalty in the amount of
$4.1 million
, to be paid in installments over
three years
, plus interest on any unpaid balance at a rate of
1.75%
per annum. As of
March 31, 2019
,
$0.9 million
remains due as a current liability, and
$0.5 million
remains due as a non-current liability. Aegerion’s payment of this civil penalty is subject to acceleration in the event of certain change of control transactions or certain transfers of Aegerion’s rights in MYALEPT or JUXTAPID. Aegerion’s payment schedule is also subject to acceleration in the event that Aegerion fails to satisfy its payment obligations under the SEC Judgment.
In connection with the DOJ investigation, Aegerion entered into a Plea Agreement, a Deferred Prosecution Agreement (“DPA”), a Civil Settlement, certain State Settlement Agreements, and a Consent Decree of Permanent Injunction (“FDA Consent Decree”). Under the Court-approved DOJ Plea Agreement, Aegerion pled guilty to
two
misdemeanor misbranding violations of the Federal Food, Drug, and Cosmetic Act (“FDCA”) and on January 30, 2018, a U.S. District Court Judge sentenced Aegerion.
The Court did not impose a criminal fine and instead ordered Aegerion to pay restitution, in the amount of
$7.2 million
payable over
three years
, plus interest on any unpaid balance at a rate of
1.75%
per annum, into a fund managed by an independent claims administrator. As of
March 31, 2019
,
$1.9 million
remains due as a current liability, and
$1.8 million
remains due as a non-current liability. As contemplated by the Plea Agreement, Aegerion was further sentenced to a
three
-year term of probation. Among the terms of probation, Aegerion must (i) comply with federal, state and local laws, (ii) notify its probation officer of any prosecution, major civil litigation or administrative proceeding, (iii) seek permission of its probation officer prior to selling, assigning or transferring assets, (iv) notify its probation officer of any material change in its economic circumstances, (v) forbear from disparaging the factual basis of Aegerion’s plea or denying that Aegerion itself is guilty, and (vi) comply with the DPA and Corporate Integrity Agreement (“CIA”) (and submit certain reports prepared thereunder to its probation officer). Under the terms of the DPA, Aegerion admitted it engaged in conduct that constituted a conspiracy to violate the Health Insurance Portability and Accountability Act (“HIPAA”). The DPA provides that Aegerion must continue to cooperate fully with the DOJ concerning its investigation into other individuals or entities. The DPA provides that Aegerion must maintain a robust compliance and ethics program that includes significant certification, training, monitoring, and other requirements. Aegerion, as well as the Board of Directors of the Company (or a designated committee thereof), must also conduct regular reviews of its compliance and ethics program, provide certifications to the DOJ that the program is believed to be effective and notify the DOJ of any probable violations of HIPAA. In the event Aegerion breaches the DPA, there is a risk the government would seek to impose remedies provided for in the DPA, including instituting criminal prosecution against Aegerion and/or seeking to impose stipulated penalties against Aegerion. The DPA is subject to supervision by a U.S. District Court judge.
Aegerion also entered into the DOJ Civil Settlement Agreement to resolve allegations by the DOJ that false claims for JUXTAPID were submitted to governmental healthcare programs. The DOJ Civil Settlement Agreement requires Aegerion to pay a civil settlement in the amount of
$28.8 million
, which includes up to
$2.7 million
designated for certain U.S. states relating to Medicaid expenditures for JUXTAPID, to be paid in installments over
three years
. As of
March 31, 2019
,
$10.4 million
remains due as a current liability, and
$13.8 million
remains due as a non-current liability. Aegerion’s payment of this civil settlement amount is subject to acceleration in the event of certain change of control transactions or certain transfers of Aegerion’s rights in
MYALEPT or JUXTAPID. In the event that Aegerion fails to satisfy its obligations under the DOJ Civil Settlement Agreement, Aegerion could be subject to additional penalties or litigation.
Aegerion also agreed to enter into the State Settlement Agreements to resolve claims under state law analogues to the federal False Claims Act. The terms of the State Settlement Agreements are substantially similar to those set forth in the DOJ Civil Settlement Agreement. As noted above, participating states will receive up to
$2.7 million
in the aggregate from the
$28.8 million
amount to be paid pursuant to the DOJ Civil Settlement Agreement.
Aegerion also agreed to the FDA Consent Decree with the DOJ and the FDA to resolve a separate civil complaint alleging that Aegerion violated the FDCA by failing to comply with the JUXTAPID REMS program and the requirement to provide adequate directions for all of the uses for which it distributed JUXTAPID. The FDA Consent Decree requires Aegerion, among other things, to comply with the JUXTAPID REMS program; retain a qualified independent auditor to conduct annual audits of its compliance with the JUXTAPID REMS program; and remediate any noncompliance identified by the auditor within specified timeframes. In the event Aegerion fails to comply with the JUXTAPID REMS program or any other provisions of the FDA Consent Decree, Aegerion could be subject to additional administrative remedies, civil or criminal penalties and/or stipulated damages. Aegerion is required to notify the FDA in advance of certain changes in control, or changes in its business that may affect its operations, assets, rights or liabilities in the United States. On March 20, 2019, the Court entered the FDA Consent Decree.
Separately, Aegerion entered into a CIA with the Department of Human Services Office of the Inspector General (“OIG”). The CIA requires Aegerion, among other things, to maintain a compliance program with significant requirements relating to, among other things, training, monitoring, annual risk assessment and mitigation processes, independent review of Aegerion’s compliance and other activities, a disclosure program, and an executive financial recoupment program. Under the CIA, Aegerion, as well as the Board of Directors of the Company (or a designated committee thereof), must also conduct regular reviews of Aegerion’s compliance program and provide an annual resolution or certification to OIG that the program is believed to be effective. Additionally, Aegerion has certain certification and reporting obligations under the CIA. In the event Aegerion breaches the CIA, there is a risk the government would seek to impose remedies provided for in the CIA, including seeking to impose stipulated penalties against Aegerion and/or seeking to exclude Aegerion from participation in federal healthcare programs.
Investigations in Brazil
Federal prosecutors in Brazil are conducting an investigation to determine whether there have been violations of Brazilian laws related to the sales of JUXTAPID in Brazil. In July 2016, the Ethics Council of Interfarma fined Aegerion’s subsidiary in Brazil (“Aegerion Brazil”) approximately
$0.5 million
for violations to its Code of Conduct, to which Aegerion Brazil is bound due to its affiliation with Interfarma. Also, the Board of Directors of Interfarma imposed an additional penalty of suspension of Aegerion Brazil’s membership, without suspension of Aegerion Brazil’s membership contribution, for a period of
180 days
for Aegerion Brazil to demonstrate the implementation of effective measures to cease alleged irregular conduct, or exclusion of the Company’s membership in Interfarma if such measures are not implemented. Aegerion Brazil paid the fine of approximately
$0.5 million
during the third quarter of 2016. In March 2017, after the suspension period ended, Interfarma’s Board of Directors decided to reintegrate Aegerion Brazil, enabling it to participate regularly in Interfarma activities, subject to meeting certain obligations. In April 2019, the Board of Directors of Interfarma agreed that Aegerion Brazil has successfully met all of the requirements imposed by the association, and the investigation was closed.
Also, in July 2016, Aegerion Brazil received an inquiry from a Public Prosecutor Office of the Brazilian State of Paraná asking it to respond to questions related to media coverage regarding JUXTAPID and its relationship with a patient association to which Aegerion made donations for patient support. This preliminary inquiry was later reclassified as a civil inquiry, which is a preliminary procedure by the Public Prosecutor’s Office that aims to verify if there are enough elements for it to file a formal lawsuit or to dismiss the inquiry. In March 2018, the Paraná State Public Prosecutor’s Office sent the civil inquiry to the Federal Public Prosecutor’s Office, after deciding that the potential case should be subject to federal jurisdiction. The Federal Public Prosecutor dismissed the case in January 2019.
In June 2017, the Federal Public Prosecutor of the City of São José dos Campos, State of São Paulo, in connection with its criminal investigation into former employees of Aegerion Brazil, requested that a Brazilian federal court provide federal investigators with access to the bank records of certain individuals and entities, including Aegerion Brazil, certain former Aegerion Brazil employees, a Brazilian patient association, and certain Brazilian physicians. The Federal Trial Court Judge issued a decision on July 12, 2018 authorizing the access to the banking records on the terms that the Federal Public Prosecutor of the City of São José dos Campos had requested. On July 16, 2018, Aegerion Brazil filed an appeal of the decision that authorized the breach of the banking secrecy, which was denied by the Federal Court Judge. The Public Prosecutor in São José dos Campos continues to gather information in connection with this investigation. At this time, the Company does not know whether the inquiry of the Public Prosecutor in São José dos Campos will result in the commencement of any formal proceeding against Aegerion, but if
Aegerion’s activities in Brazil are found to violate any laws or governmental regulations, Aegerion may be subject to significant civil lawsuits to be filed by the Public Prosecution office, and administrative penalties imposed by Brazilian regulatory authorities and additional damages and fines. Under certain circumstances, Aegerion could be barred from further sales to federal and/or state governments in Brazil, including sales of JUXTAPID and/or MYALEPT, due to penalties imposed by Brazilian regulatory authorities or through civil actions initiated by federal or state public prosecutors. Additionally, Aegerion continues to respond to inquiries from the SEC concerning the investigations by Brazilian authorities, and, in November 2018 and January 2019, entered into tolling agreements with the SEC with respect to this matter. The Company cannot determine if a loss is probable as a result of the investigations and inquiry in Brazil and whether the outcome will have a material adverse effect on the Company’s business and, as a result,
no
amounts have been recorded for a loss contingency.
Qui Tam Litigation
In March 2014, an amended qui tam complaint was filed under seal in the District of Massachusetts against Aegerion,
two
former executive officers and a former employee. On September 22, 2017, the U.S. filed a notice of intervention as to Aegerion. On September 27, 2017, the qui tam relators filed a second amended complaint naming additional parties, including a former board member, former executives, and former employees of Aegerion, as well as other third parties. The second amended complaint noted that the relators would file a joint stipulation of dismissal with respect to Aegerion upon the completion of certain conditions set forth in the Civil Settlement Agreement. On October 27, 2017, the court granted Aegerion and relators’ joint motion to stay proceedings until sentencing in the criminal matter is complete. On February 20, 2018, Aegerion was dismissed from the qui tam lawsuit. On June 5, 2018,
two
of the remaining defendants were dismissed from the lawsuit and on June 19, 2018, the remaining individual defendants filed a motion to dismiss the qui tam lawsuit. On March 31, 2019, the Court granted the Motion to Dismiss with respect to one defendant, and denied the motion with respect to the other remaining defendants. On April 17, 2019, the remaining defendants filed a motion to dismiss for lack of jurisdiction. Although Aegerion is not a party to the lawsuit, it could be liable for certain defense costs and damages for defendants remaining in the lawsuit. Although the Company does not believe the outcome of the lawsuit will have a material adverse effect on the Company, the Company cannot determine if a loss is probable as a result of the lawsuit and, as a result,
no
amounts have been recorded for a loss contingency.