12-Aug-2011
Quarterly Report
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, 2010 and Management's Discussion and Analysis of Financial Condition and Results of Operation included in our Annual Report on Form 10-K for the year ended December 31, 2010 to which the reader is directed for additional information. In addition to historical information, some of the information contained in this discussion and analysis or set forth elsewhere in this document, including information with respect to our plans and strategy for our clinical programs, business and related financing, contains forward-looking statements that involve risks, uncertainties and assumptions. All statements that express expectations, estimates, forecasts or projections are forward-looking statements. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "projects," "forecasts," "may," "should," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future results and our actual results may differ materially from those anticipated or implied in these forward-looking statements as a result of important factors described in the cautionary statements included in this document, particularly those discussed under the heading "Risk Factors" in Item 1A of Part II of this Quarterly Report on Form 10-Q. We undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are an emerging biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat severe 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, such as a heart attack or stroke in the case of hypercholesterolemia or pancreatitis in the case of hypertriglyceridemia. Our lead compound, lomitapide, is a microsomal triglyceride transfer protein inhibitor, or MTP-I, which limits secretion of cholesterol and triglycerides from the intestines and the liver, the main sources of lipids in the body. We are initially developing lomitapide, as an oral, once-a-day treatment for patients with a rare inherited lipid disorder called homozygous familial hypercholesterolemia, or HoFH. These patients are at very high risk of experiencing life threatening cardiovascular events as a result of extremely elevated cholesterol levels in the blood, and as a result, have a substantially reduced life span relative to unaffected individuals. We also plan to develop lomitapide for the treatment of patients with a rare genetic lipid disorder called familial chylomicronemia, or FC. Patients with FC have extremely high levels of triglycerides, or TGs, and, as a result, typically experience recurrent episodes of acute pancreatitis and other serious conditions.
We are currently evaluating lomitapide in a pivotal Phase III clinical trial for the treatment of patients with HoFH. On May 31, 2011, we announced the results of this trial, through 56 weeks of treatment. We believe based on our prior discussions with the U.S. Food and Drug Administration, or FDA, that these results demonstrate sufficient long-term safety and efficacy to support the submission of our New Drug Application, or NDA, for lomitapide. We refer to these week 56 results as our Filing Data, and we will later supplement the Filing Data with data reflecting the full 78-week trial duration. Before we can submit an NDA, we must complete additional clinical and non-clinical studies to assess various other aspects of lomitapide. On June 15, 2011, we met with the FDA, which informed us that it is not opposed to our submitting our NDA based on the Filing Data. We plan to submit our NDA to the FDA and a Marketing Authorization Application, or MAA, to the European Medicines Agency, or EMA, before the end of 2011.
Assuming we obtain approval, in anticipation of our commercial launch of lomitapide initially in the United States and European Union, we have begun to recruit a team comprised of sales representatives and medical education specialists who are experienced in marketing drugs for the treatment of rare, often genetic, disorders. We initially plan to hire a medical education, marketing and sales force of approximately 15 people in the United States and approximately 18 people in the European Union. We also are evaluating other markets to determine other geographies where we will commercialize lomitapide, either alone or in partnership with others.
In addition to HoFH, we are also in the process of developing a protocol for a Phase III clinical trial of lomitapide for the treatment of adult patients with a severe genetic form of elevated triglycerides, or hypertriglyceridemia, called familial chylomicronemia, or FC. In October 2010, the EMA granted lomitapide orphan drug designation for the treatment of FC. In March 2011, the FDA also granted lomitapide orphan drug designation for this indication. In October 2007, the FDA granted lomitapide orphan drug status for the treatment of HoFH.
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 initially from the private placement of convertible preferred stock, convertible debt, venture debt and the proceeds from our initial public offering, or IPO and our follow-on public offering, or FPO, completed in June 2011. From inception through June 30, 2011, we received proceeds of $40.3 million from the sale of convertible preferred stock, $21.3 million from the sale of convertible debt and $20.0 million from venture debt.
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In the fourth quarter of 2010, we completed our IPO, selling 5,750,000 shares of our common stock at a public offering price of $9.50 per share. Net cash proceeds from the IPO were approximately $48.7 million after deducting underwriting discounts, commissions and offering expenses payable by us. In connection with the closing of the IPO, all of our shares of redeemable convertible preferred stock outstanding at the time of the offering were automatically converted into 7,051,635 shares of common stock and all of our convertible promissory notes were automatically converted to 3,093,472 shares of common stock.
On June 29, 2011, we completed an underwritten public offering of 3,250,000 common shares at an offering price of $15.50 per share. Certain selling stockholders also sold 1,000,000 common shares at $15.50 per share. Net proceeds received after underwriting fees and offering expenses were approximately $47.0 million. On July 29, 2011, the underwriters exercised their overallotment option to purchase an additional 149,902 common shares at an offering price of $15.50 per share. Certain selling stockholders also sold 41,914 common shares at $15.50 per share. Net proceeds after underwriting fees and offering expenses were approximately $2.2 million.
We have incurred losses in each year since our inception in February 2005. As of June 30, 2011, we had an accumulated deficit of approximately $106.4 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.
We expect our research and development expenses to increase in connection with our ongoing pivotal Phase III clinical trial of lomitapide for the treatment of patients with HoFH, our planned Phase III pediatric clinical trial to evaluate lomitapide for the treatment of HoFH pediatric and adolescent patients (> 8 to < 18 years of age) and our planned Phase III clinical trial of lomitapide for the treatment of adult patients with FC and other potential studies or clinical trials of lomitapide. If we obtain marketing approval for lomitapide, we will likely incur significant sales, marketing, in-licensing and outsourced manufacturing expenses, as well as continued research and development expenses. Furthermore, we are now incurring additional costs associated with operating as a public company. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future.
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, and commercialize, lomitapide.
Research and Development Expenses
Since our inception, we have focused on our clinical development programs. We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:
? salaries and related expenses for personnel;
? fees paid to consultants and clinical 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, 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.
We expense both internal and external development costs as incurred. We have been developing lomitapide and our other product candidate, implitapide, in parallel, and we typically use our employee and infrastructure resources across several projects. Thus, some of our research and development expenses are not attributable to an individual project but rather are allocated across our clinical stage programs based on management estimates. These allocated expenses include salaries, stock-based compensation charges and related fringe benefit costs for our employees, consulting fees and the fees paid to clinical suppliers.
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The following table shows our research and development expenses for the three and six months ended June 30, 2011 and 2010.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2011 2010 2011 2010
Lomitapide
Clinical development (including
regulatory) expenses $ 3,723,050 $ 400,434 $ 5,970,374 $ 616,727
Preclinical development expenses 76,152 367,737 323,630 604,579
Administrative expenses 1,338,705 457,005 1,840,606 794,146
Total $ 5,137,907 $ 1,225,176 $ 8,134,610 $ 2,015,452
Implitapide
Clinical development (including
regulatory) expenses - - - -
Preclinical development expenses - - - -
Administrative expenses - 1,700 300,000 277,600
Total $ - $ 1,700 $ 300,000 $ 277,600
Total $ 5,137,907 $ 1,226,876 $ 8,434,610 $ 2,293,052
We expect our research and development expenses will increase as we complete our pivotal Phase III trial of lomitapide for the treatment of patients with HoFH and seek marketing approval for lomitapide in this indication, including our completion of studies and trials required prior to the filing of our NDA for lomitapide, and as we further develop and initiate our planned Phase III pediatric clinical trial to evaluate lomitapide for the treatment of HoFH pediatric and adolescent patients (> 8 to < 18 years of age) and our planned Phase III clinical trial of lomitapide for the treatment of adult patients with FC. In addition, we intend to explore and pursue label expansion in patient populations broader than HoFH and FC. Due to the numerous risks and uncertainties associated with timing and costs to completion of clinical trials, 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 costs 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;
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? 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.
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.
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.
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 executive, finance, and legal. Other significant costs include facilities costs and professional fees for accounting and legal services, including legal services and expenses associated with obtaining and maintaining patents.
We expect that our general and administrative expenses will increase with the continued development and potential commercialization of our product candidates and as we operate as a public company. These increases will likely include increased costs for insurance, costs related to the hiring of additional personnel and payment to outside consultants, lawyers and accountants.
Interest Income and Interest Expense
Interest income consists of interest earned on our cash and cash equivalents. Interest expense consists primarily of cash and non-cash interest costs related to our outstanding debt. In addition, we capitalize costs incurred in connection with the issuance of our debt. We amortize these costs over the life of our debt agreements as interest expense in our statement of operations. In February 2011, we entered into the Loan and Security Agreement with the Hercules Funds for a $25.0 million credit facility. At the closing of the Loan and Security Agreement, we received an initial advance of $10.0 million, with interest-only payments for thirteen months. At any time prior to December 30, 2011, we may request additional term loan advances in the minimum amount of $7.5 million, and up to $15 million.
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, 2010 included in our Annual Report on Form 10-K for the year ended December 31, 2010 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.
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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 our applicable 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 clinical trial materials; 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 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
Valuation of Investments
We have an investment in an auction rate security, and an auction rate security that was converted into non-cumulative redeemable perpetual preferred stock. Valuing these securities requires the use of estimates and assumptions that are subjective. Fair value estimates of these securities are made at a specific point in time, based on relevant market information. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.
The estimated fair value of the auction rate security is derived through the use of a discounted cash flow model. Our discounted cash flow model considers, among other things, the quality of the underlying collateral, the credit rating of the issuer, an estimate of when these securities are either expected to have a successful auction or otherwise return to par value, the expected interest income to be received over this period and the estimated required rate of return for investors that may be willing to purchase such a security. We also consider third-party valuations, reports and similar securities priced in the marketplace when arriving at the estimated fair value.
The estimated fair value of our auction rate security that was converted to preferred stock is estimated by analyzing similar securities in the marketplace. We also consider the fair value of the underlying collateral and credit rating of the issuer.
Although our investments have significant discounts as compared to the par value of the securities, changes in inputs or other data that are used to derive the valuation can have a significant change on the valuation of our investments.
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. For service type awards, compensation expense is typically recognized over the requisite service period, which is the vesting period. For performance type awards, the compensation expense is recognized beginning in the period when management has determined it is probable the performance factor will be achieved.
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,
2011 2010 2011 2010
Research and development $ 345,971 $ 82,385 $ 492,221 $ 174,531
General and administrative 1,041,899 99,996 2,157,488 207,551
Total $ 1,387,870 $ 182,381 $ 2,649,709 $ 382,082
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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 new 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 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 options previously issued are set forth in our audited financial statements and notes for the year ended December 31, 2010 included in our Annual Report on Form 10-K for the year ended December 31, 2010.
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, that 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, 2011 and Three Months Ended June 30, 2010
Revenue
We did not recognize any revenue for the three months ended June 30, 2011 or the three months ended June 30, 2010.
Research and Development Expenses
Research and development expenses were $5.1 million for the three months ended June 30, 2011, compared with $1.2 million for the three months ended June 30, 2010. The $3.9 million increase for the three months ended June 30, 2011 was primarily due to the development expenses related to our lomitapide development program, including a $1.7 million increase in clinical monitoring costs, a $0.7 million increase in clinical consultant expense, a $0.4 million increase in compensation costs, a $0.4 million increase in clinical trial supplies, $0.3 million increase in stock based compensation, a $0.1 million increase in . . .
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